The healthcare business is under great stress, with costs climbing as much as 44% over the past ten years.
Regulatory changes, the rise of high-deductible health plans, advances in technology and a shift to value-based care have added additional enormous financial and operational pressure on health systems.
For companies to survive in this environment, they will need to develop a strategic plan specifically designed for navigating a new and challenging ecosystem. And that strategy can’t be based on cost-reductions alone. It will need to revolve around a full redesign of their approach for the future to realize both better control of costs and improve outcomes.
The current state of healthcare
Healthcare is a system in crisis. Spending is projected to grow 1.2 percentage points faster than Gross Domestic Product (GDP) per year over the next decade with health costs expected to comprise almost 20% of the entire GDP by 2025. It remains to be seen whether the healthcare system currently in place can sustain such cost pressures without causing major industry bankruptcies. In 2017, 22 healthcare organizations filed for bankruptcy, and more are vulnerable. M&A activity among hospital systems is regaining momentum as many systems look to spread costs or escape bankruptcy.
At the same time, legislation has been a mixed blessing. The Affordable Care Act (ACA) has expanded coverage and has altered the payer mix while the Medicare Access and CHIP Reauthorization Act (MACRA) aims to accelerate the shift from volume to value. Both initiatives require healthcare companies to invest in advanced reporting capabilities to track the efficacy of treatments for each patient. While this has increased revenues because there are more patients, it has not improved revenue margins. Further, the uncertainty of the regulatory market in healthcare has initiated a wave of mergers and acquisitions, shrinking the provider pool as there is a search for efficiencies.
The result is a series of cost reduction initiatives that have led to staff layoffs, hiring freezes, and budget limitations. But these retrenchments do not always result in true savings and productivity. In fact, the healthcare operating model, culture, and infrastructure are not flexible enough for today’s complex challenges and changing healthcare environment. Notably, hospital admissions have been declining for years.
A strategic redesign for the future
That said, the same old strategies that kept the healthcare business profitable in the past no longer work in this age of industry consolidation. To best prepare for the changes that are currently underway, companies need to redesign their business and develop proactive strategies for both short term survival and long term sustainability.
To achieve financial stability, fully control costs, and improve outcomes, health systems need to implement the one-two punch of basic cost management: first, fully understand their baseline; second: redesign for the future.
First, develop a baseline diagnostic by determining a cost basis, and then benchmark and test that cost with feedback from key stakeholders. Effective baseline diagnostics will identify areas for cost reduction. Recently, a large regional hospital identified that admissions to its accident and emergency unit were twice that of other baselined hospitals in the area. Upon further analysis, the hospital identified that these admissions were increasing at 17% per year and were reimbursed at the lowest rate based on other procedures. The additional patient load was causing staff burnout and negatively impacting care and experience. By baselining against other organizations, it was clear that this was an area of opportunity.
Secondly, utilize baseline diagnostics to decide on a strategic redesign. Companies could do this by reviewing processes to remove waste and design improvements to operations. Once implemented, a redesign is where true cost savings can be realized. In the example above, coding processes and staff education were redesigned to allow proper coding for the actual procedures. The result was a 78% decrease in incorrect coding and an increase of ~$700K per year in reimbursement revenue.
This is only one example of leveraging baseline data to improve efficiency and reduce overall operating costs. For hospitals and health companies, implementing a cost out strategy can help them redesign for the future. Hospitals cannot continue to operate the way they have in the past if they are to survive in the future. Those organizations that don’t fundamentally redesign for the future will continue to struggle and become acquisition targets as the M&A frenzy continues into 2018.
Bret Schroeder is a healthcare expert and U.S. provider lead at PA Consulting Group https://www.linkedin.com/in/bretschroeder
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