By Brian Klepper

Lately, I’ve had interesting discussions with a thoughtful exec. at a
major Western health system about the ferocious challenges facing
hospitals and health systems. Her organization’s internal conversations
at the moment are centered, in part, on what they should do to become
"reform ready," not only for policy changes that could be in the wings,
but more importantly, for emerging market dynamics that will change the
ways hospitals work. She asked me to catalog some of the trends I think
health system managers will have to deal with, along with five
recommendations for action. Here’s some of what I told her.

Hospitals face dramatic financial stresses on a range of fronts.
Over the last 25 years, health systems’ average total margins have
remained reasonably stable at around 5 percent. As you’d expect, some
organizations have performed better, and others worse. About
one-quarter of all US hospitals, many of them safety nets, have
reported negative margins, and continually teeter toward failure.

Now the pressures are ramping up considerably. Perhaps most
profoundly, the balance has eroded between more profitable
privately-covered patients, and patients with public coverage –-
Medicare, Medicaid and other governmental sources –- that may not cover
cost.

But the dynamics of each funding stream are in flux as well, at least partly due to the rampant cost growth that health systems themselves have fueled through reasons legitimate and not: the need to replace aging infrastructures, the need to invest in new technologies, over-utilization.

Now, in the context of an economic downturn, the relentless ballooning of Medicare and Medicaid cost at 2.5 percent more than general inflation annually threatens to overwhelm state and federal budgets. Cuts to the funding of public coverage are inevitable to stem the bleeding. If and when they finally occur, expect the commercial plans to immediately follow that lead.

Come October of this year, Medicare will stop paying for "never-event" medical errors – hospital acquired infections, wrong-site surgeries, falls, and other things that should never happen. Commercial plans also have followed this action. Though this has received relatively little play in the popular press, the financial impacts could be significant for organizations that do not yet have serious quality management processes in place, and that have become comfortable with always getting paid for both their mistakes and the recoveries involved.

(Even so, there’s no question that many, if not most, health systems have been very focused on refining their processes. One colleague who oversees turnarounds of hospitals in crisis tells me that his teams usually find far less waste now than five 5 years ago, though the external financial stresses on the system are much greater.)

Health system bad debt and charity care levels are suddenly rising at unprecedented rates. As health care costs have skyrocketed, health plans have responded with skinnier, less costly benefit structures that, logically enough, also cover less. Not surprisingly, to access care more people have become responsible for larger out-of-pocket costs, a frightening trend now compounded by a tanking economy. CMS reports that patients already pay 12 percent of all health care costs and that figure is expected to rise to 20 percent in the next several years.

Already thinly stretched safety net facilities — like Miami’s Jackson, Atlanta’s Grady and LA County/USC — could collapse under the strain, and the community systems will be exposed to much higher levels of uncompensated care/bad debt than in the past.

Health systems’ dilemma, of course, is that, independent of the fact that health care coverage is being priced out of market for many individual, corporate and governmental purchasers, the demand for services continues to rise. At least in theory, each health system is expected to provide unlimited care to those without resources, mostly at its own expense. This formula works less and less well as resources decline, and as more people who are more responsible for their own bills can’t pay.

But every problem is someone else’s opportunity. Individual patient accounts receivable management –- credit scoring and collections –- has become a boom area of health care finance. As new technologies allow health systems to identify more accurately the patients who do and do not have financial resources, one huge question is whether hospitals will have the discipline to NOT apply these tools to pre-qualify a patient for care on the basis of ability to pay.

Other new information tools will work to health system’s advantage. For example, a number of ventures are working to harness Web technologies that can pay physicians and hospitals more quickly. In the era of PayPal, there is no good reason why days-in-accounts-receivable average 36 for physicians and 55 for hospitals. Some networks are now promising rapidly expedited payment in exchange for lower cost and more pricing/performance transparency for their employer/health plan clients.

At the same time, as some form of pay for performance goes mainstream and much more detailed pricing/performance information becomes available, purchasers (of all types, including health systems) will become more discriminating about where they buy services. The impact of data-driven decision-support tools, many of them being developed through Health 2.0 firms, will be at least as meaningful for industry managers as for consumers, because these tools will be necessary to hit the performance targets associated with optimal reimbursement and cost management. As these tools come online, employers will be able to more clearly identify which doctors and hospitals they do and do not want in their health plans. Health systems will use data to inform their purchasing as well, since their performance will be directly tied to reimbursement. All of a sudden, it really will matter what the data, rather than vendors, say about the performance of a stent, a hip, or anything else a hospital buys.

In patient outreach, health systems will be challenged by big box retailers – CVS, Walgreens, Wal-Mart – and an array of smaller clinic firms, who are moving beyond the catch-as-catch-can medicine of convenience care clinics and into primary care clinics that are full-blown medical homes. Walgreens already has more than 500 primary care sites around the country, and they’re expanding rapidly. These systems are developing national partnerships and referral patterns that could eventually allow them to control the referral bases within some markets, particularly those that are rural or dominated by a few mid-sized or large employers.

Clinic management firms in this sector will also move into managing jail/prison health and indigent health. In all their models they’re relying on a combination of incentives, health management programming, IT tools, creative supply contracts and professional recruitment to gain an increasing footprint in primary care, but with a heavy emphasis on population health management.

Health plans (and possibly health systems) might also seize on the medical home concept in the same way they did when employers initiated managed care a couple decades ago, but try to spin it to their own purposes.  But the idea of using (and paying) the PCP not as gatekeeper but as expert full continuum guide and advocate is compelling, and my own experience has convinced me that it is very powerful.

Employers are suddenly waking up and realizing that they can be far more pro-active about health costs. I’m getting calls from employer coalitions to talk about ways to exert leverage on health systems. Employers are finally collaborating on claims data, and then analyzing it to identify problems and opportunities that can be shepherded to impact. So far, these are very successful programs.

The most impressive trends I’ve been exposed in the last year are in:

• Health 2.0 (and particularly the refinement of data-driven decision support for personal health, clinical and business management).

• The emergence of medical homes (as realized through worksite clinics, with a new industry focused on serving as the employer-purchaser’s fiduciary at the expense of other often over-reaching health interests).

• Restructuring by health systems of their relationship to the supply chain (which is 40% of all the money).

• Medical tourism.

• The gradual re-awakening and mobilization of employers to address health inefficiencies.

To me, the wisest hospitals/health systems are thinking about how to remake their operations so that they’re prepared to advance with the declines in resources that are coming down the pike. They’re developing much tighter and more open relationships with their employer communities, and are genuinely trying to turn around so that they too become fiduciaries for their purchasers, realizing that an economically stable buyer is one key to a long term symbiotic relationship. The current model is obviously unsustainable, and so the big questions circle around how to take advantage of new tools and partnerships to become capable in a much different financial environment.

So with all that as context, here are five recommendations to health system execs:

1) Identify And Eliminate The Sources Of Safety Errors. The October termination of payments for never- could be among the most important policy changes since DRGs were introduced in 1984. And, as Jane Sarasohn-Kahn recently pointed out to me, they also constitute a beachhead for a national quality/safety improvement effort, providing a basis for next trying to eliminate lousy care.

2) Revamp Supply Chain Management. Some systems have found huge savings and tremendous increases in quality as they have implemented approaches that provide end-to-end control of their acquisition and distribution processes. Labor costs are mostly inelastic, so the obvious place to squeeze is the supply chain, 35 to 40 percent of expenditures and any clinical organization’s 2nd biggest cost area. Suppliers’ margins range from 15 to 40 percent, among the highest in health care and American business. When the Sisters of Mercy system in Springfield, MO revamped their approach to supply chain management, they also eliminated 176,000 annual medication errors.

3) Make Performance Transparent. When the Norton Health System in Louisville announced that they would publicly publish their performance results, good and bad, in each area, the physician staff became alarmed. Once the results were in, those with great scores were happy and those with bad ones immediately checked out and adopted more successful methods. Quality throughout the system improved.

4) Develop Liaisons With (The Most Progressive) Local Businesses. Convey that you are intent on transforming your operation in ways that convinces them you are a fiduciary of their health care expenditures. Showcase your advances, and not just your new technologies, but process improvements as well. Invite their input on how to improve. You may find that they have much to offer, and if you win their minds and hearts, then they’ll become your allies in health plan battles.

5) Develop A Cost Effective Primary And Full-Continuum Care Program. Develop an aggressively cost-efficient medical home-based population health management model that can be rolled out through worksite, community, indigent care and jail clinics. I know from experience that a carefully structured program of incentives, health management, creative supply contracts and health IT (including EMRs, guidelines, populations health analytics and provider profiling) can immediately drop 25%-30% from health plan costs, and create additional significant savings in workers’ comp, occ health (e.g., pre-employment screenings, drug screenings, DOT exams), recruitment/retention and lost productivity. A health system that is focused on working creatively to enhance its business volumes while reducing its individual employer purchasers costs will win over the long haul.

Brian Klepper is health care analyst and commentator based in stormy, monsoon-plagued Atlantic Beach, FL.