Short Circuited Surge Capacity: Lessons from the Blizzard for Public Health

By Frank Pasquale
In Hospitals
December 28, 2010
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pasquale2Bad weather recently caused massive failures at Heathrow Airport, and brought chaos to air travel in the New York area. Both scenarios suggest an intriguing set of dilemmas in health law and policy. We should be doing much more to prepare for sudden, disruptive events in both the transportation and health sectors. But economic short-termism rules the roost, undercutting the infrastructural investments that a more enlightened America would make.

Stuart Altman has wisely compared hospitals and airlines, and worried that many of the former would suffer the fate of legacy carriers:

By 2025 the need for general hospitals to cross-subsidize [i.e., use payments from the well-insured to pay for others’ care] will greatly increase, but their ability to do so will be diminished. U.S. hospitals could begin to resemble U.S. airlines: severely cutting costs, eliminating services, and suffering financial instability. . . .

There are numerous similarities between the airline and hospital industries. Both comprise companies that built a complex infrastructure and provided cross-subsidized services. Both were protected by a lack of price transparency and limited competition. In the recently deregulated airline industry, price competition and specialized airlines have emerged that do not have to serve all cities and can focus on the most profitable routes. They need not charge higher prices for these routes to make up for losses incurred elsewhere. Similarly, in the hospital industry, specialty hospitals have emerged that can focus on the most profitable patients and do not have to treat the uninsured or provide money-losing services.

The new specialty hospitals, like the new low-cost carriers, are not saddled with fixed costs from old plant and equipment and do not have to contend with excess capacity that resulted from historical changes in demand.* Both use their inherent cost advantages to compete for more price-sensitive consumers. Legacy airlines cannot raise fares to cover costs because price-sensitive customers can now obtain transparent price information on the Internet and shop for the lowest fares. California is now requiring, and many advocacy organizations are encouraging, hospitals to post their prices on the Internet. Hospital patients, facing increased copayments, deductibles, and other out-of-pocket costs, could begin to behave more like airline passengers. . . .

Because of increased price transparency and specialized competition, legacy airlines could not raise prices sufficiently to cover their costs. Between 1 October 2001 and 31 December 2003, they cut costs by $12.1 billion. They stopped serving some locales and reduced seat capacity. They cut labor costs, services, and amenities. Nevertheless, from 2001 through 2003, the legacy airlines lost $24.3 billion, while the low-cost carriers reported profits of $1.3 billion.

The past few years have witnessed a recovery for many airlines pushed to the brink after 9/11. They filled more seats in each plane (leading to higher “load factors”) and otherwise “cut the fat” (sometimes endangering passengers in the process). Nate Silver observes that filling up planes has some positive effects on prices and the environment, but also sets in motion dynamics that few fully consider until the unexpected strikes:

[L]oad factors have been rising steadily. A decade ago, they were closer to 70 percent, which permitted quite a bit more slack in the event of cancellations. At a 70 percent load factor, there are 2.3 passengers for every available seat, which means, roughly speaking, that one day’s worth of cancellations might take two days to clear through the system. At an 82 percent load factor, on the other hand, there are 4.6 passengers for every seat — roughly twice as many — so one day’s worth of cancellations might require four or five days to get everyone home.

The societal trade-offs here are tough, and airlines need flexibility in determining how far they should go to crowd planes and maximize profits. But in the realm of healthcare, I am much more concerned that a long series of hospital closures will leave the system disastrously overwhelmed in case of an infectious disease outbreak, terrorist attack, or extreme weather event. Like airlines, hospitals have been cutting their surge capacity in order to improve the bottom line. As I noted over four years ago, the asymmetry between projected demand and supply for something as fundamental as ventilators is shocking. A 2006 estimate suggested that only 5,000 spare ventilators would be available to as many as 742,500 people in need in the case of a serious pandemic.

In a 2005 article in the Journal of Contemporary Health Law and Policy, Lance Gable et al. discuss surge capacity as “the number of critical casualties arriving per unit of time that can be managed without compromising the level of care,” and propose ways of increasing “the availability of skilled health professionals to supplement the existing health workforce.” I applaud their approach and attention to the problem (astonishingly, it is the only article in the Westlaw JLR database with “surge capacity” in the title). But I also worry that scarce physical space is going to cause as large a problem at hospitals as personnel shortages. Like its airports, New York’s community hospitals are fraying:

In New York’s many community hospitals, which provide an essential first line of defense in the effort to safeguard public health, the danger of failure is particularly acute. Combine growing costs, decreasing revenues, and high debt loads, and you can’t dig out. Then what happens? “If you’ve accumulated any reserve over time,” an executive at a major local hospital says, “the first thing you do is eat it up. Then you cut costs on staffing and support services, sometimes below levels you know are safe. Then you stop spending money to keep your physical plant and equipment up to date. The condition of the physical plants of many New York City hospitals is staggering. Then, when there’s nothing else you can do, you declare bankruptcy. That’s the life cycle of a New York hospital.”

Given all these strains, hospitals may have to choose between community service and solvency in the wake of a major outbreak of illness. Vickie J. Williams’s article “Fluconomics” presciently examined the bad financial incentives that hospitals would face in case of a serious outbreak of infectious disease:

[W]e currently have no means of ensuring that hospitals acting as isolation, quarantine, and treatment centers in a pandemic will survive the loss of revenue that they will experience in protecting the public’s health. Our hospitals depend on a fragmented financing system that presumes the hospital’s ability to shift costs from low-paying public payors to higher-paying private payors, and from less lucrative cases to more lucrative, often elective, procedures.

During a pandemic, hospitals treating pandemic victims will be unable to perform this cost-shifting function. Furthermore, the stigma that surrounds a hospital that acts as an isolation or quarantine center for an infectious disease will make it difficult for such hospitals to attract privately insured patients for some time after a pandemic ceases. The failure to provide financial assurances to hospitals and other first responders to a pandemic is likely to result in severe damage to our hospital system and to our ability to care for the sick and injured, both during and after a pandemic.

Hospitals, airlines, and airports face far too many incentives to capture immediate profits rather than to prepare for truly trying events. Conservatives constantly urge individuals to save—why can’t their potent political movement also encourage critical institutions to invest in resilience? Aviation expert Clive Irving explains that Heathrow could be paralyzed by 5 inches of snow because “it’s more concerned with being a mall than plowing runways.” Similarly, I believe that both the American and global health care systems are too consumed with profit centers like boutique medicine and cosmetic surgery. In a “Third World America,” critical infrastructure is all too often left at risk as its ostensible stewards seek short-term gain.

As socioeconomic systems become more complex, we should redouble our investments in their resiliency. Instead, our political leaders appear to be giving up on husbanding resources to prepare for the worst. Stranded travelers, abandoned cars, and unplowed streets in all but New York’s richest borough are bellwethers for more serious infrastructural breakdowns in the future.

*Altman’s article was written before passage of the Affordable Care Act. PPACA “established a permanent moratorium on the creation or expansion of new physician-owned hospitals after December 31, 2010″ but grandfathered in existing ones.

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