Health systems are in a maelstrom. Although margins have inched back to profitability, 40% of hospitals as of earlier this year were still losing money. Ratings agencies view 2024 as a critical year for hospitals to rebound not just from the staggering financial hit during the pandemic, but from ongoing operational struggles including rising drug and labor costs, the impact of Medicaid redetermination, and more.
The reality is health system executives face a bewildering set of threats and opportunities requiring attention. Focusing on one may mean neglecting another. So, what should they do? Where should health systems focus their valuable time and energy? The answer is different for each organization, but there is a set of realities touching every corner of the health system landscape, all of which demand some level of executive attention. We’ve identified eight of them, along with the implications for leaders.
Government markets continue to flourish
We know that…
An aging population is leading to steady climbs in Medicare enrollment with most beneficiaries opting for Medicare Advantage. By 2035, the ratio of working age to senior population will be 2:1, down from 4:1 in 2015. For the same service with similar costs, every working-age adult to retiree represents a 50% or more discount on the previous reimbursement. That means revenue is often only covering variable costs. And while Medicaid and Affordable Care Act coverage provides a lifeline to many who would otherwise go uninsured, they reimburse at even lower rates than Medicare, at times not even covering the incremental direct costs of the service, in effect causing a hospital to lose money on every unit of service.
Which implies…
Long-term success requires adopting a delivery model that addresses the needs of Medicare and Medicaid patients. A volume-based business model is not sustainable in the government segment. The mismatch between reimbursement and costs, coupled with the unique characteristics of each patient segment, creates an opportunity to customize the traditional one-size-fits-all care model into one that favors prevention, health, and total cost-of-care accountability. And doing so while maintaining, at least for the time being, parts of the system still operating in the traditional, volume-based model common in the commercial segment.
New approaches needed for commercial markets
We know that…
Managed care contracting continues to be a zero-sum game and commercial payers are holding tight. In a fee-for-service environment, any rate increases to health systems come at the expense of payers and employers. While some sympathy and understanding to their network partners may exist, it usually stops short of realized rate increases, further eroding the ability of the commercial segment to cross-subsidize government payers.
Which implies…
A need to develop new value-based contracts, exclusive partnerships, and direct-to-employer offerings within the commercial line of business. Unlike the senior space, cost drivers in the under-65 population are less likely to be addressable with prevention and chronic condition management. Still, health systems can move the needle on the total cost of care through HMO constructs, narrower network partnerships, bundled episodes, appropriate utilization controls, and expanding population health efforts, including innovative use of drug therapies.
Cost pressures are unyielding
We know that…
Economic pressures continue, with expenses outpacing revenue increases. Labor, supply, and drug cost increases have exceeded reimbursement trends. In an industry where margins are narrow even during the best of times, these new dynamics, and others, threaten the core health system business model.
Which implies…
Health systems can no longer be everything, to everyone, everywhere. Instead, they need to be fit for purpose, relying on their unique connection and commitment to the local communities. Health systems have always needed to balance the scope and location of available services with the efficiency and effectiveness of consolidation and specialization offers. It is time to reevaluate where and how to deploy physical sites that provide appropriate access, augmented with virtual, retail, and home modalities of care to remove travel burdens. Where a system determines it cannot sustain a service, developing the community alternatives and connections to continue offering a solution to patients, even if not directly owned.
Competition is coming from all corners
We know that…
Other players, including insurers, are pushing further into care delivery, encroaching on profitable service lines. Digital startups are targeting patients by offering population- and disease-specific models, most of them tapping into consumer desire for greater convenience. Put it all together traditional health systems are under more pressure than ever to find ways of keeping — and growing — their relevance to consumers.
Which implies...
Mirroring the point above, health systems need to excel with specific patient segments to match and exceed purpose-built models and connect with patients differently. Providers fare better than payers and life sciences companies when it comes to consumer trust and satisfaction. When providers craft a nuanced, targeted experience for specific segments, they tend to do very well. After all, no experience can be more meaningful in people’s lives than doctor relationships. To create a truly impactful experience, systems will need to tailor their care models to some populations, avoiding a one-size-fits-all approach.
A new labor model is needed
We know that…
Plentiful, affordable labor can no longer be assumed. Care delivery is labor intensive and health systems used to rely on a reliable supply of candidates for what was considered a long-term, respectable career for many. The new, post-COVID labor market sees higher attrition, limited supply, and higher cost per unit, challenging the health systems care delivery model.
Which implies…
The care delivery model must change to leverage technology, including artificial intelligence, and allow clinicians to operate at the top of their skill set. Faced with scarcer, costly labor, systems should re-evaluate how they best utilize the talent they have while complying with local regulatory and organized labor requirements. Technology such as ambient note-taking, AI chatbots, and remote patient monitoring, will play a larger role in removing lower-skill and non-value-added tasks. Additionally, hospitals should continue exploring avenues to allow non-physicians to operate at the top of their license. The typical hospital-employed medical group, for example, has 0.6 advanced practice providers for every physician while innovators like Duke Health, have been demonstrating the ability to almost invert that structure in some cases.
Shifting care out of the hospital
We know that…
Care is rapidly moving from inpatient settings to outpatient and ambulatory sites. An Oliver Wyman analysis of commercial claims data between 2020 and 2021 showed a 15% compound annual growth rate for outpatient care compared to 8.6% for inpatient care. The trend shows no sign of abating. There was a 293% climb in outpatient knee replacement surgeries between 2019 and 2023, for instance, versus a 78% decline for inpatient surgeries. Although telehealth utilization has come down from its peak during the pandemic, its usage remains high compared to pre-pandemic times.
Regulatory tailwinds, demands to boost access, consumer awareness, and technological advancements will continue to drive a meaningful and growing segment for patient care being delivered virtually and in the home. Our recent analysis showed that up to 40% of medical spend is clinically feasible to be delivered at home and up to 60% of hospital admissions could be done at home by 2035.
Which implies…
Assume top-license for care sites, where care is consistently being reimbursed at the lowest cost appropriate site. And while an important piece of the puzzle, virtual care will not replace the need and desire to see a clinician face-to-face. What is changing is the need to create a multi-modality care model where the right care is offered at the right time and in the right place. Health systems need to have continuous, seamless dialogues and care experiences with their patients across time and place, continuing an in-person conversation at the office following a virtual consultation or rounding out an episode with a follow-up at the patient’s home. We see care at home as being an essential part of improving the patient experience and impacting the total cost of care.
Tackling social determinants of health
We know that…
Medical care can only solve for part of the whole-person health goal. A variety of studies suggest that social determinants — access to transportation, food insecurity, and housing — influence as much as 80% of health outcomes. Payers, with the Centers for Medicare and Medicaid Services leading the charge, are factoring SDOH into several programs and payment policies. We are also seeing younger generations take a more holistic view of health. From mental health to fitness and wellness, they want solutions that address the full spectrum of well-being. As payers and consumers emphasize paying for health care over sick care, providers will become even more accountable for the total cost of care.
Which implies…
Drug management, mental healthcare, and solving for SDOH are requirements for success and delivering on a whole person health objective. Rooted in medical care, systems will need to master the new ways of delivering health. Novel drugs will continue to redefine what care means, shifting volume from procedural to therapeutic nature, with immense implications to volume and mix of services and sites of care. Drug costs are expected to exceed hospital-based care costs. Health systems will need to find ways to connect their patients to these services, whether owned or partnered.
Know when, and when not to scale up
We know that…
M&A and scale are not always the answer. Health systems have been consolidating and growing for decades. In many cases, the leading response to strategic and macro headwinds has been to acquire, merge, and gain the benefits of scale — lower operating, purchasing, and borrowing costs, along with a stronger market position. Furthermore, consolidation has become a lightning rod on Capitol Hill and for executive branch agencies. Future combinations will be larger, more complicated, and heavily scrutinized.
Which implies…
Growth and sustainability must go beyond expanding footprint and focus on acquiring capabilities via a range of vending, partnerships, joint ventures, and outsourcing as core competencies. Health systems can’t hope to own and excel in all capabilities required for success on their own. Some of those capabilities will need to be found externally and knowing how to quickly discern, determine, and source that is a key success factor. Vendor relations alone will be insufficient. A successful future system, of practically any size, will effectively develop and manage a web of relationships with third parties in various legal structures. In some cases, systems may decide to outsource. In others, rely on a partner to operate. And, in some instances, co-invest to develop a capability.