Effective Alignment of Regional Hospitals With Health Systems

Health Care

February 03, 2015
by John Dao, MHA

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John Dao John Dao, MHA
Health Care Partner

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Each month Wipfli’s service line leaders contribute insights to the Health Care Perspective Newsletter highlighting the top tips for improving your organization.
Smaller rural and critical access hospitals (CAH) are joining up with larger health systems at a fast clip across the country.  There are a variety of strategic and financial reasons for consolidation, including access to capital, access to specialty physician networks, and improving negotiation leverage with insurers.  Once the legal act of a merger has been completed, however, the real work of successfully managing these assets begins.  Health organizations can rightly call themselves a “system” only if they can effectively allocate resources and clinical services between their hospitals and service areas.
The following are some of the top issues that health systems need to consider in the ongoing strategic planning and management of their regional and critical access hospitals:
  1. Patient migration patterns and market share:  For health systems that own and/or manage multiple regional/critical access hospitals, it is imperative to understand what services their patients are utilizing and where they are choosing to receive these services.  As an example, how did service area patients utilize their local hospital versus the larger system hospital?  What services are patients choosing to take directly to the system hospital versus receive locally at the smaller hospital?  What volume was “leaking” outside the system completely that might be captured in the future?  These migration patterns are important to understand because they will drive strategic and capital investment decisions.
  1. Service line quality and profitability:  Most regional/critical access hospitals provide a wide range of overlapping medical and surgical services (including OB).  While this seems like a prudent strategy, it has left many smaller hospitals with low volumes and potential quality concerns in certain services.  Health systems must look critically at the service lines each of their regional hospitals are providing and determine whether or not there is enough volume to provide consistent quality and profitability.  For example, should a regional hospital be delivering babies when it only has 50 births a year?  The answer depends on a variety of factors but is most influenced by staffing.  Some CAHs have Family Practice physicians who also deliver babies.  In addition, their nurses are cross-trained to handle OB.  These hospitals can make a margin on the service because the providers and staff are cross-trained to provide both traditional medical/surgical and OB care.  Understanding service line quality and profitability is critical in determining what services should be grown, maintained, or eliminated.
  1. Health reform impact:  As health reform continues to take hold, we are seeing a growing number of inpatient services being pushed to outpatient or home care.  Many smaller regional hospitals and CAHs have an inpatient average daily census (ADC) of less than 10 per day and trending downward.  As if low inpatient census weren’t enough, many of these admissions will be deemed “ambulatory sensitive” by CMS in the future.  In other words, these admissions would not get reimbursed under new health reform regulations.  Some CAHs Wipfli has worked with had up to 80 percent of their existing admissions in this “ambulatory sensitive” category.  This is clearly a large risk for every CAH, with significant implications from both reimbursement and facility perspectives.
  1. CAH mileage requirements:  There’s been recent proposed legislation that would strip CAH designation from those hospitals located 10 miles or fewer from another hospital.  Some health systems own multiple CAHs that are located within 10 miles of each other, and under this new policy one or both would lose their CAH status.  Health systems in this situation must be prepared with contingency plans to quickly determine which of their hospitals should retain CAH status, which could be converted to a “super clinic” (with ED and diagnostics), and which could be shut down completely.  The information gleaned from the steps above can go a long way toward making these difficult decisions.
  1. Facility implications:  Many regional/CAHs are 50 to 60 years old and are in need of significant facility upgrades.  For health systems that own multiple regional hospitals, the annual capital required for maintenance and renovations can be daunting.  The traditional process for allocating capital to their regional hospitals is often highly competitive, with each hospital “taking their turn” to receive bigger capital distributions from the system.  A more effective approach to this process would be to look more holistically at the system’s regional hospital “portfolio” and allocate capital strategically and based on the information outlined above.  As an example, converting an underutilized inpatient unit into a new OR suite or GI lab can be a worthy investment of capital.  In this scenario, underutilized and low margin square footage is being converted to space that is typically a high margin driver for CAHs.  Another example involves the use of swing beds.  Many health systems take care of inpatients that could easily fall under the “swing patient” designation.  Unfortunately, these patients often take up beds in the health system hospital (where reimbursement is less) when they could be just as easily be cared for closer to their home in a regional hospital or CAH (where there is significant bed capacity and reimbursement is higher).  Health systems that can effectively triage and co-locate these swing bed patients to their CAHs would achieve a “win-win” for both the larger hospital and the CAH. 
The health systems that are most effective at the planning and management of regional/CAHs take a more holistic and strategic approach to the allocation of resources and clinical services.  Health system growth through mergers and acquisitions alone will not produce a healthy financial bottom line.  Health systems must strive to better manage their regional and CAH assets to provide quality care at a lower cost.  Following the outline above can assist health systems to begin down this path of mutual benefit for all stakeholders involved.
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John Dao
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