The key to health system sustainability? Evolve your nonacute cost structures, these executives say

Forward-thinking organizations are testing creative ways to position themselves to take on industrywide challenges. Unlike restructuring brought on by dire financial circumstances — when facilities are 'just trying to keep the lights on' — many organizations are making internal changes to become more sustainable as they prepare for value-based purchasing, population health and the rise of healthcare consumerism.

This article is sponsored by McKesson

Executives from integrated health systems, academic medical centers and post-acute care groups nationwide shared four ways their organizations are evolving ambulatory cost structures to capture greater market share and lower operating costs during a leadership forum hosted by McKesson at Becker's Hospital Review 9th Annual Meeting in Chicago. The forum featured 15 executives.

"We've grown up around hospitals, that's where we put all our profitability," said the senior vice president of system pharmacy for a nonprofit, regional multi-hospital system in the Midwest. "As we're expanding our ambulatory services, it conflicts with that strategy of where we put our profitability and our capital. In the ambulatory space, we compete with players that don't have hospital-based cost structures, so we're figuring out how to do that and transform ourselves to be cost effective."

1. Investing in freestanding versus hospital-based cost structures. Hospital-based and freestanding facilities present different financial benefits and disadvantages. For one, hospital-based locations have substantially greater operating costs compared to freestanding facilities due to hospital salary rates, maintaining regulatory compliance with hospital Conditions of Participation, and even structural requirements to align with state licensure for hospital departments. On the other hand, freestanding facilities' reimbursement rates are just 40 to 60 percent of what they are for the same services at hospital-based settings, meaning per unit profits are considerably lower.

Yet one executive said commercial payers are increasingly forcing hospital leaders' hands in deciding whether to buy or partner with non-acute settings. The issue is pricing and cost. To avoid paying higher reimbursement rates at hospital-based facilities, some payers are denying patient claims in full for medical services considered "non-emergent" performed at hospital-based clinics.

"The difference between a $250 MRI [in a clinic] and a $1,200 MRI [in a hospital] isn't merely a price decision, but it's also how [hospital systems] structure their costs," said the president and CEO of a national, integrated health system. "Hospitals need to think about how they price and cost their services to stay competitive. If we want to compete with freestanding centers in a way that payers are going to want to take advantage of, we're going to have to look at cost structures that are very different or outsource those services."

Most health systems represented at the forum said they are currently expanding their ambulatory services arm. As organizations transition their focus from inpatient to outpatient growth, the same SVP of system pharmacy said his system temporarily sees value in having both hospital-based and freestanding assets.

"In the urgent care space, we purposely built a model that wasn't hospital based or accredited, so we didn't have to get into hospital cost structures," he said. "Likewise, we have an ownership interest in some freestanding surgery centers, but they are not integrated with the hospital system. We appreciate we still have to have relationships on both sides."  

2. Overcoming speed and innovation challenges with non-traditional capital. Executives identified institutional aversion to risk and limited access to capital as health systems’ two greatest barriers to innovation and agility in the ambulatory market. These competencies are essential to compete with new market entrants.

"We are trying to get more services pushed to the ambulatory space, but the biggest challenge in doing that is our institutional mindset," said the same VP of pharmacy services. "We compete mostly against companies that are more entrepreneurial. … There is a lot of experimentation going on in the [ambulatory] market and hospitals are not very good at that. We are slow and deliberate in our actions, and our competition is not that way."

One academic hospital system in the South has restructured to support what its leaders call a more entrepreneurial approach to academic medicine. An executive VP for the system's professional solutions subsidiary is charged with identifying and growing emerging business enterprises. He said the system has had some success in licensing and partnering with retail companies to drive non-acute innovation, but he noted they are a long way from matching the speed-to-market pace of non-provider business entities. 

3. Using data to drive strategy and streamline non-acute supply chain. Ambulatory services account for more than 95 percent of total healthcare encounters, said Greg Colizzi, the VP of marketing, health systems at McKesson. With such a large portion of patients seeking care in non-acute settings, it's crucial health systems implement efficient supply chains at these sites to rein in costs and support optimal patient care. Data plays a key role in making non-acute supply chain more efficient and strategic. Some health systems look to model their non-acute distribution and supply chain processes on those of non-traditional healthcare players, especially when it comes to data maturity.

"Retail pharmacies like Walgreens can track how flu moves through [populations] based on product sales," said the vice president of clinical pharmacy services for a regional health system in the Midwest. "They know when to move their vaccination programs to different geographies based on [that data]. Healthcare providers are very premature in understanding how to use data that way."

4. Leveraging technology to appeal to consumerism and lower cost structures. When discussing technology in the non-acute space, it didn't take long for a common theme to emerge. Executives agree: Technology will be key in expanding patient access and sustaining long-term patient-system relationships centered on personalized, holistic care.

"With our digital platform, we're making it easier for [consumers] to find us," said the VP and chief information and security officer of a national health system. "For the consumer, the idea is whatever services they need to access in the ambulatory space, we make it look and feel like it's [our health system] end to end, even though we may not own all of [our non-acute affiliates]."

The president and CEO of a national health system that includes a health plan said his organization is focused on gathering and integrating patient data from ambulatory settings to create a more complete view of patient health. This way, the system can better manage and intervene in patients' care before they end up in the acute care setting.

"We typically look at ambulatory services as somebody who walks in, gets the services and then walks out, but we have to look at the broader continuity of services and his or her social or psychological well-being over time," said the president and CEO of a national health system. "We want to fill our [health system] database with patient data so we recognize our customers before they walk in the door and understand their practices, behaviors and patterns on an ongoing basis, so we can tender a long-term relationship."  

Managing and supporting patients after they leave the outpatient setting is an important element in achieving these long-term relationships. "Care doesn't end in the outpatient space — it continues on into the home, and we need to think about how we can manage health and get supplies to those patients," Mr. Colizzi said.

Providers in the process of expanding their home health, physical therapy, behavioral therapy and other types of nontraditional services cited recruitment as a major challenge, especially in today's tight labor market. To overcome this issue, the VP of operations for a system on the East Coast said his organization is interested in using digital technologies, like remote patient monitoring devices and biometric trackers, to support care teams in serving patients outside of traditional outpatient facilities. The mobility and convenience afforded by digital health devices is invaluable considering that many patients with chronic or complex health needs also have difficulty accessing traditional healthcare channels due to geographic isolation, low socioeconomic status or limited mobility.

The importance of technology in meeting and managing consumer health is clear, yet striking the appropriate balance between IT investments and maintaining enough of an operating margin to support nonacute growth is less straightforward.

"Our focus right now is how to utilize technology — how to really implement and execute it to make sure it will help us achieve what we need to do in the next five to 10 years," said the VP of outpatient pharmacy for a 48-hospital system in the Southwest. "The challenge is: How do you implement [technology] while still protecting your bottom line margins to make sure you will have enough income to invest in the future."


Health systems face serious challenges in the ambulatory space. Declining reimbursement rates, rising operating costs and intensifying market competition complicate health systems' ability to innovate and invest in their non-acute portfolios. To best position their organizations to achieve goals in ambulatory care, health systems are reassessing hospital-based cost structures, overcoming speed and innovation challenges with non-traditional capital, improving data capabilities in non-acute supply chain and leveraging technology to facilitate patient access.

Copyright © 2024 Becker's Healthcare. All Rights Reserved. Privacy Policy. Cookie Policy. Linking and Reprinting Policy.


Featured Whitepapers

Featured Webinars