“Healthcare reform is a federal mandate to replace an antiquated and unsustainable reimbursement system with a more rational payment system based on value,” writes Lisa Goldstein from Moody’s Investors Service in a recent Special Comment, Not-for-Profit Hospitals: The Pursuit of Value. Ms. Goldstein, an iProtean expert featured in many foundational and advanced iProtean courses, presents a value perspective—both creating and measuring value.
If you have viewed the Finance and Mission & Strategy courses in which Ms. Goldstein appears, you will be familiar with her argument:
- Providing quality healthcare services at an affordable cost will be integral to a hospital’s financial strength as the sector begins a historic shift to value-based reimbursement after decades of following volume-based incentives.
- Measuring and proving value will become necessary for healthcare systems to maintain operating stability and distinguish themselves as market leaders.
In this week’s blog, we will cover Ms. Goldstein’s comments on creating value. She examines four management objectives hospitals are pursuing during the business model shift:
- Achieve breakeven performance with Medicare rates
- Build scale through non-traditional methods
- Improve patient experience
- Cultivate informed leadership
Achieve breakeven performance with Medicare rates
A pervasive objective across hospital management teams is to reach breakeven performance with Medicare rates (on a total cost basis) by lowering costs. Some hospitals compute what the financial gap is to reaching breakeven performance by assuming every patient (including commercially insured) is paid at Medicare rates. The rationale here is that over time, blended rates from all payers—commercial, exchange-based products, Medicaid, and self-pay patients—will equal Medicare rates.
Hospital management teams have adopted various strategies to accomplish breakeven performance with Medicare rates:
- Lowering costs by improving the flow of patients between clinical areas within the hospital
- Discharge planning with the patient and family so that medications and post-care treatments are well understood (particularly important because of Medicare penalties for unplanned readmissions)
- Opening lower-cost units designated exclusively for 23-hour observation patients who consume the same resources as an inpatient admission but for whom reimbursement is usually much less
Build scale through non-traditional models
Hospital management teams and boards may struggle with the question of optimal size. There is no standard answer; situations vary with the local market, long-term goals of the organization, and the organization’s focus on quality and financial viability. In many cases, hospitals try to achieve the benefits of scale by expanding beyond their traditional geographic service area through collaboration/consolidation, merger and/or acquisition. With the structural initiatives under the Affordable Care Act (ACA), many hospitals want to increase the number of “covered lives” and gain greater efficiencies.
Ms. Goldstein notes that Moody’s expects full-asset mergers and acquisitions to continue. Hospitals will also pursue scale through non-traditional consolidation strategies, which can diversify revenues while building size and expertise in managing a population. These contemporary consolidation strategies are taking various forms. Moody’s analysis of these new strategies takes a case-by-case approach. Rating implications will depend on the near-term financial and capital investment compared to the long-term impact on hospital performance and debt coverage. (See Ms. Goldstein elaborate on this in iProtean’s latest advanced course, Affiliation & Consolidation Strategies, Part Two).
Improve patient experience
Hospitals are using a variety of strategies to improve the patient experience. Examples include:
- Care navigators to accompany a patient through the course of his/her hospital treatments
- Team-based care models to determine a patient’s treatment plan
- Social media applications to increase brand awareness and promote convenience, particularly with respect to emergency room waiting times
- A Chief of Patient Experience in the C-suite to oversee these strategies
- Increased focus on information technology to coordinate care and improve the patient experience
Cultivate informed leadership
Ms. Goldstein, a long-time advocate of the importance of well-informed boards, notes that “it is undeniably clear that effective management and governance is paramount to creating high value healthcare systems.”
The ACA is driving providers to re-examine their business model with an accelerated urgency. Its new payment models will test management and governance in a profound way. The most successful hospitals will be able to quickly and effectively make changes mid course and re-adjust longer-term plans to respond to the rapidly changing dynamics in the industry.
Because of the process changes that may be required, many hospitals are adding executives and board members with atypical skills and backgrounds, including individuals with engineering and manufacturing backgrounds. Hospitals are recruiting managers with corporate backgrounds who bring consolidation expertise. Additionally, they are adding management and board members who come from industries with a heavy reliance on technology, particularly relevant given the large IT investment most hospitals are making.
(Special Comment: Not-for-Profit Hospitals: The Pursuit of Value, Moody’s Investors Service, May 8, 2013)
Next week the blog will continue Ms. Goldstein’s assessment of the pursuit of value by focusing on her second point, measuring value, and Moody’s new Indicators: measurements of demand and measurements of reimbursement risk.
iProtean subscribers, please note the new advanced Mission & Strategy course in your library, Affiliation & Consolidation Strategies, Part Two, featuring health experts Lisa Goldstein, Marian Jennings, Dan Grauman and Monte Dube. The experts discuss how to analyze alignment, regulation implications and the ratings impact of a consolidation.
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iProtean Symposium & Workshop
Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED). For more information, click here.
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