By Joel French, CEO of SCI Solutions
Moody’s Investors Service says nonprofit hospitals’ income declined for the second straight year in 2013, and their median rate of growth fell to an all-time low—a trend Moody’s expects to continue. This is in contrast to rising profits and patient volumes at publicly traded hospitals. Moody’s says part of the problem is that nonprofits tend to be smaller hospital systems or standalone facilities that have struggled to negotiate higher payment rates from insurers or curb their expenses in the face of declining federal reimbursements. Median revenue growth was 3.9 percent among the 383 hospitals in the report for 2013, which was outpaced by expense growth. About 25 percent of rated hospitals reported operating losses last year, up from just 17 percent in 2012.
Reimbursement shifts are disrupting the historic practice of cross-subsidization between commercial and public payers. For years, Medicare and Medicaid payments have been below hospitals’ costs. This is expected to worsen because patient mix for Medicare is increasing (estimated to grow from 42 percent in 2012 to 58 percent in 2022). Some of this reimbursement will be at risk-based on quality performance or subject to penalties. Medicaid enrollment is growing and is universally the worst payer for most hospitals. Hospitals used to be able to cross-subsidize their government payer losses by charging premium rates to commercial payers. This is no longer a sustainable strategy as narrow networks, defined contributions, high-deductible health plans and other risk-based arrangements are restricting payment or shifting more costs to patients.
In this environment, in addition to cost-reduction efforts designed to achieve breakeven with lower federal reimbursement levels and to achieve a low unit price in readiness for possible future population health management arrangements, health systems have an increasingly urgent need for revenue. However, revenue from inpatient admissions (a primary driver of hospital operating margins) fell in 2013, on average, by 4.9 percent. While ACA enrollment may have stemmed uncompensated care in some markets, the migration of volumes from inpatient admissions to lower cost outpatient volumes is expected to accelerate as payer and regulatory inpatient utilization scrutiny increases. Therefore, health systems must increase outpatient revenue. Most large health systems spent a lot of money to acquire and implement certified EHR technologies and to hire/acquire physician practices, but available market data suggests those investments (while arguably useful in the long term), do not meaningfully improve outpatient revenue and associated contribution margins. Indeed, network leakage to alternative providers from employed physicians is estimated at 25 percent of revenue and losses on physician employment are well-documented.
With volume shifting from inside the traditional acute hospital out to the community, hospitals must utilize technologies that can efficiently allow them to virtually establish provider network arrangements adequate for payer geographic and clinical scope requirements, and to be vigilant around revenue cycle performance. None of the major market share EHR technologies were designed to do this and attempting to redesign them for this purpose is a high-risk endeavor – the Emperor has no clothes. Instead of utilizing EHR software purpose-built to work inside the confines of a department, hospital or a hospital-owned clinic, clinically integrated networks and forward-leaning health systems are adopting cloud-based community referral management platforms designed to grow revenue across the care neighborhood, at the network level. These tools are natively designed to interoperate with software used inside the enterprise boundaries, breathing new life and return potential into those legacy investments without the risk of trusting an EHR vendor to become something it is clearly not.