How are hospitals actually organized

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The basics of hospitals

Last year, I worked with Ben Chao to explain how hospitals actually spend their money since all of them seem to be brokebois.

Then a lot of you asked “what actually counts as a ‘hospital’”? And after a brief ayahuasca trip, we started asking ourselves the same question (just me, Ben’s clean).

So today we want to actually explain organizationally what hospitals actually are. We’ll go through:

• A short history of how hospitals evolved
• The different types of units you might see at a hospital
• What it means for a group to be “hospital-affiliated” and the various flavors
• The different types of hospital designations
• FAQ: What’s the difference between for-profit, non-profit, and public hospitals

Quick Note - Selling to Health Systems ends this week

As a very related side note - if you need to understand how these different hospital structures will change how you sell to them…

Our Selling to Health Systems starts next week, enrollment ends this week. Email neelesh@outofpocket.health if you have questions or want a group rate.

This course is basically a combination of teaching you the basics + consulting to refine your pitch from people that have been through the selling trenches. Sign up here.

What…is a hospital?

Hospitals have been around for centuries, established generally to care for the sick, poor, homeless, or suffering from mental health disorders. Most hospitals with a >100-year history were started with the dual role of being a charitable institution while serving public health needs. That’s why most hospital names sound like they’re a faction of the Inquisition.

Before the 80s, the basic hospital had an emergency department, Inpatient units for medical and surgical patients needing more complex care over multiple days, and operating rooms for increasingly specialized surgical care. They had contracted physicians and directly employed the support around them (nurses, nursing assistants, receptionists, etc.)

From the 80’s to the early 2010’s, hospitals evolved to directly employ more physicians. This first happened in primary care, then in medical specialties, and later in some surgical specialties. They evolved from hospitals into full “health systems”.

Health systems have further diversified since the mid-2000’s. A health system might have built more divisions/business units with a specialized focus to serve specific demographics like kids who need pediatric care or certain types of procedures. They’ve also bolted on more services like labs, imaging, etc. that help make decisions quicker. In the last few years you see more sites in the communities like urgent care that can feed into the hospital. 

They were even slanging’ burgers - Mayo Clinic’s cafeteria did $37M revenue, more than 95% of digital health companies.

Hospitals have expanded to become the “one stop shop” for a patient. But there’s lots of different hospitals, so today we’re going to talk about how they’re organized.

The “organizational units” of hospitals - Inpatient side

Before we start, it’s worth level-setting on the different lego blocks that make up a hospital.

What makes all hospitals common is the presence of inpatient beds. Inpatient beds are for stays over 24 hours providing comprehensive care including monitoring and support for medical conditions. Beds are aggregated into units typically ranging from 8-32 beds, and the units are staffed by an attending physician, a nurse, and some blend of other clinical support staff. 

What community hospitals and academic medical centers offer as inpatient units can vary by sophistication and size. Common unit types include:

• Observation - a unit typically for patients who have been triaged and had their chief complaint treated by the emergency department, but need monitoring for 24-48 hours to figure out if they need to be admitted or can be safely discharged. 
• Medical/Surgical - provides care for patients recovering from surgery or those with acute medical issues.
• Obstetrics/Midwifery - caring for mothers during pregnancy, childbirth, and immediate postpartum.
• Intensive or Critical Care - for critically ill patients requiring constant monitoring and life support, usually with a lot of staff and with subspecialized docs.
• Other units can be specialized for pediatrics, psychiatry, G-G-G-G unit, specialty-specific ICUs like cardiovascular care, inpatient rehabilitation (occupational, physical, and speech therapy), and skilled nursing (transitional care for patients with a longer recovery timeline but still need some level of medical supervision).

Some hospitals have emergency departments (ED). If you have an emergency department and participate in Medicare, you are by law required to service all patients when they come to your door. Your garden-variety community hospital or regional academic medical center is intended to be a broad catch-all for health services and uses the ED as a “front door” for most potential hospital stays. Stopping patients from doing exactly that is the business model for 50%+ of healthcare companies.

Other hospitals don’t want to take just anyone who walks through the door. They exist strictly for their specific purpose – maybe it’s helping people with long-term recovery from acute injuries or getting stabilizing care for a serious psychiatric episode.

Some patients who come in need procedures. Down the hall from these inpatient units can be procedural units for interventional care, or for diagnostics. These can include:

• Operating Rooms for invasive surgeries that require some type of open incision, including most common General, Orthopedic, ENT, Cardiothoracic, OB/GYN, Urologic, Neuro, and Colorectal surgery.
• Diagnostic Imaging/Radiology procedures using machines like CT, MRIs, Ultrasounds, and X-Ray are critical for supporting physician decision-making, and some radiology capabilities 
• Interventional Procedure Suites for minimally invasive procedures across three specialties:
  
  • Cardiac catheterizations - anything heart/vascular related, particularly angioplasties, stenting, electrophysiology studies, and valve repairs/replacements. 
  • Gastrointestinal Endoscopy labs - yup, for every 45 year-old. We’re putting tubes in your holes.
  • Interventional Radiology is a hybrid specialty leveraging imaging technologies for minimally invasive procedures like drainages, biopsies, and embolizations.

It takes several other Ancillary Departments to support these inpatient and procedural units, including:

• Laboratory: Diagnostic tests on bodily fluids to support care team decisions.
• Pharmacy: Preparation and dispensation of meds, including medication management (mitigating adverse reactions), compounding, and education.
• Physical, Occupation, Respiratory, and Speech Therapy: In many cases, a decentralized team that roves from unit-to-unit based on physician orders and patient care plans.
• Nutrition Services: Dietitians who assess nutritional needs and develop meal plans to support recovery
• Social Services: A wide range of care management, discharge planning, emotional support, and connection to community resources.

Most hospitals are measured by their capacity and operating statistics

• A small rural hospital might have something like 8 beds in their ED, 25 inpatient beds and 1 operating room for the most general surgeries. 
• An academic medical center in an urban metro area could have 80 ED beds, 16 ORs, 4 cath labs, and 700 inpatient beds
  
  • Of those 700 inpatient beds, they could have 50 ICU beds, 50 OB/midwifery beds, and another 600 divided across 20 units with most for surgical recovery and medical care. Maybe there’s one unit each for pediatrics, psychiatry, and inpatient rehabilitation.

What does “Hospital-Affiliated” mean? The Outpatient side

This is the healthcare equivalent of asking what a Chief of Staff is. No one really knows, and yet somehow you see it everywhere.

Everything we’ve talked about so far is bundled up under inpatient care. Outpatient care (where you go home the same day) can also take place on the campus of a hospital, or at a standalone clinic/satellite location. Outpatient care is typically physician-driven by a medical group. 

Hospital-affiliated practices are typically medical groups with a diverse set of primary and specialty care. These physicians refer internally to one another, and when procedures or inpatient stays are necessary they steer patients to get services at their affiliated hospital. It’s a beautiful dance between doctors, hospitals, and lawyers navigating anti-kickback laws. 

Physician affiliations can mean anything from co-branding and participating in contracting together, all the way to full acquisition. 

[I want to specifically highlight the Health Data Atlas post about this which goes way into the weeds of how this works. We drew a lot of inspiration from their graphics.]

A few flavors include:

• Acquisition: The physicians sell their practice to the hospital. Both the physicians and their practice support staff (medical assistants, nurses, admin) become employees of the system. Subsequently the physicians complain about hospital bureaucracy and how medicine isn’t the same while wiping their tears with piles of cash.

• Joint Venture: The physicians sell a portion of their equity in the practice to the hospital. This might be so the physicians can maintain some autonomy while gaining access to hospital assets like preferred contract rates with payers or suppliers.
• Professional Service Agreement (PSA): The clinic rebrands to the hospital and the staff become employees of the hospital. The physicians create a professional corporation that they employ themselves through, and sign an exclusive agreement to provide professional services to the practice and other parts of the hospital. This gives the physicians more flexibility around how they compensate their staff, contract with other hospitals, etc.
• Hospital Master Services Agreement (MSA): The physicians retain their equity in the practice, but the hospital manages certain elements of the practice for them - this might include IT (access to an EHR or information security capabilities), scheduling and call center services, and sourcing expensive supplies.

The diagram below illustrates the above three arrangements.

The medical group is divided into a joint venture between the health system and a collective of physicians. The physicians work at the clinics that belong to the medical group and may work at the local hospitals that the health system operates.

Not all providers that work for the medical group are necessarily shareholders in the group - there could be affiliate providers that are directly employed by the group instead. Depending on the ownership stakes in the medical group, the health system can provide a variety of management services to the group. 

• Physician MSA/PSA: Same as the Professional Services Agreement but staff remain employed by the physicians’ professional corporation or a separate Management Services Organization (MSO) likely owned by the physicians. These staff are paid a fee by the affiliated health system to manage certain aspects of the practice, but the health system doesn’t have ownership in the MSO, unlike the equity in the joint venture medical group.

In this model, the staff in the MSO can enjoy the best of both worlds - they can take advantage of the hospital’s economies of scale for better contracts/equipment, and maintain autonomy to manage the practice better than the hospital could by carving out their own processes or buying best-of-breed technology. But you can only pull this off if your medical group has a lot of leverage vs. the affiliated hospital.

In this arrangement, the non-physician owner providers could be employed by the MSO or stay directly employed by the medical group.

• Value-Based Care Entity: The physicians have strategically decided to participate in value-based arrangements with risk-bearing entities. But, they don’t have the leverage to negotiate directly with the risk-bearing entity. They might join a hospital’s Accountable Care Organization (ACO) as a network provider and receive clinical or technology support services from the ACO as a result.

Here’s another, more Escher-esque example from Healthcare Data Atlas that shows a few ways that physicians work with facilities, third-party staffing agencies like Envision, and various provider networks at Emory Healthcare. It’s like one of those mazes in the back of kid’s cereal boxes you need to escape.

Some different types of hospitals

Some hospitals have specific legal designations that help Medicare and other agencies figure out how to appropriately reimburse and regulate them. Legal designations create unique requirements or enable different capabilities. 

Some examples of legal hospital designations, which don’t equate to the more informal hospital categories we’ll note later:

• A Critical Access Hospital is a federally-designated facility that serves a rural community. They must be at least 35 miles from another hospital, can only have up to 25 beds, and are expected to maintain an average length of stay of 4 days or less. This designation helps these hospitals receive cost-based reimbursement from Medicare, improving their financial stability. 
• Long-term acute care hospitals (LTACHs) are for people who need extended inpatient rehab - they’re likely recovering from a severe injury and need bedside care plus regular visits with physical, occupational, speech language, and respiratory therapists. LTACHs will have much longer lengths of stay compared to a community hospital. Medicare typically likes to evaluate and pay hospitals a fixed amount for each diagnosis-specific discharge, so a longer length of stay is likely to incur more cost to the hospital. As a result, LTACHs have different length of stay benchmarks than other hospitals.

While not federal designations, there are also other hospital types you’ll tend to see that have emergency departments and offer certain types of services.

• Academic Medical Centers are your brand-name, regional, research-driven teaching hospitals (e.g. NYU Langone). They are affiliated with or part of a university, likely have a medical school attached, and use indentured residents/fellows as part of their medical staff. They tend to take the most acute and complex cases, participate in or lead most clinical trials/uses of novel procedures, and handle the highest-tier levels of trauma care for a community. 
• Children’s Hospitals specialize in pediatrics and attract patients for rare pediatric subspecialties. They may also be affiliated with a system that has an obstetric/midwifery service line for tighter coordination of care, particularly in neonatology care for sick or premature newborns. Like Academic Medical Centers, Children’s Hospitals have a very broad geography of patient origin than a local community hospital.

Some hospitals don’t have emergency departments:

• Psychiatric hospitals were previously dominated by large public institutions, acute behavioral health hospitals have increasingly become privatized. An increasing number have added emergency departments recently, and accept patients from the ED after stabilization, while others are strictly destinations for transfers from other acute care settings. McLean Hospital is an example.
• Surgery hospitals are focused on short-term 1 or 2-night stays for patients following surgery. Think of them as an extension beyond what can be done in an Ambulatory Surgery Center, where patients can go home the same day. This will be based on acuity, complexity, and the clinical riskiness of the patient. Surgery hospitals tend to be for-profit and may be owned by physicians. Patients with commercial insurance are almost exclusively seen at these hospitals. Animas Surgical Hospital in Durango, CO is an example - they are owned and operated by Surgery Partners, a Bain Capital-backed surgery chain and MSO.
• Cancer hospitals might be co-located with an academic medical center. They tend to be heavily outfitted with specialized ancillaries - including extensive imaging, onsite pharmacy, and diagnostic lab support - and procedural areas for radiation therapy, infusion suites, and surgical oncology operating rooms. City of Hope is an example.
• Long-term acute care hospitals which we talked about before, also typically don’t have emergency departments.

FAQ: What’s the deal with non-profit vs. for-profit?

We did a longer post about this topic. The general gist is that:

Non-Profit Hospitals (58% of hospital systems): These are governed by a self-regulating board with committees. They accept government-supported insurance (e.g., Medicaid, Medicare) and provide charity care to retain tax-exempt status, though the balance between charity care and tax benefits is debated.

Hospitals effectively trade-off between charity care and taxes. It’s important to remember that “non-profit” can be just as much a tax status influencing business operations as it is a charitable mission. Practically, it’s just a matter of where their operating margin is deducted from.

For-Profit Hospitals (24% of hospital systems): These hospitals operate under shareholder-elected boards and are not bound to charity care obligations. They pay corporate income taxes, unlike non-profits, and many are part of major publicly traded companies.

For-profit companies are not restricted to the same guidance around who they provide care to beyond their emergency department, meaning they can target patients that have better and higher paying insurance coverage. 

Public Hospitals (18% of hospital systems): These are often district-based or tied to public universities. Governed by elected Board Commissioners or academic leadership, they frequently serve rural communities and may have Critical Access Hospital status to support underserved areas. Hug your public hospital employee, they've...seen things.

Conclusion

Next week (or 6 months from now who cares), we’ll go through some specifics around what hospitals actually prioritize and a real-world example of a hospital making changes to its organization structure. Sign up for the newsletter to get it.

Big thanks again to Ben Chao who’s really the brains behind this post and the most knowledgeable person about hospitals I know.

Also next week…How To Sell to Health Systems starts! This course will teach you a lot of low-hanging fruit things that will very quickly make your pitch to hospitals better.

Thinksquad out,

Nikhil aka. “Tree of Qliphoth-ass org structures” and Ben aka. “The hospital whisperer”

Twitter: ​@nikillinit​

IG: ​@outofpockethealth​

Other posts: ​outofpocket.health/posts​

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