At the Helm

A canary in the coal mine? Hospital revenue just grew at the slowest rate on record.

In recent months, our research experts have been arguing that as industry pressures intensify, providers will have an ever-harder time passing cost increases onto employers, insurers, and patients.

The latest hospital report from Moody’s Investors Service suggests that they’re onto something. Moody’s says that not-for-profit hospital revenues in 2013 grew at the slowest rate ever recorded for the industry: 3.9%. Why? In part, it’s a slowdown in utilization—while outpatient settings continued to see more patient visits, institutions experienced a median decrease in inpatient admissions of 1.3%.

But the bigger change seems to be on the pricing side. According to Moody’s, high-deductible health plans and slim payer rate increases are keeping hospital prices in check like never before.

More price pressure ahead

The reality is, across the past few decades, American health care providers have largely been able to base their price growth on changes in their underlying costs.

The pricing formula for government payers such as Medicare is based on an estimate of what it costs hospitals and doctors to provide their services. Likewise, until recently, health systems have been able to pass cost increases onto commercial payers and thus employers in the form of rate increases.

But with more people buying their health insurance on federal, state, and private exchanges, and thus more directly exposed to the total price of insurance, the commercially insured market will no longer be a receptive arena for price increases. And government payers like Medicare and Medicaid aren’t going to pick up the slack; quite the opposite, Medicare payment innovations and market-based Medicaid reforms promise a tighter environment for government-pay pricing in the years to come.

Our Health Care Advisory Board research team expects that these forces dampening hospital revenue growth in 2013 will only strengthen over time. At this year’s CEO Special Sessions, Chief Research Officer Chas Roades has been telling member executives to expect a "retail revolution," in which narrowing provider networks, insurance exchange-based plan purchasing, and newly cost-conscious consumers will place unprecedented downward pressure on the prices for health care services.

A new approach to costs required

If the long-term outlook for health care pricing is really changing this profoundly, health care organizations will need to look at costs differently as well. In the future, health systems will need to figure out how to deliver services for the price that the health care market will bear, and manage costs accordingly.

The Moody’s data suggests this greater emphasis on cost management may be beginning already; according to the report, hospital expense growth slowed down from 5.5% growth in 2012 to 4.3% in 2013. Still, health systems must do more on the cost front to keep their finances healthy—and not all of it will be pain-free. Accordingly, across the Advisory Board, our research teams are working to identify how to realize the most promising opportunities to inflect costs, including such "third-rail" categories as labor costs and clinical practice variation.

At a high level, though, we’re optimistic that health systems can do what it takes to bend their own cost curves, by focusing on controlling the rate of cost growth, not just cost-cutting.

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