Its an interesting exercise, trying to unpack something very complicated that you live in every day, so that its like water to a fish.  The biggest challenge is, how do you break down and explain something that is basically a chaotic system?  Well, here goes:

Operations.*  Hospitals have essentially three or four different primary service lines from an operations perspective:  the emergency department, surgery, medical, and (depending on the hospital) labor and delivery (L & D, in hospital parlance).  L & D really is its own animal – the patients are mostly healthy.  Surgery is divided into emergency and “elective”, which really means “scheduled”, not, as one would think, “optional”.

You can also divide up the different kinds of patients – inpatients (classically, patients admitted to the hospital for an overnight/24 hour stay), outpatients (patients who aren’t “bedded” because they are getting some kind of service, like radiology or infusion, that doesn’t require it), and observation patients (patients who are “bedded” but not necessarily overnight/24 hours).  There has been a migration from inpatient to outpatient and observation, mostly due to advancing technology.  More things can be done without overnight stays, especially surgery (knee and hip replacements, for example).

Patients can go from one category or service line to another.  An inpatient may have been admitted as an observation patient, for example.  Many emergency department patients (who start as outpatients) are admitted as observation or inpatients (roughly around 20% of ED patients get admitted).  Someone who comes in for a medical condition may require surgery, or someone who comes in for surgery may develop a medical condition.  Someone who is an inpatient may be discharged with outpatient followup treatment like rehab or infusion.  Etc., ad infinitum.

Every hospital function is interconnected.  While a patient is in a bed, the nursing, janitorial, food services, case management, and medical staff will be in and out of the room daily, and visits from the lab, respiratory therapy, wound therapy, and rehab are all a possibility.  The patient may also need things they can’t get in their room, which brings in transportation and whatever they need – radiology, the cath lab, surgery, dialysis, and so forth.  Or, they may need to be transferred to a different unit – we have about four or five different kinds of units for inpatients.  Think of trying to organize the trades during a home renovation, only it happens every single day.  This all changes on a constant basis, with knock-on effects galore, hence, a “chaotic” system in just about every sense.

To try to deal with this, we have committees (oh, do we have committees) on the theory that you need somebody at the table from every function that might be impacted by whatever you are doing.  You also need policies (oh, do we have policies) to try to capture institutional knowledge and standards and spread them throughout the organization.  Partly to amuse myself, I have succeeded in creating a policy on policies, standard work on standard work, and a committee on committees.  Believe it or not, a bureaucracy like a hospital needs this kind of meta-governance.

Hospital capacity is very rarely determined by the number of beds the hospital has (although in recent years, for the first time in living memory, hospitals actually capped out at the number of physical beds they had).  Licensed capacity is notional, as most hospitals are licensed for more beds than they actually own.  The real limit on capacity is staffing, particularly nurse staffing.  Around one third of our workforce is nurses, maybe a little less.

*No, not those kinds of operations.

Business.  Hospitals cannot turn patients away, at least, not if they come in through the ED, due to the federal Emergency Medical Treatment and Active Labor Act  (EMTALA).  We also can’t discharge patients until they are safe to discharge (this includes having a place to go – skilled nursing facility, home, whatever is needed) and a plan for post-discharge care.  Medicare patients can appeal their discharge, which means we have to keep them for a few more days.  So we are stuck with our “customers” on the front end and the back end.  We can’t turn them away, and we can’t fire them.

Hospitals get paid a flat fee for inpatients based on their discharge diagnosis (more jargon – the “DRG” or diagnosis related group), meaning, the final diagnosis of their primary health problem.  It doesn’t matter how long they stay, what we do for them, none of that – it’s a fixed amount.  We get paid for outpatients based on what we do for them – unlike inpatients, its usually a very defined and discrete service.

The rates we get paid are either dictated by the government (Medicare and Medicaid pay for roughly half, maybe more, of hospital patients, although it varies a lot by hospital) or are locked in for two or three years at a time by commercial insurance contracts.  What this means is that as demand goes up, we can’t charge more.

Hospitals are expensive to run.  Not only do we have a large capital plant (big building, expensive equipment) and expensive supplies, we also have a large labor force.  There’s a whole lot of hospital work that is unavoidably hands-on.  The nurse complement for a 30 bed “med-surg” unit will likely be around 18 FTE nurses (at one nurse per 5 patients, 2+ shifts per 24 hour day, plus a nurse manager and a charge nurse).  For an ICU, the typical ratio is one nurse per 2 patients, and for some patients, the ratio is 1:1. There are also patient care techs, which different hospitals use (or don’t) at different levels.  Throw in a hospitalist physician or so, various specialty nurses (wound care, respiratory, etc.) and it adds up.

And that’s just the patient care staff.  There are also swarms of back office chair warmers (tips top hat), janitorial staff, biomedical equipment maintenance, facilities, landscaping, food service, laundry, instrument sterilization, on and on.  We even have our own locksmith.  The ratio of patient care staff to “other” is probably around 60/40.

Remember that part about being stuck with our customers?  And the part about getting a flat fee for inpatients?  That sets up a disconnect between the two different kinds of volumes in a hospital.  There is the “average daily census” – how many patients in beds – and the number of admissions – how many patients in the door.

The average daily census drives cost.  As long as a patient is in the hospital, the hospital has to staff that bed, order tests, etc., all of which feeds the cost side of the equation.  Admissions are, really, the same as those discharges that we get paid for – the more admissions, the more you get paid.  The average daily census and admissions marry up with the “length of stay” metric.  Long length of stay means more expense and, when the hospital is running at capacity, less revenue because it has to decline admissions.  A full hospital has to turn away what are called “direct admissions”, meaning (mostly) admissions that are transfers from other hospitals.  Everybody else just calls the damn ambulance and they show up at the ED.

The sweet spot for most hospitals is around a 4 day average length of stay, and an average daily census of around 85%.  Much above that 85%, and you start paying overtime and various other premium pay deals to staff the beds, and you can go underwater on patients at the margin.

With these kind of business dynamics, its no wonder most hospitals eke out low single digit margins.  Currently, there are very few hospitals that aren’t losing money, a lot of money, because they are at capacity with a high length of stay.  Nobody can explain it, but hospitals all over the country have sicker patients, and a lot more of them, than we did pre-pandemic.  High average daily census plus high length of stay means upside down profit and loss statements.  Especially in this labor market – our labor costs have gone up 40% (not a typo) over the last year, due mostly to various kinds of premium pay for nurses.

Medical Staff.  You can’t overstate how essential doctors are to hospitals.  Nothing (much) can be done for a patient without a doctor’s order, including admitting the patient.  There has been some erosion of this monopoly in recent years, with nurse practitioners and other “advanced practice providers” getting privileges (including admitting privileges) in hospitals.  As far as I know, the hospital industry is unique in that it is completely dependent on independent actors (not even independent contractors) doing business, for their own account, in the facility.

And it gets worse.

A hospital’s medical staff is the doctors (and more recently, the nurse practitioners and other advanced practice providers) who are allowed to practice in the hospital.  The medical staff is “self-governing”; the closest analogy is probably the faculty at a university.  They elect their own leadership (the medical executive committee), adopt their own bylaws, determine who is allowed to join the medical staff (“credentialing”), what they are allowed to do in the hospital (“privileges”), and who is kicked out (“peer review”).  The hospital board is theoretically the final word on all this, but it would be a very foolish hospital board indeed that stuck its, err, nose, into medical staff governance.  Even the CEO treads lightly around the medical staff; it is well known that nothing gets a CEO fired faster than getting on the wrong side of the medical staff.

To be fair, its pretty hard for somebody who isn’t a doctor to have an informed opinion on what a doctor should be allowed to do and when they should be kicked off the medical staff for screwing up.  To get an informed decision on who is allowed in, what they are allowed to do, and whether they should be allowed to stay, you pretty much have to rely on other doctors, which is, really, the basis for the self-governing medical staff.

Fortunately, this doesn’t create opportunities for shenanigans, backstabbing, self-dealing or petty politicking at all.  I can only imagine what it would be like if doctors had big egos and there was a lot of money at stake.

But wait!  It gets even worse than that.

Remember that bit about how stuff is migrating from inpatient to outpatient?  That also means its migrating out of the hospital to doctor’s offices, ambulatory surgery centers, and the like.  This also means that hospitals are no longer essential to many doctor’s practices, and increasingly doctors aren’t bothering to join hospital medical staffs.  Or, if they do, they don’t want do things that the hospital needs (like take emergency call).  There is a brewing crisis over this newish mismatch between the specialists not needing hospitals, and the hospitals still really needing the specialists.

So, hospitals are heavily bureaucratized, can’t control who their customers are, can’t increase prices when demand is high, have large fixed costs, are beholden to the nursing staff for how many patients they can have, have low margins, and are completely dependent on independent actors who don’t pay a penny to use the hospital, make a ton of money by using the hospital, and control who else can use the hospital.  And I haven’t even gotten to the legal and regulatory burdens.  So how do hospitals work?  Beats me.  As near as I can tell, it’s a miracle they work at all.