- Hospitals are having a harder time controlling costs through labor and efficiencies and improvement efforts plateaued last year, according to Kaufman Hall’s 2018 National Flash Report. Profitability indicators show that operating margin improved by about 5% compared to 2017.
- Kaufman Hall, which analyzed more than 600 hospitals, found that volume trends underperformed compared to the previous year. Higher-acuity patients resulted in higher reimbursement per adjusted discharge and adjusted patient day.
- Drug expenses are one reason for the cost issues. Drug costs increased by about 4% from 2017. Also, bad debt and charity care grew, though at a slower pace at the end of the year. One piece of good news for hospitals is that revenue increased in 2018.
Kaufman Hall found that 2018 was generally a year of improvement in regards to profitability. However, volume indicators showed underperformance as discharges continue to drop.
Revenue indicators showed promise, but an ongoing problem is expenses. Hospitals are trying to contain costs by reducing full-time equivalents and bed numbers. However, those savings only go so far and hospitals expect they’ll need to add staff in the coming years. A recent Healthcare Financial Management Association/Navigant survey reported that 78% of hospital CFOs said their organizations’ labor budgets will grow in the coming years, with 18% expecting an increase of more than 5%.
Another factor working against hospitals is drug costs. A recent InCrowd survey found that physicians are pessimistic that those prices will change, with 82% saying it’s unlikely the situation will improve next year.
The Trump administration backs cutting prescription prices as a way to reduce costs. HHS released a proposal in January to end safe harbor protections for drug rebates through pharmacy benefit managers in Medicare Part D and Medicaid managed care plans. Those savings would instead go directly to consumers.
Hospitals have implemented cost-containment strategies, but the report shows there comes a point when hospitals can’t cut anymore. It appears the industry may have reached that point. “Hospitals will need to think more innovatively on how to manage expense,” according to the report.
Kaufman Hall pointed specifically to the West, which experienced “worsening labor efficiency.” Hospitals in this region “need to consider how to employ more advanced approaches to labor management,” the authors wrote.
There are other ways to squeeze dollars out of hospital costs, according to a recent McKinsey & Company report. It estimated that between $1.2 trillion and $2.3 trillion could be saved over the next decade on productivity gains and not expanding the workforce. The report highlighted potential opportunities to improve productivity through efficiency and care coordination.
For CEOs, market share is critical. But measurement of it, and tactics to grow it, are getting more complicated as patients connect with providers in more sophisticated ways.
Health system CEOs have always worked to meet their mission of caring for the poor and underserved and improving the health of their community. They often cite that mission as their top priority. But in truth, they are evaluated by how well they grow revenue and margin, both of which come through expanding market share.
Market share used to be easy to define. CEOs counted on a reliably increasing reimbursement model that exceeded inflation and an aging population that meant more hospital days every year. No longer. But even though market share growth is much more complex now, failing to achieve that growth could mean termination.
To win the market share battle, healthcare organizations must first redefine what it is (see the sidebar on new market share proxies) and then build strategies that take advantage of the shifts in healthcare delivery. Here’s how three healthcare leaders are doing it.
NORTHWELL: ‘THE CONSUMER IS THE DETERMINANT OF SUCCESS’
Michael Dowling, president and CEO of Northwell Health in Great Neck, New York, acknowledges the need to provide access, value, and convenience for consumers who are increasingly looking for a wide-ranging array of services offered by a single health system. The key to this strategy is the consumer as the focal point of healthcare decision-making.
Northwell is currently investing heavily in home health and digital care access, including a major initiative in telemedicine, but tying it all together into a seamless consumer experience is critical.
“You need hospitals as anchors, but the strategy is very consumer-focused in providing access and convenience,” Dowling says. “We’ve been doing this for 10 years, and it’s one of the reasons we’ve grown to being one of the biggest players in the New York City market. It’s the interconnection of all these pieces that makes all the difference.”
Although it’s not a perfect analogy, Dowling says Northwell wants to emulate Starbucks’ approach to market coverage. It’s not a location on every street corner, but it’s close.
“The traditional way of looking at market share isn’t valid anymore.”
—Chris Van Gorder
Also, getting critical market share mass in a variety of modalities is necessary to becoming the viable narrow network that employers and insurers are looking for. Smart health systems are spending more on smaller facilities, like micro-hospitals, or on freestanding ERs, homecare, urgent care centers, and telehealth capabilities. Such investment aims to meet the everyday health needs of consumers, not just provide for their increasingly rare inpatient stays.
This means focusing on organic growth that complements or even stands alone from the inpatient realm rather than buying hospitals, for example. Specialized areas of investment in both inpatient and outpatient care are the usual profitable service lines, such as orthopedics, neurology, and cardiac care, says Dowling.
He says he seeks two kinds of market share when it comes to reimbursement: Medicare and Medicaid, and commercial. Both kinds are needed to serve the community comprehensively, he says, but only one of the two makes a margin. Patients don’t see that distinction, though, and Northwell must serve them all.
“[Commercial] is what everyone’s going after,” he says. “So, you try to be the preferred provider. You take market share from competitors by developing the physician relationship and by the expansion of ambulatory. We’ve built a massive ambulatory network with over 650 locations. It’s a marketing and consumer experience strategy. If patients are not happy with experience, they will go somewhere else, so it’s multifaceted.”
Hospital-centric organizations used to measure market share in terms of inpatient volume or discharges, but as more services have moved outside the hospital environment, those have become less reliable measures of success.
“We’re all moving toward understanding that the consumer is the determinant of success, rather than just the patient care business,” says Dowling. “The consumer is going to be determining how they want care and where, and since more of it is not needed in the hospital, you have to create locations for cancer care and imaging and surgery where it can be done on an ambulatory basis.”
SCRIPPS: ACCENTUATE YOUR STRENGTHS
Chris Van Gorder, the longtime president and CEO of Scripps Health in San Diego, is content with a level of uncertainty around market share, and says that growing it depends partially on instinct in a time of upheaval.
“Market share’s an odd thing. Everyone still wants to gain commercial market share, of course,” he says. “But today we’re not so focused on the inpatient side. We’re doing total hips on the ambulatory side. So, the traditional way of looking at market share isn’t valid anymore.”
Even though the discharge-based methodology isn’t as relevant as it used to be, it’s still important. Rating agencies still use discharges as an important tool to measure financial health, and with the relative lack of precise alternatives, discharges can be an important factor in how they determine borrowing capacity and interest rate terms for healthcare organizations.
“As an industry, we have to figure that out,” Van Gorder says. “Rating agencies use discharges, but you could be reducing that number and getting stronger as an organization.”
Scripps went through its rating agency sessions about three months ago and has seen a small decline in those traditional market share measures, but Van Gorder says those measures don’t tell the full story anymore. Scripps’ market is dominated by three major players: itself, Kaiser Permanente, and Sharp HealthCare, so fluctuations in discharges are often small and at the edges.
Rating agencies are smart enough to recognize that healthcare is changing, Van Gorder says. For example, they know it’s the right strategy to move to ambulatory, and Scripps experienced growth in covered lives in its health plan, which is part of Scripps’ strategy to build its own narrow network. But even rating agencies are frustrated that there’s no metric to enable consistent comparisons, he says.
“We still talk about market share because I still need to make sure the hospitals are occupied enough. Half-full hospitals are the fastest way to go bankrupt,” he says.
Scripps is strong in cardiovascular services, particularly interventional cardiology. “So, we focus on maintaining our strength in that area and in ortho, which is becoming much more ambulatory than it used to be,” says Van Gorder.
One area where it’s not as strong is cancer, he says, even though Scripps is a major oncology provider in San Diego. To maintain and even buttress that market share, the health system has partnered with Houston’s MD Anderson Cancer Center to build a new comprehensive cancer program that started treating patients this summer.
“[MD Anderson] is building a network strategy, and they have 23,000 people just working on cancer, so we are taking advantage of their knowledge to make us stronger,” he says. “It was a market share play, but it’s much more than just that, with increased access to research and clinical trials.”
Facing fierce competition in ambulatory, Van Gorder says the health system is focusing on areas where it’s strongest and trying to grow there.
In all areas, he says Scripps must aggressively focus on cutting costs, because he sees cost as a proxy for quality. In fact, he notes, cost may be the major limitation for most health systems in growing market share for the foreseeable future.
“People are paying more out of pocket to come in, and insurance companies have gotten so good at narrow networks,” he says. “People tell me you can’t lead with cost, and I say no. Cost is a quality indicator.”
GRADY: INVESTING IN SPECIALTY SERVICES
Safety-net hospitals, such as Grady Health System in Atlanta, have historically been overrun by mission patients—that is, patients who do not bring margin, such as Medicaid patients. But its leadership has recognized that the health system needs to be more competitive in commercial patients.
For Grady, that hasn’t meant investment in traditional service lines, but instead investment in highly complex tertiary and quaternary services that can’t easily be found elsewhere in its market, says John Haupert, its president and CEO. With seed funding from philanthropic sources, Grady has made multimillion-dollar investments in stroke and neurological surgery, interventional cardiology, and surgical subspecialties.
“In our case, it was a matter of survival. If all your patients are Medicaid or unfunded, you’re not going to be in business. Part of Grady coming back to life 10 years ago involved developing strategies to grow in funding the mission,” says Haupert.
The complex cases that have come from Grady’s recent investments weren’t previously present in the market. Unlike many organizations, Grady needed to create additional inpatient capacity to maximize those investments in capital and talent. It will soon be operating around 700 occupied beds; 10 years ago, it was barely operating 400. It’s building new outpatient facilities as well, expanding ambulatory surgical and oncology capacity across the street to free up space in the main facility where its cancer center is now.
“In the next three years, we’ll have 750 beds in operation,” Haupert says. “We’ve gone from 9% to 20% commercial. That helps with sustainability.”
Approximately 25 percent of hospital and health system executives have no cost reduction goals for their organizations over the next five years, despite 96 percent of executives noting that transforming costs is a “significant” or “very significant” need for their organization, according to survey findings published by Kaufman Hall.
As hospitals and health systems face a myriad of pressures, including regulatory challenges, the rise of narrow networks and consumer demands, healthcare organizations need to reach a cost position that is equal or lower to competitors. For the majority of hospitals and health systems, achieving such a position will require a 25 percent to 30 percent reduction of costs over the next five years, according to Kaufman Hall.
The report, titled “2017 State of Cost Transformation in U.S. Hospitals: An Urgent Call to Accelerate Action,” presents the results of an online survey of more than 150 senior executives from U.S. hospitals and health systems to determine where the industry stands with transforming the cost of care.
Here are six insights from the report.
1. While almost all (96 percent) of executives identified cost reduction as a “significant” of “very significant” need, more than half (51 percent) of respondents said they have no cost reduction goal or a goal of only 1 percent to 5 percent in the next five years.
2. Only 5 percent of hospitals or health systems have a cost reduction goal of more than 20 percent over the next five years.
3. Seventy-five percent of executives indicated that their cost transformation success is average or below average.
4. Nearly 70 percent of executives acknowledged that they must close the discrepancy between their current operating performance and financial plan.
5. Almost 80 percent of respondents noted that they must proactively revise their cost structure with the industry switch to value-based care.
6. According to the report, a lack of accurate data, along with a lack of insight into costs and savings opportunities, may be the reason for limited cost reduction measures.