Radio Advisory's Rachel Woods sat down with Optum EVP Dr. Jim Bonnette to discuss the sustainability of modern-day hospitals and why scaling down might be the best strategy for a stable future.

Read a lightly edited excerpt from the interview below and download the episode for the full conversation.

Rachel Woods: When I talk about hospitals of the future, I think it's very easy for folks to think about something that feels very futuristic, the Jetsons, Star Trek, pick your example here. But you have a very different take when it comes to the hospital, the future, and it's one that's perhaps a lot more streamlined than even the hospitals that we have today. Why is that your take?

Jim Bonnette: My concern about hospital future is that when people think about the technology side of it, they forget that there's no technology that I can name that has lowered health care costs that's been implemented in a hospital. Everything I can think of has increased costs and I don't think that's sustainable for the future.

And so looking at how hospitals have to function, I think the things that hospitals do that should no longer be in the hospital need to move out and they need to move out now. I think that there are a large number of procedures that could safely and easily be done in a lower cost setting, in an ASC for example, that is still done in hospitals because we still pay for them that way. I'm not sure that's going to continue.

Woods: And to be honest, we've talked about that shift, I think about the outpatient shift. We've been talking about that for several years but you just said the change needs to happen now. Why is the impetus for this change very different today than maybe it was two, three, four, five years ago? Why is this change going to be frankly forced upon hospitals in the very near future, if not already?

Bonnette: Part of the explanation is regarding the issues that have been pushed regarding price transparency. So if employers can see the difference between the charges for an ASC and an HOPD department, which are often quite dramatic, they're going to be looking to say to their brokers, "Well, what's the network that involves ASCs and not hospitals?" And that data hasn't been so easily available in the past, and I think economic times are different now.

We're not in a hyper growth phase, we're not where the economy's performing super at the moment and if interest rates keep going up, things are going to slow down more. So I think employers are going to become more sensitized to prices that they haven't been in the past. Regardless of the requirements under the Consolidated Appropriations Act, which require employers to know the costs, which they didn't have to know before. They're just going to more sensitive to price.

Woods: I completely agree with you by the way, that employers are a key catalyst here and we've certainly seen a few very active employers and some that are very passive and I too am interested to see what role they play or do they all take much more of an active role.

And I think some people would be surprised that it's not necessarily consumers themselves that are the big catalyst for change on where they're going to get care, how they want to receive care. It's the employers that are going to be making those decisions as purchasers themselves.

Bonnette: I agree and they're the ultimate payers. For most commercial insurance employers are the ultimate payers, not the insurance companies. And it's a cost of care share for patients, but the majority of the money comes from the employers. So it's basically cutting into their profits.

Woods: We are on the same page, but I'm going to be honest, I'm not sure that all of our listeners are right. We're talking about why these changes could happen soon, but when I have conversations with folks, they still think about a future of a more consolidated hospital, a more outpatient focused practice is something that is coming but is still far enough in the future that there's some time to prepare for.

I guess my question is what do you say to that pushback? And are there any inflection points that you're watching for that would really need to hit for this kind of change to hit all hospitals, to be something that we see across the industry?

Bonnette: So when I look at hospitals in general, I don't see them as much different than they were 20 years ago. We have talked about this movement for a long time, but hospitals are dragging their feet and realistically it's because they still get paid the same way until we start thinking about how we pay differently or refuse to pay for certain kinds of things in a hospital setting, the inertia is such that they're going to keep doing it.

Again, I think the push from employers and most likely the brokers are going to force this change sooner rather than later, but that's still probably between three and five years because there's so much inertia in health care.

On the other hand, we are hitting sort of an unsustainable phase of cost. The other thing that people don't talk about very much that I think is important is there's only so many dollars that are going to health care.

And if you look at the last 10 years, the growth in pharmaceutical spend has to eat into the dollars available for everybody else. So a pharmaceutical spend is growing much faster than anything else, the dollars are going to come out of somebody's hide and then next logical target is the hospital.

Woods: And we talked last week about how slim hospital margins are, how many of them are actually negative. And what we didn't mention that is top of mind for me after we just come out of this election is that there's actually not a lot of appetite for the government to step in and shore up hospitals.

There's a lot of feeling that they've done their due diligence, they stepped in when they needed to at the beginning of the Covid crisis and they shouldn't need to again. That kind of savior is probably not their outside of very specific circumstances.

Bonnette: I agree. I think it's highly unlikely that the government is going to step in to rescue hospitals. And part of that comes from the perception about pricing, which I'm sure Congress gets lots of complaints about the prices from hospitals.

And in addition, you'll notice that the for-profit hospitals don't have negative margins. They may not be quite as good as they were before, but they're not negative, which tells me there's an operational inefficiency in the not for-profit hospitals that doesn't exist in the for-profits.

Woods: This is where I wanted to go next. So let's say that a hospital, a health system decides the new path forward is to become smaller, to become cheaper, to become more streamlined, and to decide what specifically needs to happen in the hospital versus elsewhere in our organization.

Maybe I know where you're going next, but do you have an example of an organization who has had this success already that we can learn from?

Bonnette: Not in the not-for-profit section, no. In the for-profits, yes, because they have already started moving into ambulatory surgery centers. So Tenet has a huge practice of ambulatory surgery centers. It generates high margins.

So, I used to run ambulatory surgery centers in a for-profit system. And so think about ASCs get paid half as much as a hospital for a procedure, and my margin on that business in those ASCs was 40% to 50%. Whereas in the hospital the margin was about 7% and so even though the total dollars were less, my margin was higher because it's so much more efficient. And the for-profits already recognize this.

Woods: And I'm guessing you're going to tell me you want to see not-for-profit hospitals make these moves too? Or is there a different move that they should be making?

Bonnette: No, I think they have to. I think there are things beyond just ASCs though, for example, medical patients who can be treated at home should not be in the hospital. Most not-for-profits lose money on every medical admission.

Now, when I worked for a for-profit, I didn't lose money on every Medicare patient that was a medical patient. We had a 7% margin so it's doable. Again, it's efficiency of care delivery and it's attention to detail, which sometimes in a not-for-profit friends, that just doesn't happen.