Hospital ratings: What the shift from inpatient to outpatient means for performance measurement

About five years ago, South Nassau Communities Hospital in Oceanside, N.Y., saw about 62 percent of its volume from the inpatient side and 38 percent on an outpatient basis. Now, however, that ratio has shifted to 59 percent to 41 percent, says Joe Lamantia, the hospital's COO and executive vice president of administration: "We're clearly seeing the same effect of what's happening in the market; the percent of outpatient visits is growing."

He attributes that change, in large part, to a shift in mindset from volume to value.  Administrators today are challenged with the need to identify the most appropriate setting for care, while working to improve quality (outcomes) and service (the patient experience) in the most cost effective manner. This may mean moving certain services that were traditionally provided in the hospital into the community.

Additionally, the transition to population health management is also playing a role in the shift from inpatient to outpatient, according to Mr. Lamantia. Providers will soon be financially responsible for an entire episode of care (versus a visit), and managing costs by keeping patients out of the high-cost inpatient setting, where clinically appropriate, will become more common. For instance, at South Nassau, the hospital staff members follow heart failure patients after discharge to assure that they are accessing the next level of care and are compliant with their discharge instructions. This prevents patients from returning unnecessarily and ensures that they follow their treatment regimens. The care managers thoroughly educate these patients about their conditions and connect them with home care resources, in addition to following up a few days after discharge and at the one- and three-month marks.

"Hospitals today are focusing as much on what happens outside the hospital as they do on what happens inside the four walls," Mr. Lamantia says. "We're spending more time today than in the past on developing initiatives and programs to keep the community healthy."

The decline in inpatient admissions and rise in outpatient care isn't just occurring at South Nassau.  Inpatient utilizations per 1,000 showed notable declines from 2000 to 2011, according to an analysis of almost half the U.S. population by healthcare advisory firm Kaufman Hall. Of the states included in the study, 71 percent showed decreases of more than 5 percent, with an overall range from 0.6 percent in Florida to 13.3 percent in Minnesota. Key drivers of the drop in inpatient utilization include efforts to reduce care variation, a new focus on coordinated and collaborative care, and the financial incentives of value-based payment models, among others, according to the study.

Similarly, in an August report, Fitch Ratings indicated that the Patient Protection and Affordable Care Act, value-based payment models, risk-sharing arrangements and consumerism favor providers delivering high-quality, low-cost services in the most convenient settings. Subsequently, from fiscal years 2010 to 2013, Fitch's rated hospital and health system portfolio showed a decline in inpatient activity, along with an increase in outpatient and ambulatory care.

For ratings services like Fitch and others that assess hospital performance, this shift in care setting also necessitates a change in perspective. According to Fitch's report, the shift from inpatient to outpatient care means there must be a reassessment of nonprofit hospital clinical performance measurement methodology.

Performance assessment and the shift from inpatient to outpatient
Utilization in and of itself doesn't drive hospital and health system credit ratings, according to Emily Wadhwani, FACHE, a director at Fitch. However, the ratings service does examine utilization to inform the overall trend in the credit quality of the healthcare organization.

"It should help us to be better analysts in terms of what are the risks of the revenue going forward, what is their revenue made up of, what are the trends that indicate growth and decline," she says of focusing more on outpatient utilization.

As providers increasingly concentrate on value instead of volume and seek to contain costs by keeping patients out of the hospital, Fitch needs to incorporate measures of outpatient utilization into its analyses to see the whole picture of hospitals' and health systems' market share and where their revenue is coming from, according to Jim LeBuhn, a senior director at Fitch: "Obviously more and more is shifting to the outpatient. We need to find a way to measure that other piece."

Meanwhile, Moody's Investors Service also reported in August that nonprofit hospital operating revenue growth dropped from 5.1 percent in 2012 to 3.9 percent in 2013, driven partly by the shift from inpatient to outpatient care. Last year's medians indicated inpatient admissions decreased, while outpatient services grew. However, the growth rate for outpatient admissions slowed in 2013, which potentially signals a drop in demand for healthcare overall, according to Moody's.

Lisa Goldstein, an associate managing director with Moody's, says the slowdown in outpatient volume growth and the continued decline on the inpatient side stems partly from patient becoming more price-sensitive and taking on a greater share of the cost of their care: "People have more financial skin in the game, so they watch their spending more closely." Additionally, she says retail clinics run by companies such as Walgreens and CVS Caremark have introduced a new competitive factor for hospitals and health systems.

Like Fitch, Moody's is adjusting its methods in accordance with the shifting industry. In February 2013, the agency released a set of new metrics to measure hospital performance and demand — for instance, while Moody's continues to track admissions, it has added different types of volume such as unique patient visits. "If Mrs. Jones shows up at the hospital five times in one year, it's counted as five admissions," Ms. Goldstein says. "With unique patients, Mrs. Jones would represent one unit of care. There's more analysis to come, and we're always refining and evaluating how we look at what's really become an evolving industry that's going through more change now than it has in the past couple of decades."  

Volume-related hospital metrics will continue to be important in assessing performance and profitability going forward, but which volumes have the most impact will change as healthcare providers focus on population health management, according to Joel Shalowitz, MD, a clinical professor and director of health industry management at the Kellogg School of Management and professor of preventive medicine at the Feinberg School of Medicine at Northwestern University. Instead of how many operating beds a hospital or health system has, he predicts the number of people they take care of will matter more.

"If it can be measured, the volume that really matters is what the insurance company calls covered lives," he says. "What a health system really wants to do…is to increase the number of covered lives, the people who are served by the system."

What changing assessments mean for hospitals
Mr. LeBuhn of Fitch says many hospitals won't necessarily have to do anything to adapt to his agency's changing method of analyzing them, given that Fitch is reacting to changes they're already making: "I'm not sure they have to adjust to us. This is our adjusting to the changing market."

Dr. Shalowitz of Northwestern says a lot of smart hospitals are shifting their focus beyond the inpatient setting to the "true meaning of healthcare," which involves preventive medicine and keeping people out of the hospital.

"Theoretically, what healthcare systems should be saying is every admission is a failure of the system in one way or the other," he says. "For example, except for extraordinary genetic problems, people should not have a heart attack and die at an early age. Correctable behavioral factors such as diet, exercise and smoking cessation contribute to the problem. No one should go to the emergency room with an asthma attack, much less be admitted."

The hospital is starting to be thought of as a cost center rather than the center for everything in healthcare, according to Kathy Luther, RN, a vice president at the Institute for Healthcare Improvement. Healthcare organizations are beginning to change their mindsets and align differently, and eventually their performance could be measured by the health of people in a particular geographic region, encompassing both insured and uninsured patients. "It's quite possible that systems will be evaluated for their patient outcomes as well as their impact on the health of an entire region or across an entire zip code," she says. "It may turn out that organizations are much more responsible for the overall populations in their cities or towns, as opposed to just the people with insurance cards who turn up at their door."

At South Nassau, Mr. Lamantia anticipates changes in assessment methods will hurt his hospital if it isn't successful in its population health management efforts. "If we're not meeting our financial goals and operating more efficiently and [delivering] more value…it's going to affect our rating, which in turn will affect our ability to borrow," he says. "When you're a credit risk, it's not only harder to access capital; it's also more expensive."

Conclusion: Inpatient metrics remain important

Despite the decline in inpatient volumes and rise in outpatient utilization, Fitch projects inpatient metrics will remain relevant. "There will never be a time when inpatient volume is not critical to the overall financial profile, particularly for your larger, urban, typical community provider," Ms. Wadhwani says.

Ms. Goldstein with Moody's similarly states the need for inpatient care will not disappear. "There are plenty of services that are still delivered inpatient that require inpatient stays," she says. "Inpatient demand remains an important indicator of the industry."

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Moody's assigns 'A1' rating to CentraCare Health System's bonds
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