By Jackie Kimmell, Senior Analyst
Despite the recent uptick in mergers and acquisitions (M&A) among providers, there's little evidence that health systems have actually been able to generate effective economies of scale as they grow.
For example, Advisory Board research has not found a statistically significant correlation between cost to collect (a key indicator of a hospital's revenue cycle efficiency) and net patient revenue (which reflects total system size).
After merging, many health systems fail to centralize and effectively integrate newly acquired entities. In many cases, entity-level goals create internal competition, ultimately cannibalizing patient volumes and stifling system-level strategy.
So what can executives do to streamline their health systems? The Health Care Advisory Board team's latest research on achieving true "systemness" highlights three ways to create a system greater than the sum of its parts.
Make sure to download the entire research report, Toward True Sustainability, to learn more about these strategies, including case studies and executive takeaways for each.
3 ways to achieve real systemness
In theory, hospital mergers should enable health systems to lower the unit cost of production and give them the opportunity to pass savings on to patients. But too often, mergers result in price increases, and health systems miss an opportunity to leverage their systemness and achieve enterprise-wide goals. Below are the Health Care Advisory Board's three recommendations for turning the tide.
- Start with administrative services—with the aim of creating spillover benefits
Administrative services after M&A activity can easily become siloed and duplicative, which can add unnecessary bureaucracy and slow down system-wide decision making. Yet, administrative services are one of the best places for systems to generate true economies of scale.
For organizations that chose to perform administrative functions in-house, they must be efficient; it should be more cost effective to provide these services in-house than to outsource them. For organizations that cannot mature to this stage, executives should re-evaluate the value of keeping those functions in-house and consider whether a third-party vendor can provide the service more effectively.
Ultimately, administrative services kept in-house should become so effective that they help to advance the organization’s broader strategic goals by providing valuable business intelligence.
- Create a top-of-site care delivery network to maximize financial return on fixed-cost assets
Many organizations are not realizing the full potential of all their assets. Within the same system, some hospitals may be full while nearby hospitals operate significantly under capacity.
The solution is to create a top-of-site care delivery network. Top-of-site care is defined as delivering clinical services in the setting that maximizes financial return without undermining care quality or burdening clinicians or patients. Ideally, this network:
- Distributes patient volumes;
- Consolidates resource-intensive services to the best site;
- Sends patients to facilities that are appropriate for their acuity level;
- Increases efficiency; and
- Maximizes financial return of the health system's assets.
There are three steps to delivering top-of-site care. First, transfer patients between hospitals to manage capacity and balance volumes across the system. Second, direct patient volumes in order to deliver care in the most cost-effective location. Finally, in the long term, reconfigure the portfolio of assets and services across a geography to reflect patient demand and needs.
- Consider alternatives to traditional inpatient spaces when rightsizing acute care capacity
While controlling operating expenses is critical to managing margins, they can pale in comparison to the fixed costs on health system balance sheets. As inpatient volumes decline, progressive organizations are considering innovative alternatives to traditional inpatient infrastructure.
Hospital-at-home programs, which provide acute care in a home setting, and micro-hospitals, which provide acute care in small neighborhood hospitals, are two alternative strategies that have received a lot of attention recently.
To learn more about the strategic advantages and potential challenges of these alternative models—and how to restructure existing fixed costs by reallocating services across the system—read our research report on the Hospital of the Future.
Ultimately, achieving systemness is just one component of the overarching strategy necessary to build a cost-disciplined enterprise. The enduring nature of today's revenue pressures means that hospital leaders cannot solely rely on increasing revenues to remain financially solvent. Rather, they need to sustainably slow cost growth.
To learn about the key characteristics of cost-disciplined organizations—and what hospital leaders can do to help their organization become one—download the Advisory Board's new research report, Toward True Sustainability: Eight Lessons on Building a Cost-Disciplined Enterprise.
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In 2017, nonprofit hospital operating expenses outgrew revenue for the second year in a row. In fact, the gap between cost growth and revenue growth widened slightly from 1 percentage point in 2016 to 1.1 percentage points in 2017, driving median operating margins among not-for-profit hospitals to an all-time low of 1.6%.
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