Interviewed by Bob Kehoe

How do you anticipate the looming budget debate will impact health care?

The economy is not recovering the way folks would have desired and the ability to pull discretionary spending out of defense doesn't seem to be as likely as before, so deeper cuts are likely, particularly to Medicare. I think legislators will punt on the Medicare sustainable growth rate. I can't envision any scenario where the cuts to Medicare are limited to the 2 percent of the sequester agreement.

How deep might the Medicare cuts be?

I'm expecting 3 to 4 percent because if you look at the sequester agreement solely around defense you have to find $50 billion to cut in 2013. Every nickel that's not taken out of defense has to come from somewhere else. Health care, as one-fourth of the federal government, is not going to escape that.

H&HN Web Exclusive

H&HN Contributing Editor Bob Kehoe interviews Paul Keckley, executive director of the Deloitte Center for Health Solutions, about a new Deloitte survey that finds many employers are unclear on many of the key elements of health reform, while most give middling grades to the health care system in general. Running Time: 4:21.

How will hospitals be impacted?

Sustainability is a question. The ability to pass through revenue increases via outpatient services will be ratcheted back. The inpatient side has been marginally increasing, but the outpatient side is where hospitals have tried to create a margin. I think that's going to be cut dramatically.

One out of four hospitals is going to be at or near technical insolvency. This sector faces enormous challenges. It's a three-part issue: You've got the payment cuts that will hit from the sequester agreement and from much more aggressive contracting by the health insurance plans. You've got increased supply chain costs as a result of the taxes in the Affordable Care Act, such as the device tax, the pharmaceutical tax and so on. Third, you have a poor economy in which bad debt is not going to go down. The number of people who will delay paying their medical bills or not pay them is going to rise.

It's the perfect storm. It's not just the budget. It's the budget plus the cost structure plus you've got this almost disastrous stall in the recovery. If you're a hospital CEO, you're not sleeping well. You know that this is going to get worse before it gets better and your front door now has the doctors in front of it saying, "Don't forget about us." You're redeploying capital from hospital operations into other physician-related entities to survive.

With all the political gridlock, what will be the motivating factor for action in early 2013?

It will be the solvency and liquidity crisis. We have to get serious about our debt and the bond-rating agencies, and the capital markets have been telling us this for three years. We have to get past the political cycle, and I think that's the reason nothing much will happen before Nov. 6. And you have these three sets of big deals — the sequester agreement, the sustainable growth rate and the Bush tax cuts — hitting at the end of the year. I think that's when this crescendos.

The hospital industry is essential from a workforce standpoint and others, but being essential and efficient are not the same. The organizations that become innovative about radical cost-reduction are going to be the ones that come out of this stronger. But there will be some losers and we have to acknowledge as a sector that we don't need every bed that we have and we don't necessarily need a hospital in every community.

How much overcapacity do you believe there is today?

If we adjust the demography — the population age and the prevalence of disease — against hospital capacity we probably have about 30 percent more capacity than we need, and that's being liberal. If you were being very aggressive, you'd push that to maybe as much as 40 percent.

Can an organized delivery system operate with 1.1 or 1.2 beds per 1,000 people? Yes. And we've got communities with 3 beds per 1,000 people. So this is going to happen one community at a time and it will be a pretty messy process, but much of the reason for the hospitals that were built 30 years ago has changed as a result of what we've learned about how to diagnose and treat patients. We don't need to be fighting the good fight of needing hospitals at all costs. We need local delivery systems in which inpatient care is one of several services. I don't think the inpatient business is going to be as central to or the epicenter of these systems in the future.

In the scenario you're painting, does it matter whether Obama or Romney is president?

No, that's the irony. We forecast and run a lot of models looking at health inflation and what happens if the employer penalty went to $6,000 from $2,000 and health care costs go from 4 percent compounded to 8 percent, and any way you cut it on a per capita basis we're spending enormously too much money on health care. Regardless of who's sitting in the White House, you can't fix the economy unless you fix health care spending. It may not be popular to say that, but it's true. I'm not sure you can say it and get elected.

Will Congress be forced to limit Medicare benefits?

Absolutely. Cost is volume times price. What policymakers have done for 25 years is experiment with different ways of pricing and defaulting more often than not to a discount to price. Reducing demand on the system and addressing the volume part is something we've been sheepish about.

Hospitals are paid to do hip replacements that shouldn't be done. They're doing diagnostic tests that shouldn't be done. But hospitals are kind of caught between a rock and a hard place. The doctor orders the tests, and in some cases the doctor owns the imaging center or the surgery center where the procedures are done.

The toughest job in health care is to be a CEO of a health system where yesterday you dealt with patients, today you deal with consumers; yesterday you dealt with a medical staff, tomorrow you've got to deal with an organized medical group. You're talking about transitioning strategy from growth models to where it's almost a sustainability model. You have to cut away all that you can and see if you can live to play another day.

We're all looking at the same data — go big or get out. You can't do this on a small footprint. You must be simple, bigger and you need a physician strategy that complements the health system strategy. The capital markets will reward the ones who can do all of this without piling up too much debt.

The Keckley File

Career spans 30 years in health services research in the private sector, academic medicine, health economics and policy.

On health care delivery changes
"I'm very optimistic about what's happening. What comes out of this chaos and chasm is opportunity. These are entrepreneurial folks who are finding ways to work smarter and better."

What he's reading
Reads three to four hours a day, usually starting at 4 a.m. Focuses on: clinical research and decision-making, industry studies on issues such as whether medical homes work, and case studies. "These are deep dives of organizations that see an opportunity and pursue it. They break the rules. I like that."