Wednesday, September 4, 2013

Addition by Contraction: Hockey and Hospitals

In the 1990’s, the growth strategy of the NHL was to move teams into Florida, Arizona, North Carolina and California and expand into non-traditional markets like Nashville and Columbus.  Two decades later, it appears that the NHL has pushed more hockey out across the country than people wanted to see.  Throughout the healthcare industry, hospitals have reported little or no inpatient admission growth in recent years and are facing a trend to curb spending by treating patients anywhere but in the costly hospital setting.  Both are faced with a similar challenge of trying to manage their excess capacity in order to achieve financial success.

At first glance, attendance appears strong in most NHL cities with two-thirds of all teams filling their arenas to 95% or more of capacity in 2011.  However, this is misleading as revenue varies significantly as teams in strong hockey markets enjoy more pricing power.   For example, teams like Tampa Bay and the NY Rangers draw comparable attendance per game however gate receipts are $23M vs. $95M.   In healthcare, just because inpatient volume is up (and generally speaking it’s not) doesn’t necessary translate to financial prosperity.  This is particularly true if a significant portion of that volume is Medicaid and your hospital is located in Illinois where the state is already over $8 billion behind in Medicaid payments and reimbursements are delayed six months or more.

The NHL has experienced four major work stoppages since initiating the “Sunbelt” (FL, AZ, NC, & CA) and non-traditional market growth strategies of the early 1990’s which certainly contributed to their lack of success.  Surprisingly, in the 12 years between the most recent and the 2004-05 lockout that cancelled the entire season, NHL league-wide revenue is up about 50% to over $3 billion.  However, that percentage is misleading as more than 80% of the profits go to three teams and almost half the 30 clubs lost money in 2011.  

 According to David Houle and Jonathan Fleece, authors of “The New Health Age: The Future of Health Care in America”, the hospital institution as we know it is in the midst of massive and disruptive change.  This change is likely to worsen and already difficult situation as almost 29% of hospitals had negative operating margins in 2011 (AHA Annual Survey, 2012).  With an emphasis toward managing population health, there are new incentives to treat patients and promote wellness in order to prevent expensive hospital visits.  The outcome of these incentives will mean a lot fewer hospitals and hospital beds because providers will do more to keep patients healthy enough not to need them.  As a result, hospitals are looking closely at capacity and spending has shifted toward outpatient services.

A 2012 article in Forbes magazine referred to contraction as “The NHL's Best Hope” for financial stability as the league has 30 teams when it should have 20.  Houle and Fleece foreshadow that the change in healthcare will be so transformational that by 2020 one in three hospitals will close or reorganize into an entirely different type of health care service provider.  In the end, it appears that both NHL teams and hospitals will ultimately face a similar fate because the fundamental problem is that there are too many of each.

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