Consumer Choice Will Play Larger Role in Hospital Spending

Analysts at Moody’s Investors Service weighed in on the larger role consumer choice will play in determining where some healthcare services are delivered. According to its new Sector In-Depth report, hospitals that provide convenient, high-quality care and customer service will “gain patient loyalty, improve market share and boost credit strength.”

 

The report details four key factors:

 

Physical and virtual convenience. There has been a significant shift in care delivery sites to outpatient settings. Median outpatient revenue has increased from 46.4 percent of net patient revenue in 2011 to 49.2 percent in 2014. Many hospitals are building or leasing outpatient space in geographically diverse settings to improve convenience. They also are investing in new technologies to facilitate physician-to-patient communication such as telemedicine, virtual clinical appointments, patient websites, smartphone and mobile device applications.

 

 Investments in strategies to measure and improve customer experience. Moody’s characterizes not-for-profit hospitals as operating in a competitive, service based-industry where providers must devote greater resources to better customer service and experience. Under health reform, measures of clinical quality and patient satisfaction will have a growing financial impact on hospitals and will affect payer reimbursement rates.

 

Escalating demand for healthcare value and price transparency. Consumers are paying higher deductibles, whether they get their insurance through their employers or a health exchange. They have developed a price sensitivity not seen even five years ago. Hospitals that demonstrate value and provide transparent, understandable pricing on treatment costs may gain market share among price-sensitive patients.

 

Less comparison shopping for more complex and non-routine healthcare needs. Consumer choice will be more significant for simpler, lower-acuity services. Physician and hospital reputation will continue to be the primary factors influencing volumes for higher-acuity, higher-reimbursed services.

 

(Source: The Patient as Consumer: Convenience and Value Drive Hospital Strategies, Moody’s Investors Service, June 11, 2015)

 

iProtean subscribers, you can read the full report from Moody’s in the Resources section of the upcoming course, Consumerism: Strategic and Financial Implications, Part Two.

 

Consumerism: Strategic and Financial Implications, Part One is in your library now. In this course, Mark Grube (Kaufman Hall), Marian Jennings (M. Jennings Consulting) and Nathan Kaufman (Kaufman Strategic Advisors) discuss the move to consumerism in health care and some of its effects.

 

 

 

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Healthcare Spending Increases So Far in 2015

Healthcare spending in the first quarter of 2015 experienced its fastest growth in more than five years, and hospital spending led the way, according to a new Census Bureau report.

 

Spending in the overall healthcare sector increased 7.2 percent compared to the first quarter last year; spending on hospital care increased 9.2 percent during that time period. In comparison, spending in the overall economy increased 3 percent in the same time period. (“Hospitals Lead Increase in Healthcare Spending,” HFMA Weekly News, June 19, 2015)

 

Kaiser Family Foundation tracks healthcare spending and reported that growth exceeded earlier estimates and has been increasing since the first quarter of 2014.

 

Some of the highlights from the Census Bureau and Kaiser Family Foundation reports include:

 

  • Spending at general medical and surgical hospitals increased 9.3 percent, 7.9 percent at psychiatric and substance abuse hospitals and 7.6 percent at other types of specialty hospitals.
  • Spending on ambulatory healthcare services grew 5.9 percent—9.4 percent for practitioner offices; 9.1 percent for laboratory services; 8.7 percent for outpatient centers.

 

Some analysts attribute the spending increase to a greater use of services; for example, over the same time period the number of hospital days increased by 3.5 percent and discharges increased by 4 percent. Others have said “pent-up demand for care by newly covered consumers” under the Affordable Care Act is driving the spending increase. (“Hospitals Lead Increase in Healthcare Spending,” HFMA Weekly News, June 19, 2015)

 

While some analysts have predicted that the period of historically low spending growth rates may be over, others noted that the first quarter growth rate will represent a peak, and that spending growth will moderate for the remainder of 2015.

 

Although spending increased significantly, hospital prices increased only 0.5 percent and physician and clinical services by only 1.1 percent. For the healthcare sector overall, prices increased only 1.2 percent. However, prescription drug prices increased by 5.6 percent, a near 13-year high.

 

The 9.2 percent revenue increase for hospitals provided them $261 billion in the first quarter of this year, contributing to a “hospital job boom . . . an average monthly increase of nearly 13,000 new jobs per month so far in 2015” after sluggish growth in 2013 and 2014. The healthcare sector has added more than 400,000 jobs in the last 12 months. (“Hospitals Lead Increase in Healthcare Spending,” HFMA Weekly News, June 19, 2015)

 

 

iProtean subscribers, the new advanced Mission & Strategy course, Consumerism: Strategic and Financial Implications, Part One, is in your library. In this course, Mark Grube (Kaufman Hall), Marian Jennings (M. Jennings Consulting) and Nathan Kaufman (Kaufman Strategic Advisors) discuss the move to consumerism in health care and some of its effects.

 

 

 

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Drops in Bad Debt May Not Result in Better Operating Performance

Bad debt and charity care are decreasing for the first time in years, and the drop is significantly larger in states that expanded Medicaid, according to a new report from Moody’s Investors Service. However, authors of the report noted that hospitals in Medicaid expansion states “are not uniformly transforming lower bad debt expense into higher cash flow and are not reporting financial results that are marginally better or different from those in states that have not expanded Medicaid.”

 

Reduction in bad debt in hospitals in Medicaid expansion states has been impressive. During 2014, these states had reductions averaging 13 percent; some had reductions of 40 percent or more. Hospitals in non-expansion states had an increase in bad debt through much of the year. (Medicaid Expansion Linked to Lower Bad Debt Amid Improving Hospital Financials, Moody’s Investors Service, June 3, 2015)

 

Hospitals in all states improved their financial performance and there was no significant difference in the degree of improvement among expansion and non-expansion states. The authors of the report noted several reasons for this:

 

  • Many hospitals have difficulty translating bad debt reductions into stronger margins.
  • Hospitals in Medicaid expansion states had a lower bad debt rate than those in non-expansion states even before this component of the Affordable Care Act was implemented in 2013: 4.8 percent of median hospital revenue for hospitals in expansion states compared to 7.5 percent of median hospital revenue to hospitals in non-expansion states.
  • Macroeconomic factors, especially the improving economy and lower unemployment have a bigger impact than reductions in one expense line item.
  • Reductions in bad debt are overshadowed by other expense growth including salaries and pensions and strategic investments in population health management.
  • Hospitals in non-expansion states derive some benefit from “the ‘woodwork effect’ whereby more people enroll in insurance because there is more awareness of the issue.”

 

Moody’s expects more states to expand eligibility and that bad debt will then decline in the first year in those states. This would have a positive impact on these hospitals’ financial performance. The authors caution, however, that “a reduction in bad debt will not in and of itself result in stronger margins.” More important are the overall economic environment and hospitals’ ability to control other expenses.

 

 

(Note: iProtean thanks Moody’s Investors Service for permission to quote liberally from its report, Medicaid Expansion Linked to Lower Bad Debt Amid Improving Hospital Financials. iProtean subscribers can read the full report in several of the Finance courses’ Resources sections.)

 

 

iProtean subscribers, the new advanced Mission & Strategy course, Consumerism: Strategic and Financial Implications, Part One, is in your library. In this course, Mark Grube (Kaufman Hall), Marian Jennings (M. Jennings Consulting) and Nathan Kaufman (Kaufman Strategic Advisors) discuss the move to consumerism in health care and some of its effects.

 

 

 

For a complete list of iProtean courses, click here.

 

For more information about iProtean, click here.

Moody’s Releases 2014 Preliminary Medians

Not-for-profit hospitals appear to be successfully managing themselves out of the significant downturn that resulted from the Great Recession, according to the recently released Moody’s Investors Service report on 2014 preliminary medians.

 

“Not-for-profit hospital operating margins and operating cash flow margins stabilized as revenue growth rate edged ahead of the expense growth rate, the first time since the fiscal year 2011 medians,” the Moody’s authors wrote. (“Growth in Hospital Revenue Edges Ahead of Expenses in 2014,” Moody’s Investors Service Sector-in-Depth Report, May 26, 2015)

 

Highlights of the report include:

  • Annual median revenue growth improved in 2014 to 4.7 percent, the first time in three years. The pace of operating expense growth continued to decline. This revenue growth is a “sharp reversal” of the decline in growth rate since fiscal year 2011 medians. Moody’s attributed revenue growth in part to consolidation in the not-for-profit hospital sector and the initial influence of the Affordable Care Act as benefits of the exchanges and Medicaid expansion were realized.

 

The repeal of the sustainable growth rate (SGR) formula for physicians’ services may aid future revenue growth for those hospitals with sizable physician employment strategies.

 

The median annual expense growth rate declined to 4.6 percent in FY 2014, down from 5.0 percent in FY 2013 and 5.5% in FY 2012. Moody’s attributed the decline to the ongoing shift of patient care to lower-cost and more efficient settings such as outpatient and ambulatory centers. Operating efficiencies also benefited from size and scale.

 

  • Unrestricted cash and investments grew for the second consecutive year due to strong equity market returns and “cautious” capital spending.

 

  • Profitability margins stabilized. Moody’s noted, however, that the 2.2 percent operating margin and the 9.2 percent operating cash flow margin are down from higher levels in 2012. Operating margins improved from 2.0 percent in FY 2013 to 2.2 percent in 2014, and operating cash flow margins remained relatively stable (9.3 percent in 2013 and 9.2 percent in 2014). Moody’s noted that the growth rate of both measures remain negative, but have improved following a two-year decline in the rate of growth.

 

A number of factors have contributed to stable performance in 2014:

  1. Resiliency with careful budgeting, increased efficiencies including an ability to adjust to lower reimbursed settings, that translated into lower expense rate of growth
  2. Payer mix shift away from self pay
  3. Utilization trends that were generally favorable including increased growth rates of outpatient visits, outpatient surgeries and combined inpatient admissions and observations stays.

 

Final medians will likely show weaker operating performance than the preliminary medians because the finals will include more hospitals with December year-end audits that are concentrated in geographic regions with weaker economies, the authors wrote. The full medians report will be published this summer.

 

 

(Note: iProtean thanks Moody’s Investors Service for permission to quote liberally from its report, Growth in Hospital Revenue Edges Ahead of Expenses in 2014. iProtean subscribers can read the full 2014 preliminary medians report in several of the Finance courses’ Resources sections.)

 

 

iProtean subscribers, the new advanced Mission & Strategy course, Consumerism: Strategic and Financial Implications, Part One, is in your library. In this course, Mark Grube (Kaufman Hall), Marian Jennings (M. Jennings Consulting) and Nathan Kaufman (Kaufman Strategic Advisors) discuss the move to consumerism in health care and some of its effects.

 

 

 

For a complete list of iProtean courses, click here.

 

For more information about iProtean, click here.

 

Hospitals Consider Consumers As They Tailor Services

Kaufman Hall’s Mark Grube urges hospitals to consider consumers as they design and tailor their services to meet the demands of the new healthcare delivery system. “Health care’s new business model seeks to ensure delivery of the right services at the right location and time and at an appropriate cost, in turn achieving the Triple Aim of lower healthcare costs and improved population health and care quality,” Mr. Grube wrote in a recent hfm article on consumerism/retail health. Mr. Grube describes consumerism in the new iProtean course, Consumerism: Strategic and Financial Implications.

 

The new healthcare business model has given rise to the following trends:

 

  • Higher out-of-pocket costs for insured individuals
  • Transparency of price and quality data, leading to actionable consumer 
information
  • Increased and varied competition among providers, with new entrants 
attracted by the industry’s evolving business model
  • Consumer expectations related to convenience and service consistency
  • New applications of technology and data, enabling virtual patient 
monitoring and care provision

(Source: Kaufman, Hall & Associates)

 

In response to these developments, hospitals and health systems should adopt a clearly defined, consumer-centric ambulatory and virtual strategy and a thoughtfully considered tactical plan for delivering care in all settings and through new modalities. This effort can help organizations create a retail playbook for maintaining or increasing relevance and market share—and building financial and clinical strength—in a changing industry. (“Preparing to Succeed in a Retail Health Environment,” hfm, November 2014)

 

Mr. Grube, along with Marian Jennings and Nathan Kaufman, describe the “points of retail competition” for healthcare providers. These are:

  • Convenient access: the right service at the right time and place
  • Competitive pricing: nuanced pricing strategy; not a knee-jerk “lowest price in town” reaction
  • Multichannel offering: including virtual, mobile, telemedicine, e-visits as well as traditional settings
  • Customer experience: coordinated and differentiated
  • Brand preference: based on “must have” products, services and experiences
  • Understanding the customer base: understanding different needs and expectations across customer segments
  • Product relevance: services understood by consumers and tailored to needs and preferences of the customer base

 

To hear more from Mr. Grube, Ms. Jennings and Mr. Kaufman on this complex and timely topic, go to your library for Part One of Consumerism: Strategic and Financial Implications. The course will be available by the end of this week.

 

 

 

For a complete list of iProtean courses, click here.

 

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