The hospital model today stands in the crosswinds of market and nonmarket forces. On the market side, there is the hard reality that sustainable margins are required for financial viability. On the nonmarket side, there are a host of regulations to comply with, a mission that includes caring for those who can’t pay, disproportionate payer bargaining power and a relative inability to compete on the dimensions of price and quality.
Compounding the problem has been the growing number of freestanding clinics, which are not subject to the same regulations and are able to carve out the most profitable portions of the market for themselves. With newer equipment and lower overhead, they can capture higher margins and can refer the uninsured, the marginally insured with big copays and those complex cases that pose the biggest medical and financial risks to the hospital.
Hospitals have been left playing catch-up. To stay competitive, they’ve needed to upgrade and expand facilities, compete for a shrinking pool of qualified staff and implement expensive new technology. The ongoing gap between current income and the requirements for continued competitiveness forced the assumption of debt, further increasing overhead.
Looking ahead, the view is even darker. In the aftermath of recession, banks have tightened their requirements for credit and governments are more wary of guarantees they might previously have given, so capital costs are rising.
Worse yet, significant reductions in reimbursement are in process, even as growth in the Medicare population is set to rise to historic levels. Hospitals have previously cost shifted to private payers to make up for Medicare’s notoriously low rates, but that’s sure to meet increasingly stiff resistance. Between new regulations and public fury over a decade of premium increases, private payers will not just resist but also continue to follow the Centers for Medicare & Medicaid Services' lead.
The kinds of cost-cutting tactics that have been typical in health care delivery for the past few decades won’t be adequate going forward. Paired with flat or shrinking margins, this typical situation makes for an unsustainable business model. Something has got to change. Here are five opportunities to do so.
1. Redefine Hospitals As Businesses
For more than a decade, as payers have increasingly squeezed revenues, much of health care delivery has defined its strategic response as doing what it’s always done, but for less.
To get off the “spend and borrow treadmill,” hospitals need to redefine the business they are in. For some that means defining themselves, in fact, as a business. While there is no single solution or model that guarantees success, it’s clearly time for some out-of-the-box thinking.
As a first step, hospitals will need to decide what businesses they won’t be in, and they’ll need to get out of those businesses. It’s that first step that improves margins and frees resources for future growth. They also need to think about how to change their cultures to create an environment in which this kind of entrepreneurial activity can flourish. A critical step in this direction is challenging the long-held assumptions that (1) if you practice good medicine, the money will follow, and (2) clinical and financial activity are independent and should remain separate.
2. Capture all the value in consolidation
One opportunity for thinking differently about health care delivery lies in more fully realizing the benefits of scale. Most hospital systems have successfully used their aggregated economic power to negotiate better terms with suppliers and payers but have hardly begun to leverage all of the competitive advantages that scale offers. Outside of health care, multidivisional corporate structures look for synergy across operating units by centralizing support functions, integrating sales forces and specializing manufacturing. Generally, this hasn’t happened in health care.
Systems need to move more decisively to capture operational improvements by specializing within facilities. This will allow more efficient use of assets as volume increases and efficiency efforts become more focused on core processes, and it will help to improve the competitiveness of hospitals with smaller clinics.
3. Make better use of service line organization
More radically, hospitals and systems need to more effectively integrate individual practice areas and ancillary treatments into a disease-state focus in selective areas. Such integration enables them to capture marketing and expertise synergies, as well as operational efficiencies, as fewer core processes are refined and standardized.
4. Rethink your competitive strategy
Established health care delivery organizations also need a more proactive strategy to counter the “cherry picking” of high-margin patients by freestanding clinics. Historically, the most common “strategy” is to enter into a joint venture reactively, when possible, which simply mitigates the loss. Hospitals need to consider new models of distribution and capital acquisition that will allow them to pre-empt such competitive activity.
Reconceptualizing delivery models also means considering innovations like walk-in retail clinics staffed by a nurse practitioner with a supervising physician on call for consultation. Entrepreneurial service companies already have broken this ground; forward-thinking corporations have followed suit, and hospitals that don’t act soon will find themselves shut out.
By mid-2014, there were 1,686 retail clinics in the United States, an increase of over 16 percent year over year. Most clinics are operated by pharmacy chains, grocery chains, and large discount stores like Wal-Mart and Target. Some operate in partnership with hospitals. Walk-in clinics led the way, providing nonacute diagnostics and treatment for the ills and minor accidents of everyday life.
Retail clinics are expanding into chronic disease management, employer-based health services and telehealth services that bring skilled practitioners to remote areas via electronic technology.
Podiatry and chronic disease management are now turning up in retail settings, and as increasingly sophisticated technology enables many formerly complex procedures to move to an ambulatory setting, it will continue to present new opportunities for growth outside the walls of hospitals.
5. Build your management infrastructure to support change
Hospitals have historically found it difficult to implement new strategy. In part that’s a result of their diffuse structure. Departments often function as silos, specialization confers power, and resistance to change is high. Too often, line management is not actively engaged by administration in making the case for and supporting change. As a result, change moves slowly or not at all.
Paralleling this issue is an even more fundamental one. The management infrastructure in most hospitals is optimized for performing technical tasks, not for meeting strategic business challenges. Managers themselves are usually promoted on the basis of strong technical skills and the ability to execute efficiently within the existing structure, so they are likely to lack the managerial and financial skills that allow them to drive change through the organization and are often exceptionally resistant to changing the system that worked so well for them.
Creating a management infrastructure that supports change is a critical first step for hospitals to remain competitive. This doesn’t simply mean putting appropriate information technology in place or training managers to get information from it (though both are necessary). It means ensuring that managers know what to do with the information once they have it, that they have the skills to use it effectively and that they understand what their larger purpose within the organization is so that they can use it to further that purpose.
What are you waiting for?
As we’ve suggested, there isn’t anything holding health systems back. There is, though, a rare market opportunity to seize the initiative and deliver more accountable care. Improving accountability will differentiate organizations in an increasingly competitive market in which cost and quality outcomes are growing more critical to success.
How well each of these interventions works depends in part on the development of a new underlying payment mechanism — in other words, transparent, predictive and inclusive at-risk provider accountability for comprehensive care across the continuum, whether it’s called population health, bundled pricing or anything else.
Editor’s note: Excerpted and adapted, with permission, from Bringing Value to Healthcare: Practical Steps for Getting to a Market-Based Model (Productivity Press, 2016).
Rita E. Numerof, Ph.D., is president and Michael N. Abrams, M.A., is managing director of Numerof & Associates Inc., St. Louis.