Although there is a broad consensus about the importance of holistic patient care, this approach won't truly take shape until it becomes financially viable. The most intriguing and practical vision for implementing this new healthcare ecosystem has payors establish financial incentives and risk-sharing parameters with healthcare providers, who will be held accountable for improving overall patient health.
This type of accountable care organization model requires hospitals and other providers to have the appropriate economic incentives and infrastructure to treat patients across a continuum of care and manage their costs more efficiently. This will be challenging because L.E.K. Consulting projects that healthcare reform will place added financial strain on hospitals, and drive many of them to operate in the red once new mandates are enforced.
Exposing the cracks in hospital financials
The fiscal health of U.S. hospitals and health systems has been largely predicated on these institutions using profits from commercial health insurance plans to cover losses generated when caring for individuals who either don't have insurance or are insured by Medicare or Medicaid.
Commercial health insurance plans typically constitute approximately 45 percent of net patient revenues associated with hospital visits, procedures and related care conducted annually nationwide. Commercial health insurance plans also generally provide the majority of hospitals' gross profits because their reimbursement rates are significantly higher than those from federal agencies. (For a cross section of facilities that L.E.K. examined, commercial rates averaged 140 percent of Medicare rates and 149 percent of Medicaid rates).
L.E.K.'s analyses and estimates indicate that more than half of all U.S. hospitals and health centers are not structurally set up to provide care at costs that are within Medicare and Medicaid reimbursement rates. This is critical because these two programs represent an oversized and rapidly growing share of healthcare spending. Medicare alone provides approximately 30 percent of all reimbursements to hospitals — nearly double the percentage of the American population that it insures.
The new healthcare landscape
Five major drivers will affect hospitals once healthcare reform legislation is fully implemented.
1. The aging population expands. Baby boomers will continue to age into Medicare at a rate of roughly 3.1 percent per year, thereby transitioning individuals out of profitable, higher reimbursement commercial insurance coverage to the government payor.
2. Medicaid expands. The reform legislation greatly expands Medicaid eligibility to help cover a portion of those that are currently uninsured. As part of this effort, the federal government will fully fund the expansion for individuals who meet eligibility criteria between 2014-2017. Beginning in 2018, federal Medicaid funding will likely revert to historical levels — with the federal government paying roughly 65 percent of Medicaid costs and the states bearing the remainder. For the Medicaid program to remain financially viable post-expansion, the states will likely have to provide lower reimbursements to hospitals and providers.
3. Employer-sponsored coverage shrinks. Individuals under the age of 65 who are working may see their employer-sponsored coverage plans be discontinued. Instead, many companies may subsidize their employees' healthcare benefits via health insurance exchanges (similar to that in Massachusetts or Utah), which are slated to come online nationally in 2014. Or, companies will simply pay government penalties and drop coverage altogether.
4. Insurance exchanges gain prominence. In addition to gaining members who were previously covered by their employers, individuals who had been uninsured will also shop on exchanges with government subsidies to purchase individual coverage. These dynamics will lead to significant growth in the individual insurance market and make exchanges the dominant distribution channel. The dwindling commercial employer group market will add pressure to hospitals and providers by reducing the population of higher-reimbursement, commercially insured patients.
5. Reduced hospital bad debt. One bright spot of healthcare reform is new coverage for the majority of previously uninsured individuals through expanded Medicaid coverage or subsidized individual coverage through exchanges. Since a hospital's bad debt is largely driven by care for the uninsured, this change will significantly shrink the amount of bad debt that hospitals accrue.
2020 post-reform revenue projections
As a result of these and other marketplace changes, L.E.K. forecasts the following:
Based on this insight, reform will place significant financial pressure on hospitals and health systems, transforming them from slightly profitable entities today (on average) to operating at annual net losses in the future.
7 key considerations for hospitals
Despite the challenges reform will create, hospital and health systems can create a financially viable and sustainable care model by following the following seven practices.:
1. Refocus on market needs. Use market insights and relationships with payors to institute tailored programs (e.g., wellness) to better address specific populations. A shared view of population dynamics and collaboration with payors are keys to providing care efficiently for the multiple populations that providers serve.
2. Create and administer new care models. Begin reorienting operations to support a more holistic approach to patient care across all settings. This is especially important as hospitals establish their role in ACOs, and as the Medicare ACO compliance mandates come into effect in 2012.
3. Institute incentives for holistic patient care. Many hospital executives are considering risk/gain sharing models that establish appropriate financial motives among participants across the continuum of care. To increase efficiency, they are also evaluating partnerships, joint ventures and acquisitions to better align hospitals, health centers, primary care and specialty physicians.
4. Integrate clinical data. Changing the provider mindset regarding the value of clinically integrated data systems has proven difficult because most hospitals believe that payors (and patients to a lesser degree) are the primary beneficiaries of greater clinical transparency, simplified billing, etc. Providers must move past these perceptions and accept that clinical outcomes and quality measurement will be part of their financial equation going forward.
5. Ensure seamless transition of care. Controlling care transitions (from hospital to post-acute provider, or hospital to home care) represents a key lever in addressing issues around hospital re-admits due to poor post-discharge planning and coordination in the next care setting. Given the focus on readmission reduction by CMS and other payers, future reimbursements will be linked partially to a hospital's ability to reduce readmissions. This requires improvements in care transition and accountability for care outside the hospital campus.
6. Measure performance. Given the impending linkage between quality, outcomes and reimbursement, hospitals must enhance their ability to track quality and cost metrics across multiple patient populations. Hospitals will need to improve these measures to influence their reimbursements, and this is an area where innovative hospitals could lead the revolution instead of being trampled by it.
7. Educate consumers about new care models. Market education is pivotal to addressing consumer apprehension about changes in the healthcare system. It will be paramount to illustrate how these changes are beneficial to consumers and not just another attempt to control cost and limit care. Provides should partner with payors to show how new programs — such as wellness incentives and services — can be tailored to address specific consumer needs.
Reengineering care
Hospitals, providers and insurers need to reengineer the way they work together while transitioning to more coordinated models of care. This type of coordination can lead to greater use of alternative, low-cost care settings outside of hospitals – which can enable medical staff to treat relatively minor illnesses such as cold and flu quickly — and also serve lower reimbursement populations effectively. Hospital executives also need collaborate across the continuum of care and refocus on the primary populations that they serve.
Providers should also consider restructuring, mergers and joint-ventures, and specialization (e.g., specialized facilities) to further optimize cost. As part of this framework, insurers may also expand their strategies to own providers, hospitals and healthcare centers, and become more vertically integrated (as Integrated Delivery Networks or ACOs).
Finally, patient education and acceptance is essential to any new programs success. Informed patients will be in a better position to work collaboratively with providers to follow their care regiments and take the steps necessary to maintain and improve their health.
Martin Graf is a vice president in L.E.K. Consulting's Healthcare Services practice. Please contact L.E.K. at healthcare@lek.com for additional information.
Note: The L.E.K. analysis addresses the shifting population mix and uses the relatively optimistic assumption that hospitals will continue to realize the same level of gross profit margins from commercial insurers and individuals in the post-reform era as they do today. For simplicity, the analysis also assumes no further margin erosion for either Medicare or Medicaid. In reality, the true outlook may be worse because reimbursement rates from commercial and government insurers are likely to decrease in the wake of healthcare reform.
The Care Management Imperative
This type of accountable care organization model requires hospitals and other providers to have the appropriate economic incentives and infrastructure to treat patients across a continuum of care and manage their costs more efficiently. This will be challenging because L.E.K. Consulting projects that healthcare reform will place added financial strain on hospitals, and drive many of them to operate in the red once new mandates are enforced.
Exposing the cracks in hospital financials
The fiscal health of U.S. hospitals and health systems has been largely predicated on these institutions using profits from commercial health insurance plans to cover losses generated when caring for individuals who either don't have insurance or are insured by Medicare or Medicaid.
Commercial health insurance plans typically constitute approximately 45 percent of net patient revenues associated with hospital visits, procedures and related care conducted annually nationwide. Commercial health insurance plans also generally provide the majority of hospitals' gross profits because their reimbursement rates are significantly higher than those from federal agencies. (For a cross section of facilities that L.E.K. examined, commercial rates averaged 140 percent of Medicare rates and 149 percent of Medicaid rates).
L.E.K.'s analyses and estimates indicate that more than half of all U.S. hospitals and health centers are not structurally set up to provide care at costs that are within Medicare and Medicaid reimbursement rates. This is critical because these two programs represent an oversized and rapidly growing share of healthcare spending. Medicare alone provides approximately 30 percent of all reimbursements to hospitals — nearly double the percentage of the American population that it insures.
The new healthcare landscape
Five major drivers will affect hospitals once healthcare reform legislation is fully implemented.
1. The aging population expands. Baby boomers will continue to age into Medicare at a rate of roughly 3.1 percent per year, thereby transitioning individuals out of profitable, higher reimbursement commercial insurance coverage to the government payor.
2. Medicaid expands. The reform legislation greatly expands Medicaid eligibility to help cover a portion of those that are currently uninsured. As part of this effort, the federal government will fully fund the expansion for individuals who meet eligibility criteria between 2014-2017. Beginning in 2018, federal Medicaid funding will likely revert to historical levels — with the federal government paying roughly 65 percent of Medicaid costs and the states bearing the remainder. For the Medicaid program to remain financially viable post-expansion, the states will likely have to provide lower reimbursements to hospitals and providers.
3. Employer-sponsored coverage shrinks. Individuals under the age of 65 who are working may see their employer-sponsored coverage plans be discontinued. Instead, many companies may subsidize their employees' healthcare benefits via health insurance exchanges (similar to that in Massachusetts or Utah), which are slated to come online nationally in 2014. Or, companies will simply pay government penalties and drop coverage altogether.
4. Insurance exchanges gain prominence. In addition to gaining members who were previously covered by their employers, individuals who had been uninsured will also shop on exchanges with government subsidies to purchase individual coverage. These dynamics will lead to significant growth in the individual insurance market and make exchanges the dominant distribution channel. The dwindling commercial employer group market will add pressure to hospitals and providers by reducing the population of higher-reimbursement, commercially insured patients.
5. Reduced hospital bad debt. One bright spot of healthcare reform is new coverage for the majority of previously uninsured individuals through expanded Medicaid coverage or subsidized individual coverage through exchanges. Since a hospital's bad debt is largely driven by care for the uninsured, this change will significantly shrink the amount of bad debt that hospitals accrue.
2020 post-reform revenue projections
As a result of these and other marketplace changes, L.E.K. forecasts the following:
- The percentage of net hospital patient revenue from commercially insured plans will drop by more than half with unwinding of the employer group market.
- Providers will see a net 10 percent increase in hospital patient revenue from Medicaid.
- The percentage of total reimbursements from Medicare will grow approximately 15 percent through 2020, driven by seniors aging into the program.
Based on this insight, reform will place significant financial pressure on hospitals and health systems, transforming them from slightly profitable entities today (on average) to operating at annual net losses in the future.
7 key considerations for hospitals
Despite the challenges reform will create, hospital and health systems can create a financially viable and sustainable care model by following the following seven practices.:
1. Refocus on market needs. Use market insights and relationships with payors to institute tailored programs (e.g., wellness) to better address specific populations. A shared view of population dynamics and collaboration with payors are keys to providing care efficiently for the multiple populations that providers serve.
2. Create and administer new care models. Begin reorienting operations to support a more holistic approach to patient care across all settings. This is especially important as hospitals establish their role in ACOs, and as the Medicare ACO compliance mandates come into effect in 2012.
3. Institute incentives for holistic patient care. Many hospital executives are considering risk/gain sharing models that establish appropriate financial motives among participants across the continuum of care. To increase efficiency, they are also evaluating partnerships, joint ventures and acquisitions to better align hospitals, health centers, primary care and specialty physicians.
4. Integrate clinical data. Changing the provider mindset regarding the value of clinically integrated data systems has proven difficult because most hospitals believe that payors (and patients to a lesser degree) are the primary beneficiaries of greater clinical transparency, simplified billing, etc. Providers must move past these perceptions and accept that clinical outcomes and quality measurement will be part of their financial equation going forward.
5. Ensure seamless transition of care. Controlling care transitions (from hospital to post-acute provider, or hospital to home care) represents a key lever in addressing issues around hospital re-admits due to poor post-discharge planning and coordination in the next care setting. Given the focus on readmission reduction by CMS and other payers, future reimbursements will be linked partially to a hospital's ability to reduce readmissions. This requires improvements in care transition and accountability for care outside the hospital campus.
6. Measure performance. Given the impending linkage between quality, outcomes and reimbursement, hospitals must enhance their ability to track quality and cost metrics across multiple patient populations. Hospitals will need to improve these measures to influence their reimbursements, and this is an area where innovative hospitals could lead the revolution instead of being trampled by it.
7. Educate consumers about new care models. Market education is pivotal to addressing consumer apprehension about changes in the healthcare system. It will be paramount to illustrate how these changes are beneficial to consumers and not just another attempt to control cost and limit care. Provides should partner with payors to show how new programs — such as wellness incentives and services — can be tailored to address specific consumer needs.
Reengineering care
Hospitals, providers and insurers need to reengineer the way they work together while transitioning to more coordinated models of care. This type of coordination can lead to greater use of alternative, low-cost care settings outside of hospitals – which can enable medical staff to treat relatively minor illnesses such as cold and flu quickly — and also serve lower reimbursement populations effectively. Hospital executives also need collaborate across the continuum of care and refocus on the primary populations that they serve.
Providers should also consider restructuring, mergers and joint-ventures, and specialization (e.g., specialized facilities) to further optimize cost. As part of this framework, insurers may also expand their strategies to own providers, hospitals and healthcare centers, and become more vertically integrated (as Integrated Delivery Networks or ACOs).
Finally, patient education and acceptance is essential to any new programs success. Informed patients will be in a better position to work collaboratively with providers to follow their care regiments and take the steps necessary to maintain and improve their health.
Martin Graf is a vice president in L.E.K. Consulting's Healthcare Services practice. Please contact L.E.K. at healthcare@lek.com for additional information.
Note: The L.E.K. analysis addresses the shifting population mix and uses the relatively optimistic assumption that hospitals will continue to realize the same level of gross profit margins from commercial insurers and individuals in the post-reform era as they do today. For simplicity, the analysis also assumes no further margin erosion for either Medicare or Medicaid. In reality, the true outlook may be worse because reimbursement rates from commercial and government insurers are likely to decrease in the wake of healthcare reform.
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