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Reflecting on lessons from the past to predict and improve the future of the healthcare industry

bret schroeder | electronic health reporter | 16 february 2016

Everybody knows that the US healthcare system is in trouble. Issues ranging from cost, to quality and access of care are rampant and only getting worse. On a macro level The Affordable Care Act (ACA) has solved some of the previous access issues, but has added tremendous cost within the system, and at the same time it has not solved the quality issues that exists.

Research suggests that the cost situation is becoming increasingly worse, which is causing firms to scramble for viability. Waves of cost cutting efforts have led payers and providers to capture some, but not nearly enough of the costs necessary for long term survival. 

There are two main cost challenges that both healthcare payers and providers share: 

1) Wildly inefficient operating models and processes. The Harvard School of Public Health projects that of the $2.8 trillion the US spends on healthcare each year, 30 percent or $840 billion may be wasted. For organizations that function on small operating margins, this alone represents the boundary between success and failure. 

2) Large stranded infrastructure and costs combined with declining revenues - The ratio of hospital expense vs. revenue has increased from just under 15 percent in 2011 to nearly 30 percent in 2014 with 25 percent of hospitals reporting an operating loss. For nearly 49 million enrollees in Medicare, hospitals receive only 88 cents for every dollar with lower reimbursement rates predicted in the future.

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These pressures have led organizations to make hasty decisions about how to fundamentally solve the problem.  Merger and acquisition activity among both payers and providers is at an all-time high, and the ACA appears to have been the catalyst for this M&A activity. Since its enactment, hospitals started merging with competitors at unprecedented rates. In 2009, pre-ACA, there were 52 announced transactions involving 80 hospitals. That number more than doubled by 2012, with 107 announced transactions involving 244 hospitals.  The M&A frenzy among healthcare payers has also increased with Anthem’s announcement to acquire Cigna, and Aetna’s acquisition of Humana.  Both of these were announced last year and are two of the largest payer M&A deals in history.

In addition to M&A, early discharge rates have increased due to lack of reimbursement for select procedures.  However, this has not been for the good of the patient. It is estimated that as many as one in five patients are re-admitted within 30 days of their discharge. As the payment model moves from fee for service to fee for outcome, re-admissions will become more costly for providers (not to mention potential escalated reimbursement penalties).

While there is no silver bullet to solving the fundamental economic pressures that are currently impacting healthcare organizations, companies must fundamentally rethink how they are working to solve these economic challenges. Business models are changing, and for companies to survive they will need to rethink where future revenues will come from.

Cost transformation will be key for both payers and providers as we look to the year ahead and beyond. And not just low hanging, easy cost cutting (which has been going on for the past five to ten years), but truly rethinking processes and technology that will bring about significant change. Supporting legacy IT systems and brick and mortar hospital beds must transition to efficient, cloud-based service models and innovative home and telehealth care models. The economic challenges will continue for the foreseeable future and companies that are truly committed to addressing their revenue models and cost structures have the best chance for survival. 

Bret Schroeder is a healthcare expert at PA Consulting Group 

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