Changing priorities shift hospital focus to outpatient strategies

It wasn’t all that long ago that most surgeries, and many medical and diagnostic procedures, required patients to plan for an inpatient hospital stay. But times have changed.

According to a 2013 report from Moody’s Investors Service, ambulatory service centers' same-location revenues have been growing in the low- to mid-single digits since 2007, while hospitals have seen same-facility inpatient surgery cases decline 0.22 percent annually.

Most hospitals are adjusting. “Many revenues that used to be generated from an inpatient setting are being diverted to outpatient settings,” said Brad Spielman, vice president and senior credit officer at Moody’s Investor Services, and the lead writer of the company’s new report, Building Value: Investments Aimed at New Priorities Create Opportunities for Not-For-Profit Hospitals.

Hospitals are investing more in outpatient facilities, from full-scale service centers to urgent care centers to standalone emergency departments, he noted. So intense is the drive to capture outpatient revenue that the strategy is approaching critical-mass status. “Certain hospital-based systems are starting to have more than 50 percent of revenues generated outside of the inpatient setting,” he said. “The trend is accelerating and the scales are starting to tip a bit.”

The movement is being propelled by many factors. They include consumers who are somewhat more mindful of receiving services at the lowest price point possible, and insurers and government payers focusing on trying to control the cost of healthcare, said Steve Kennedy, managing director at Lancaster Pollard. Healthcare services are also advancing, he noted. “… there is greater efficiency in being able to treat certain illnesses and complete certain procedures that negate the necessity of having so many inpatient stays as before,” he said.

A new world

Hospitals have their work cut out in ensuring that their outpatient service investments succeed. For one thing, there is increased competition from new venues, such as CVS, Walgreens, Target, and other retail giants, that offer retail-based walk-in medical clinics that can treat minor injuries, including burns, which in the past might have sent some patients to the ER, as well as vaccinations, care for common illnesses, checkups and other health services.

That said, opportunities may be found amid the new competition. If retailers like these “can deliver healthcare at some point on the low acuity end of the healthcare spectrum more cost effectively than a healthcare system, why wouldn’t the healthcare system reconsider whether or not to provide those same low-acuity services, or even look at partnering or associating with the low-cost provider?” Kennedy said.

Spielman points out that Cleveland Clinic already has a partnership with CVS Minute Clinic, and sees no reason why more such relationships wouldn’t develop.

He also noted other non-traditional investments that have taken place. These include the 2012 acquisition by Dignity Health (the fifth largest health system in the nation and the largest hospital provider in California) of U.S. Healthworks, an independent operator of occupational medicine and urgent care centers.  

Another challenge to hospitals trying to grow their outpatient services success may be the lack of strong ties to physicians. If hospitals don’t have the right relationships – either through direct employment of doctors or other close alliances – they are less likely to find success with outpatient ventures, “simply from the standpoint of just meeting staff levels and having the patient relationship already,” said Spielman.

For any hospital considering more investment in outpatient services, Kennedy suggests that they explore their financing options carefully. “Does it make sense for them to be the real estate owner, or to lease that space?” he said. For hospitals that employ physicians, the former option may be the better choice for new building plans. If employed physicians are to reside in the new building, the debt incurred in creating the structure can be tax-exempt, said Kennedy.

“It’s a unique characteristic when talking about nonprofit hospital versus general for-profit industries,” he noted. On the other hand, if the hospital’s credit profile is not particularly strong, leasing outpatient site property – whether physicians are employed or not – may be the better bet, to avoid taking on additional long-term debt.