How evaluating risk, physician integration can turn around hospital finances

Lack of operational discipline and a disconnect between strategy and actual market demand are fueling a downward slide in financial performance for hospitals and health systems, according to a post in the Harvard Business Review by Jeff Goldsmith, a national adviser to Navigant Consulting and associate professor of Public Health Sciences at University of Virginia.

To reverse the trend, Goldsmith said hospitals must revamp their strategies and demand that investments in new payment models and physician employees yield solid returns.

For years, hospital and health system leaders have used mergers and acquisitions to achieve scale in regional markets, entering employee contracts with physicians and taking on additional financial risk in the form of insurance contracts and sponsored health plans. But Goldsmith cited a number of large, well-known hospital and health systems who were clobbered by hefty losses in recent years, including a $266 million operating loss for MD Anderson Cancer Center for fiscal 2016 that was compounded by a further $170 million in losses in the first months of 2017. Cleveland Clinic saw a 71 percent drop in operating income in 2016. Duel losses in operating income of $512 million and $252 million operating loss suffered by Providence Health&Services, the second largest Catholic Health system in the U.S., inspired Catholic Health Initiatives and Dignity Health to announce merger plans, as the two systems had seen their own similar losses of late.

While Goldsmith conceded some of those financial issues are due to difficult IT installations or troubled provider-sponsored health plans, he said there is a common ground on which these issues built up and that is that operating expense increases outpaced revenue growth.

"After a modest surge in inpatient admissions from the Affordable Care Act's coverage expansion in the fall of 2014, hospitals have settled into a lengthy period of declining hospital admissions," Goldsmith wrote.

The main cause, he proposed, is failure to manage workforce size. This area accounts for about half of all hospital expenses, and to achieve sound financial performance, health systems need to "match their strategy to actual market demand," Goldsmith wrote.

First, providers should weigh investments in population-based payments, something into which many have already pumped millions. , but so far only eight percent of hospitals reported any capitated payment in in 2014. Market demand for provider-based risk arrangements is not high, or even consistent. Provider-sponsored health plans are not properly tailored for the exact demand there may be for them, and often falter in the face of well-established heavy hitters like Blue Cross.

Second, hospitals are losing money on Medicare patients thanks to lower reimbursement levels that cost hospitals money. Lacking management of basic revenue-cycle operations for commercial patients, such as having an appropriately documented, justifiable medical bill that can be collected, billing, and collection functions are also not being managed in such a way as to stop money leaks. This all boils down to diminished cash flows, Goldsmith said.

Finally, making physicians employees of the system needs to be purposeful, with a clear objective and return on the investment.

"If the goal is control over hospital clinical processes and episode-related expenses, then the physician enterprise should be built around clinical process managers (emergency physicians, intensivists, and hospitalists). If the goal is control over geographies or increasing the loyalty of patients to the health care system, the physician enterprise should be built around primary care physicians and advanced-practice nurses, whose distribution is based on the demand in each geography."

Systems would also do well to standardize compensation and support staffing, implement a centralized revenue-cycle operation health plan rate negotiations, and cut down on variations in prescribing and diagnostic-testing patterns.

Twitter: @BethJSanborn
Email the writer: beth.sandborn@himssmedia.com