Charting a Roadmap to Financial Sustainability in an Increasingly Subsidized World

Hospitals and health systems nationwide continue to engage physicians through various service arrangements to strengthen provider alignment and secure critical healthcare services for their communities. Many of these arrangements result in growing losses that the engaging organizations subsidize. Hospitals and health systems have long considered these losses an inherent and unavoidable by-product of executing provider service arrangements. Healthcare leaders typically rationalize subsidy losses as a recurring (and growing) cost required to establish or expand their footprint and outreach and provide adequate and necessary patient care.Board members have increasingly begun expressing concern regarding these subsidies as stakeholders across organizations realize that the related losses are growing at increasing rates with no end in sight. Ultimately, these losses adversely impact organizations' bottom line and pose a material risk to the organization's long-term sustainability in many cases. In response to concerns raised by hospital and health system board members, executives commonly reference industry benchmarks, showing that subsidy losses are increasing year-over-year. We illustrate the upward trend of survey data in Figure 1.

graph of increasing subsidies

Source: MGMA Cost and Revenue Survey

All Practices Charges & Revenue per FTE Physician Considering that the entire industry faces professional reimbursement pressures and a widening gap between physician compensation and productivity expectations, eliminating these subsidy losses outright is unrealistic. The issue becomes exacerbated in specific market settings (e.g., rural communities) where low patient volume and associated reimbursement are extremely disconnected from the real cost of providing adequate and necessary healthcare coverage. There are, however, multiple controllable factors that may significantly improve profitability by controlling and reducing the magnitude of these operating losses.Regardless of the focus area (e.g., revenue cycle processes, provider contracting, payor contracting, compensation plan, operational throughput), the path to achieving financial sustainability starts with understanding the primary drivers of profitability. As part of the evaluation process, executives must identify factors that can be immediately addressed and prepare a remediation plan.

More specifically, organizations need to:

  1. Develop a common framework for analyzing drivers of provider financial performance.
  2. Understand that certain losses are controllable, while others are uncontrollable.
  3. Develop long-term performance targets for net financial performance and strategies to achieve those targets.
  4. Set "right-sized" subsidy targets and implement structural controls over physician arrangement approvals to maximize the "bang for your buck."

Although primary profitability drivers may vary slightly depending on each organization's unique facts and circumstances (i.e., setting of care), consider the following for the common framework. These drivers tend to have a significant bottom-line impact across most hospitals and health systems:

  • Patient Revenue | Actual compared to expected net patient service revenue levels. Commonly impacted by payor mix, revenue cycle, charge capture, billing and coding, collections, and denial management.
  • Practice Expense | Actual practice expenses compared to expected levels based on costing methodology. Commonly impacted by direct versus indirect expense structure, operating leverage, and actual versus market costs.
  • Provider Compensation | Actual provider compensation expenses compared to expected levels based on costing methodology. Market compensation rates, volume-based costs, marginal costs, contract structure, and compliance commonly impact it.
  • Provider Productivity | Actual provider productivity levels compared to expected levels based on historical trends and community needs. It is commonly impacted by life cycle, care setting, coverage type, and work effort.

After agreeing upon a common framework, the next step is to analyze the profitability drivers utilizing local market data and benchmarking. This analysis should enable organizations to segregate the subsidy into controllable "fixable" losses versus uncontrollable "structural" losses. At this step, organizations should also begin identifying subsidy reduction opportunities by comparing results across practices and time.

The next step is to develop an achievable budget representing a right-sized subsidy. One can achieve this by creating a budgeting process that utilizes validated benchmarks as realistic goals within each profitability driver. A significant advantage of this methodology is setting achievable financial goals in each identified focus area, which are frequently managed by different functions within each organization. Implementing key management processes and controls is paramount to achieving budgeted goals, requiring identification and empowerment of team members and the potential modification of reporting and accountability structure to make changes in targeted improvement areas.

The last step is to continue assessing the right-sized subsidy. Clinical, operational, and financial stakeholders may wish to consider alternative opportunities or coverage models. For example, leadership may consider utilizing specialists on a system-wide shared coverage basis or expanding scalable, (relatively) lower-cost programs such as telemedicine. Another option is to achieve reasonable provider clinic performance standards by developing standardized clinic structures through optimal utilization of support staff, operating models, and predetermined equipment and resource deployment thresholds. Leadership may consider changes to the target physician-to-non-physician provider ratio and utilize lower-cost advanced practice providers to meet coverage needs.

Hospitals and systems should not expect to eliminate subsidies; however, leadership must understand their actual losses, define what is reasonable, and then manage these losses on an active and ongoing basis. They must develop tactics to reduce unnecessary subsidies and, in doing so, chart a path for long-term sustainability.If you need help assessing profitability drivers and determining what to do next, contact us and request to speak with our financial services team.

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