By, Bill Eveloff
Are you achieving real economies of scale? Do you want to?
While your first answer is possibly “no,” I suspect your second answer is most assuredly “yes!”
I recently attended Sg2’s annual Executive Summit, titled “Scale, Progress, and Promise,” which teed up exploration of the challenge that real economies of scale through increased health provider consolidation has been elusive to date. While balance sheets have grown among the top providers, consolidation has not yet measurably translated into value for communities and patients, many of whom have experienced wide variation of clinical service performance. Unfortunately, this inconsistency has been amplified by increasing costs for care, which some attribute to the increased market concentration of health providers. The recent Health Care Cost Institute report studied 112 metros over a four-year period during which 72% of the metros become highly concentrated. Amongst those concentrated metro areas with merger activity, the report identified larger price increases.
As such, a smoldering platform is heating up as regulators are intensifying pricing pressure in light of increased market concentration. In parallel, disruptors are further organizing to compete for health services, and patients are becoming more cost-sensitive and savvy consumers of care.
While these challenging dynamics are daunting and certainly not easy for health providers to navigate, there is great opportunity to generate value through focus and alignment. In fact, while fee-for-service continues to be the dominant payment model, many are leveraging economies of scale to invest in value-based care payment models of varying risks. For these new approaches to be successful, Sg2 laid out multiple intriguing strategies. I will focus on the environment of care.
Achieving Real Economies of Scale through the Environment of Care
Providers would be well served to broaden their definition of the “campus of the future” beyond just the physical environment and instead as a continuum of high-quality care consistently provided along a patient’s journey — one that spans different physical and virtual environments. That means providers should continue to enhance and integrate their breadth of services and resources along the system of care, which Sg2 categorized into three groups with different success strategies:
low volume, very low growth, high cost
While patient days are expected to increase for higher-acuity inpatients over the next 10 years, total inpatient discharges will essentially remain flat nationally, as lower acuity populations continue to shift to lower-cost, intermediate-acuity settings. However, average daily census (ADC) is not expected to decline significantly due to continued Hospital Outpatient Department and Observation Visit patient volume. Of course, capital investment in inpatient facilities will still be needed to improve flow, enhance efficiency, address obsolescence, and enhance services. While investment may be necessary for new facilities in certain circumstances, maximum value will be achieved more cost effectively by creatively renovating, repurposing, and modernizing existing space. The savings gained can then be utilized to invest in other strategic needs within the broader portfolio.
moderate volume, high growth, moderate cost
A significant amount of patient volume in areas such as orthopedics, general surgery, spine, and cardiology procedures, will further shift to the outpatient environment over the next 10 years, driving growth of outpatient facilities. However, they will have to do more than simply provide the physical environment. It will be imperative for services to be integrated and consistently delivered in this more competitive environment in order to meet consumer expectations. Physicians and other caregivers will need to be closely aligned with organizations to deliver on these expectations, and, in some cases, involving otherwise perceived competitors or non-traditional partners will enhance long-term sustainability.
high volume, very high growth, low cost
While this is the area of greatest growth along the system of care, it is also the most highly competitive. Highly capitalized new entrants, such as CVS, Walmart, Haven (established by Amazon, JPMorgan Chase, and Berkshire Hathaway), and countless others intend to disrupt preventative and primary care services throughout flexible physical and virtual environments — including at work and at home. In these circumstances, healthcare providers will need to leverage their capabilities to provide seamless integration along the care continuum while embracing consumer demands for access, personalization, consistency, quality, and affordability. Perhaps most challenging will be the capability to maintain an efficient service environment that leverages technology, maintains provider staff resiliency, and seeks out enhanced partnerships with others — including the disruptors.
Change is coming even more rapidly than before, that much is clear. The question is: How will you strategically leverage environment of care opportunities to best achieve economies of scale that will ensure your hospital or health system stays profitable, stays competitive, and remain relevant in the new era of healthcare?
At Petra, we’re all about creating better — for our clients and the patients we ultimately all serve. Our team of experts ensures your next facility project meets tomorrow’s healthcare needs by delivering holistic, innovative solutions with the benefits of long-term sustainability and flexibility for the future.