The convergence of four powerful forces is forcing hospitals and health systems to choose between clinging to the status quo and reinventing themselves to thrive in a rapidly changing environment.

The first of these forces is the skyrocketing price of medical devices and pharmaceuticals, particularly specialty drugs such as Sovaldi, which is adding unsustainable cost to the health care system. Second, consolidation of the insurance industry has given large commercial payers more power to force price concessions from providers. This is exacerbated by the steady change in patient coverage from private to government payers, especially Medicaid and Medicare, both of which offer reimbursement lower than in the commercial market.

Third, public and private payers are encouraging a move from fee-for-service to value-based purchasing. This trend will force hospitals to maintain two payment systems at once: the FFS system that is generating most of the revenue and the shared savings system from which quality-based bonuses are calculated. The revenue generated from the FFS reimbursement model may not be sufficient to cover the cost of building a value-based organization.

Fourth, the rapid growth of disintermediating organizations such as ambulatory surgery centers and freestanding imaging centers, along with moves by large retail stores like Wal-Mart and CVS to become major providers of primary care, threatens to cut into both the specialty care and primary care business of hospitals.

Threat or opportunity?

How hospitals respond to the convergence of these forces — whether they entrench themselves in old, familiar business models or whether they seize the extraordinary opportunity that is embedded in this period of rapid change — is the seminal challenge. To date, hospitals have largely focused on clinging to the familiar and investing in the infrastructure necessary to compete for market share. This infrastructure includes acquisitions and expansion, purchasing expensive new technology, hospital-owned urgent care centers and a host of retail strategies based on the false assumptions that health care is just another retail commodity and that people seeking care act like other retail consumers.

There are serious problems with this approach. First, these strategies are largely motivated by trying to maintain and increase hospital revenue, not necessarily by working to increase value or looking critically at an opaque and, I believe, unsustainable hospital cost structure. Second, although over 80 percent of what determines lifetime health status has little to do with our formal medical system, this hospital response does not seek, in any serious way, to address the social determinants of health and health equity. Third, the focus on expansion and increasing market share adds significantly to an already massive infrastructure, trapping equity in the old business model and making it much more difficult to change course.

New playing field

Hospitals have no control over two demographic and fiscal realities: the relentless increase in the portion of the health care system funded by public resources and the fact that Medicaid and Medicare have become major, long-term drivers of our national debt. Hospitals have little time to reposition themselves for an uncertain future.

As the expansion of Medicaid under the Affordable Care Act and an aging population continue to increase the percentage of hospital revenue coming from public payments, the expectation of how these dollars will be spent will change. Many of the strategies employed by hospitals to expand their market share and enhance revenue do not improve overall community health. When most of the money to fund these activities came from private commercial payers, they could easily be justified as part of a health system's business model. However, it will become increasingly difficult to defend underwriting these activities with public resources — raised from the population as a whole — in the absence of a real commitment to community health.

In addition, the intensely partisan process of raising the debt ceiling to avoid default will become more focused on controlling the cost of Medicaid and Medicare, which compose an ever-growing share of hospital revenues. This is simple arithmetic as an aging population meets a hyperinflationary medical system. Every day for the next 14 years, another 10,000 people will become eligible for Medicare, at a rapidly escalating annual cost, which is now over $18,000 per person. On our current course, by 2027, the cost of Medicare, Medicaid, Social Security and interest on the national debt will equal all the revenue collected by the federal government. Obviously, that is not going to happen.

Remember, the debt ceiling crisis of 2011 gave us the “sequester” and an across-the-board 2 percent cut in Medicare. In October 2013, the federal government shut down for 16 days because Congress could not agree on raising the debt ceiling, which at that time was $16.7 trillion. Since then, Congress has suspended the debt ceiling, allowing the United States to keep borrowing to pay for spending already authorized, including Medicare and Medicaid. This suspension ends in March, at which time the national debt is projected to exceed $20 trillion, likely setting up a partisan debate about the debt ceiling and how to rein in the cost of Medicare and Medicaid.

Facing the future

Current hospital strategies do not adequately anticipate the politics of an increasingly revenue-constrained environment in which public funding will increasingly be tied to measurable improvements in community health, and Medicare and Medicaid will have become the focal point of federal cost control efforts.

Charting a successful course through change and uncertainty will require strategies that embrace the need to produce more value while assuming greater risk for the health of the community. The Adverse Childhood Experiences Study (conducted by Kaiser Permanente and the Centers for Disease Control and Prevention) clearly demonstrates the connection between early childhood risk factors and later health problems. And much of what we treat in our hospitals and medical practices is the aftermath — the symptoms of problems that occur first in our families, our homes and our neighborhoods.

The hospitals that emerge stable and resilient from the coming storm will be those whose leaders have the courage to fundamentally redefine how they see themselves and their role in their communities. Whether or not they are part of a larger system, hospitals are place-based organizations, not traded sector industries; they exist in, and are part of, communities.

That means leaders must ask the right questions: Is community benefit more than just complying with federal Internal Revenue Service requirements? Is all the health care infrastructure in the community, especially hospital facilities, necessary for high-quality care and improving community health? Does your organization have access to data systems measuring community health, and are you sharing this information with other stakeholders to determine where resources should be deployed? Is your organization moving toward risk-based systems requiring reinvention of service delivery and full partnership with players in other sectors?

Those hospitals that still have healthy margins should begin to adjust their central role as major community employers, investors and procurers of goods and services. To do so, they need to use strategies that improve community health, including the courageous redeployment of resources upstream to address the social determinants of health. Now is the time to shape your own destiny.

John A. Kitzhaber, M.D., is a physician and former governor of Oregon. He resides in Portland.