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 or volume canoe.
In the long run, hospitals that put more of their business in risk-based contracts earlier might fare better than those where it makes up a small percentage of revenue. 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 CMS has issued final regulations for 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 from volume to value, I foresee four other challenges in 2018.
- 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. 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 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, 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.
- Boosting use of EHRs
The majority of hospitals and health systems are using EHRs in some capacity, but I see many levels of implementation. 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 and work to make EHRs more interoperable – across systems as well as system to system.
- Improving efficiencies through virtual care
Telehealth is another technology poised to reshape care delivery. 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. Still, one of the biggest barriers to adoption 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. As we enter 2018, hospital leaders should take a closer look as this technology becomes more widely adopted – and expected by consumers.
- 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. 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. Consider this: According to Deloitte research, good patient experience is associated with higher hospital profitability.
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, may be better positioned for a successful journey.