Posted: 14 Nov. 2017 5 min. read

2018 outlook: Many hospitals and health systems will be straddling two canoes

By Steve Burrill, vice chairman, US Health Care Providers Leader, Deloitte LLP

As we paddle into 2018, many hospitals and health systems are rowing upstream–with a bit of choppy water ahead–straddling two canoes. The smaller canoe is value-based care, and many CEOs are trying to find stable footing. The other shoe remains firmly planted in the larger fee-for-service (FFS) or volume canoe.

In a recent survey conducted by the Deloitte Center for Health Solutions, hospital and health system CEOs told us they are concerned about operating under these two completely different financial models. In the long run, hospitals that have put more of their business in risk-based contracts earlier might fare better than those where it makes up a small percentage of revenue.

We’ve been talking about the shift to value-based care for the past several years now. Although the transition away from FFS is taking place, adoption is occurring more slowly than many hospital and health system CEOs anticipated. Almost 30 percent of all health care payments in the US are tied to alternative payment models, according to an October 30 report from the Health Care Payment Learning & Action Network–a public-private partnership launched by the US Department of Health and Human Services.

I’m not aware of any hospitals that have a majority of their payments coming from value-based contracts. However, I expect adoption will increase in 2018 now that the US Centers for Medicare and Medicaid Service (CMS) has issued final regulations for the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). Initiatives from CMS’s Center for Medicare and Medicaid Innovation, state Medicaid programs and, to some extent, private-sector health plans, could encourage further acceleration.

Along with strategically moving their business model from volume to value, I see four other challenges that hospitals, health systems, and physicians could face as we enter 2018.

Challenge 1. Sustaining positive margins in an uncertain and evolving environment

Sustaining positive margins might be one of the biggest issues for hospital and health system CEOs as we head into the New Year. Here’s why:

  • Changes to the 340B Program: Recent changes to the 340B Program could result in a steep reduction in pharmaceutical margins for hospitals that participate in the program. 
  • Lower inpatient revenue: Inpatient revenue has fallen 18 percentage points since 1994, which will likely push some health systems to consider additional revenue streams. Although operating margins increased in 2010 after the Affordable Care Act (ACA) due to increased insurance coverage–and as the economy emerged from a difficult recession–they began to level off beginning in 2012. I expect the actual cost of delivering care will continue to increase faster than inflation, but revenue increases won’t keep up.
  • More value-based contracts: As health systems take on more at-risk contracts with health plans and government payers, they become financially responsible for the health of their members. For many hospital leaders, it will be critical to understand the populations included in their risk-based contracts. The people who make up a community won’t necessarily reflect the population included in a contract. Members in a contract might be sicker and higher users of resources compared to the broader community. While health plans seem to understand this, some health systems aren’t there yet.

How can hospitals make up these higher costs given that revenue is likely to be relatively flat in the year ahead? Hospitals that are strictly in the FFS business might be able to boost margins by bringing in more cases–a tried and true approach, but not one that works with value-based care.

New approaches, such as using predictive analytics and artificial intelligence to improve the supply chain, or robots and cognitive automation to enhance finance and revenue cycle processes, have the potential to bend the cost curve and improve revenue next year and in the years to come. These emerging technologies, which are outlined in our recent paper, could help hospitals truly innovate their operations in the face of mounting financial pressures.

Additionally, to help offset potential losses, hospital leaders might want to consider alternative revenue streams, such as urgent care centers or joint ventures with health plans or other health systems, to counter declining revenue from in-patient services.

Challenge 2. Boosting use of electronic health records
The vast majority of hospitals and health systems are using electronic health records (EHRs) in some capacity, but I see many levels of implementation. Some hospitals continue to use EHRs that are several generations old and are little more than data repositories that are not interactive. More sophisticated hospitals are beginning to rely on EHRs to improve care. An EHR, for example, might trigger a warning to a physician who prescribes a drug that could cause an adverse reaction with another medication. The next step is to figure out how to extract data from the EHRs and use it to improve care quality through the use of data analytics, predictive analytics, and better care coordination.

Using big data to create better care plans and higher quality for patients is what hospitals and health systems should work to refine. In the year ahead, hospital leaders should get EHRs into the hands of every clinician. They also should work to make EHRs more interoperable – across systems as well as system to system.

Challenge 3. Improving efficiencies through virtual care including telehealth
Telehealth is another technology poised to reshape care delivery in 2018. Office visits conducted through a smart phone or tablet are becoming more prevalent as risk-based contracts encourage hospitals and health systems to build a holistic view of the patient, and consider new sites of care including the home. Still, one of the biggest barriers for the adoption of telehealth is the lack of payment for visits. In a volume-based world, clinicians generally do not get paid for virtual visits.

As health systems take part in more value-based contracts (and get paid a per-member per-month fee), the health system has a financial incentive to be efficient and effective. If telehealth can make clinicians more effective, hospitals are going to use it. However, executives at hospitals that generate most of their revenue from volume have little reason to adopt telehealth. These executives want patients to come in for their visits. As we enter 2018, hospital leaders should take a closer look at virtual health and telehealth as this technology becomes more widely adopted – and expected by consumers.

Challenge 4. Winning the hearts and minds of patients and families
The most successful hospitals in 2018 might be those that focus more attention on the member experience. Historically, this has not been the top priority for hospitals. But, we are seeing a shift. Consider this: According to Deloitte research, good patient experience is associated with higher hospital profitability. Hospitals with the highest patient-reported experience scores, for example, reported an average net margin of 4.7 percent. Hospitals with “low” ratings, by contrast, reported an average net margin on 1.8 percent.

Hospitals and health systems should help members manage chronic diseases, and keep patients out of the hospital through the use of preventive medicine and wellness programs. This might include connecting to their patients digitally and monitoring them at home. For patients who make on-site visits, hospitals and physician offices should create environments where patients feel comfortable. It also has to be easy for them to schedule appointments, and easy to get in to see a clinician. Patients also want to understand their bills, and even find a parking spot when they visit. To win the hearts and minds of their customers, patients should be greeted and thanked for their business. They want a sense of belonging.

As we paddle into the unknown waters of 2018, many hospitals will enter into new risk-based contracts, or will expand existing ones. Some hospitals will remain seated in the FFS canoe despite mounting pressure to change. Executives who are aware of potential hazards ahead, and have a map to help navigate around them, may be better positioned for a successful journey.


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