10 Challenges and Opportunities for Hospitals in 2014
It's not hard to develop a Chicken Little worldview if you work in healthcare, particularly if you're sitting in the hospital C-suite. If you don't catch yourself, it's easy to think the sky is falling, piece by piece, one day after the next.
The challenges facing hospitals are daunting, surely. But real leaders know what good they get from doomed thinking: none. It's an exercise in futility, and real leaders have never cared for pointlessness.
For this, we're glad. As experts here can attest to, there are some real opportunities behind each of the challenges looking hospital and health system leaders squarely in the eye in 2014.
1. Health insurance exchanges. Hospitals face three challenges regarding the health insurance exchanges. One is lower reimbursement under the exchanges than they would receive from employer-sponsored commercial plans.
Christopher Kerns, managing director with The Advisory Board Company in Washington, D.C., said he's heard reimbursement rates under the typical exchange plan are a single-digit point above Medicare reimbursement rates, which generally cover 85 to 95 percent of fully allocated costs.
The second challenge lies in signing patients up for the exchange. "Hospitals need to make sure there is maximum awareness to ensure their patient base is insured," says Mr. Kerns.
The third challenge for hospitals will be dealing with the effects of high-deductible plans, which make up a majority of those offered on the exchanges. "This places a huge collection burden on hospitals," says Mr. Kerns. Historically, hospitals' recovery rate for collections has ranged from 18 to 30 percent, meaning organizations have to significantly upgrade their collection capabilities.
Although hospitals will have to make some changes to their collection practices, they have a big opportunity this year to reduce their overall bad debt under the exchanges, since most bad debt stems from uninsured patients. If high-cost patients gain coverage under the exchanges, hospitals can reduce one of the most extractable expense categories, says Mr. Kerns. As he points out: Exchanges were supposed to be one component of the healthcare reform law to benefit hospitals, and there is still a chance to realize that.
2. ICD-10. ICD-10 will go live Oct. 1, 2014, a day some hospital leaders are more cognizant of, while others have pushed it to the back of their minds. The amount of preparation hospitals have devoted to ICD-10 varies greatly from institution to institution. Some have been working diligently for the past two to three years and have made great progress. Other organizations are incredibly far behind. The latter problem isn't limited to small practices or 90-bed hospitals, says Ed Hock, senior director of The Advisory Board Co. "We talked to 10 health systems that, even as of a couple weeks ago, have done next to nothing," he says.
Why are some health systems so behind? "Every reason from they just went through a merger to they just implemented an electronic medical record to they are just trying to survive," says Mr. Hock. Hospitals that haven't been taking ICD-10 seriously make up a sliver of the pie, he says. Most have had a hard time preparing for it simply because their resources and time are devoted to meeting other high-priority demands.
"This is a really important year," says Mr. Hock, but the transition will also be taxing as staff and physicians are asked to learn new systems, terminology and work patterns. There is a silver lining, however. Organizations that have properly prepared for ICD-10 have an opportunity to improve numerous different processes, from coding to the way they engage with physicians to centralization and implementing new technology.
3. Organizational bandwidth. Healthcare executives may be busier today than they've ever been. They practically need a map to navigate their priorities and external pressures, some of which are conflicting. Executives aren't used to having much room on their plates, but healthcare reform presents a whole new type of demand on their bandwidth.
"The difference today is the dollar levels of those projects are extremely large," says John Dugan, partner with PwC. Take implementing an EMR system, for example. That project touches a vast number of people throughout the organization, and its repercussions are sometimes unforeseen. "There are numerous examples where providers haven't budgeted the full cost of that technology," says Mr. Dugan. "It may cost double what they estimated. That right there is tremendous stress. Who has responsibility over that?"
To deal with this, hospitals and health systems must first refresh their strategic plans. They look at the next three to five years and determine what projects they can undertake with their current bandwidth and resources. Some organizations are also building new internal functions to structure better project management and governance around these investments. "It's not unusual to see the creation of performance improvement offices to help with the coordination and interdependence of initiatives," says Mr. Dugan.
He has also seen more boards ask for external assistance in evaluating how well a hospital or health system's management team is executing their respective projects. "They're saying, 'Can someone come out here and really report back to us on this EMR initiative,'" says Mr. Dugan. Proactive management teams welcome these second-level reviews, as they don't want any surprises either and appreciate validation that they are carrying out projects correctly.
4. Sustaining the mission. This challenge is interpreted differently depending on the institution, but many organizations, particularly nonprofits, are spending time looking at their market position in order to survive reimbursement cuts.
For community hospitals, the largest challenge may be a matter of remaining independent. For safety-net hospitals, it may mean remaining solvent while undergoing reduced disproportionate share hospital payments, particularly in states like Georgia that did not expand Medicaid. And for academic medical centers, the challenge may be in training the next generation of physicians and maintaining top clinical care and medical research considering the cuts to Medicare's graduate medical education funding. Of course, all providers still have to deal with extra cuts from sequestration.
Each of these scenarios and the repercussion of healthcare reform are bringing executives to ask themselves if their organization will be able to accomplish its goals.
Going into 2014, nonprofit hospitals and health system leaders will need to be mindful of their charitable mission and how they are reporting charity care, particularly with the newly insured. "There have been more nuances relating to the Internal Revenue Services' requirements for levels of charity care provided," says Mr. Dugan. "The large population that will have insurance over the next two to five years, does that provide a vehicle to further question an organization's mission?"
Igor Belokrinitsky, principal with Booz & Co., says hospitals can really prove and differentiate themselves in a market by focusing on or refining their mission. "Just as hospitals reconsider their physician alignment and ambulatory strategies, it's also time to dust off the old mission statement," he says. "Is it ready for the future, or is it still stuck in the past?"
Safety-nets, for instance, may have to decide whether they should continue offering everything to everybody, or focus on a few service lines and double down on those. Community hospitals face a similar decision, particularly about leaving more specialized services to newer and more advanced providers, or forming clinical affiliations.
And academic medical centers may need to determine whether their premium prices are justified by the acuity of their patients. "If your mission is to be on the forefront of research, but 80 percent of your patients don't really benefit from that because they have straightforward clinical needs, how does that align?" says Mr. Belokrinitsky.
5. Price transparency. The outpouring of hospital chargemaster data in 2013 frustrated many healthcare leaders. Many executives and organizations made the distinction between chargemaster prices (i.e. "sticker prices") and how much they actually receive in exchange for a service. "That's good for hospitals to point out," says Mr. Kerns of the Advisory Board Co. "Just because we have more transparent charges doesn't mean we have more transparent prices."
With that said, attention toward hospital charges, prices or overall cost of care is unlikely to subside in 2014, especially as consumers take on more financial responsibility for their care. Areas that may be especially prone for scrutiny are imaging, diagnostics, pharmacy and ambulatory surgery, as these services are more price sensitive, according to Mr. Kerns.
Katherine Hempstead, PhD, team director and senior program officer with Robert Wood Johnson Foundation, came to realize something about the CMS' inpatient and outpatient pricing data last year. "Even though patients don't pay charges, when people look at this variation in price that has nothing to do with quality, they know something about those prices is wrong," she says. "That's the sign of a malfunctioning system."
How hospitals will respond to these cost pressures will depend on the price sensitivity in their market and whether there is a significant reason for variation in their prices. "Hospitals have to be careful about how they do this, because in many cases they're offering a premium service, and in many cases they're not," says Mr. Kerns.
6. Need for more physicians. This is the single most important issue facing hospitals, says Mr. Kerns. The huge demand for primary care physicians and the relatively small supply poses a great challenge for systems, particularly those in rural areas that have a harder time recruiting physicians.
The Association of American Medical Colleges estimates the U.S. physician shortage will grow to more than 130,600 physicians by 2025. A November 2013 study published in Health Affairs found a distinct need for trained specialists to care for an aging population that is expected to nearly double from 2013 through 2025.
Specialists will face higher demand than primary care physicians, according to the study, as the number of cardiology and rheumatology office visits is expected to increase by 18 percent, while urology and neurology will undergo a 17 percent increase in office visits and dermatology 16 percent. The demand for adult primary care office visits is expected to grow by about 14 percent.
Brett Hickman, partner with PwC, said the country will not only need more physicians for the increase in chronic conditions, but in other subspecialties, as well. He sees disease patterns, such as those for obesity, cancer and infectious disease, changing. "I think we're moving back to the 1950s and 1960s, where we will see waves of infectious diseases," he said. The recent outbreak of meningitis at Princeton University is an example of the type of case Mr. Hickman described as, "incidences we need to learn, from the public health perspective, how to manage more effectively."
Hospitals can make the most of the physician workforce by allowing their providers to practice to the top of their licenses or by exploring relationships with retail health clinics and other consumer-facing primary care services. But the real opportunity is a rich and large one, and Mr. Hickman says he's waiting for a disruptive innovator to grab it, take it large-scale and change physician care delivery for good.
"Somebody is going to come in and make a major play that just totally disrupts the physician model. Our grandkids will laugh at us because of [this] fragmented, misaligned and inefficient historical care delivery model versus a more collaborative and connected model of tomorrow," says Mr. Hickman. The disruption will not only make care more accessible, but it will also incorporate the main tenets of population health — preventive care, wellness programs and public health initiatives.
7. Access to care. A November 2013 study from The Commonwealth Fund compared healthcare systems in 11 countries, looking at their affordability and accessibility. While the United States led the way in spending, it came up short for patient access. For instance, only 35 percent of American adults' primary care physician practices had arrangements for patients to see physicians or nurses after hours. In the Netherlands and the United Kingdom, that figure was 95 percent.
Retail clinics present a wealth of opportunity for health systems and hospitals, many of which have been eying consumer-facing primary care with great interest, says Mr. Kerns. In 2014, hospitals will have to cater to consumer demands in an unprecedented way as more take on the costs of their care. Retail clinics are meeting an important demand in the healthcare landscape, as they are more convenient than primary care, and urgent care clinics are faster and open much later. "These are all things that appeal to consumers," says Mr. Kerns. "Clinics are not necessarily huge profit centers, but they are great doorways into the system."
Retail clinic relationships also present a chance for hospitals and health systems to reinforce their population health networks. By collaborating with a consumer-facing provider, hospitals can better ensure their patients stay in-network — something that is invaluable under population health contracts.
8. Philanthropy. A source of substantial revenue to hospitals, aside from patient care, is philanthropy. Despite the sluggish economy, nonprofit hospitals and healthcare systems raised more than $8.9 billion through philanthropy in 2012, according to a study from the Association for Healthcare Philanthropy. That's steady from 2011 and an increase of more than 7 percent from fundraising revenue in 2010.
So, on average, hospitals aren't necessarily finding it more difficult to get charitable donations, but donors' focus is changing. More and more, hospitals and health systems are realizing that a successful fundraising campaign must be centered on more than assets, or specifically, construction projects. Many donors, especially those who are entrepreneurial, want to be seen as progressive when it comes to furthering strategic goals and transforming care delivery.
"To make sure philanthropy is firing on all cylinders is pretty important," says Mr. Belokrinitsky of Booz & Co. "To be able to do that, you need to have a compelling story in the market. Donors want to give money for distinction, groundbreaking discoveries, quality of care and the patient experience — not just to keep the hospital lights on."
9. Employee relations. Layoffs are top of mind for many hospital and health system leaders coming off 2013, a year when several prominent and integrated health systems eliminated jobs. Although the reasons for layoffs can vary, from reduced volume to reduced reimbursement to a closed department, Mr. Hickman with PwC says they are sometimes the byproduct of what has become an overbedded, overstaffed industry.
"A lot of successful health systems have had the luxury of an overstaffed type of environment," says Mr. Hickman. A physician Mr. Hickman knows was hospitalized recently, and as a patient in a well-known medical center, he was "dumb-founded" by the amount of attention he received.
"Someone would come in every hour and change a waste basket. Then someone would come in an hour later, and ask how he felt about the waste basket," says Mr. Hickman. "There is an absolute ton of waste in the system. We just need to be smarter about how we deliver healthcare."
While layoffs may be necessary in some instances, it's also easier for hospitals to focus on the people rather than the structural problems in their industry. Ultimately, the United States is overbedded, says Mr. Hickman. "We're supporting an old delivery model that is stealing resources from other services that really need it," he says.
Hospitals may pursue job reductions because they are easier to implement than say, closing a specialty wing or an entire hospital. "No community wants to hear its hospital or a unit is closing," says Mr. Hickman. "So many emotions and politics come into it instead of a rational approach."
Also, as hospitals undergo more pressure to offer high-quality care and a top patient experience, some tend to turn to technology as a solution. Whether it's through a more robust EMR system or other technological program, executives may lapse in thinking more health IT will lessen the complexity at their organizations.
Rather, Mr. Belokrinitsky recommended they consider "high-touch" initiatives that they can further through employee engagement. This includes the sense of pride and hospitality staff exhibits toward patients, which Mr. Belokrinitsky says is far from universal in healthcare. "They don't cost a lot but can make a huge impact in how patients perceive you," says Mr. Belokrinitsky. "Your employees are more important than the technology you have."
10. Executive turnover. CEOs are not only facing more demands, but many of the most seasoned leaders are deciding the time has come to hang up their hats. Although 71 percent of healthcare provider CEOs age 55-59 have said they have "no plans" to retire in less than five years, some of America's most prominent hospital and health system executives began their retirements in 2013 or announced them, effective 2014.
Many of these men and women had worked in the industry for decades, and large organizations like Oakland, Calif.-based Kaiser Permanente, Roseville, Calif.-based Adventist Health, Memphis-based St. Jude Children's Research Hospital, Omaha-based Nebraska Medical Center and Tacoma, Wash-based MultiCare Health System will say goodbye to their long-term chiefs.
"Today we're seeing a lot more turnover driven by retirements, consolidation and, frankly, some leaders who are just less invigorated by wanting to lead in the new era," says Paul Bohne, managing partner of executive search firm Witt/Kieffer's eastern region in Burlington, Mass. He's found the recruiting process to be more challenging, as well. Executive candidates are more cautious about making moves, he says. "And to avoid surprises, they're doing deeper levels of due diligence about potential employers. For example, they want to make sure organizations have a strong market position and are changing with the times."
Given the lengthy tenures of many hospital leaders, their nearing retirement plans may not come as a shock. But a 2012 survey from Witt/Kieffer found a noticeable lack of succession planning in hospitals and health systems. Of 200 healthcare CEOs older than 55, only 39 percent said they have worked with their boards to develop a formal succession planning process. Furthermore, only 29 percent said they have identified a successor who could step into their position. Some survey respondents said succession planning was not on their radar, despite knowing better. Others felt it was simply something "corporate" would handle.
It may be easy to duck succession planning or push it to the back burner. However, management should work with senior leaders to identify potential successors, work with the board to develop a formal plan that can be enacted the moment the CEO does announce his or her retirement and delineate a communication strategy internal and external stakeholders about the transition.
Most of the challenges facing hospitals in 2014 are interconnected, sometimes even hinged onto each other. But as experts here pointed out, hospitals have many opportunities to gain from these challenges. They can explore new care delivery models to improve access and better circumvent a physician shortage. They may resort to new governance bodies or strategies to strengthen organizational bandwidth and project management.
Hospitals need to adjust for consumers who, through high-deductible plans, have more skin in the game, as well. This may very well mean more frank discussions about pricing, particularly in price-sensitive markets. Hospitals may also need to spend more time fine-tuning their missions, fundraising initaitives and succession plans this coming year.
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