In the second year of the Trump administration, the ACA lives on, but continuous political uncertainty and weakening of Obama-era healthcare reform policies, such as the individual mandate and bundled payments, have created enough friction to necessitate some strategic course corrections for hospitals and health systems.
"2017 was definitely a challenging year for the healthcare industry," said Mukesh Gangwal, president and CEO of Prism Healthcare Partners, a Chicago-based healthcare consulting firm, in a webinar Jan. 25. "There was a fair amount of political and therefore regulatory uncertainty in the U.S. There was no clarity in the pre- and post-Obamacare environment and this resulted, I think, in some level of inertia and freeze in terms of large-scale strategic or operational moves."
Mr. Gangwal was joined on the webinar by David Nosacka, CFO of Springfield, Ill.-based Hospital Sisters Health System's Southern Illinois Division and Brad Fetters, COO of Prism. During the webinar, Mr. Gangwal, Mr. Fetters and Mr. Nosacka discussed the major trends shaping the healthcare industry and how hospitals are reacting.
1. Payers pulled out of ACA markets. This left many patients uninsured and increased competition among providers. Mr. Nosacka noted southern Illinois saw a number of payers exit ACA markets for financial reasons, leaving patients uninsured and more hesitant to use healthcare services. "The whole play around the ACA and the election … really just shocked the insurance side of our business, which for most of us in health systems, that's largely where our profits come from," Mr. Nosacka said. "The competition amongst providers intensified as we tried to take market share from each other in a market that's flat and didn't see the sustained utilization growth that we may have seen in a prior year."
In addition to declining revenue from commercial payers, local politics also continue to exacerbate cash flow issues. HSHS receives limited payment from Illinois' Medicaid and the Medicaid managed care programs due to the lack of a state budget. This means Mr. Nosacka has been especially focused on containing costs at his organization. The state is migrating to a Medicaid managed care plan, so HSHS is working to determine which payers will have the most covered lives. "Medicaid is really driving a lot of our time and effort on the payer side right now," Mr. Nosacka said.
2. Risk-based contracts temporarily lost steam. While the industry is still moving toward risk-based contracts and value-based care, the pace of change has been slower than anticipated — arguably constrained by the administration change and resulting weakening of the ACA. "The risk-based contract is no longer as relevant a national issue for providers as was expected in the [2015-17] period," Mr. Gangwal said.
HSHS, for example, is dipping its toes in the water with risk, but doesn't have plans to expand in the near future, according to Mr. Nosacka. "It's not something that's grown significantly in the last few years, nor do I think it will in 2018," he said. At the moment, HSHS is focusing on managing internal risk, as well as the risk of its highest cost patients. The system still sees a future in value-based care, but plans to limit risk-based contracts until it can really excel at and scale population health management.
This slow and steady approach could be more sustainable. Some providers have had to pull back population health initiatives and other similar investments that have not yielded significant return. "We are seeing hospitals disband entire departments dedicated to population health and value-based care. It almost brings us back to where we were a few years ago," said Mr. Fetters.
3. As urgency around value-based care slows and reimbursements decrease across the board, providers have renewed their focus on cost reduction and service line rationalization. Though cost control never went out of style, there was some pivoting away under the hope that the ACA would bring in more revenue from the self-insured. When that didn't materialize, providers began to refocus their efforts on reducing expenses.
"The cost pressure kicked in in 2017," Mr. Nosacka said. "We had to go through that period really trying to reinvent ourselves. We had a budget; we had a strategic plan. We implemented that in the start of the year, but a lot had to be redone midcycle because just enough economic pressure was on us to pivot and try to run at a more efficient level. We didn't have the utilization, and the payer environment was just different."
However, this was no easy feat, Mr. Nosacka said. "The easy stuff most of us have already done." Compared to the "cost control" of years prior, providers are now looking for more significant improvements — not just 3 to 5 percent, but more like 10 to 20 percent improvements, according to Mr. Fetters. To attain this level of improvement, some hospitals are prioritizing service line rationalization. Systems are focusing on the service lines their communities need most and working to make those as efficient as possible. "There has been struggle around that, to be all things to all people in these communities, but [hospitals] just can't afford to do that anymore from both an economic and a quality standpoint," Mr. Fetters said.
4. Labor cost management remains a priority. Labor costs — typically accounting for 55 to 60 percent of a hospital's budget — present ample opportunity for improvement. "Organizations must find ways to reduce these expenses, no matter how many times they've looked at it in the past, or think there's nothing left," said Mr. Fetters. Hospitals need to reframe labor costs from work per unit of service to cost per unit of service, he said. This means examining shift schedules and skill mix on a real-time basis to ensure hospitals are using staff to the top of their license and getting the most for their money.
Mr. Nosacka noted HSHS is feeling financial pressure when it comes to labor and productivity, though the challenge is a bit different than years prior. While the system has adjusted staffing levels for peak efficiency, it is still a challenge to tighten productivity ratios while ensuring staff are not stretched too thin. "There is this sweet spot of being able to drive [the cost of] productivity down, but not being so understaffed or not having the number of part timers or PRN so you can't scale up and down," he said. His system's goal in 2018 is to find the perfect balance between cost reduction and staff retention.
5. With labor costs under greater scrutiny, hospitals are reexamining returns on physician employment. Many hospitals spent the last five-plus years hiring as many physicians as fast as they could. Now that pendulum is ready to swing in the other direction as physician payrolls eat up hospital margins. Adding weight to this trend are the physicians themselves, many of whom are seeing compensation fall short of expectations.
"We've seen this ramp up of employed providers and now we're trying to figure out how we are going to get them busier," Mr. Nosacka said. "Also we've got an expectation from the physicians that their incomes will rise ... And there may be legitimate reasons why [things haven't improved]." They may not be busy enough to grow their compensation, or some new physicians may not really know how to build a practice, he said.
While one of the chief benefits of employment for physicians is the ability to focus on clinical care delivery and have other teams handle leadership and administrative processes, the key to improving productivity, according to Mr. Fetters, is to actually pull employed physicians up into the strategic decision-making process.
For example, Prism worked with physicians at a children's hospital, where initially physician satisfaction scores were the lowest they had ever been, said Mr. Fetters. After involving physicians in process redesign for supply chain, preference items, pricing and labor, the hospital found physician satisfaction scores turned around completely. Satisfaction hit all-time highs due to increased engagement, even though the redesign reduced full-time employees.
6. Providers are bringing some revenue cycle management back in-house. The payer industry is becoming more complex, and providers are seeking ways to make the revenue cycle more efficient. "We all know we want to drive down [accounts receivable] days. We all know we want to drive down denials … But what does it really mean now?" said Mr. Nosacka. "Now it's so meaningful and the dollars we need are so apparent, we just can't wait another year."
Providers are beginning to bring these functions in-house for full control of the process, to ensure every dollar of clinical care provided is accounted for. "Functional outsourcing of revenue cycle is no longer fashionable. There was an upsurge of that activity over the last five years … but providers have realized revenue cycle is a core competency," Mr. Gangwal said. That said, many low-risk, low-dollar accounts can and should still be outsourced, according to Mr. Gangwal. He suggests outsourcing to a revenue cycle company or managing low-risk accounts with automated software that has artificial intelligence capabilities.
7. IT is ripe for cost-cutting initiatives. For several years, IT has been a black box, according to Mr. Fetters. Providers were happy to gear up on IT applications to help get their EHRs up and running. The opportunity outweighed the cost, and efficiency was an afterthought. However, hospitals are becoming more discerning about their IT investments. Many hospitals find they don't have controls in place to manage IT demands and associated labor, making it an ideal place to look for efficiencies in 2018. When organizations see how much they are spending on IT compared to their peers, it often comes as a shock, according to Mr. Fetters. Many find they are spending much more than necessary. "A lot of organizations we work with are stepping back and saying, 'First and foremost, how much can we afford to spend on IT? What are our priorities? Let's reprioritize and understand all the costs and resources that go into those priorities and make some tough decisions,'" Mr. Fetters said.
To learn more, view the full webinar here.
To learn more about Prism Healthcare Partners, click here.