Breathing Room | 3 Powerful Ways to Respond to Today's Financial Squeeze

For the tenth year in a row, financial challenges have ranked number one on the list of hospital CEOs' top concerns on the American College of Healthcare Executives' annual survey. The pace of change in healthcare remains brisk.

While healthcare spending is on the rise again, price growth is down across all payer classes. And there's no end in sight for inpatient reimbursement cuts as the Center for Medicare and Medicaid Services' (CMS) Value-Based Payment (VBP) penalties continue to roll out for new covered diagnoses. Here's what you can do to respond now:


Today, 70 percent of hospitals are in a CMS penalty phase for readmissions. This challenge takes on new urgency as CMS continues to expand the definition of what's at risk under Pay for Performance.

One of the most effective ways to reduce readmissions is to ensure effective handovers—or care transitions—for patients between care settings. In fact, a 2017 study by The Joint Commission reported that 80 percent of serious medical errors involve miscommunication when a patient is transitioning.

Another study of patients discharged to home after an inpatient stay found that only 41 percent were able to state their diagnoses. Just 37 percent could explain the purpose of their medications and only 14 percent knew common side effects. As a result, approximately 2.6 million Medicare beneficiaries are re-hospitalized at a cost of over $26 billion annually. It's estimated that up to 76 percent of these are preventable.

It makes sense, then, that hospitals that patients rate highly for care transitions have fewer excess readmissions and pay fewer penalties. They receive better reimbursements under the VBP program and enjoy higher net operating profit margins.

What works to turn the tide? The best way to both cut costs and close the safety gap is an integrated approach focused on the longitudinal path of the patient from point of entry through discharge, including care transition calls, Key Words at Key Times and Nurse Leader Rounding on patients, for starters. When combined with the use of Bedside Shift Report, visit guides and discharge folders to coordinate care and clarify post-discharge instructions, results can be remarkable. (See page 10 to learn how Advocate Sherman Hospital cut costs by $265,000 during a three-month pilot of a comprehensive approach to hardwiring care transitions.)


Is it 1990 all over again? After buying medical practices throughout the nineties, hospitals then divested to shed losses. But now, the industry is racing to employ physicians once again for better integration to compete under population health. In fact, in 2016, less than half of U.S. physicians owned their own practices. Moreover, in some healthcare systems today, physician employment expense comprises 10 percent of total health system operating expenses. According to the Medical Group Management Association, the average annual loss per employed physician by health systems is approaching $200,000.

Before you can turn the tide on costs associated with employing physicians, it's critical to be clear on why you're employing them in the first place. Did you hire physicians as a loss leader to feed your health system? Do you believe you'll need them to be successful under a population health strategy? Or are you employing them to lock in business at your facilities? Once you answer that question, you'll be ready to design a strategy to maximize the value of your physicians.

Capture downstream revenue. Since medical groups are the front door to the health system, it's important to capture referrals through downstream revenue. "Frequently the Board approves the acquisition of a medical group based on anticipated downstream revenues, but then the system never measures it and the CEO finds the system is losing money," explains Huron managing director Matthew Bates. "If you can't measure downstream revenue, can you measure referrals? What percent of your employed physician's patient referrals stay in your system or don't?"

Align compensation to desired behavior. Remember that physicians are rational human beings who act rationally by doing what's incentivized. "If you pay them for volume and then enter into lots of at-risk contracts where you're losing money and ask them not to repeat tests and procedures, you're sending a mixed message," adds Bates. "Forward-leaning organizations are measuring billable encounters rather than relative value units (RVUs)."

Frequently, systems acquire a medical practice that no longer performs financially at the same level that it did pre-acquisition. Why? Health systems may offer a two- to five-year salary guarantee so that physicians are making more by working less. As a result, productivity falls off.

Such salary guarantees can be particularly challenging when an organization that wants to open a new service line makes an expensive salary guarantee in a crowded market. "It's often not possible to break even on a reasonable market share position of many specialized procedures," notes Bates.

So, incentivize the behavior you're seeking. At one high-performing physician-owned medical group, physicians are paid a salary in exchange for meeting a productivity standard. They also earn end-of-year Medicare bonuses-a 50-50 split with owners-driven by value-based performance to align with the entity's reimbursement.

Value salary and benefits accurately in the deal. Because 80 percent of the cost in a medical group is labor, remember that a richer benefits package will add cost. Are you offering all nurses in the practice the same salary as those in the newly affiliated hospital? Nurses in office practices typically enjoy regular hours with weekends and holidays off so job descriptions may differ.

Make ancillary revenue part of the equation. Frequently, systems will move the lab services of an acquired physician practice from the practice into a centralized outpatient services division to benefit from economies of scale. Once that revenue stream is removed from the practice, it may appear that it is now losing money. But actually, the system may be charging more for those procedures for a net gain.

“If you're betting on Value-Based Purchasing (VBP) as the future, that's commendable. Just recognize and accept that, for now, you are making an investment-which may mean losses-until that future arrives.”

Matthew Bates, Huron managing director

In the same way, some systems add more layers of management-which adds overhead-after an acquisition so that multiple people are doing what one person used to do. The opposite should be true. Greater economies of scale should lead to a wider span of control.

Understand your population health strategy. Is your organization going to build a value-based infrastructure for all patients? Or just a subset? “If you’re building a Patient Centered Medical Home for everyone, but only getting reimbursed more for five percent of your patients, that means you’re paying for overhead on the other 95 percent,” says Bates. “If you’re betting on Value-Based Purchasing (VBP) as the future, that’s commendable. Just recognize and accept that for now you are making an investment—which may mean losses—until that future arrives.”


Ambulatory surgery centers (ASCs) are big business today due to increasing volumes, consumer interest and potential for higher Medicare reimbursement. In 2016, Medicare payments to the top-three highest volume ASC procedures were $1.1 billion for cataract surgery with IOL 1 stage, $185 million for upper GI/endoscopy biopsy and $180 million for colonoscopy with biopsy.

As consumers continue to step up pressure for easy access to quick, convenient, patient-centered procedures, hospitals and health systems are responding at a record pace. In April 2017 alone, eight healthcare organizations across the country either announced plans to build, broke ground, or opened new ASCs.

As a result, ambulatory surgery is one of the fastest growing service lines in a hospital's portfolio today. Increasingly, major procedures that range from GYN and urology to digestive systems are moving to ASCs. Orthopedics is coming. CMS also recently proposed a 1.9 percent increase in 2018 ASC reimbursement-including total joint replacements-to those meeting quality reporting requirements.

OAS CAHPS is imminent. To capture these upsides, hospitals will need to excel at delivering an excellent patient experience. In fact, public reporting on the OAS CAHPS (Outpatient Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems) survey is slated to begin in 2018 (mandatory in 2019) and impacts both freestanding and hospital-based ASCs. The survey includes 37 questions broken into five domains: (1) before your procedure, (2)the facility and staff, (3) communication about your procedure, (4) your recovery, and (5) your overall experience.

In an ASC, patients are expecting an experience that's more than just an episodic event. And because ASCs that don't hit certain thresholds face VBP penalties, now is the time to put tools and tactics in place to ensure your ASCs deliver.

What to Fix. "Begin by looking at both the front and back end of the patient experience," explains Davy Crockett, Studer Group senior leader. "Is scheduling easy? Do cases start on time? Do patients understand discharge instructions? Long-time Studer Group partners will find that the tools they're already using are critical in an ASC environment. Tactics like AIDET® and Key Words at Key Times correlate directly to survey questions around items like 'Did the doctors and nurses treat you with courtesy and respect?' and 'Did they explain your procedure in a way that was easy to understand?'"

Because the OAS CAHPS survey also emphasizes relationships, communication gaps will become quickly apparent and easily differentiate top performing ASCs from low performers. For example, there are multiple questions on how patients felt they were treated by the anesthesiologist and questions on how handovers occur during different phases of surgery. Also, the surveys can be completed by family members so it's more important than ever to build trust and collaboration between the patient, his/her family, and the provider. Questions on managing complications dictate a fresh focus on ensuring quality post-visit calls are occurring consistently and providers are using the teach back method to ensure every patient is prepared.

While it's not likely that the pace of change in healthcare will slow down any time soon, reducing preventable readmissions, refocusing compensation for employed physicians, and streamlining the patient experience in ASCs can make a critical difference to your organization's financial future.

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  • Jim O'Loughlin, PH.D., MBA, MS, President and CEO, Munroe Regional Medical Center

    Jim O'Loughlin, PH.D., MBA, MS

    President and CEO, Munroe Regional Medical Center

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