Editor's Note: This article is part of a series on healthcare supply chains, which can be found in full here.
It's been an exhausting year for hospitals.
In 2017, the big theme was uncertainty. Uncertainty over the Affordable Care Act. Uncertainty over value-based payment structures. Uncertainty over artificial intelligence threatening the clinical profession.
If the year has taught the industry anything, it's that macro changes are no longer episodic, but chronic and needing to be continually tended to. The horizon for 2018 includes increased focus on social determinants of health, artificial intelligence, regulatory changes from Washington and changing players in the space, to name a few.
These changes are coming as hospitals tackle the challenges of managing costs and expenses while reimbursement and inpatient admissions flatten.
"It's a long and intimidating list," Michael Abrams, co-founder and managing partner at Numerof & Associates, recently told Healthcare Dive, looking at the factors working against a hospital's bottom line.
"If I was a hospital executive, it'd be a challenge to feel great about the year ahead."
Some believe the use of technology will help gain visibility into where cost savings lie over time. However, until the trends shaking up the market settle down, prepare for the cost containment movement to forcibly continue.
Expect margins to feel pressured
Generally, providers have had a challenging year. Patient admissions have been softening thanks to rising deductibles and medical cost increases outpacing wage growth. Reimbursements have waned and private payers are pushing patients to less expensive low-acuity settings while operating expenses climb.
Total Admissions in all U.S. Registered HospitalsSource: AHA Annual Survey
Total Expenses for all U.S. Registered HospitalsSource: AHA Annual Survey
The numbers don't paint a pretty picture going into 2018. While hospitals experienced a drop in uncompensated care since the passage of the Affordable Care Act, Moody's Investor Services predicts bad debt will be back and grow at a rate of 6-7% next year.
The bond creditor changed its view on nonprofit hospitals from stable to negative based on rising operating pressure. The company expects operating cash flow to shrink by 2-4% over the next 12-18 months. While the outlook could be revised to stable if operating revenues resume growth between 0-4%, the aging population will increase providers' exposure to government payers, which will dampen revenue growth, the company said.
For U.S. for-profit hospitals, Moody's expects a stable outlook with a same-facility EBITDA growth of 2.5-3%. However, lower cost settings will continue to constrain inpatient volumes along with rising labor expenses, pressuring margins.
Moody's believes companies will take action to increase efficiencies to offset the margin issues. Such actions will be necessary. As seen in the first nine months of FY 2017, the majority of the big for-profit health systems experienced net operating expense rate increases that outweighed patient admission changes for the same time period.
Nine-month FY 2017
Patient Admissions % Change
Operating Expenses % Change
Net Operating Revenue % Change
Three areas to watch as providers react
Providers are rethinking their business strategies to realize these efficiencies. The for-profit systems have been investing in lower cost settings and Moody's predicts consolidation will continue as a local market strategy becomes increasingly important.
For savings that can be generated relatively quickly, institutions big and small have begun to figure out where to cut costs. Mayo Clinic has realized $900 million in savings in the past five years across 400 projects to manage costs. Cleveland Clinic sought to shave $330 million from its 2014 budget while Partners plans to find $500 million in savings over three years.
Pressure on margins has increased in recent years mainly due to an increase in labor and purchase service expenses, Christopher Kerns, executive director, research at Advisory Board Company, told Healthcare Dive. While expenses are projected to grow, Kerns expects the industry will see a decrease in budget growth.
Hospitals will review three main buckets to contain costs next year:
1) Clinical variation reduction: Kerns says supply chain managers will attempt to minimize variations in areas with a combination of a high aggregate spend, high variation in spend-per-item, and a degree of modification, such as surgical supplies. "That will bend the cost curve over time," he said.
Ben Isgur, director of PricewaterhouseCoopers' Health Research Institute, agrees and adds that clinical variation tends to be a cultural issue for administrators. In Isgur's view, if physicians agree to standardized care paths and supplies, that creates efficiencies and savings. The challenge is getting physician buy-in to agree to the standards. But it isn't impossible. Creating incentives across an organization can help add drive adoption.
“Getting the culture aligned on incentives is what makes supply chains successful,” Isgur said.
2) Labor management: A major driver of expense growth will be labor costs as providers hire clinical staff to manage the incoming "silver tsunami" in tandem with physician and nursing shortages. Health systems are not able to control costs as they might have in the past because wages are increasing in light of the shortages.
Some organizations have announced large layoffs. Tenet Healthcare, for example, announced in its preliminary Q3 disclosures the company would cut 1,300 jobs. Lahey Health said in October it would lay off 75 employees to help bridge a budget gap.
But layoffs can only take an organization so far. Providers will have to learn how to optimize their workforce and use automation when appropriate, such as in areas like medication reconciliation.
Chip Newton, Healthcare Leader of LaborWise, Deloitte, told Healthcare Dive he has seen a greater focus in recent years on workforce management as a means of controlling costs. For example, providers are reviewing the incremental components of overtime like missed meal breaks and missed punches. "Those seem minor but that level of granularity helps them maximize their labor force," Newton said.
3) Revenue cycle management: Revenue cycle costs have remained flat in recent years despite increased consolidation in the industry, indicating health systems have not realized greater savings by pooling their revenue cycle functions, Kerns said. Therefore, providers will increase focus on the cost-to-collect and minimizing denials.
To maintain savings over time, health systems and supply chain managers will need greater visibility into where clinical variation exists. To that end, technology will be a critical tool for cost containment efforts. While technology no doubt contributes to the increasing expenses a provider faces, analytics and EMRs should be considered as a tool to target savings.
Better use of analytics will help supply chain managers identify year after year where the savings are going to come from, according to Kerns. If supply chain managers can show physicians data that reducing clinical variation can lower costs, managers are much likely to get physician buy-in. "That will give them the best long term bang for their buck," he said.
While cost savings is an important effort, Abrams believes it isn't striking at the heart of the problem. Providers need to think seriously about delivering what the market has been requesting for years: better care at lower costs.
"You can't save your way to prosperity," Abrams said.
He points to the CVS-Aetna deal as an example of the private sector stepping in to fill the gaps in areas that traditional providers are unwilling to tread to lower costs. The recent flurry of merger activity reflects an intense power struggle in the industry. Traditional providers are consolidating on one end to maintain their market influence while nontraditional players such as Aetna-CVS or Optum-DaVita are coalescing in vertical integration agreements to gain larger market share and compete against the industry incumbents.
"Until we align incentives, we aren't going to see change," Abrams said. And to that end, cost containment looks to be an effort that administrators will need to get used to.