The business of healthcare delivery is one of the most difficult and complex businesses to operate. This is especially true for hospitals and healthcare delivery systems (a combination of hospitals and healthcare delivery services (e.g. surgical centers)).
While we are all concerned about the availability, quality and affordability of healthcare services, the vast majority of not-for- profit hospitals, continue to lose money on an annual basis or survive on razor thin margins. These hospitals represent 58% of healthcare systems in the U.S. (American Hospital Association) These organizations teeter on the precipice of financial failure relying largely on charitable contributions and their endowment funds. These additive sources of income keep the doors open and buffer hospitals from larger financial losses. With challenging economic times, these sources of supplemental income are reduced.
So why is one of the most demanded and largest industries in our country struggling to survive without the appearance of getting any better? The complexity of this problem and a framework of solutions are beyond the scope of this blog. I will be sharing over the month’s insights the business of healthcare, and how it contributes to this problem with suggested solutions and thought provoking ideas.
The following is an analogy of the complexity of the healthcare business, and how it does not follow the principles of a free market.
Let’s say you are an entrepreneur and you want to open a restaurant in Anytown U.S.A. The local government dictates if a restaurant can be opened and location in the town. So after years of working hard and saving to open your dream business, you need to spend a substantial amount of your money and time to convince the local government that a restaurant adds value to the community. After satisfying the local government’s requirement of demonstrating a need in the community (called a certificate of need), you learn that there are regulations on how much you can be paid for your meals. The entrées on the menu will only be paid at the price dictated by the local government. It just so happens that the price is just at or below the cost of delivering the food and service. Additionally you learn that the price of the food may be adjusted by the local government based upon what they feel the community can afford.
You are also required by local laws to hire a licensed chef. This individual has spent years studying at great personal and financial cost. The chef expects to be paid a premium salary for his services. Through years of studying at culinary school, suppliers of products have convinced the chef that their products are the best and anything else would deliver inferior results. Therefore, your chef dictates which products will be used while you pay the bill. Given your chef’s requirement of certain brand products, your negotiating power with the suppliers has been significantly diminished.
So now you are the owner of a restaurant which has no control over what you are paid for the meals from your customers, and you have limited control over the products used. Your key personnel are well paid, and they dictate premium priced products that must be used or they will not work at your establishment. Given this business model, we wonder why not-for-profit hospitals are losing money and are about to go on life support.