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Can emerging technologies improve hospital performance?
Strategies for healthier operating margins
Hospitals are anticipating tighter operating margins in 2017 and beyond, due to increasing financial pressure from policy, industry, and market changes. This report discusses innovative technologies and cost-reduction strategies that hospitals can consider to enhance revenue, increase efficiency, and achieve long-term financial stability.
- Increasing margin pressures for hospitals
- Hospital operating margins: Three key findings
- Hospital cost-reduction strategies
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Increasing margin pressures for hospitals
It’s an issue that’s keeping many chief executives up at night. Rising labor costs, fluctuations in payer mix, and regulatory changes, among other issues, are pressuring many hospitals and health systems to reduce costs and increase revenue (see figure one below).
Current and projected hospital operating margin challenges are considerable:
- Commercial health insurance payments as a percentage of hospital and health systems’ total payments are projected to drop from 37 percent to 33 percent by 2024.
- The percentage of revenue from historically lower-margin Medicare payments is projected to increase from 35 percent to 40 percent of total payments.
- Labor costs are anticipated to continue rising due, in part, to patient volume growth from an aging and more chronically ill US population.
Some future-state scenarios show that the combination of these trends could significantly reduce margins. For instance, a recent study from the Congressional Budget Office suggests that absent productivity growth, 51 percent to 60 percent of hospitals could have negative margins by 2025.
Hospital operating margins: Three key findings
To shed light on the main drivers of hospital operating expenses and revenue, the Deloitte Center for Health Solutions analyzed the financial performance of approximately 3,000 acute US hospitals between 2011 and 2015. Secondary research was also conducted on the types of innovative technologies that hospitals are beginning to leverage to reduce costs and enhance revenue.
Our analysis turned up three key findings:
- Variation in hospital revenue and expense performance is large. Although on average, margins increased from 4 percent in 2011 to 4.8 percent in 2015, roughly 30 percent of hospitals had negative operating margins each year.
- Hospitals might need to adopt new strategies, such as combining traditional workforce planning with predictive analytics, to improve efficiencies in labor costs and find alternatives to contract labor.
- To improve revenue, hospitals may want to revisit revenue cycle strategies, such as leveraging new technologies and analytics tools that help improve processes and coding to reduce claims denials.
Hospital cost-reduction strategies
Two primary drivers of hospital expenses and revenue that we identify in our analysis—increased labor costs and changes in case and payer mix driven by regulatory and demographic changes—likely will continue to exert pressure on hospital margins. Some of these pressures, such as regulatory and payer-mix changes, might be beyond hospitals’ control, but others are not.
Cost-reduction strategies that hospitals traditionally have relied upon may no longer be sufficient. To stay afloat—even thrive—in the future, health system leaders should consider strategies to optimize labor costs, reduce fixed costs, gain greater access to revenue through innovative value-based payment contracts with health plans, improve revenue cycle processes, and invest in new value-based care capabilities.
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 boost revenue in coming years. They could also help hospitals truly innovate their operations in the face of mounting financial pressures.
To read the full report on how innovative technologies can improve hospital financial performance, download The uncertain road ahead: Could technology offer hospitals relief from increasing margin pressures?
Health systems should consider developing proactive, winning strategies now to achieve long-term financial sustainability.