Capacity planning seeing the forest for the trees: the recent return to increasing demand for inpatient capacity may have surprised many healthcare leaders, but broad population and technology trends suggest it was inevitable

Healthcare Financial Management, Oct, 2003 by Dean C. Coddington, Keith D. Moore, David C. Stephens, Jr.

Hospital facility construction is booming. Inpatient utilization is on the rise. What happened to the conventional wisdom that hospitals have too many beds? Or that demand for inpatient services will decline as patients flock to outpatient settings? Today's reality is proving quite different.

Between 1994 and 2000, inpatient admissions to the nation's acute care hospitals grew from 30.7 million (the low point of the past 20 years) to 33.1 million, according to the American Hospital Association's 2002 Hospital Statistics. Anecdotal evidence from hospital CEOs indicates that utilization of inpatient beds and emergency services is continuing to increase rapidly. These patients, many of whom are sicker than in the past, are increasingly consuming substantial hospital resources such as lab testing and imaging.

Insatiable Demand

"What Americans want is really quite simple," according to Uwe Reinhardt, Princeton University political economics professor. Reinhardt writes:

   [A]ll the health care they or their doctors can
   imagine, virtually free, without added taxes for health
   care and without higher out-of-pocket costs for
   their 'employer provided' health insurance. That's
   all. Call it part of the American dream. (Los Angeles
   Times, July 17, 2003)

Today's rising demand for healthcare services has often been characterized as "insatiable." And that demand will only increase as hospitals strive to meet the needs and expectations of the aging baby-boom generation.

Four indicators point to an increase in the overall demand for healthcare services over the long term--a demand affecting both inpatient and outpatient areas. Those indicators are the growth in total healthcare spending, the proliferation of outpatient surgery and diagnostic imaging centers, an increase in surgical volume, and an increase in prescriptions per physician office visit.

Growth in total healthcare spending. The annual healthcare spending growth rate, which is at least halfway attributable to volume of services, jumped from an average of 5 percent between 1995 and 1999 to nearly 8 percent between 2000 and 200l. Annual increases in healthcare spending are expected to be about 7 percent for the next few years.

Proliferation of outpatient surgery and diagnostic imaging centers. Over the period of 1996 through 2002, the number of outpatient surgery centers in the United States increased from 2,435 to more than 3,500. There were 4,159 diagnostic imaging centers in the U.S. in 2001, compared with 1,821 in 1991.

Increase in surgical volume. The number of surgeries performed (combined for inpatient and outpatient settings) increased at a substantially greater rate between 1996 and 2000 than in the preceding four years. Surgical volume has continued to grow rapidly since 2000.

Increase in prescriptions per physician office visit. In 1999 (latest data available), every 100 visits with a physician led to 146 prescriptions, compared with 109 prescriptions for 100 visits in 1985 (Burt, C. W., Health Affairs, July/August 2002). With the explosion in direct-to-consumer advertising of drugs, the number of prescriptions per 100 physician visits has continued to climb.

Surging Admissions

Now, indications are that demand for inpatient services is accelerating. What has been driving this trend? Jeff Goldsmith, the noted healthcare futurist, believes it is an outgrowth of the decline in managed care:

   I believe the current surge of hospitalization stems
   from the collapse of health plan oversight for physician
   and hospital use. Not only have managed care
   restrictions been successfully overridden by state and
   federal regulatory changes, but many strictures have
   been abandoned by the plans themselves because
   their administrative costs outweighed the savings they
   were intended to create. Physicians, in turn, have
   reacted to the end of managed care's "gatekeeping"
   technique by pushing the envelope of the level of care
   they can provide to patients. (Trustee, October 2002)

But the rise in admissions cannot be attributed entirely to the decline in managed care. Roger Gilbertson, MD, CEO of MeritCare in Fargo, N.D., observes, "This has never been a big managed care area, so we can't blame the loss of controls for the huge increases in utilization we have experienced. Fortunately, we were able to acquire a hospital in town that closed, and this gave us more capacity. We are still operating at 80 to 90 percent of inpatient capacity, and this creates very serious management problems."

Other factors contributing to the rise in inpatient care include the aging of the population, especially those 85 years and older, and advances in medical technology that are enabling the healthcare system to do much more for people than it could 15 or 20 years ago. Not just the elderly, but also many individuals in their 40s and 50s are becoming more active consumers of health care and taking advantage of new procedures and technology, and physicians are responding by providing greater access to such services. Overall population growth in the United States has also been a contributing factor.