De Blasio’s hospital reorganization plan should include closing hospitals

New York City’s public hospitals, under the NYC Health + Hospitals umbrella (previously known as the Health and Hospitals Corporation), have long provided care for the indigent and the uninsured. Yet a slew of factors – some unique to the system, others less so – are squeezing the system’s budget. Mayor Bill de Blasio’s plan for a reorganization of the hospitals is laudable, and includes important proposals, but it should go even further.

First, it’s important to understand how dire the situation at Health + Hospitals really is. The mayor’s reorganization plan raises the city’s subsidy to the system from $1.3 billion to $2 billion by 2020. But even with this infusion, the hospital system will still be insolvent; by 2020, this would still leave Health + Hospitals with a $1.1 billion deficit.

A number of factors are driving this shortfall.

Let’s begin with a broad trend: Hospitals around the country, including in New York, are rapidly changing how they do business. Many more diseases are treatable in the outpatient setting compared with 20 years ago, eliminating the need for hospitalization. That’s led to a steady decline in inpatient stays and a reduction in total bed capacity. Now more than ever, hospitals are focusing more on generating revenue from preventing disease in a clinic or a physician’s office.

Inpatient admissions declined by about 5 percent at Health + Hospitals facilities between 2012 and 2014, according to state data. Not only does this make outpatient revenue more important, it also reduces the need for expensive large hospital infrastructure.

But there are other problems more specific to Health + Hospitals. One of the biggest factors is the Affordable Care Act’s reduction in federal subsidies to hospitals with large shares of Medicaid and uninsured patients (“Disproportionate Share Hospitals,” or DSH funding), under the theory that with more insured patients this supplemental funding will be less important as these new payments help replace the previous subsidies. Health + Hospitals is in a particularly difficult position, however, given that some 80 percent of its patients are either uninsured or covered through Medicaid. While these cuts have been delayed until 2018, DSH funding to the system is expected to fall from $1.3 billion in 2016 to less than $1 billion by 2020, two years after the cuts kick in. Of course, these cuts are happening while Medicaid receipts to system hospitals are projected to remain mostly flat.

The reorganization plan suggests that New York can make changes to its own DSH distribution formula, but that is unlikely to entirely offset these reductions. Nevertheless, that doesn’t mean that the city is simply left to subsidize HHC’s constant losses.

For instance, the system is participating in the state’s Medicaid reform efforts (the Delivery System Reform Incentive Payment program, or DSRIP). If Health + Hospitals meets all performance metrics appropriately, it stands to gain $1.2 billion over the five year program – most of this funding, however, is accounted for in the budget. But participating in the payment program should also lead to broader, system-wide changes that put greater emphasis on value-based care and disease prevention. If this generates savings elsewhere – for instance, by reducing readmissions (and getting dinged with fewer penalties by Medicare) or earning quality-based payments for keeping patients healthy – a leaner system with lower costs could potentially emerge.

Yet, even with the additional incentive payment funding, Health + Hospitals will likely need significant reorganization, as de Blasio has noted in his executive budget. While the mayor has dismissed the idea of shutting down facilities, there may be little choice – in fact, it may be beneficial. By 2014, for instance, two Health + Hospitals facilities were failing to improve in Medicare’s readmission reduction program, losing more money since the program had started. One of these facilities, Bronx North Central Hospital, has seen its number of patients dwindle by over 30 percent since 2012; in 2014, it saw 42 percent of its beds go unused. The solution may very well be shutting down such hospitals (or at least reducing bed capacity).

The reorganization plan does make important proposals, including those addressing social determinants of health like supportive housing. But it also relies on reducing the pain of less DSH funding, which may not be a realistic option. Similarly, as the Obama administration has discovered, reaching out to and enrolling those who are still uninsured (and thus increasing revenues) is a difficult task. While these efforts should certainly be included, there is simply little reason why low-volume hospitals that deliver average or below-average care need to remain open.

Rather than avoiding what might happen anyway, Health + Hospitals should consider the significant cost savings that might accrue from shutting down these facilities that are a burden on the system.

Yevgeniy Feyman is deputy director of health policy at the Manhattan Institute.