Class 5- Final Stage Services

By Rex Rumsey, MBA Candidate Class of ’25

2024 Fall Kelley Life Sciences Industry from Research to Patient Class

December 3 Class 5: Final Stage Services – Profit and Non-profit Hospitals, Free-standing Treatment and Surgery Centers, Physician Practices, Insurers, Prescription Benefit Managers

Healthcare Challenges & Innovations was the common thread of this class discussion. Healthcare spending now consumes nearly 17% of GDP, with pharmaceuticals and hospital services driving much of the cost. Sarah Adkins Svoboda, Brechin Newby MD, MBA, FAAP, and Jeff Stultz, representing HMOs, non-profit hospitals, for profit hospitals, and clinicians shared how cost-containment efforts are driving new trends in healthcare, like coordinated care & the shift away from inpatient care.

🔑 Key Trends:
Cost Containment: Though not without critiques, Health Maintenance Organizations (HMOs) and Pharmacy Benefit Managers (PBMs) are working together to implement value-based care models and smarter formularies to negotiate and manage drug pricing, which has significantly outpaced inflation nearly every year until 2020. Sarah shared how these efforts can reduce healthcare spending by nearly 20%.

Shift away from inpatient care: The rise of Ambulatory Surgery Centers (ASCs) offers lower-cost, convenient options for procedures like total knee arthroplasties (TKAs). In my PT office, we saw many THAs and TKAs that were performed in ASCs once these centers were reimbursed by CMS during the COVID crisis. Telehealth and at-home services also increased around this time for similar reasons.

Consolidation for Efficiency: Two-thirds of hospitals are now part of health systems, with 400+ mergers from 2018-2023. Consolidation aims to improve efficiency, coordination, and pricing power, making health systems attractive to private equity firms seeking strong returns from these indispensable entities (though clinical outcomes have been called into question).

⚠️ Challenges:
Hospital Profitability: The shift of profitable surgeries and treatments away from inpatient settings and increased costs have reduced operating margins for many systems. While some larger systems can leverage scale to achieve double digit profits, many hospitals operate at loss and the average seems to be low single digits.

Rural Care: Staffing shortages, limited specialty care, and financial strain from low reimbursement rates have led to many rural hospital closures. Geographic isolation and poor broadband access for 20% of rural Americans exacerbate these challenges, though telemedicine and innovative care models still offer potential solutions.

Labor Shortages: Rising compensation costs and persistent workforce gaps strain care capacity. This has driven investments in automation and innovative care models, but these solutions remain in early stages.

💡 Balancing a Complex System:
Healthcare is a web of competing needs where solutions for one group often create challenges for another. Achieving balance requires managing trade-offs to ensure affordability, access, and equity for all.

Thank you to our speakers, and to George Telthorst and Kelli Conder for bringing executive leaders and health policy professionals to the Indiana University – Kelley School of Business to help us understand these issues from multiple perspectives.