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CHAPTER 1

The Emerging Healthcare Business Model

Compelled by the urgency to rein in costs and improve quality and access, US health policymakers and consumers are demanding greater accountability and demonstrated value from healthcare providers. These forces are fundamentally altering how care is financed and delivered, in turn transforming the business of healthcare delivery.

Historically, healthcare organizations succeeded by performing more and more services to an increasing number of patients. Hospitals and health systems leveraged their brand and expanded services to attract more patients. Revenues grew with increases in patient volumes. When revenues exceeded operating costs, healthcare organizations could reinvest gains into equipment and facilities, invest in human capital, and build brand recognition in the markets they served. Absent a disruption to this cycle — a drop in patient volumes, uncontrolled operating expenses, or adverse quality events — healthcare providers could continue to prosper.

Over time, the old volume-driven, fee-for-service model has resulted in medical cost growth that has far outpaced general inflation. Medical consumers, including patients, health plans, and employer groups, have paid increasingly higher costs with limited means to measure outcomes and value. Recent healthcare policy reform, new payer strategies, and the forces of consumerism are poised to bring greater information and control to consumers while requiring greater provider accountability and transparency than has been seen in healthcare in the past. These forces represent a fundamental challenge to the traditional healthcare business model.

HOW HEALTHCARE'S BUSINESS MODEL IS EVOLVING

Faced with these challenges, healthcare providers must adapt to this new environment by adopting a new success model. The emerging business model in healthcare (exhibit 1.1) is based on the requirement of providers to produce demonstrated, measurable results for the services they provide at a cost that is affordable to consumers.

The model is made up of three primary components: results, revenue, and margin, as discussed in the following paragraphs.

Results

Providers must produce consistent results that meet the needs of healthcare consumers. In this context, results are the outcomes and value a healthcare entity or practitioner delivers to the patients served. These outcomes are a composite of three performance dimensions, which align with the Triple Aim of the Institute for Healthcare Improvement as explained by Berwick, Nolan, and Whittington (2008):

• Clinical quality. The organization provides high-quality, evidence-based clinical services that ensure patient safety and consistently achieve high-quality outcomes.

• Service quality. The organization provides excellent customer service through streamlined, patient-centric processes that facilitate access and efficient care that is reflected in high patient satisfaction scores.

• Cost performance. The organization provides cost-effective care that is market competitive and produces high value to patients and the communities served.

Increasingly, providers are required to track multiple metrics along these performance dimensions and share results with patients, payers, and the public. Armed with this information, consumers will increasingly migrate to high-value providers. This trend will, in turn, create mandates for competing providers to improve their performance.

Revenue

Fee-for-service reimbursement for healthcare services represents a shrinking portion of payments for those services. Increasingly, a healthcare organization's revenues will be based on the results they produce. A variety of payment programs now reward providers on the basis of their performance, including the following:

• Medicare accountable care organizations (ACOs) are intended to drive the coordination of care for Medicare patients, particularly those with chronic conditions. ACO payments include bundled payments that combine hospital and physician service remuneration. ACOs share in the savings that accrue through the program (CMS 2017a).

• Medicare's Hospital Value-Based Purchasing program withholds a portion of participating hospitals' acute care reimbursement and rewards or penalizes organizations on the basis of their quartile ranking in multiple clinical and service performance measures (CMS 2017d; AHRQ 2017).

• Case- or episode-based payment arrangements have been established for high-volume, high-cost services such as joint replacement surgery and usually bundle the hospital and physician professional fee. Providers are financially motivated to provide care at lowered costs.

• Direct contracting mechanisms are used by many large employers to obtain care for their employees. These arrangements usually have negotiated pricing, including case-based payment.

• Capitation sets a fixed amount that healthcare organizations are paid per month to provide for the total healthcare needs of patients.

Each of these payment methodologies places greater financial risk on providers than in the past and requires organizations to adopt new systems and learn new competencies to manage costs and improve quality performance. Hospitals and physicians must work together to coordinate and deliver high-quality, cost-effective care for patients. For low-performing health systems, payment reform will result in anemic or declining revenues for facility and professional services.

Margin

Organizations must generate operating margins for reinvestment in medical technologies, information systems, facilities, and new programs and services. Organizations that cannot generate sufficient operating margins are unable to pursue new markets, improve existing services, or enhance the organization's brand in the community.

As reimbursement pressures build, organizations will need to focus increased attention on reducing operating expenses to maintain sufficient margins. The new reimbursement systems will require new or reimagined operating structures that deliver quality care at substantially reduced costs. For most providers, this expectation creates significant disruption to current health system organization and management.

OPERATIONAL CHALLENGES IN THE NEW HEALTHCARE ENVIRONMENT

The emerging business model has profound implications for healthcare organizations and how care will be organized and delivered in the future. Pursuing value improvement requires providers to transform old operating systems and create new models of service delivery that lower costs and ensure increasingly high-quality outcomes.

To lead this transformation, healthcare executives must first confront significant operational challenges common to most health systems. These include the following:

• The rising costs of medical care resources

• The need for improved and integrated information systems

• The costs of building and sustaining ambulatory services

• The challenges of health system consolidation

• The shift from acute care hospitals

• The challenges of performance-based population health management

• The implications of increased consumer engagement and consumerism

The Continued Rise of Medical Care Resources and Costs

The rising costs of healthcare in the United States are driven largely by the ever-increasing operational expenses required to run healthcare systems. For many provider organizations, operating costs are increasing at rates that exceed revenue growth, resulting in small or negative operating margins, which are unsustainable over time.

Several operational components contribute to medical cost inflation, such as labor, supplies and capital, and facility operation.

Labor Costs

Healthcare delivery is a labor-intensive business, so providers continuously face challenges associated with

• wage inflation due to shortages in key skilled positions, including registered nurses, pharmacists, physical and occupational therapists, and numerous others;

• rising benefit expenses, particularly for employee health insurance coverage; and

• increased costs resulting from high staff turnover and recruitment expenses.

Supplies and Capital Equipment

Nonlabor expenses often represent the highest growth component of a healthcare system's operating expenses. Medical supplies represent 20 percent or more of a healthcare system's operating budget. High-growth, high-expense supply categories include the following:

• Surgical supplies associated with implants, biologics, and other devices

• Invasive cardiac supplies and devices

• Oncology drugs and other specialty pharmaceuticals

• Imaging and laboratory supplies and equipment

Facilities

Many health systems operate with outdated facilities and equipment that need renovation or replacement. The substantial investments required for these upgrades, or to service the debt associated with them, must ultimately come from philanthropy or through operating margins.

The Role of Information Systems

Information systems represent an ever-growing portion of a healthcare organization's capital investments. Significant funding is required for a wide range of applications, including the following:

• Electronic health records

• Electronic prescribing and order entry

• Clinical and operational decision support systems

• Decision support systems for population health management

• Health information exchanges

• Telemedicine

Leaders must fully leverage information technologies to streamline business processes and reduce costs. An information infrastructure is critical for healthcare systems seeking to maintain integrated and seamless processes and data flow across the enterprise. Organizations without sufficient margins will not be able to maintain the informational platform required for the future.

The Cost of Integrating Physician Services

Many healthcare systems have made substantial investments in purchasing physician practices, specialty clinics, urgent care centers, and other related ambulatory service providers. These investments are the centerpiece of a healthcare organization's drive to build integrated delivery systems that bring together hospital-based and physician office–based healthcare services. Hospital systems have many reasons for pursuing physician practice ownership, including the following:

• It provides new sources of ambulatory-based revenues.

• It preserves a hospital's primary care referral network.

• It builds physician alignment with and loyalty to the healthcare system.

• It facilitates joint business ventures between hospitals and physicians, such as comanagement agreements, bundled payment strategies, and population health management.

• It provides a foundation for cooperation in clinical and cost improvement initiatives.

Although the business case for integration is often compelling, many systems find the payback period on these investments to be much longer than originally envisioned. Healthcare systems may experience financial challenges with their physician enterprise, including

• gaps in leadership experience and competencies in managing complex, multidisciplinary physician organizations;

• lingering practice subsidies from high compensation levels and, in some cases, lower-than-planned physician productivity;

• continued leakage of patient referrals to competing organizations;

• lower-than-planned net revenues resulting from slow practice growth, payment reforms, and revenue cycle challenges;

• difficulties in consolidating practice support and administrative services; and

• challenges in blending hospital-centric cultures with physician service cultures.

The new business model will require healthcare systems to greatly improve the cost and revenue performance of their physician services enterprise and fully leverage the potential benefits of integration.

Hospital Consolidation into Large Healthcare Systems

With increasing frequency, hospital systems, through mergers and other affiliation agreements, are joining with other hospitals in their region or large national systems. Many markets today are dominated by a few large, integrated health systems.

Hospital mergers and consolidations are pursued to achieve the following goals:

• Enable joint contracting for managed care business

• Build scale and operational efficiencies

• Increase purchasing leverage for supplies and services

• Provide a broader portfolio of patient care services

• Reduce duplicative services and programs

• Expand the organization's geographic service region

Despite the many advantages of affiliation, multihospital systems are often slow to reap the full benefits. Many systems experience protracted delays in

• standardizing processes and systems to ensure consistencies in patient care services and create a unified brand;

• centralizing services beyond purchasing, patient accounts, and other support services;

• pursuing management consolidation across care sites;

• implementing clinical services consolidation to reduce duplicate programs; and

• reducing clinical practice variation across care sites and medical groups.

These delays occur most often in the early phases of system formation. During this period, individual sites and leaders frequently resist integration, preferring autonomy and retention of legacy processes and systems. Underlying these preferences are cultural norms and practices that vary across sites and are difficult to change and unify.

With increased revenue pressures, health system leaders need to focus attention on achieving the savings and revenue synergies that are possible in a multi-institutional healthcare system. For many health systems, achieving this aim requires executives to lead large-scale operational changes that are difficult to implement but necessary for the organization's future success.

The Shift from Care Delivery at Hospitals

Hospitals have long been the centerpiece of healthcare delivery. Most hospital facilities and programs have been designed primarily to support acute care services. As the most expensive component of healthcare, inpatient service utilization is a primary target for cost improvement from payers and population health initiatives. Advances in medical technologies are driving the shift of services even further from acute care to ambulatory or home care settings.

The shift from acute care has profound, long-term implications for how health systems are organized and structured, and healthcare leaders face numerous challenges as they guide organizations through this transition. For example, hospitals need to dramatically reduce inpatient bed capacity and redeploy resources to other components of the care continuum. In some cases, hospitals will eliminate acute care entirely and repurpose facilities for ambulatory care and other services.

During this transition, hospital organizations must build competencies in case management, improve inpatient throughput, and lower length-of-stay rates. Simultaneously, leaders must continuously adjust staffing and bed capacity to match reduced census levels.

Performance-Based Population Health

The shift from acute care will accelerate as the industry migrates to risk-based population health management and commensurate reimbursement. Healthcare systems must transform operations, invest in new systems and skills, and create new programs and services. The push toward population health is altering the traditional notion of margin generation for provider organizations (exhibit 1.2) and the incentives that drive provider behaviors.

To succeed at population health, health systems need to adopt the following approaches (Medicare.gov 2017):

• Expand clinical programs, through partnerships or acquisitions, to provide coordinated services across the full continuum of care.

• Create new medical programs designed to address the care requirements of patients with specific chronic conditions and disease states.

• Build clinically integrated networks with physicians to jointly coordinate and improve care delivery.

• Invest in information technologies, personnel, and expertise to support utilization management, health information exchanges, population analytics and predictive modeling, patient registries, and other programs.

• Implement processes and systems to support the patient-centered medical home models (AHRQ 2017).

Increased Consumerism and Consumer Engagement

Healthcare consumerism has risen in recent years out of growing public concerns and frustrations with the chronic problems plaguing the industry — rising costs, safety issues, wide variations in clinical outcomes, restricted access, and others. Consumerism continues to be fed from two primary sources: consumer-led trends and movements, and the consumer-based initiatives of government agencies, employers, health plans, and other organizations seeking to empower consumers.

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Excerpted from "18 Levers for High-Impact Performance Improvement"
by .
Copyright © 2018 Foundation of the American College of Healthcare Executives.
Excerpted by permission of Health Administration Press.
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