Keeping the Lights On: Why Are U.S. Hospitals Closing?

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Wharton's Lawton Burns and Drexel's Robert Field discuss the closure of Philadelphia's Hahnemann University Hospital and the trend of medical facilities closing nationwide.

Hahnemann University Hospital had been in failing health for years before administrators announced last month that the 496-bed academic facility in the heart of Philadelphia will close in early September.

With mounting debt and losses of $3 million to $5 million a month, the hospital was sold to an investor company last year and laid off more than 200 employees to cut costs. Out of options, the parent company has filed for Chapter 11 bankruptcy protection as it winds down operations at the facility. “Hahnemann University Hospital has been experiencing severe financial difficulties. Despite our best efforts to find solutions, none were found. The hospital cannot continue to lose millions of dollars each month and remain in business,” the hospital said in a statement.

The city surely will feel the absence of Hahnemann, which was founded in 1848 and employs 2,500 people. It serves some of the city’s sickest, poorest patients and has a Level 1 trauma center, which is the highest designation of surgical care for patients with traumatic injuries. Philadelphia has other medical centers to fill the gap, including Pennsylvania Hospital and Jefferson University Hospital, but Hahnemann’s closing is symptomatic of the larger financial and operational issues plaguing hospitals across the U.S., especially in rural areas. More than 100 rural hospitals have closed since 2010, according to a University of North Carolina study.

“One of the real core conflicts here, which you see at the city level and also at the national level, is we still can’t decide what health care is. Is it a commodity where you can have a for-profit company come in and make money for investors? Or is this an essential public service where it’s a government responsibility, and the government should come in and take care of it?” said Robert Field, a law and health management professor at Drexel University, which is affiliated with Hahnemann. Field is also a lecturer in Wharton’s heath care management department.

He and Lawton Burns, a Wharton professor of health care management, joined the Knowledge@Wharton radio show on SiriusXM to discuss why so many U.S. hospitals are shutting down. (Listen to the podcast at the top of this page.) Although closures such as Hahnemann’s have made headlines recently — often endemic of the larger problems facing the ailing American health care system — the professors said the closures are nothing new. Hospitals have been shuttering for several decades.

“The future growth of the hospital business is not in inpatient care, it’s outpatient care. So, this is just part of a wider trend.”–Lawton Burns

“This isn’t a seismic shift; this is more of a gradual decline,” said Burns, who referenced a 1981 book, Can Hospitals Survive: The New Competitive Health Care Market. “That book was prescient because it was looking down range and realizing that a lot of hospitals aren’t going to be able to make it over the long term. If you look at the number of hospitals in the United States, it’s gradually declined because the hospital inpatient business is a flat-liner at best. The future growth of the hospital business is not in inpatient care, it’s outpatient care. So, this is just part of a wider trend.”

While each hospital under threat of closure deals with problems unique to its location, their underlying problem is singular: not enough money. The biggest factor, the professors said, is the mix of payers. Hospitals need enough commercially insured patients with private polices to offset the uninsured patients, because Medicaid and Medicare do not reimburse 100% of expenses. Some hospitals can capture the right mix, but Hahnemann likely could not because it competed with other for-profit hospitals for commercially insured patients in an “over-bedded market” with no public hospital.

“What we’re seeing as a general trend is consolidation, and we’re seeing the rich get richer and the poor get poorer.”–Robert Field

“What we’re seeing as a general trend is consolidation, and we’re seeing the rich get richer and the poor get poorer,” Field said. “Major hospital systems here in Philadelphia, the University of Pennsylvania in particular, are growing like crazy. We’re seeing that in cities around the country. They’re adding high-tech procedures and equipment. They’re now onto gene therapy and these futuristic kinds of treatments. But the lower-tier hospitals, which is what Hahnemann has been, or even the mid-tier hospitals have not been able to survive on their own. We’re seeing everything drawn to the major centers, which is a particular problem in rural areas, where those centers might be 50 miles away.”

Field described access to health care in rural areas in the U.S. as “a perennial problem” where distance plays an outsized role, especially in emergencies. A patient who lives in a small town may be able to drive an hour or two for an appointment to see, say, a dermatologist. But that doesn’t work if the patient is having a heart attack.

“In the era when hospitals were the center of everything, we could afford to maintain a hospital in every little town and it would do a little bit of everything. It was less of a problem,” Field said. “But now we’re seeing, as I was saying before, the rich getting richer. The business is going to the big city academic medical centers. The poor are getting poorer or going out of business. And to the extent we rely on hospitals as centers of care, that’s a problem.”

Telemedicine and other advances can help patients in rural areas, but technology doesn’t replace treatment, said Burns. He also pointed out that it’s difficult for rural areas with few cultural amenities to draw physicians. At small medical centers, the small staffs shoulder the entire burden, he said.

“Hospital systems are not systemic. They can’t act in a coordinated, coherent way.”–Lawton Burns

“The rural hospitals that are going to succeed are the ones that can attract physicians and keep them there. That means those rural communities have to have some level of amenities,” Burns said. “Often times, the rural hospitals will attract physicians who actually grew up in that area. So, rural hospitals will need to target their physician search activities towards doctors who came from that area, who feel an affinity towards that area. And if you can attract the doctors, then you can attract the patients.”

To boost the bottom line, many hospitals in urban areas in the U.S. have consolidated to ease operational costs and absorb losses across the system. In some rural areas, medical facilities have established a loosely connected consortia to “eke out as much savings as they can,” Burns said.

Despite these efforts, hospitals continue to struggle, contract and close. Burns thinks one reason is over-zealous expansion under the consolidation strategy.

“It’s not the winning strategy unless you execute upon that in an excellent way. And most of these places haven’t even thought about that. As I tell my students, hospital systems are not systemic. They can’t act in a coordinated, coherent way. They just have sort of this assemblage of assets spread across a market, maybe multiple markets, and it gets hard to manage that.”

“So, it’s a march of the lemmings,” Field added. “They just start following each other over the cliff.”

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