Hospital strategy is unite or fail

Hawaii’s health care industry is in flux as smaller independent hospitals look to be absorbed by larger institutions in order to survive.

The trend is expected to continue as hospitals seek to balance quality with profitability and position themselves for sweeping changes in the way health care is paid for and delivered.

"Independent, free-standing hospitals are going to become dinosaurs," said Don Olden, chief executive officer of Wahiawa General Hospital, which is hoping to partner with Hawaii Pacific Health. "You’ve already passed the point where you’re going to have stand-alone hospitals in Hawaii. You’ve already passed the point where they can survive anymore."

Chris Flanders, executive director of the Hawaii Medical Association, the professional physicians organization, said few hospitals today are making money.

"Hospitals are kind of limping around here," he said, adding that the push for preventive medicine to keep patients healthy and out of the hospital "isn’t necessarily a good thing if you’re a hospital."

The major hospitals on Oahu are exploring at least three potential acquisitions or partnerships, the most controversial of which is the privatization of the state-owned Maui Memorial Medical Center, Kula Hospital and Clinic, and Lanai Community Hospital.

The main suitor for the Maui hospitals is Hawaii Pacific Health, the parent company of Kapiolani Medical Center for Women & Children, Pali Momi Medical Center, Straub Clinic & Hospital and Wilcox Memorial Hospital on Kauai.

Kaiser Permanente Hawaii has expressed interest in the past, and said Friday it is "looking at all options to improve care to the people on Maui."

Hawaii Pacific Health also is exploring the purchase of all or part of the financially struggling 160-bed Wahiawa General Hospital, while the Queen’s Health Systems is in talks about possibly acquiring Kua­kini Medical Center.

"The era of the private hospitals operating independently and the doctors operating as solo practitioners independently, that model is evolving. It’s going away," Olden said. "The old business model is going to be a historic relic. Many, if not most, stand-alone hospitals are near failure. Consolidations and migration to better management and delivery models are an imperative." Theoretically, the consolidation of competing hospitals would tend to drive up prices, Olden said.

"However, the reality of health care is that the pricing is controlled by federal and state government programs and big insurance companies," he said. "They tell doctors and hospitals what they’re going to pay them. There’s no free-market negotiation. Under Obama­care, or the Affordable Care Act, the increased control over the pricing of services is going to continue to grow. Whether price controls will work or not … who knows?"

Hospitals are making big investments in outpatient care, which is less costly than hospitalization and generally more highly reimbursed, said Randy Perreira, executive director of the Hawaii Government Employees Association, whose members staff public hospitals.

"That’s where the money is, frankly," he said. "Clearly, from a business standpoint, if you’re able to do more procedures in an outpatient basis, you’re not incurring the higher cost of staffing and providing care in a hospital setting. That’s why more clinics are being built."

In this new paradigm, consolidation will mean fewer jobs at the affected facilities as billing and other back-office positions are eliminated to save on duplicate costs, Perreira added.

Another "potential danger" is that providers might start making decisions based on reimbursements and insurance coverage. "We just got to guard against that," Perreira said. "There are occasions where we do need that inpatient care."

Hospital executives agree that health care in the U.S. has become unsustainable. And with the increasing costs of inpatient care, coupled with shrinking reimbursements, hospitals are turning to consolidation to gain operational efficiencies and administrative savings by eliminating the redundancy that occurs as multiple hospitals compete to provide the same services.

The trend of hospital consolidation is being driven largely by Obama­care, said Art Ushi­jima, chief executive officer of Queen’s Health Systems, in an email.

The challenge of meeting the requirements of the law, rising medical costs, improving quality and patient safety, and increasing access to more affordable health care is "placing strains on the resources of all organizations but especially on smaller hospitals," he said.

"Over the long term, the expectation is better access and better delivery of care, with a goal of a healthier population — a worthy goal that will be very difficult and challenging at best to achieve — but, nevertheless, represents what we must strive for," Ushi­jima said. "Hospital consolidation is a reflection of the pressures facing the health care industry, not unlike industries that have or are undergoing transformation."

Another factor is a new payment model that rewards providers and physicians for quality outcomes rather than volume, or fee-for-service, shifting the way reimbursements are calculated. The payment model is expected to lower medical costs, but that requires significant upfront investment by hospitals and other providers for costly technology as well as increased staffing and outreach to patients.

"We all need to be accountable for the care we’re providing, so when you talk about consolidations, it’s a challenge for smaller stand-alone hospitals to have all those things within your hospitals," said David Okabe, chief financial officer at Hawaii Pacific Health. "Health care is a very capital-intensive business. It’s a challenge to be investing in all the capital needs of the organization to be sure you’re providing the highest-quality health care for your patients. The worse thing that could happen is people in our state don’t have access to good-quality care when they need it."

The fear is that without consolidation, smaller hospitals will face the same fate as the now-defunct Hawaii Medical Centers in Li­liha and Ewa, which closed by 2012 after mounting losses and a lengthy bankruptcy.

"The primary thing is we want to make sure people in our community are taken care of, they have access to good-quality care," Okabe said. "We as an industry just need to make sure we always keep the patient in mind and make decisions that are going to benefit ultimately our patients and the community."