The higher the fixed cost on the left side of the blue line,
the more volume is needed to get the revenue above the total expense.
Health care is getting really crazy lately.
After decades of growth at a pace everyone agreed was unsustainable, waves of health policy lurches, insurance company plan design tweaking, public and business outrage over premiums and prices, and government fears of loss of international competitiveness of American products, it’s beginning to be clear that some fundamentals have shifted.
The new payment models, appropriately labeled “risk,” are impacting providers and patients more rapidly than many of us anticipated. Right now, for providers in markets who are experiencing the tipping point into more than 50 percent of revenue coming from such risk contracts, the speed of change seems suddenly striking.
The growth in volume of services does seem to be waning. Is the cause the dramatic drop in prices, forced by government and commercial payers? Is it the emergence of higher co-pays and deductibles forcing patients to make new economic decisions? Has the effort to improve coordination of care yielded enough results that chronically ill patients are no longer over utilizing unneeded emergency room and inpatient resources? It’s probably all these things. Already several health systems here in Western Mass are showing signs of shrinking.
Several major shifts in healthcare payment are creating a storm of challenges in executing appropriate change management. Prices per unit of service are falling. Variable costs have been reduced, but this is a high fixed cost industry, at least on the hospital side. With a drop in revenue per unit, the breakeven point for volume increases.
Now enter the contracts that pay a significant portion of revenue based on quality scores and “shared savings.” Shared savings are usually calculated on the basis of a recent run rate of costs for the local population projected forward in a “budget.” If the provider group can provide the care for the population at lower cost, the provider group gets to keep some of the savings. The proportion of savings that becomes revenue depends directly upon the quality scores.
So now there are two critical sources of revenue entering a system with high fixed costs. In order to be successful, health systems will need to think of volume more in terms of the size of the population served, then the number of units of service, although the latter will remain important for some time.
From a budget standpoint, there are three variables that must be maximized at the same time.
1) Volume of services has to be sustained above the breakeven point for fixed expenses, for those services still paid on a unit basis.
2) Provider groups have to get really good at achieving highest quality scores to gain access to shared savings, which must also be achieved.
3) To succeed in both of the first two items, the total population has to grow. That allows adequate volume to cover the fixed costs in services continuing to be paid in units. The growth in covered lives also provides scale so that savings generated are adequate to cover the increased expenses in infrastructure required to succeed in quality/shared savings payments.
Most health systems are gearing up for the first two. As volumes drop, the third factor will lead to consolidation of provider groups and health systems. If the population utilizes fewer high-end expensive services because of improved coordination, and a reduction in fees paid for these high-end services, then provider groups will need a larger population to sustain themselves. The aging of the population will have some impact, but the consolidation is likely to happen quickly in the next five years before the demographics of aging, obesity, and chronic illness create enough need.
The short, pithy conclusions I reach for provider groups are consolidate, standardize/improve, and become indispensable to those we serve, because the business model requires we care for a larger population.
To do so means competing with other provider groups. To do that, a cultural commitment to continuously understanding the needs of those we serve, focusing on the experience of our customers by truly listening to them in caring about their individual needs, will lead to successful health systems.
I am optimistic because all of these things are the right thing to do, and are what everyone who works in healthcare desires for their patients. If we act smart and with heart, we will be okay.
Cooley Dickinson Hospital • 30 Locust St. (Route 9), Northampton, Mass. • (413) 582-2000
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