Illinois Governor Signs Bill Funding Conversion of Underutilized Hospitals

Article by Phil DeBruzzi and Brian Dennen

Illinois Gov. Bruce Rauner recently signed legislation that substantially updates the state’s hospital assessment program. The program gathers contributions from hospitals to seek matching federal funds, which are then redistributed with a focus toward facilities treating higher volumes of Medicaid patients. Importantly, this legislation also:

  • Provides for $263 million in initial funding that may be used toward renovation and other costs by underutilized or “overbedded” hospitals to fully or partially convert their inpatient beds to other uses.
  • Enacts a “Hospital Transformation Review Committee” to establish detailed guidelines over the next several months, including prioritizing projects that adapt facilities to provide behavioral health services, free-standing emergency centers, long-term care, or other unmet needs. The legislation also exempts projects approved by the committee from certain certificate of need program-related reviews.

What's Driving the Decrease in Need for Beds?

The Illinois legislation begins to address the glut in what has traditionally been the hub of our healthcare infrastructure: inpatient acute-care hospital beds. Medical and technological advancements have driven declining inpatient utilization rates and average length of stay, leading to a decrease in total inpatient days (and thus beds). The trend of services once thought to demand an inpatient stay moving to outpatient settings is likely to accelerate, among them minimally invasive total joint replacements and cardiac catheterization.

The Challenge Ahead for Hospitals

Our health facility infrastructure, much of it still dating to the Hill-Burton Act era of hospital expansion, is just starting down the path of adapting to the reduced need for beds and broader changes in healthcare delivery. The overcapacity is seen most directly in hospital occupancy rates, which as recently as 1990 averaged close to 70%, a level of occupancy that facilitates an efficient and sustainable use of resources while still providing significant contingency for surges in admissions.

Occupancy rates can vary significantly between urban and rural hospitals and by specific market. In 2014, the nationwide average occupancy rate was 61%, whereas rural hospitals with fewer than 100 beds had an average of 37%. That year, Atlanta had a market wide occupancy rate of 72%, while St. Louis, Missouri was at 55%. Low occupancy rates are not surprisingly correlated with poor operating margin; in a MedPAC study of 28 hospitals that closed, the average occupancy rate was 25% (19% among rural facilities, 32% for urban markets) and the operating margin -5.6%.

What Options Exist for Health System Leaders?

Of the 28 hospitals described above that closed, eight were reconfigured to provide free-standing emergency departments, urgent care centers, or other outpatient and community-supported developments like healthcare villages. Other hospitals are being transformed to post-acute care or assisted-living facilities, and even general residential uses. For leaders considering these options, a brief market assessment, as well as an initial feasibility study of the infrastructure, is advisable. Many markets may be saturated in these offerings and certain facilities will have significant physical limitations on future use based on irregular floor plans, low floor-to-floor heights, or mechanical and electrical systems.

Other factors may also rule out existing campuses from continuing as outpatient-only facilities or with a substantially scaled back inpatient footprint (e.g., microhospitals). Facilities with limited accessibility and visibility from major roadways will be ineffective in attracting patients demanding increasing convenience and retail-like experiences. Extended drive times to larger affiliated community hospitals or regional medical centers will prohibit successful free-standing emergency departments or microhospitals; the aligned “parent” hospitals are needed to accept transfers from these distributed locations, and to facilitate clinical and support services efficiencies such as “e-ICUs” or satellite lab locations.


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