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    Want to Prevent the Next Hospital Bed Crisis? Enlist the SEC
    Op-Ed
    Want to Prevent the Next Hospital Bed Crisis? Enlist the SEC
    24 Feb 2022Op-Ed

    Want to Prevent the Next Hospital Bed Crisis? Enlist the SEC

    by Regina Herzlinger and Richard Boxer
    24 Feb 2022| by Regina Herzlinger and Richard Boxer
    After two years of COVID-19, many hospitals still haven't figured out how to manage the overwhelming wave of patients that flood ICUs during each surge. Regina Herzlinger and Richard Boxer offer a novel solution.
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    During the initial phases of the COVID-19 pandemic, many US hospitals could not provide enough beds to meet demand. Solving the problem of inadequate capacity is of utmost importance in the “new normal,” which requires recognizing the ongoing need for hospital-based care for viral diseases.

    Past attempts to avoid bed shortages by sharing capacity have generally failed, in part, because of the persistence of an independent hospital culture. As COVID-19 surged in 2020, capacity varied widely even among hospitals in the same city, according to data from 189 hospitals and 224 intensive care units (ICUs) studied by the University of Minnesota. For example, while one of the two largest hospitals in Spokane County, Washington, was 92 percent occupied, the other was only 30 percent full.

    Hospital administrators could help alleviate capacity problems by creating surge capacity plans for their institutions within individual and community networks. But they have not done so to date.

    Enter the SEC

    One novel way to assure that independent hospitals create network plans is to harness a new accounting standard, as specified by the Financial Accounting Standards Board (FASB). The standard would require hospitals to note their plans for meeting surges in capacity in their financial disclosures, most likely as accounts called “contingent liabilities,” events that are likely to cause expenses in the future. In general, FASB would require the hospitals to estimate the financial consequences of meeting surges in capacity and to explain how they derived that estimate.

    Transparency as a solution often fails because of a lack of enforcement or overly complex regulations. For example, when President Biden issued an executive order that warned of stiffer penalties for violating the surprise billing rule that hospitals had ignored, it imposed a tangle of new requirements and directed the US Department of Health and Human Services (HHS) to help prevent excess out-of-network charges. And consider the HHS’s multimillion dollar partnership with the American Hospital Association. The effort set out to bolster the “ability to identify and disseminate crucial information during the formative moments of a crisis," but has yet to offer implementation guidelines.

    How can such complex requirements—housed within the HHS, a $1.4 trillion organization that has so many other responsibilities—engender the required transparency?

    In contrast to approaches that rely on HHS, our recommendation for building hospital capacity uses the power of the Securities and Exchange Commission (SEC), which for nearly a century has been widely emulated for its success as a transparency agency. Under the SEC, FASB’s singular purpose—to increase for transparency—ensures that enforceable standards will be created.

    Although the SEC is hardly perfect, it helped reform once opaque financial markets with accessible, timely, relevant, and trustworthy information standards that enabled better resource allocation by investors. If these results were replicated in health care, in the short term, patients could select hospitals with more adequate surge capacity arrangements and investors in hospital debt and equity would reward them. In the longer run, lower-performing facilities would be motivated to improve, or new ones would emerge.

    How to make transparency happen

    Standards for hospitals’ surge capacity plans that follow typical SEC requirements should include the following four essential elements:

    Uniformity and relevance. The FASB would need to create a disclosure standard so that plans for surge capacity of different hospitals can be readily compared.

    As measurement and investment experts, FASB’s governors are capable of and motivated to fashion a standard that clearly addresses this issue. Their focus would be to protect the public, in contrast to industry stakeholders who fear the effect of transparency on their slice of the pie.

    Trustworthiness. When President Franklin Delano Roosevelt created the SEC, the 1933 law was often called the “Truth in Securities Act.” The SEC has helped build trust by requiring auditing of financial disclosures by independent experts, such as the Big Four accounting firms. Auditor opinions that are “qualified” or “adverse” can materially injure an organization’s credit worthiness and credibility, thus increasing its cost of capital.

    Accessibility. The SEC’s Electronic Data Gathering, Analysis, and Retrieval system (EDGAR), the SEC’s accessible database, can readily include standardized trustworthy data about the surge capacity plans of individual hospitals—updated in real time.

    Understandability. An expert should analyze plans and frame them in a way that the public would understand. A host of securities analysts, such as Bloomberg, Standard & Poor’s, Morningstar, and Fitch Ratings already comb EDGAR’s data to assess nonprofit hospitals’ debt and for-profit hospitals’ financial instruments. These analysts can communicate with investors and patients, including those who can’t plumb the depth of FASB’s technical nomenclature.

    Avoiding another pandemic calamity

    Does the SEC’s mandated financial transparency affect the financial markets? The literature overwhelmingly concludes that the answer is yes.

    Thus, for-profit hospitals and debt-financed nonprofits that lack adequate surge capacity plans will likely be rated as riskier than hospitals that have credible plans. Nonprofit hospitals with excellent plans may also experience a boost in donations, which strongly correlate with good performance.

    The “new normal” requires a variety of initiatives, including realistic plans for surge capacity. Our feasible transparency solution—relying on the SEC and FASB to compel uniform, trustworthy, and accessible information about hospitals’ surge capacity plans—would help avoid yet another calamity during the next inevitable cycle of the COVID-19 pandemic.

    Read more about the authors’ proposed solution in Transparency as a Solution for COVID-19-Related Hospital Capacity Issues in Health Affairs.

    About the Authors

    Regina E. Herzlinger is the Nancy R. McPherson Professor of Business Administration at Harvard Business School and author of Innovating in Healthcare: Creating Breakthrough Services, Products, and Business Models. She has advised Congress and past presidents on health care policy, and won the first HBS student award for outstanding instructor. Richard J. Boxer, MD, FACS, is clinical professor at the David Geffen School of Medicine at the University of California, Los Angeles, and previously represented the US as a private citizen at the World Health Organization.

    [Image: iStockphoto/Tempura]

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    Regina E. Herzlinger
    Regina E. Herzlinger
    Nancy R. McPherson Professor of Business Administration
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