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Running on Medicare Margins

Restructuring Costs and Building the Care Management Enterprise to Prosper on Radically Lower Pricing

Topics: Market Trends, Strategy, Volume Growth, Performance Improvement, Efficiency, Medicaid, Reimbursement, Finance, Medicare, Cost Management, Margin Performance

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By reading this study, members will learn:

  • The nature and magnitude of the major forces shaping future operating margins
  • The relative impact of revenue enhancement, cost growth control, throughput improvement, and case mix management
  • How to launch and sustain margin improvement initiatives to preserve healthy finances in an era of increasing reliance on public payers

Executive Summary

An ever-increasing reliance on public payers…

The health care industry stands on the cusp of two transformational shifts. The first Baby Boomers entered the Medicare program this year, and over the coming years a steady influx of new Medicare beneficiaries—around 7,000 each day—will dramatically reshape hospital payer mix. In addition, a payer mix shift of a different sort will begin in 2014 as millions of Americans find themselves newly eligible for Medicaid or exchange-based private insurance due to the coverage expansion provisions of the Patient Protection and Affordable Care Act.

…compounded by slow price growth and growing cost pressures

As economic pressures place budgetary pressure on federal and state governments, employers, and individual citizens, the outlook for provider pricing growth is weakening. At the same time, a constellation of forces continue to drive hospital expenses upward, further straining margins. And through it all, the rising prevalence of chronic disease threatens to crowd out high-margin procedural volumes with less profitable medical cases, thereby undermining the surgical-to-medical cross-subsidy almost all hospitals depend upon for margin stability.

Reform operations to prevent a sharp drop in operating margins

The potential impact of these forces is daunting. Health Care Advisory Board financial modeling indicates that, without intervention, the typical hospital could face as much as a 19 percentage point drop in operating margins over 10 years.

The path back to prosperity must be built on a foundation broader than cost cutting alone. Because of the complexity of the challenge ahead, effective strategies will combine long-term reductions in cost growth with enhanced revenue capture; improved throughput and efficiency; and, perhaps most important, robust case mix management that sustains profitable procedural growth while managing low-margin medical cases in low-cost settings.

Access the full study to learn more

Running on Medicare Margins, the first in a series of publications from the Medicare Breakeven Project, explores the nature and magnitude of the threat to margins and offers guidance on sustaining healthy performance throughout the coming decade.

Unlimited copies included in your Health Care Advisory Board membership

Log in to advisory.com and click the “order study” link at the top of this page to obtain hard copies of this study for your team.

Understanding the Challenge Ahead

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