Editor's Note: The following article was first published in Oliver Wyman's Health Innovation Journal, Volume 4.
HOW HEALTHCARE’S SUPPLY CAN BETTER FIT DEMAND
The United States healthcare system has yet to pivot over to value-based, consumer-oriented care. As a result, our fragmented patient journey is emptying consumers’ wallets, hindering delivery execution of high-quality, low-cost care, and saddling the nation with an expensive, unnecessary acute care infrastructure. Despite this article’s dismally toned introduction, we are optimistic about the future and see a substantial correction coming over the next decade.
We Have and Use Way Too Many Beds
COVID-19 exposed the paradox in our system: The US had more than enough inpatient beds – it just didn’t have the right ones. Recent Oliver Wyman analysis shows that if we adapt utilization patterns and stop building beds, we will have 1.6 times the number of inpatient beds than we will need in 2030. Said differently: The current supply of inpatient beds is far higher than what we need now, or even what we will need a decade from now…despite the population continuing to grow, age, and ail.
The current supply of inpatient beds is far higher than what we need now, or even what we will need a decade from now.
Source: Oliver Wyman analysis, MarketScan, CMS 5% National Sample, US Census, American Community Survey
The mismatch reflects the delta between, “what is it that the population can support?” – a question that drives capital planning in a fee-for-service market – and, “what is it that the population needs?”
To answer the latter question, we leveraged the utilization profile of the top 15 metropolitan statistical areas (MSAs) by value-based-care penetration – spanning large portions of California, and ones inclusive of select markets across Oregon, Colorado, Michigan, Nevada, and Massachusetts; then we age-sex adjusted the utilization for every county’s projected 2030 population. The assumption behind the MSA selection is that markets with sufficiently high penetration of value-based care will drive appropriate utilization for all patients – even those in fee-for-service arrangements. These markets are not theoretical. The mismatch reflects an achievable reality.
The delta between our projected need and our current supply is driven by demand-side factors – such as performing surgeries in outpatient settings – as well as supply factors – we assumed utilization of 80 percent for urban counties and 70 percent for rural counties (rural counties are defined as those with less than 50,000 people).
The US hospital sector operates at around 64 percent bed utilization – well below our 80 percent assumption and even further off from the 83 percent regulators use as the benchmark for an “efficient” annual average to handle demand volatility. If the 83 percent figure was taken at face value, it suggests 23 percent of beds nationwide should be rationalized. At more operationally manageable levels of 75 percent capacity, the opportunity would be 15 percent (before any corrections to demand). For our analysis, using a utilization rate of 64 percent reduces the projected 2030 over-supply from 1.6 times supply to 1.3 times supply.
On the demand side, industry length of stay (LOS) has moved little over the past decade, but this is likely the result of incremental progress on LOS being offset by increasing underlying acuity, as lower acuity services have moved out of hospitals. Bed days will continue to decline as the industry matures in case management and operational efficiency capabilities. Our analysis assumes care guidelines don’t change between now and 2030. Given this, expect the mismatch to be even greater.
The paradox in our system is we have the wrong bed types. The US has an abundance of medical and surgical beds and too few intensive care unit (ICU) beds – likely because ICU beds are often unprofitable in a fee-for-service schema. Our overall oversupply of beds belies the fact that we have less than half of the ICU/critical care unit (CCU) beds that we will need in 2030.
The paradox in our system is we have the wrong bed types.
We’re Pointed Towards Positive Change
With healthcare’s relatively recent value prioritization, is the situation noticeably improving? US bed supply has indeed been on a slow decline. Although demographic factors generally created upward pressure on demand, clinical and business innovations shifting services outside the hospital have been the dominating influence – for example, consider that the system’s hospital bed supply has been falling for the past couple of decades. The total number of hospitals, hospital beds, and admissions alike fell by roughly three percent from 2008 and 2018. The US population, for comparison, grew by 6.3 percent from mid-2010 to mid-2019. The US population has experienced a recent increasing burden of chronic disease, with 60 percent of adults having a chronic disease and 40 percent having at least two.
The Next Decade Will Look Different
Demographic trends will keep putting upward pressure on acute demand over the next decade. Beginning in 2030, it’s projected that immigration will overtake the excess of births over deaths as the main cause for US population growth. Yet, those residents over 65 will grow by 30 percent through 2030 – far faster than the 10 percent increase over the past decade – as the youngest baby boomers age into Medicare. Only a few years later, older adults will outnumber children for the first time in US history. Also, the US adult obesity rate reportedly tops 42 percent. (It’s worthy of note that stats like these are critical in shaping healthcare’s future supply and demand capabilities as we head into 2030.)
Will innovations in care delivery, business models, and consumer engagement continue driving a net decline in demand and supply in the next decade? We believe so – due in no small part to COVID-19.
Three Reasons Hospitals Will be Progressively Displaced in Serving Low-acuity Volume
Virtual- and digital-led new front doors and population health innovators are proliferating. At the start of the pandemic, health systems saw all non-emergent professional activity moved to virtual almost overnight and long-held beliefs about who would or would not adopt, shattered.
Medicare went from 11,000 virtual users per week to 1.3 million per week – in a month. This was largely due to changes in Medicare reimbursement rules. From mid-March through early-July of 2020, over 10 million beneficiaries received a telehealth service. A survey by Kyruss shows that more than 75 percent of baby boomers expressed very high or complete satisfaction with telehealth. According to Oliver Wyman analysis, at least one in two people will use telehealth more after stay-at-home orders are lifted compared to before the pandemic.
While different people have different use cases for virtual, no age demographic is poorly suited; no age demographic will never need in-person care.
This bodes very well for innovators, including One Medical, Collective Health, and Livongo, who have shown virtual care plays a vital role in reaching consumers at the right place and right time, pre-empting acute episodes and avoidable emergency department (ED) visits to bring down total ED and acute volume.
Virtual care and digital innovation may have just as big of an impact on ambulatory care. At the time of this writing, many physicians nationwide are practicing part-time in-office, part-time virtually.
Many physicians nationwide are now practicing part-time physically, part-time virtually.
Payers are jumping on the bandwagon, as innovative, digital-first products such as Humana on Hand and Kaiser Virtual Plus are better positioning themselves to leverage digital front ends to mitigate avoidable admissions and redirect care to more convenient, higher-value, lower-cost service sites and care providers.
More homes will serve as care settings. The home as a proper site of care, including acute care, will substantially reduce future hospital demand. Hospital-in-the-home programs, once pioneered by Johns Hopkins, are on the rise. Consider how, for example, specialized player Contessa is cracking the reimbursement issue through contracts with national payers. More established players are prioritizing this too, including major systems Mayo Health, Mount Sinai, and the scaled innovator CareMore. Most hospital-at-home models discharge patients to the home from the ED or discharge early from an acute stay. Now, some new companies are offering acute care on-demand, pre-empting the need for hospital visits. By diverting low-acuity admits to hospital-at-home and earlier discharge on stable acute patients, a leading population health executive that we spoke with expects the shift could reduce total bed days by up to 30 percent.
Urgent care will be disrupted, too. Imagine if urgent care came to you when you needed it, versus you transporting there physically. Consider one of many examples, Doctor On Demand, which has banked over $160 million since its conception in 2012. Launching initially as a virtual urgent care clinic, the platform offers 24/7 patient on-demand care. Physicians employed by the company see patients on video to talk about patients’ health issues, diagnose urgent issues, and prescribe medicines. Another player, Heal, offers a longitudinal relationship with a physician who meets patients virtually or on-call to the home as needed.
Sites of service will keep shifting. One of the more influential forces of the last decade was the shift of inpatient procedures to hospital-based outpatient (HOPD) and ambulatory. According to a prediction from the Ambulatory Surgery Center Association (ASCA), hip and knee joint replacement surgery will increase by 84 percent within the next decade. Despite a surge in demand for these procedures, inpatient volume will drop, while outpatient volume will spike. Over 57 percent of all non-fracture knee and hip replacements done by 2028 will happen in an outpatient setting, ASCA predicts.
Over 57 percent of non-fracture knee and hip replacements done by 2028 will happen in an outpatient setting.
This kind of industry opportunity will expand in the coming decade as the Centers for Medicare & Medicaid Services (CMS) continue moving more services off the inpatient-only list each year and as organizations continue to innovate around how to safely move more inpatient volumes to outpatient. Consider one of many examples – Muve Health, a value-based outpatient ambulatory joint replacement provider with a robust approach for better outcomes and experience, including near-site observation outside the hospital to facilitate patients shifts.
Not All Hospitals Will Prosper. Those That Do Will Look Different.
COVID-19 will accelerate bankruptcy and closures. Before COVID-19, American Hospital Association (AHA) data showed more than a quarter of hospitals operating at negative margins. The pandemic-induced loss of elective and preventive volumes will push some over the edge. The COVID-19-led unemployment spikes and resulting payer mix shifts critically impair more.
If, for example, CMS enforces Paycheck Protection Program (PPP) loan terms as currently structured, some independent practices may fall bankrupt, along with those hospitals that perhaps weren’t financially strong before COVID-19 hit, let alone during. As sites close, immediate communities will face new access issues while the overall market cost structure declines.
This will take a few years to play out, with some sites closing and others successfully pursuing mergers and acquisitions (M&A).
Sub-specialization will reshape acute care and unlock capacity reduction. More hospitals will shift over time from the one-size-fits-all, take-all-comers approach to specialized sites of care within networks. Mounting financial pressure will increasingly force leaders to strategically prioritize services that support differentiation and unique value propositions. Investing in those areas will require a scaling back in services that are well supplied in the market but don’t allow for differentiation.
Organizations moving in this direction – such as Chicago-based NorthShore’s reconfiguration to concentrate orthopedic services into one site, for example – may gain high efficiencies through reduced duplication of infrastructure, cost, and quality efficiencies from scale, improved throughput, and reduced excess capacity from greater predictability of demand. Physician satisfaction and patient satisfaction also improve through more efficient, effective operations.
As systems pursue this strategy, higher predictability in demand will create a fair incentive for operators to right-size beds at these sites from a 65 percent average to levels above 80 percent.
The march to value will take a new turn, adding long-term pressure on performance and specialization. COVID-19 has shown providers the value in diversification that accountable care organizations (ACOs) offer. Financial strains and payer mix shift will lead government and private payers alike to drive affordability and medical cost management agendas for their employers. The movement to value – while elusive – will remain a front-and-center industry imperative. But the movement will not look the same in years ahead.
Transparency and value are merging to substantially change competitive dynamics. CMS is leading the charge on both fronts with its price transparency regulations and value-based reimbursement agenda. Rather than “value” being something separate or alongside the fee-for-service chassis, the fee-for-service system itself will increasingly be value-driven. The best example of this perhaps is CMS’ new MIPS Value Pathways (MVP), which will progressively foster higher-quality transparency at the specialty level and vary payments based on specialty-specific quality performance (including downstream cost/utilization).
Recent Medicare Payment Advisory Commission (MedPAC) recommendations, for example, suggest this same concept will increasingly be applied to hospital arrangements. Private payers are already moving in this direction, with at least one major Blue plan tying one-third of a major academic medical center’s (AMC’s) fee-for-service reimbursement to value metrics.
As value transparency comes into the main stage, expect high disruption to patient care patterns and current funding streams. Enhanced pressure for service line-level performance will lead more hospitals to hone their scope of services. Those who fail to demonstrate a defensible value position will be forced to exit the market.
Expect high disruption to patient care patterns and current funding streams.
Calling for a More Sustainable Economic Model
Today’s economic model depends on unsustainable levels of cross-subsidization. Higher commercial rates cover the costs of Medicare and Medicaid patients. Higher payments on surgical volumes cover costs for medical patients. Systems thrive or dive on their payer mix and medical-surgical mix. Even within a specific surgery type, lower acuity patients subsidize higher acuity patients.
The trends described above disproportionately threaten to reduce hospitals’ highest-profit patients and volumes. While reductions of excess infrastructure and streamlining of operations are necessary to offset these pressures, cross-subsidization will also substantially worsen unless there’s an intentional effort to rebalance prices across patients and services, through public policy, a coordinated industry effort, or both.
A Brighter Future
The next decade holds great potential for healthcare providers. There will always be a role for acute care in our communities, and the trends driving down acute demand are all to patients’ net benefits. Those who embrace coming innovations and new rules of competition will be true leaders in the health and sustainability of their organizations and their communities.
Bryce Bach Partner, Health and Life Sciences, Oliver Wyman
Santiago Doria Principal
Minoo Javanmardian, PhD Partner, Health and Life Sciences, Oliver Wyman
Tammy Tomczyk Partner, Oliver Wyman Actuarial Consulting