What Hospitals Must Do to Thrive -- Not Just Survive -- on Medicare Margins

Published on Thursday, 01 December 2011 14:32 Written by TradersHuddle Staff

The Advisory Board Company recommends seven key levers providers should pull to respond to forces driving the future of hospital economics

WASHINGTON, Dec. 1, 2011 /PRNewswire/ -- Over the next decade, U.S. hospitals and health systems will face significant changes in the operating environment that, left unchecked, could negatively impact their financial outlook.  However, according to research and analysis from The Advisory Board Company, proactive leaders can position their health systems to thrive in the new environment by creating road maps for balanced margin enhancement.

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"Hospital leaders understand two immutable truths about the decade ahead: No one can repeal the aging of the Boomers onto the Medicare rolls, and caring for this population means tackling the rising costs of chronic medical conditions," says Tom Cassels, Executive Director of Research and Insights for The Advisory Board Company, a research, consulting, and technology services firm serving a membership of more than 2,900 of the world's leading health care organizations. 

"In the face of these challenges, you cannot simply cut your way to financial sustainability," Mr Cassels adds.  "Rather, hospital leaders need comprehensive plans to ensure financial strength, to continue investing in clinical excellence, and to sustain their commitments to the communities they serve."

Analysis from The Advisory Board Company's flagship research program, the Health Care Advisory Board®, suggests that through rigorous efforts to bend their own internal expense growth curves, best-in-class hospitals and health systems can achieve significant margin improvement to offset the impact of downward pressure on price, supply cost inflation, payer mix shift, and case mix shift.  

Yet focusing narrowly on cost cutting as a means of maintaining profitability will not be nearly enough, achieving just half of the margin improvements necessary.  Rather, successful margin enhancement efforts will require a balanced approach including each of the following seven levers:

• Sustained focus on rationalizing labor spending;
• Standardization of clinical protocols;
• Development of team-based care models;
• Best-in-class revenue cycle operations;
• Demonstrated performance on all value-based purchasing contracts;
• Gains in effective capacity by improving throughput and investing in less-costly outpatient facilities; and, most importantly,
• Proactive efforts to manage case mix by re-evaluating service line portfolios, deflecting avoidable medical admissions, and capturing share in procedural service lines.

Health systems preparing their own road maps for financial sustainability in the decade ahead are working with The Advisory Board Company through its Medicare Breakeven Project to quantify the margin impact of forthcoming changes, design comprehensive margin enhancement plans to improve both financial health and market position, and implement proven tactics and care models that yield value in the form of more effective, efficient service delivery.   

Meeting the New Performance Standard

"In every scenario we ran, hospitals and health systems will need to gain several percentage points of margin improvement across the next five years from vigorous outpatient management of chronically ill patients, while concurrently backfilling inpatient capacity with procedural cases," says Mr. Cassels. "Unfortunately the demand for inpatient surgery just will not grow like the demand for inpatient medicine, so these replacement cases will come from capturing a mix of organic growth and shifts in market share."

Despite the analysis, Mr. Cassels is hopeful: "While there is no getting around the fact that this represents a challenge for providers, the good news is that organizations have already begun investing in the tools they will need—physician alignment, care transformation, and IT infrastructure in particular. And these investments will not only help the hospital's bottom line, they will support the greater goals of better care for patients and healthier communities."

For more information, please visit The Advisory Board Company's Medicare Breakeven Project website, http://www.advisory.com/Research/Health-Care-Advisory-Board/Projects/About-The-Medicare-Breakeven-Project.

About the Health Care Advisory Board

The mission of the Health Care Advisory Board, The Advisory Board Company's flagship research program, is to track, report, and provide expert support to members on the most critical issues facing hospitals and health systems today and into the future.  The program's staff of expert industry researchers runs deep on a wide range of strategic, operational, and clinical subject areas, directing ongoing inquiry toward those areas of most acute interest to its members.

About The Advisory Board Company

The Advisory Board Company is a global research, consulting, and technology firm partnering with 125,000 leaders in 3,200 organizations across health care and higher education. Through its innovative membership model, the firm collaborates with executives and their teams to elevate performance and solve their most pressing challenges.  The company provides strategic guidance, actionable insights, web-based software solutions, and comprehensive implementation and management services. For more information, visit The Advisory Board Company's new website, http://www.advisory.com.

SOURCE The Advisory Board Company