To remain financially stable and strategically flexible, hospitals need to grow revenue while also cutting costs. However, revenue growth is becoming more difficult as inpatient volumes decline, outpatient price points remain low, and competition in both spaces gets ever stronger.
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To overcome these challenges and meet revenue targets, some provider organizations are investing in new services beyond traditional care delivery. To help you better understand this emerging approach to growth, we've highlighted three strategies that providers might deploy as they look to diversify their revenue streams.
1. Commercialize intellectual property (IP)
Some IDNs will try to capitalize on existing strategic advantages by commercializing their IP. In other words, they'll look internally for investments that are innovative or potential market disruptors. By translating these non-care-related core competencies into new revenue streams, organizations can raise external funding to better execute on their existing strategy.
For instance, UPMC Enterprises—the innovation, investment, and business development arm of UPMC—collaborated with their own finance department to develop a cost-accounting technology. This technology was so well designed that it was licensed to HealthCatalyst, and UPMC generates revenue in the form of royalties from its equity stake in the company. Other examples include The Resource Group, which was created by Ascension Health to commercialize its supply chain management capabilities, and Navican, which was developed by Intermountain Healthcare and offers precision cancer care.
Supplier implications: Success in IP commercialization can potentially yield high returns. But large capital investments and stiff competition are just some of the barriers that make such an endeavor risky. To increase chances of success, provider organizations may invest in solutions that can enhance their capabilities, help differentiate their product, or speed their IP to market.
2. Source investments externally
Between 2009 and 2015, there was a 304% increase in hospital venture investment. This means that provider organizations are looking externally for investment opportunities as well, often in the form of separately managed venture funds or in health care startups.
These types of investments are increasingly attractive to provider organizations for a couple of reasons. First, they present opportunities to build relationships and collaborate with partners throughout the industry. Second, venture investment give providers a hands-on role in developing solutions that can further their mission to deliver high-quality care.
Since launching a venture investment arm is high-risk and resource intensive, large organizations with liquidity will be best positioned for success—but don't be surprised to see community hospitals explore and succeed in this strategy. For example, REX Healthcare, a community hospital affiliated with UNC Health Care, has invested in a number of health care companies and has consistently seen strong annual returns.
Supplier implications: Innovative vendors or health care startups should make sure they know who among their existing and potential customers have the appetite to serve as a strategic partner or investor in novel products or services, as they may be willing to provide funding or serve as beta testers.
3. Invest in pharmacy operations
Many provider organizations will increasingly view their pharmacies as a source of revenue. This approach could potentially reap high rewards, as high-performing specialty pharmacy margin can be 15% after accounting for operating expenses. It's important to note that margins are significantly higher with 340B eligibility.
However, the pharmacy market sees ongoing regulatory changes, new and innovative market entrants, and incumbent competition that holds significant market share. These barriers will not deter everyone, and there are certainly conditions that will give organizations a clearer path to ROI, such as:
- A large specialty physician network;
- Eligibility for 340B drug discount pricing;
- Existing outpatient pharmacies ready to dispense; and
- A large capitated and/or self-insured population.
Supplier implications: Large organizations may have the resources in-house to tackle this type of investment alone. But small- and mid-sized systems interested in this strategy may look to partner with third parties. These partners might be other provider organizations, suppliers, or service firms that are able to offer the infrastructure, technology, or staffing resources needed to expedite entry into the market and increase the chance of success.
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Help your customers uncover the right strategies for service line growth
Hospitals and health systems depend on traditional service lines to fuel growth—but the economics of care are changing. Providers now face a steady outmigration of lucrative services and a host of new competitors.
Use this infographic to learn about the five trends changing service line economics and the four new imperatives for service line growth.
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