©Jarrett Scott Gladstone, 2020
Shi and Singh's Essentials of the U.S. Health Care System (5th Edition, 2019) commits a full chapter to hospitals and hospital systems. The chapter presents the history and evolution of hospitals in the USA as occurring in six stages (p. 184):
1. In the first half of the 1800’s, most health care was provided by local governments via social welfare institutions known as almshouses or poorhouses. These institutions existed before medicine and nursing as professions, so they simply provided food and shelter to the destitute and with some nursing care to the sick.
2. In the latter half of the 1800’s, affluent donors supported community-owned private hospitals as charitable institutions. Private hospitals have dominated the U.S. paradigm ever since.
3. Advances in medical science since the mid-1800’s, especially anesthesia led to hospitals becoming institutions of medical practice where surgeries could be performed. Advances in medical science and technology were concentrated in these modern hospitals, which became needed resources for local physicians and medical students.
4. As sanitation, medical and nursing science advanced, hospitals became places where the wealthy would go for medical care. This influenced the for-profit medical models we have today.
5. As hospitals built relationships with university-based medical schools, many become complex centers for medical research. This complexity necessitated a demand for formal training in hospital administration.
6. As complexity and costs grew, the 1990’s saw many independent hospital systems merge into medical systems that provide a large array of health services.
Whoops
While we have very large, complex hospital systems (to use Shi and Singh’s concept in stage 6, above) these independent systems don't provide enough beds to treat a pandemic such as the one we experience now.
As our hospitals evolved from government supported almhouses to the major health systems they are today, they became grounded in a market system. This economically makes sense since market philosophy believes in and makes decisions based on consumer supply and demand. When our nation’s health is in the aggregate rather stable and predictable, that is we have a general idea how many will become sick over a period of time, we can forecast how many beds we’ll need.
Space Costs Money
A hospital administrator needs to be aware of costs. The first rule of business is buy low, sell high. Profits are made when you keep a wide difference between production costs and the price you sell your goods and services. One way to keep that difference low is to maximize every resource you have. It’s important to not let expensive resources sit idle. That is, business want to avoid what is called idle capacity, which is the capacity of a company not currently being used. A good example of this are the very large dump trucks used at open pit mines. One of these trucks is the Caterpillar 797F, which sells for about $5-million. If you ever visit an open-pit mine, you will see these machines parked only when they are being loaded, being emptied, and being serviced. Otherwise these trucks run all day and all night long. One does not spend five-million dollars on a truck and then park it. The same logic applies to hospitals and any medical practice. You don’t buy stuff you will rarely use unless you can justify costs for storing the items. That is, the cost of storage is less than the return gained on their infrequent use.
So, what does this have to do about space? A hospital bed takes up space. And there is more to a bed than a . . .
I was about to say a “simple bed,” but hospital beds are rather complex devices in their own right. They are more than a mattress on a platform. The platform is motorized to adjust height for treatment and patient comfort. It has handrails and places for a variety of restraint systems that both keep the patient from falling out of bed to supporting ancillary care-related equipment and devices. And that’s just the bed. The space set aside for the bed needs to have access to oxygen and other utility lines, all that require plumbing infrastructure, which in turn require pipes and people to install and maintain those pipes. There are electrical systems to support the technology used to monitor patient health and sustain life. All of this space and ancillary systems cost money to keep and operate. When a bed sits idle, all that infrastructure doesn’t generate revenue for the hospital while it draws air conditioning and heating and requires regular cleaning for sanitation.
Therefore hospitals need to find a balance between keeping a bed and having it available for a consistent flow of patients. Akin to a restaurant needing enough tables to host customers, but not so many that empty tables bring in no revenue.
Of course there always appears to be a shortage of beds. Doctors can always admit more patients. But our health care system is driven by insurance providers. Their goal is to turn a profit on the bets they make that people will not need health care. Insurance companies, too, operate on a buy low, sell high model. Well, actually, more a sell high, buy low when it comes to paying for health services. Health insurers want to sell more plans than they pay out. Unfortunately our market systems spends a lot of money for hospitals to get more money from insurance systems trying to minimize payments to hospitals.
While hospitals can easily fill more beds, but insurance companies want to avoid induced demand. Induced demand is an economic hypothesis that increased supply of something creates its own demand for it, or basically “build-it-and-they-will-come.” If hospitals build more beds, doctors will admit more patients. While this sounds good in thinking about providing needed care, insurance companies don’t want to pay out more to keep more patients in those beds since it will cut into their profits. So they strongly influence hospitals to keep bed availability low and inhibit induced demand.
The Market System Is Not Designed to Prepare for Disaster
So, on the hospital side, our market system doesn’t want to have a lot of empty beds since empty space violates a basic business rule that space cost money. But while it is possible for hospitals to fill beds through induced demand, insurance companies don’t want to pay our more in hospital costs than they take in through insurance premiums.
The nice thing about government is that keeping things in storage for just-in-case moments is acceptable. For decades we’ve kept nuclear missiles in silos just in case they are needed for a counter-attack against a hostile country sends its own missiles our way. And those hostile nations keep their missiles on the ready just in case we decide to send ours their way. Those missiles cost far more than just the cost of the bombs and rockets they are comprised of. There is the physical infrastructures housing them, from fixed silos across the Great Plains to nuclear submarines and bomber aircraft cruising in circles under and above the ocean. All of this infrastructure costs money to build and maintain. And then our missle defense system requires people to operate and maintain them. And these people cost money to train, house, and feed.
Not once have we used this very expensive missle system. And I’ve haven’t heard overwhelming Congressional and constituent complaints about this “wasted” expense. Given that we got ourselves stuck in a mutually-assured-destruction cycle, we are kind of stuck with this expense. Let’s think about something less aggressive, cost-wise: fire trucks.
How often have you seen a ladder or tower truck putting out a blazing inferno? I assume for you, not very often. Outside my experience fighting forest fires, I haven’t seen any large warehouses burn for several years. I actually don’t recall any house fires in my neighborhood over the years I’ve lived here. We’ve made our homes and buildings quite fireproof, and on the rare times they do catch fire, they are able to extinguish their own fires with fire suppression systems. Since houses and building don’t burn very often, why do we keep and maintain very expensive fire trucks? It appears that about the only time they are used are to travel with EMTs on illness and injury calls, and that’s mostly smaller trucks that go out. The huge ladder and tower trucks are very rarely, if every used to put out hi-rise fires these day. They cost a lot of money to be parked.
Governments and their communities are okay with such expenses (well, there are some crazies who complain about costs to maintain them). Likewise for hospital beds. Our market-based hospital and insurance systems discourage keeping extra beds. However government systems are fine with that. Well, depending on what political power is in charge at the moment. While some folks are okay with the costs of keeping weapons going in circles, they frown on the cost to keep an emergency supply of medical resources on standby for the rare pandemic.
Future Hospitals
What will this pandemic do about our nation’s thinking about a comprehensive public health care and hospital system? I admit I cannot answer this question. Our nation is very divided when it comes to those wanting stronger social safety nets versus those who firmly believe that despite how little they have, the American Way is to pull ourselves up by our bootstraps. I admit that I am quite clear on the former, we need a strong social safety net system, including a well-stocked and maintained hospital bed infrastructure that can respond to the rare pandemic, and more frequent epidemic. But this require leadership willing to pay for these idle costs, plus competent leadership capable to deliver these emergency resources to states and communities when they are needed.
April 28th Update: Hospital Organization Finance
The lesson in this article is to buy low and sell high. One way to keep costs low is to not store unused resources since space costs money. This is a reason why hospitals today do not have enough equipment to manage the pandemic. Governments don’t need to worry about storing unused items, and when government leadership is competent and caring, is able to keep stockpiles of medical items for times they are needed.
One thing that costs very little to store, and actually makes money while in storage is money. When you place money in a saving account or index-based mutual fund, you will gain either interest (savings) or value (mutuals) while you store your money. Additionally, money today is simply computer code. It occupies no space.
I read today that some hospitals have done a very good job storing their money. Be sure to read this article carefully. The hospitals with strong financial health are those in stronger economic regions and treat more affluent patients. It’s easier to build a nest egg when you have access to money. But the quick lesson here is organization finance, a topic that Shi and Singh do not speak about in their health policy text. For future hospital administrators, including those of you who might someday sit on director boards, you need to either acquire knowledge about organization financing. Organization finance is much more than finding money for your organization, it’s finding secure, reliable ways to ensure that you will have a sufficient supply of money on-hand when disaster strikes. While insurance will cover natural disasters such as floods, earthquakes, and tornadoes, and will cover liability, there is little protection out there when you lose business. Just as we should keep a nest egg handy that will keep us afloat when financial disaster strikes, you need to lead your organization toward finding and securing safe and reliable financial plans so it can remain operating and serving its clients.
