tipping point: hospital resilience in a perfect storm

1Tipping point: Hospital resilience in a perfect storm Executive summary

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TIPPING POINT: HOSPITAL RESILIENCE IN A PERFECT STORMExecutive summary

Hospitals in the U.S. play a critical part in the country’s economy. Besides helping maintain the population’s health, they employ nearly 5.6 million people and spend US$782 billion on goods and services of other businesses, according to figures from the American Hospital Association. Yet today hospitals face a wide array of challenges, some a result of long-standing trends others a result of the Affordable Care Act (ACA).


Introduction

Certain pressures are financial, as payers attempt to rein in escalating costs, precipitating a need to reorganize or even transform hospital business models. Others, such as the introduction of electronic health records (EHRs), are technological; while others still are cultural, such as difficulties in persuading staff to accept new business models, systems and processes, or the need to respond to new patient demands.

To shed light on the complex and daunting challenges affecting the U.S. hospital sector, The Economist Intelligence Unit (EIU) conducted a survey in November 2015. The survey tapped the views of 301 executives at rural, urban and suburban hospitals of all sizes and across all parts of the country. The hospitals included those owned by government, by investors and non-profits, as well as those with various operating structures (network, system and standalone facility).

Critical challenges facing institutions(% of respondents)

Shifting from fee-based to value-based payments

Rising healthcare costs

Lower Medicare and Medicaid payments

Changing patient demands around service levels, personalisation of care

Planning for new regulationsLeveraging Big Data to inform patient

outcomes, payments, business model changes

Managing against more limited operating margins

Managing against key service talent shortages

Capital requirements for technology-related expenses (EHRs, upgrades)

Compliance with existing regulationsChanging patient medical requirements

as a result of ageing populations

Managing integration from consolidations/M&As

Drop in patient numbers

Accessing credit/�nancing/capital

Attracting and retaining the best talent

Lower payments from private insurers/managed care

0 10 20 30 40 50 60 70 80

Extremely critical Very critical

Source: The Economist Intelligence Unit survey, 2016

71

60

57

55

54

54

52

52

50

49

48

47

46

44

43

39

Total


The resource challenge

The shift from fee-based to value-based payments, say survey respondents, is the single biggest challenge facing U.S. hospitals, affecting institutions across every region, size, location and type of ownership. The reason is clear. The ACA focuses on the quality of care given to patients rather than quantity or volume. Thus performance-based indicators will increasingly determine hospital income rather than the fees based on service volume.

Such changes can have unforeseen consequences and have hit hospitals in lower-income areas that work with elderly or vulnerable patients particularly hard. Not only is the transition to value-based care a “very” or “extremely critical” issue at the hospitals’ of 71% of respondents, a majority (61%) believe that it is placing pressure on their hospital’ inherent value proposition.

Finances are another source of unease, beginning with cost. In 2014 spending on healthcare in the U.S. accelerated sharply, rising by 5.3% compared with 2.9% in 2013, reaching US$3 trillion, according to government figures. Spending on hospital care grew by 4.1% (against 3.5% in 2013), reaching US$971.8 billion.

Sixty percent of survey respondents describe cost as an “extremely” or “very critical” challenge. Similarly, 57% consider lower Medicare and Medicaid payments to be equally critical. While greater participation in Medicaid has led to higher total costs, the U.S. administration’s attempts to control costs means that reimbursements rates have dropped. (Increases in Medicare spending are expected to slow, according to the Kaiser Family Foundation.)

Meanwhile, outsiders are disrupting markets on which hospitals have long relied. Nearly half (46%) of survey respondents cite falling inpatient numbers as a “very” or “extremely critical” challenge, making outpatient services all the more important. However, 64% of respondents agree that new types of market entrants are significant competitors for outpatient service revenue. Technological advances, for instance, now mean that a growing number of procedures can be safely conducted at ambulatory centers or even pharmacies.

New and evolving service and business models

Survey respondents believe these challenges have made their current way of doing business unsustainable. A lack of confidence pervades the industry: only one-half of respondents agree with the statement, “my organization is very prepared to address the critical issues facing the hospital sector today.”

More striking still, 58% believe their institution’s business model must change substantially in the near term to survive financially. They expect

58% of respondents believe their institution’s business model must change substantially in the near term to survive financially.


this change to be rapid: 36% expect their business model to be largely transformed over the next three years; only 19% expect no change at all.

Survey respondents recognize the problems, but don’t appear to see a single, clear road ahead. Instead, the sector is experiencing widespread experimentation, with no single strategic direction dominating the survey findings.

When executives describe the business model innovation their hospital is likely to adopt over the next three years, the leading activities they cite are an increased focus on niche areas of healthcare expertise; an increase in the use of e-health, m-health and non-traditional service delivery; and the use of technology to outsource services (45%, 39% and 36%, respectively). None of these are majority choices; significant minorities are trying other approaches; and, on average, hospitals are trying between two and three of these.

Business model innovation is unlikely to be easy. Among other challenges, it will require cooperation between hospitals, physicians and other staff. Yet according to EIU findings, resistance from clinical or surgical staff ranks as the leading barrier to effective business model change (37%).

A recent dispute at a hospital in Oregon is a good example of how such opposition can impede change. In an attempt to cut costs and boost efficiency, the hospital administration outsourced hospital staff to a management company and tied doctors’ payment to the number of patients seen per day. Physicians at the hospital formed a union in response and stymied the changes.

Which activities will hospitals conduct in the next three years? (% of respondents)

Increase focus on niche areas of healthcare expertise (e.g. geriatrics, speci�c chronic diseases)

Increase use of e-health, m-health or other non-traditional methods of service delivery for patients

Use technology to outsource services (e.g. radiology, tele-health consultations with experts at other facilities)

Increase capacity of preventative healthcare services

Increase non-hospital services (e.g. create or expand a provider- owned health plan or pharmacy associated with hospital)

Increase capacity of community-based clinics associated with hospital

Expand alliances with other local healthcare providers

Reduce acute care beds

Engage in M&A/joint ventures with other hospitals, insurers or physician groups

0 10 20 30 40 50

Source: The Economist Intelligence Unit survey, 2016


Compliance and regulation

According to a report by Deloitte on the U.S. healthcare industry—2015 healthcare providers industry outlook—new rules and reporting guidelines, the ACA, and requirements around transparency, security and privacy are causing growing complexity in the regulatory environment. Healthcare providers might consider investing in healthcare IT to navigate the complexity, according to the report.

The EIU survey reveals that compliance with existing regulations (49%) and planning for new regulations (54%) are challenging areas for all hospitals, across regions, hospital size, ownership status and community. Meanwhile, just 55% of respondents believe the sector has adapted to the implementation of the ACA. Here, too, there is a long road ahead.

Talent

Attracting and retaining talent is a critical issue for the hospital sector as a whole, according to 39% of survey respondents. As far as their own hospitals are concerned, a far larger number—69%—say that strategic talent management will be critical to staying competitive, and 74% believe their organization needs to pay more attention to retaining and attracting the best talent.

Concerns about the talent pipeline are supported by government research. A report to Congress published by the Health Resources and Services Administration projected that “if current trends continue, the growing supply of intensivists [critical care physicians] will be insufficient to provide the optimal level of care to future populations through 2020.”

An ageing workforce is on the healthcare horizon too. One in three practicing physicians are over 65 years old. The American Association of Medical Colleges estimates that by 2025, the shortfall in medical, surgical and other healthcare specialists in the country will be between 28,200 and 63,700. According to the EIU survey, 65% of respondents see an ageing workforce presenting a problem in the long term, with talent costs and the need for newer areas of expertise driving this challenge.

The data challenge

The healthcare industry has been slow to adapt to technological change. The HITECH Act of 2009, reinforced by the ACA, made the use of electronic health records (EHR) necessary. Interoperability—the functioning of the records across different systems—is lacking, however, which hinders the transferability of data and the effectiveness of EHRs.

Executives believe in the potential of analytics to improve services and care, according to survey respondents: 60% think Big Data will transform

74% believe their organization needs to pay more attention to retaining and attracting the best talent.


patient management and outcomes in the future while 57% say it can be a game-changer for operational performance in hospitals. At present, however, nearly two thirds (63%) say the value of the data hospitals hold on patients and outcomes remains largely untapped.

Indeed, healthcare organizations lag in exploiting the wealth of data they possess. Not only have hospitals delayed investing in analytics, but just 37% of executives expect their hospitals to invest specifically in analytics (to improve patient outcomes and administrative efficiencies) over the next three years. Traditional institutions risk missing the boat or being scooped by competitors.

Changing demographics and patient needs

Patient-centered care has long been a goal in healthcare, but progress has been slow. Patients do not look likely to wait quietly any longer: 63% of respondents say that as consumers take on a greater burden of healthcare expenses, they are demanding more transparency in outcomes and the cost of care. Not surprisingly, changing patient demands about service are the second most likely challenge to be described as “extremely critical” (24%) by respondents.

The government also wants to see progress in this direction: since 2013, the Center for Medicare and Medicaid Services has used hospital scores on the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) survey to reward high performers through the allocation of US$ 850 million of funds, and to penalize hospitals with lower scores.

Hospital executives seem to understand in theory the importance of shaping care around the patient. In practice, though, their actions show less urgency in this area than their opinions indicate.

The survey provides several examples. Sixty-eight percent of respondents agree that “the ageing boomer population will force hospitals to reconsider the care continuum through to end-of-life care.” Yet only 40% say that the ageing boomer population will influence operational planning over the next three years. More strikingly, slightly more hospitals plan to reduce their focus on palliative and end-of-life care than increase it over the next 10 years (31% to 28%). The same is true of chronic care (33% to 29%), even though age is a risk factor in most of the major chronic conditions.

Similarly, 60% of respondents say hospitals need to adjust to more heavily engaged and knowledgeable consumers; 62% believe they are looking at consumer experiences in other industries to evolve their own services; and 54% say that in future successful hospitals will need to

60% say Big Data will transform patient management and outcomes in the future; 57% say it can be a game-changer for operational performance in hospitals.


respond to patient demand for individualized treatment. Far fewer, though (21%), say that digital-first patients—those most wedded to technology—will influence operational planning in the next three years.

Meanwhile, over the same time period, only 22% say they will use analytics to improve individual diagnosis and care plans; and just 39% expect to increase the use of e-health, m-health and other non-traditional service delivery channels—not a sign of widespread adoption of tools used in other industries.

Conclusion

The findings of the EIU survey highlight an industry preparing to make substantial changes in the midst of diverse and pressing challenges. In particular, the ACA and payers’ desire to stem rising costs have necessitated a shift toward value-based payment models, which is unleashing disruption across the industry.

However, this is only one of a range of daunting market, talent, technological and patient-centered pain points. If hospitals fail to respond to these challenges, competitors will emerge, which will further unsettle the healthcare landscape. Established hospitals must act quickly and creatively to identify business models that will enable them to thrive in the new healthcare landscape.


SourcesAmerican Hospital Association, “Economic contribution often overlooked” http://www.aha.org/content/15/econcontribution.pdf

Medicare, “Linking quality to payment” https://www.medicare.gov/hospitalcompare/linking-quality-to-payment.html?AspxAutoDetectCookieSupport=1

Kaiser Family Foundation, “Medicaid moving forward” http://kff.org/health-reform/issue-brief/medicaid-moving-forward/

USA Today, “In high-profile Kentucky, hospitals say Obamacare has hurt them” http://www.usatoday.com/story/news/nation/2015/05/08/kentucky-hospitals-say-aca-has-hurt-them/26998939/

Kaiser Family Foundation, “The facts on Medicare spending and financing” http://kff.org/medicare/fact-sheet/medicare-spending-and-financing-fact-sheet/

North Carolina Rural Health Research Program, “65 rural hospital closures: January 2010-present” http://www.shepscenter.unc.edu/programs-projects/rural-health/rural-hospital-closures/

American Academy of Orthopaedic Surgeons, “Ambulatory surgical centers position statement” http://www.aaos.org/CustomTemplates/Content.aspx?id=5610&ssopc=1

Deloitte, “2015 healthcare providers industry outlook” http://www2.deloitte.com/us/en/pages/life-sciences-and-health-care/articles/2015-health-care-providers-outlook.html

USA Today, “Rural hospitals in critical condition” http://www.usatoday.com/story/news/nation/2014/11/12/rural-hospital-closings-federal-reimbursement-medicaid-aca/18532471/

US Department of Health and Human Services, “Report to Congress: The critical care workforce: A study of the supply and demand for critical care physicians” http://bhpr.hrsa.gov/healthworkforce/reports/studycriticalcarephys.pdf

US Department of Health and Human Services, “The US nursing workforce: Trends in supply and education” http://bhpr.hrsa.gov/healthworkforce/supplydemand/nursing/nursingworkforce/

HHS.gov, “Key features of the Affordable Care Act by year” http://www.hhs.gov/healthcare/facts-and-features/key-features-of-aca-by-year/index.html

McKinsey & Company, “In the cold light of day: Ten demanding tests for hospital strategy” http://www.mckinsey.com/global_locations/europe_and_middleeast/united_kingdom/en/our_work/healthcare_systems_and_services

Journal of Hospital Administration (2013) vol 2.2, “The Patient Satisfaction Survey: What does it mean to your bottom line?” http://www.sciedu.ca/journal/index.php/jha/article/viewFile/1216/1139

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This executive summary was written by The Economist Intelligence Unit and sponsored by Prudential. For more information call Prudential Retirement at 1-800-353-2847 or visit www.Healthcare.PrudentialRetirement.com.