by David Hoffman, Ph.D.
Each year, the Wipfli Health Care practice takes a look at the pertinent issues that shape business decisions in the health care industry. This year our focus is on hospitals and physicians and four major areas that we think will have the greatest impact on the industry in 2008. As we look at the landscape of our ever-changing industry, there are many issues that occupy the thinking of health care leaders, but the following appear to loom as the most significant for the coming year:
- Strategic and financial planning
- Hospital-physician collaboration and competition
- Organizational leadership and industry knowledge
- Quality and patient safety
Planning Strategically and Financially for the Future
Look for hospitals to plan more effectively and to increasingly link their strategic plan to a long-term financial plan that includes a projection for overall revenue growth and capital investments needed to achieve their business objectives.
Regardless of size, most hospitals are facing the challenge of how to grow their businesses in the face of increased competition, decreasing government reimbursement, and the need to stay current with physical plant and technology assets. To position themselves successfully, leaders will have to be sure that strategic planning, financial forecasting, and capital planning are closely coupled and not approached as disjointed activities.
In setting strategy, the big drivers will still be volume and market share, which depend on hospitals developing or expanding their key clinical service lines and engaging and aligning physicians around the hospitals’ business objectives. In other words, hospitals—especially small and rural hospitals—will need to selectively identify what clinical service lines will be their highest priorities for volume growth and which ones may be of less strategic value.
In HFMA’s Healthcare Financial Outlook: 2008-2013, two of the prime factors cited that will have the greatest impact on hospital volumes growth are 1) hospital-physician integration and 2) the development and use of non-hospital outpatient facilities.(1) Hospital-physician integration continues to be an important way for hospitals and physicians to rally around the common business objectives that will ultimately result in support of new or expanded services, hence new or expanded volumes. Likewise, the development of non-hospital outpatient services will open new markets and new alliances with non-health care partners (e.g., walk-in clinics at Wal-Mart, Shopko, and other retail outlets).
Both metro and rural health care systems will have to differentiate themselves from competitors not only on the basis of core services but also on customer service. In markets where patients face choices of hospital providers, customer service will continue to be a powerful differentiator. In order to ensure profitability, hospital leaders will need to have a keener understanding of what services and programs make or lose money, and they may have to make difficult decisions about services that are not likely to be profitable in the future. Surgical and outpatient services are likely to continue to be key areas for building volume.
As more and more hospitals are faced with replacing or renovating aging facilities and keeping current on technology in order to compete, emphasis will shift to building the balance sheet. That could entail dropping selected unprofitable services.
Capital planning will be more important than ever. Hospitals that successfully plan for replacement and renovation will have a leg up on those who wind up with insufficient resources to keep services and programs current. An important part of capital planning will be to have or build the reserves or debt capacity to invest in technologies that help guarantee maximum efficiency and productivity, as well as ensuring the highest level of patient safety and clinical quality (e.g., EMR, updated imaging, etc.).
Hospital-Physician Collaboration and Competition
Health care leaders can expect the tussle over outpatient business to continue, fueled by changes in medical practice and disparities in reimbursement for traditional physician services. Physician practice has changed dramatically over the last 5-6 years, evidenced by the drop in solo and two-person practices—40.7% in 1996 to 32.5% in 2004.(2) This trend is likely to continue. Younger physicians faced with the increasing burdens of private practice will continue to gravitate to health system employment models and large group medical settings.
To supplement practice revenues or to simply just survive, single specialty and large multi-specialty medical group practices will increasingly compete with hospitals for profitable ancillary services, such as laboratory, imaging and surgery centers, in-office stress testing, and other therapies. Unless Congress acts otherwise, physicians are facing a 10% reduction in Medicare professional fees in 2008, which will likely drive the ongoing trend towards in-office testing and competition with hospitals.
In a recent article in Health Affairs, the authors note that trends in payment systems have played a large role, however inadvertent, in the struggle between hospitals and physicians for lucrative clinical services.(3) They reason that historical favoritism in higher pricing for procedural versus cognitive services, as well as higher payments for technical services (i.e. hospital-based services for nurses, equipment, and supplies) rather than for the physician’s professional services, has encouraged physicians to form large groups, aggregate capital, and move into the realm of traditional hospital services. Evidence of this trend is seen in the high percentage of ambulatory surgery centers, endoscopy centers, and specialty hospitals owned in part by physicians.
That said, not all situations need to result in competitive struggles between physicians and hospitals. There is, and will continue to be, an array of joint ventures and other legally acceptable collaborative arrangements that will attract physicians and hospitals into stable and beneficial business arrangements. Examples include joint ventures, hospital-based clinics, integrated health care systems, and employment of selected specialists.
But merely having these options available to hospitals is not a guarantee of a collaborative outcome. Ultimately, successful joint ventures, the creation of integrated health care delivery systems, and even hospital/system-based physician employment models will depend on health care leaders who can build trust, vision, and relationships that yield economic benefits for the partners.
In order to achieve maximum alignment with physicians around hospitals’ financial and business objectives, it will be more important than ever for governing boards and CEOs to have a firm grasp on underlying business principles of the health care industry, coupled with the ability to engage their medical staffs in long-range business discussions.
While hospitals have been historically gun-shy of overparticipation by physicians in short- and long-term strategic planning, more physician involvement will be essential in order to successfully implement enduring collaborative relationships.
Organizational Leadership and Industry Knowledge
Highly competent health care leaders—from the board room to clinical departments—will become increasingly important. Successful delivery systems will have governing boards and CEOs with a strong knowledge of the health care industry and an ability to embrace bold strategies that focus on growth, profitability, and innovative services. They will need to be entrepreneurial and willing to take decisive action.
Governing boards, CEOs, and senior management teams will also need to have a strong grounding in planning, finance, and operations, as well as the ability to set targets, translate strategies into action, lead individuals, and hold their organizations accountable for results. While execution on a daily basis will still be the responsibility of line managers, governing boards will need to be well-grounded in market dynamics and have a good working knowledge of the major directions of the health care industry in order to set vision, focus their organizations on opportunities, and marshal the resources necessary to achieve success. They will also need to be excellent strategic thinkers, have strong analytical skills, and be capable of developing working relationships with their senior leadership teams and physicians.
Leadership skills for department managers and supervisors will be more and more important in order to successfully serve patients, manage people, and complete projects that advance the organizations’ business objectives.
Quality and Patient Safety
The quality and patient safety movement has become deeply rooted in the American health care system, driven in part by the studies of The Institute of Medicine Quality Initiative (4) and Medicare’s insistence that payment be linked to the quality of care. One of the most noticeable changes in the approach is that quality is now being more broadly defined than just clinical performance.
In the past, discussions about quality centered on what was necessary to ensure that patients’ needs were being met and that care was being provided in a safe environment. Not surprisingly, until recently most discussion revolved around clinical quality and the elimination of errors in patient treatment.
Now, quality is being spoken about in terms of the total performance of the organization—how the governing board functions; the quality of the total patient experience; the efficacy and efficiency of key internal processes with respect to billing, admissions, and registration, as well as turnaround times in lab, imaging, and surgery.
At the governance level, look for boards to take a much more active role in reviewing quality and setting standards and benchmarks for performance, as well as setting targets for performance improvement. Many hospitals now consider quality improvement to be so important that they exercise their quality oversight responsibilities as a “committee of whole” rather than delegating the responsibility to a separate committee. Hospitals, physician groups, and integrated delivery systems are using balanced scorecards and other performance monitoring and management tools to help them focus on ways to improve overall organizational performance. Look also for quality initiatives to be a visible part of clinical and non-clinical management in health care organizations.
On the clinical side, we expect to see evidence-based medicine (EBM), which embodies a more formalized scientific process for gathering information and making clinical decisions rather than relying entirely on individual practice style and personal judgment, becoming more widespread, especially by larger organizations that are able to do the research, gather and handle data, and make it available to practitioners.
Parting Thoughts
The themes of strategic and financial planning, hospital – physician collaboration and competition, organizational leadership and industry knowledge, and quality and patient safety are certain to dominate the health care dialogue in 2008 and beyond. We have focused on these issues because we believe that building knowledge in these areas and developing practices that address the principles contained in them can help organizations function at higher levels, service patients better, endure and be successful.
(1) Healthcare Financial Outlook: 2008-2013, HFMA, 2007.
(2) “Unhealthy Trends: The Future of Physician Services.” Pham, H. H. Pham and P. Ginsburg, Health Affairs, Vol. 26, No. 6, November/December 2007.
(3) Ibid.
(4) “Crossing the Quality Chasm,” Institute of Medicine, 1996.
About the Author
David Hoffman, Ph.D., is a partner in the Wipfli Health Care practice. He can be reached at our Madison office at 608.270.2968 or dhoffman@wipfli.com.