Hospitals often speak of what’s called “surge capacity” -- the ability to absorb a sudden influx of patients because of a terrorist attack, a natural disaster, or even, yes, a pandemic. Given the possible influx of patients sickened by the new coronavirus, how much of a surge can U.S. hospitals accommodate?

Not as much as you might think. For years, cost-conscious hospitals have emulated the lean, just-in-time principles that have revolutionized manufacturing. The result has been a health care system that is far more efficient, but unprepared to handle a sudden influx of seriously ill patients.

Over the first half the 20th century, hospitals expanded, adding beds at a steady clip. By the late 1950s, the United States had approximately nine hospital beds for every 1,000 people. Many of these beds went unused in normal times, but came in handy during periods of extreme stress.

For example, in the winter of 1957 and 1958, an epidemic of influenza swept the country. This was the worst outbreak since the famous pandemic of 1918, but hospitals managed to absorb the surge without any problems. Even in New York City, which was harder hit than most, hospitals coped with the increased demand, adding a few extra beds. The epidemic came and went with little damage. Hospitals didn’t overflow with patients. Things kept running.

In the 1960s and 1970s, hospitals expanded their facilities, thanks to government subsidies that encouraged capital spending. This eventually created a surplus of hospital beds at precisely the moment when growing concern over medical costs began to fuel a search for ways to limit hospital stays or eliminate them altogether.

The turning point came in 1983, when Congress transformed how Medicare reimbursed hospitals. Up to this point, the government had followed a fee-for-service arrangement. If a Medicare patient occupied a bed, the hospital could bill the government for whatever services the patient incurred. If anything, this arrangement gave hospitals an incentive to be inefficient, keeping patients in beds longer than necessary.

By contrast, under the new system introduced that year, a patient’s particular diagnosis was translated into a flat payment for their entire hospital visit. This unleashed market forces on hospitals as they began billing by the case, not by the day.

Its effects can be glimpsed in the data on occupancy rates in the nation’s hospitals. From 1945 to 1983, hospitals in the United States kept approximately 75 percent of beds in use, leaving a quarter ready for unanticipated surges. But after Congress acted, occupancy rates began to plunge, reaching 65 percent within two years and bottoming out at around 60 percent the following decade.

Hospitals began consolidating and cutting capacity, just as Congress intended. The rise of managed care and other cost-conscious models also moved much of the business of delivering health care out of hospitals and into doctors’ offices and other settings.

As the need for hospital care declined, the number of beds per capita declined, too. By the early 1990s, the number of beds per 1,000 population had fallen by 50 percent from its peak. Over the next decade, a growing number of analysts began to worry about the unthinkable: a future shortage of hospital beds. The aging of the larger population -- especially baby boomers -- looked particularly worrisome.

Yet little changed. Worse, there were growing signs of a strain on emergency rooms and intensive care units. Between 1997 and 2004 alone, 12 percent of the nation’s 24-hour emergency departments closed entirely. They weren’t profitable, particularly given that many of the people who showed up in them lacked insurance to pay for the visit.

This translated into increased pressure on the remaining ERs. Indeed, statistics show that emergency-department diversions -- when hospitals nudge ambulances to take patients elsewhere -- began increasing at this time. So, too, did the number of Americans seeking care from emergency rooms.

Increasingly crowded waiting rooms meant longer waits. This in turn led more patients to leave without being seen at all. In California alone, for example, the number of visitors to emergency departments who left against medical advice shot upward by 57 percent from 2012 to 2017.

For hospitals struggling to cut costs, the idea of adding beds -- particularly expensive ICU beds -- wasn’t particularly appealing. True, some hospitals added critical care beds, but this barely kept up with population growth and demand. In fact, studies over past 20 years have highlighted that while the system can handle normal levels of patient admissions, it’s ill-prepared to handle something like a pandemic.

But the problems beget by decades of cost-cutting and razor-thin margins don’t end with the availability of beds and emergency-room care. They extend to the most basic materials used in hospitals.

Since 2000, a growing number of health-care providers adopted the just-in-time inventory methods pioneered by auto manufacturers. Industry publications and academic articles alike have touted the cost savings that could come from pursuing this approach. In 2015, for example, a supply chain manager at Chicago’s Mercy Hospital told reporters, “It’s our job to make sure clinicians have what they need when they need it, but we must also make sure we don’t have too many dollars tied up in inventory.” Mercy proceeded to cut its on-hand inventory by 50 percent.

This included the equipment most critical for handling a pandemic, such as respirators. Michael Osterholm, an infectious disease expert who has long warned that the U.S. is unready to handle the influx of patients caused by an outbreak, recently noted: “No health care organization has gone out and stockpiled lots of personal protective equipment. They have always bought it on a just-in-time basis.”

Again, keeping costs to a minimum is laudable in normal times, even necessary. The same can be said for all the other cost-cutting measures unleashed on hospitals in recent decades. And yet, it may have set us up for disaster.

In the end, the pandemic may do more than kill people and sow chaos. It may do something more shocking still: destroy the quaint belief that market forces can cure all that ails us.


Stephen Mihm
Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to Bloomberg Opinion. -- Ed.

(Bloomberg)