5 Challenges for Health Systems in 2014

5 predictions for the healthcare market in 2014 and beyond


Surveying the market for 2014 and beyond we outline five predictions for the market. In general we believe the 2014 market will be the beginning of a multi-year transitional period that will prioritize operating effectiveness and market relevant value. As a result, we see challenges to the health system historical business model and advantages for the organizations that have actively built towards the future.

Prediction 1: Soft volumes for the core hospital businesses while ambulatory and physician networks start to pay dividends. Even as the ACA has promised millions of newly insured patients, 2014 will see softening inpatient volumes for the traditional health systems. Not only may regulations such as the two midnight rule come into play, the increased interest by payers and providers in shared savings models will continue to put pressure on the inpatient enterprise. This pressure will be felt especially hard for the systems that depend on large numbers of loosely aligned private practice physicians as they band together in independent practice associations to capture shared savings bonuses from reducing hospital price and utilization.

However, the systems that have built a strong network of ambulatory locations and tightly aligned physicians will start to see these investments pay off. These systems will continue to have a reliable source of referrals, be able to maintain pricing power and capture the volumes that do shift to the outpatient settings.

Prediction 2: Payer mix erodes for everyone. Those that have fallen behind on their infrastructure and new capability investments will be unable to catch up. The new insurance models will not cover enough of the uninsured fast enough to off-set declines in the commercial insurance rates. Moreover, the coverage is expanding most rapidly in the lowest paying categories, with Medicaid grow making up most of the newly insured populations. The result will be rapidly deteriorating payer mix limiting the ability for health systems to reinvest in capital intensive projects. Many health systems will be forced to choose investing available cash flow into only one area: new assets, existing operations or capabilities for the future. Those that have developed the discipline to create operational efficiencies and the cash flow position to not fall behind on the infrastructure will be much better positioned. With reimbursement declines expected across all markets, year-over-year efficiency improvements in the 5 to 7 percent range will be required just to maintain operations much less make up on any deferred capital, infrastructure and capability investments.

Prediction 3: Physicians choose sides in order to supplement wRVU income with population health bonuses. As a result, health systems must have a mechanism to both clinically integrate with physicians and create ways to supplement their income beyond direct hospital-generated subsidies.

Accountable care organizations and clinically integrated networks will be paying larger and larger portions to providers to off-set the declining ability of physicians to survive on wRVU models alone. ACOs and clinically integrated networks will have to show tangible value in reducing utilization to create the shared savings needed for the physician bonuses. Those that cannot capture shared savings will rapidly strangle the owners with costs. The health systems that have built the foundations for clinical integration and the data analytic capabilities to manage diverse populations' health are positioned to succeed. Those that are sitting on the sidelines waiting to see how system fare under new reimbursement models are losing experience to build the capabilities important under future reimbursement models.

Prediction 4: Information system challenges continue as health systems and providers work to capture and analyze population health data and meet new regulations such as additional meaningful use requirements and the ICD-10 conversion. Early comprehensive EMR investments pay off. The continued information system investments to meet population health management data needs and new regulations such as meaningful use and ICD-10 will consume more and more of the health systems' capital and operational budgets. As a result, other investments in facilities, new markets and physician subsidies will come under increasing pressure. Moreover, health systems that have fallen behind in IT investments will be forced into larger systems to survive and access the EMR data required for managing populations’ health.

Prediction 5: Unless the health system can prove market-relevant value, they will rapidly be commoditized. As a result, regional health systems focus on integration and performance. The hospitals acquired over the last several years will be under increasing pressure to integrate and demonstrate performance for the systems they have joined. New acquisitions and mergers will continue to take place, but under different terms than the last few years. The increasing focus will be on how the potential partners create or leverage new capabilities to improve market-relevant value. The ability to improve contracting leverage and back office scale economies by joining a bigger system will not be enough in many markets to justify acquisition. At the same time, health systems that cannot achieve the integration and its resulting performance will be unable to demand increasing system-related costs from their members. As a result, the next several years is likely to see the national systems becoming bigger while simultaneously responding to local market dynamics by creating stronger regional structures.

 

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