The C-suite Agenda

Hospitals are responding vigorously to the challenges before them. And they expect their suppliers to do the same.

The current and future state of hospital economics? In a word, daunting. But hospitals are responding to the challenge vigorously, and they expect their suppliers to do the same. That’s the assessment of Fred Bentley, managing director, strategic research, The Advisory Board Company. The Advisory Board presented “The New Performance Standard: Prospering on Medicare Pricing” at the 2011 Health Industry Distributors Association Conference & Expo in Charlotte, N.C.

Hospitals’ response to economic challenges
Hospital margins have bounced back a bit since 2008, said Bentley, speaking with the Journal of Healthcare Contracting after the meeting. “But clearly, hospitals still have big concerns.” Public and private payers are continuing to hold the line on reimbursement, “and there’s the long-term reality of Medicare and Medicaid comprising a much larger percent of hospitals’ revenue base,” he said. And 18 months after the Patient Protection and Affordable Care Act (healthcare reform law) was signed, the industry is still trying to figure out exactly what it means. But hospital CEOs aren’t sitting idly by. Rather, they are responding in a number of ways:

1. M&A activity. “When you have this much upheaval in an industry – and it’s safe to say that healthcare has experienced upheaval in the past two years – you see increased consolidation,” said Bentley. There has been a “big uptick” in mergers-and-consolidation activity. “Recognizing it’s a tough environment to operate in, many hospital executives are recognizing they need to jump in with bigger players with deeper pockets.”

2. Redesigning operations. In the past, most hospital executives focused primarily on growing volume, particularly surgical volume, and pursuing commercially insured patients, while keeping costs in line. Today, and in the foreseeable future, they will focus on improving the quality of care their facilities provide, while bringing cost-consciousness to a new level, he said.

3. Information technology. Hospital executives are investing heavily in IT to build what The Advisory Board calls “the information-powered health system,” said Bentley. Just as physicians are required to demonstrate “meaningful use” of IT and electronic medical records, so too are hospitals. As a result, there has been a dramatic shift in capital spending priorities, with many administrators postponing purchases of new medical equipment in favor of IT.

4. Partnering with physicians. Even prior to the current recession and signing of the healthcare reform law, hospital executives had been pursuing closer partnerships with physicians, Bentley said.

5. Developing a chronic disease management infrastructure. Having laid the groundwork with information technology, hospitals are developing the ability to track patients across care settings, even helping to develop “medical homes.” It’s new for them. “There are a whole host of things hospitals will have to do to manage chronically ill patients, that they aren’t doing today,” said Bentley.

It’s difficult to say exactly what form accountable care organizations will take, he said. But with their emphasis on managing care across the continuum (that is, in inpatient and outpatient settings), ACOs will force providers to re-engineer their care delivery systems. “Commercial payers are already moving along that front.”

Of course, hospital executives won’t move faster than payers will allow them, he added. In other words, hospitals’ involvement in non-acute care won’t outpace their ability to be reimbursed for it. For that reason, The Advisory Board is advising its hospital clients to move forward cautiously. Even so, “there are some key investments hospitals can and should make that certainly will pay off in the long run in this chronic disease area,” said Bentley.

Spending priorities
Hospitals’ spending habits will continue to have a profound impact on their suppliers, said Bentley. Spending priorities and the purchasing process itself are changing. So is the way in which providers are defining value.
Hospital administrators have long recognized the value of product standardization in helping them maintain a lid on costs, said Bentley. Increasingly, they are recognizing the value of standardizing treatment processes too, not only in improved patient care, but in reduced costs.

What’s more, hospitals are getting smarter about how they spend their money, he said. They have the data and analytics to know how much they are spending, what their utilization is, and whether they are adhering to contracts. “They’re coming to the negotiating table…with a lot more insight, and they’re making investments in business intelligence software with the idea of achieving further savings down the road.”
Suppliers of products and services should be aware that while hospitals are more cost-conscious than ever, and price is still very important, they are also looking for strategic partners who can bring them value, said Bentley. Providers also want to know whether the data that is generated by a vendor’s product or system can be electronically linked to the rest of the healthcare system. “That’s a value parameter I don’t think we saw a couple of years ago,” he said.

Engaged patients
Perhaps the greatest challenge for hospitals will be engaging patients before and after their acute-care stay, said Bentley. How can hospitals help people be aware of their health status and the ramifications of the decisions they make in their daily lives? “They really must engage them in a different way.”

They will need the assistance of their physicians. As they did 10 or 15 years ago, hospitals are once again acquiring physician practices. And while they met only limited success in the 1990s, they have gotten much more savvy in managing practices, setting compensation, and, most important, integrating physicians into the decision-making process, said Bentley.