The Corporate Growth Model is Not Sustainable

The volume model for a physician, a hospital, a healthcare system or for any other type of corporation is not a sustainable model. Like many public companies, I see healthcare organizations attempt to meet their revenue and profit targets through merger and acquisition. This has become common for hospitals, too. Not only can they add revenue to their balance sheets, they can also gain millions of dollars in net profit by applying the most favorable bond rating to their debt and thereby decreasing their interest rate.

These hospital systems can also gain market share power which results in more favorable contracts with private insurers and industry (pharmaceutical, medical device, and diagnostics companies). They can get better contracts because these companies are also in the volume model. If you have more hospitals, meaning more drugs, devices, and diagnostics tools in a purchase order, these companies will provide lower prices for these higher volume purchase orders.

But there’s an obvious limit to this strategy – what happens when you can’t buy more hospitals? Then what? I haven’t seen leaders even think about this, but they’re going to have to sooner rather than later because we’re getting to that point in healthcare.

If you studied the history of hospital growth models, you would find the canary in the coal mine that demonstrated the unsustainability of growth as a long-term strategy for healthcare. In the early 1990s Alleghany General Hospital in Pittsburgh had about 700 beds. They were one of the first hospital systems to apply this growth strategy. They bought hospitals around Pennsylvania and grew to a total of almost 5,000 beds.

Initially, this looked like a great strategy, gaining some of the short-term financial benefits I mentioned. But growth is not a sustainable strategy and they eventually filed for bankruptcy in 1998. This one example has not deterred other hospitals and hospital systems from this strategy. However, there are beginning to be more examples of the flaws in this model such as the Community Health Systems (CHS) hospital system. The CHS stock price has plummeted from almost $50/share five years ago to about $3/share and it has published a net loss of $675 million in 2019. It’s only a matter of time before this will need to be addressed.

The growth model is also harmful to the people on the front lines providing patient care. I gave my own personal story about the harm of trying to function in a volume model as a surgeon, here. The rates for physician burnout, depression, addiction, and suicide are related to this volume model in healthcare. More and more people are recognizing that this is not an individual problem of resilience and work-life balance, but a systemic structural problem resulting in moral injury to those providing care for patients.

I’ve also seen this growth model in the area of my clinical expertise, hernia disease. Most of the hernia companies I’ve worked with started as small, hernia mesh-focused organizations or divisions. They had sales forces and other resources dedicated to hernia disease. But as hernia related revenues grew with new devices, such as mesh fixation devices, and new types of mesh, such as biologic mesh, these revenues began to be noticed by larger medical device companies.

It’s hard for large companies to grow revenue through innovation, especially in a complex hierarchical organization with lawyers who seem to always be risk averse. It’s much easier to grow through acquisition, even when the organization doesn’t really know much about the clinical focus of the company they’re acquiring, hernia disease in this case.

I’ve witnessed several hernia companies become acquired by larger companies with little or no knowledge of the hernia market. Yes, the added revenue and profit margin must have looked nice on the quarterly financial reports for Wall Street. But, as a hernia surgeon, I observed a decrease in the commitment to education and innovation for hernia disease gradually over time for most of these larger companies.

Corporate growth as a strategy is not sustainable, while the potential for employee personal growth is limitless. The focus of a sustainable healthcare organization should be on improving value for patients and providing the necessary resources and support for the front-line clinical teams, including a new data infrastructure to help these teams learn to measure and improve the value of care they’re providing. This is what it will take to have a sustainable healthcare system.