Imagine running a heavily regulated business where the pressure is on improving the quality of your service while lowering prices, but your largest payers don’t even cover your costs—and they promise to pinch you even more. Add to the mix the overwhelming pressure to change your entire business model, even though it doesn’t make financial sense to do so today. And that’s only half of it. Welcome to the hospital business.
“It’s like straddling a fence and the fence is barbed wire,“ notes John Bluford, president and CEO of Truman Medical Centers, a Kansas City, Mo., hospital that provides care to a significant number of poor and uninsured patients. “You can’t afford to slip.”
The nation’s roughly 5,000 hospitals vary widely in shape, size, and mission. But front and center for hospital executives today is improving quality of patient care while simultaneously lowering costs. “It’s changing from one business model, based on volume, to a value-based one,” says Malcolm Isley, vice president for strategic services at Greenville (S.C.) Hospital System.
That is the new mantra in healthcare, one encouraged by the health reform law enacted last year. Reform reduces Medicare and Medicaid payments to hospitals—accounting for 56 percent of hospital revenues—by $155 billion this decade. In return, some 32 million people gain coverage in 2014—easing hospitals’ significant charity care loads. Reform also sets in place incentives for hospitals to coordinate patient care to keep people out of the hospital and those treated from returning to it. For hospitals, changing business models—and mind-sets—from rewarding costly, episodic hospital care to a system in which hospitals have a stake and say in what patients do before and after visiting the hospital requires having “one foot on the dock and one foot on the boat,” says Rich Umbdenstock, president and CEO of the American Hospital Association. Even with new Medicare payments that penalize hospitals when certain patients get readmitted, volume still remains the top payment method for the foreseeable future.
Nonetheless, hospitals are moving to change organizational culture, improve care quality and safety, develop care coordination acumen, and make investments in costly electronic medical records and other information technology to support value-based care. They are also partnering, working, and improving relations with physicians. Positioning for tomorrow requires dealing with the financial realities today. This includes lower patient volumes and higher levels of charity care, thanks to the economy and stubborn job market, and difficulties accessing capital.
“The big question is, can we make it to 2014?” says Bluford, who also serves as AHA chairman. That is a central question for nine of 10 hospital executives surveyed by U.S. News and Fidelity Investments (see. X). More than 90 percent of executives are concerned or extremely concerned with being able to align hospitals’ operating costs with post-reform reimbursement in the next three years. To appreciate the issues hospital executives face, one needs to look in the rear-view mirror while simultaneously peering into a crystal ball.
Moving from a volume- to value-based business model “is hard work and it became harder with the recession and its issues,” Isley says. With high unemployment, “self-pay and bad debt has increased,” he adds. While some large hospitals and health systems weathered the recession, many institutions saw revenues drop and charity care costs rise. Well after the recession ended, seven of 10 hospitals reported lower overall patient volumes and depressed volumes of elective procedures, according to the AHA.
Meanwhile, hospitals have seen privately insured patients struggle to pay their growing out-of-pocket costs, switch to public health programs with lower reimbursement, or simply lose coverage, according to the Center for Studying Health System Change. Industry operating margins ran 2 percent to 4 percent in the last decade; nearly one third of hospitals in 2009 had negative operating margins.
Hospitals responded by cutting services and overhead, reducing staff, and deferring capital projects and investments in technology, says Umbdenstock. Hospital leaders support healthcare reform but note that the law creates many challenges.
Besides health reform’s already deep Medicare and Medicaid hospital cuts, the industry is bracing for more with this summer’s deficit reduction negotiations. Meanwhile, half of the newly insured in 2014 will be on Medicaid, which covers only 89 percent of hospital costs. Reform also included Medicare’s value-based purchasing, a carrot-and-stick initiative where hospitals can earn or forfeit 1 percent of their Medicare revenues starting late next year, and 2 percent later this decade, based on each hospital’s ability to improve quality and contain costs.
A seemingly small incentive, it nonetheless has gotten the attention of hospital leaders, as a 2 percent differential from a dominant payer can mean a good or bad year. “We strive to have a 2 percent margin,” says Bluford. Commercial insurers also are likely to follow Medicare’s lead.
The movement from sickness to wellness has sparked hospital activity around so-called accountable care organizations, bundled payments, and patient-centered medical homes, concepts built on care coordination, says Steven Valentine, president of the Camden Group, a Los Angeles-based healthcare consultancy. Hospitals are racing to put in place the pieces to support a move to value, including aligning with physicians and investing in information technology.
But hospitals have no roadmap in adopting a value-based care business model. “There is no transition plan,” notes Susan Davis, president and CEO of St. Vincent’s Medical Center in Bridgeport, Conn. To prepare St. Vincent’s, Davis is cultivating a culture focused on delivering safe and reliable care. The Catholic hospital also is looking to improve care delivery and coordinating patients’ care outside the hospital by better integrating physician and hospital interests and spending $10 million on a hospital electronic medical records (or EMR) system and investing $4 million in getting medical staff technology up to par. Later this year, hospitals can earn millions of Medicare dollars based on their ability to have in place a functioning EMR that can manage, track, and coordinate patient care. “IT is critical to safety of patients and continuum of care,” Davis says.
“Doctors are the key” to value-based care, says Isley. Greenville Hospital System “transitioned to a physician-led system,” putting doctors in governance and leadership positions. GHS also is employing many of the physicians caring for its patients, which is a trend nationally. The system’s 600 employed physicians deliver 85 percent of hospital and outpatient care. Having physician and health system interests financially aligned, says Isley, should give GHS a leg up in its ability to deliver value.
Some hospitals are ahead of others. Sinai Health System in Chicago, for example, began focusing on improving community health 20 years ago. “It’s not just acute care,” says Sinai President and CEO Alan Channing, “it’s housing, education, chronic disease.” Investments and initiatives outside the hospital have helped Sinai become a top hospital nationally, based on federal quality and performance measures. “We’ve been a low-cost provider for a while,” says Channing.
Still, commercial insurers have been slow to take notice of Sinai’s ability to reduce costs and improve health. For every $1 Sinai has invested in reducing asthma-related hospital admissions—largely by improving education in the community—it has prevented $15.57 in costs. Sixty percent of Sinai’s revenues come from Medicaid and only 5 percent from commercial carriers. “The payment mechanisms are still encounter-based,” Channing laments, worrying about “Sinai being able to make that transition while struggling to make payroll.”
Consultant Valentine says value and volume are intertwined. “To demonstrate value, you have to have volume,” he notes. Hospital consolidation will pick up, Valentine says, as providers strive to reduce per-unit costs and make investments to improve quality. One third of executives surveyed by U.S. News and Fidelity expect their hospitals will be absorbed or will absorb another in the next five years. “We believe in reform,” says Isley. “I’m optimistic on it, but there are head winds.”