At the Margins

Johnston: How our clients are looking at margin improvement today—and how they ought to be

The At the Margins team recently sat down with John Johnston, a senior vice president with our Consulting and Management division and a former finance executive, to discuss how his team advises hospital executives on the approach they should take for improving their margins.

Q: For the past several years, hospital executives have been focused on the idea of "Medicare breakeven," or performing at a level to generate a positive operating margin at Medicare reimbursement rates. Are your clients still thinking about their margins in the same way?

Johnston: Medicare will continue to be the main payer for hospitals, and it drives rates and models other payers adopt. Therefore, hospital leaders will keep looking at operating margins in the context of Medicare reimbursement.

But actual Medicare breakeven is also a long way off for most organizations. While it is a priority, and hospital leaders are working to move in that direction, they’re doing so in a way that prioritizes “front burner” issues, such as Medicare rate cuts, reimbursement policy changes, and risk readiness.

Q: So how should executives balance near-term margin pressures and the longer-term Medicare breakeven ambition?

Johnston: We’re advising our clients to think about two primary avenues of improvement, which will address these more immediate issues and steer the hospital toward breakeven: reform their cost structure and redesign their care delivery model at the same time. And redesigning the care delivery model is quickly becoming the most important next step for most hospitals.

Q: For your clients who are actively working toward Medicare breakeven, are there common threads across each of them?

Johnston: One common thread is that most of my hospital clients had already begun tightening up cost discipline over the past two to three years, but they did so in traditional ways: improving labor productivity, lowering supply cost, and reducing physician practice subsidy. Those efforts were effective to the extent they prevented their situation from worsening, but they weren’t quite enough to bend the cost curve in the out years.

There is also a common thread among a subset of our clients who’ve been fortunate to have a good payer mix. Because they have been able to maintain stronger margins over the past few years, they’re having a harder time making adjustments to cost structure. Culturally they have not yet become accustomed to the frequency of change other hospitals have had to experience.

Q: For hospitals on the other end of the spectrum, ones that are struggling today, what advice are you giving them to get on a path to sustainability?

Johnston: The first step for that group is to create a 12- to 18-month business plan to recast their cost structure while better positioning the organization for risk. It’s important for struggling hospitals to go down both paths simultaneously. If not, they risk staying two steps behind the market. This means taking a very purposeful approach to care redesign.

Everyone should have a plan. It gives hospital leaders a framework for guiding their employees, physicians, and even their boards down a road that is difficult to navigate. The most forward thinking organizations are not waiting on margins to drop—they are implementing a plan now, while they have time.

One organization that comes to mind is Alexian Brothers Health System in Chicago. They have a very strong business plan to move to Medicare breakeven. Their plan has become a new way of doing business, and as a result they are seeing physicians, managers, and staff all move in the same direction.

Q: What are the main reasons clients need your help and expertise?

Johnston: We’re working with hospitals that have highly skilled people serving their patients. But the single biggest barrier to care redesign is the siloed structure of most hospitals today. Those silos create inefficiencies, particularly in patient care transitions into, within, and out of the hospital. The structure also makes organization-wide initiatives difficult to execute.

Outside support can be valuable in breaking down silos and accelerating broader initiatives.

Q: This is a turbulent time in the health care industry. Should hospital leaders be optimistic about the future of health care?

Johnston: If hospitals approach their margin improvement efforts in the right way, they should have the resources to continue building a system that will enable hospitals, physicians, and caregivers to work collaboratively for the wellness of the patient.

Hospitals have always treated sickness, but we also need to help patients avoid getting to the point of requiring hospitalization. Finally we are moving to a reimbursement model that supports providers to maintain a patient’s wellness, which is exciting and new. We just have to figure out how to get there in a financially sustainable way.

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