By: James Agnew, MBA, FACHE, Vice President, The Camden Group
In the 1970’s David Bowie sang “Ch-Ch-Ch-Ch-Changes…” that theme continues to resonate with health system executives well into the summer of 2015.
In today’s era of industry reform and provider consolidation, a new examination of the health system’s most critical assets is overdue. Governing Boards and C-Suites are being asked to make multi-million dollar decisions on deployment of resources without a clear view of what the healthcare industry will look like in the nextthree-to-four years. There is a growing need for new strategies to optimize limited resources to ensure the organization’s mission and financial sustainability.
As an industry, we are quickly moving from a hospital-centric business model to a “health enterprise” composed of diverse assets, strategic partnerships, and clinical service lines. Health systems must begin a process of systematically analyzing how their clinical assets are deployed across the market to optimize the clinical and economic value of each under a value-based industry landscape.
Provider consolidation transaction activity has elevated the need to address asset optimization across the newly-formed health system enterprise. Historically; U.S. integrated health systems have grown through merger and acquisition (“M&A”) strategies; adding hospitals and clinical programs with little rationalization of their clinical deployment strategy. But financial executives are in agreement that the ultimate rationale behind today’s consolidation activity is; a) the need to reduce operating costs and b) the opportunity to drive economic and strategic scalability. Health systems positioned as provider aggregators, (i.e., large systems with the ability to develop regional or super-regional alliances) need to reexamine their entire asset portfolio post-transaction. Most health systems remain over-invested in a traditional “brick and mortar” hospital capacity and under-invested in outpatient, primary, and ambulatory care settings. Many times the newly acquired hospital’s assets are redundant or overlap with existing clinical assets including cath labs, imaging centers, ambulatory surgery centers, clinics, and even fully-operational acute-care hospitals. This is the result of transactions that in all likelihood included all the assets, services, and clinical locations of the entity to be acquired or merged. So it has become more important than ever for health systems to reassess their total asset portfolio post-transaction to begin the process of rationalization for overlapping assets and programs. This should be an integral part of the post-transaction integration plan and fully discussed with leadership and governing boards prior to a definitive agreement.
Service Line Portfolio Rationalization
Rationalizing the programmatic asset portfolio is a delicate balance between efficiency and scale. Under emerging value-based reimbursement, the healthcare enterprises will be incentivized to reduce inappropriate utilization and duplication of services and facilities in order to provide patients with the “right care at the right place and at the right time” …to meet quality, cost, and access objectives.
To date, most health systems have been reluctant to rationalize services post-transaction for fear that patients, physicians, and payers would simply choose another provider outside of their system.
In light of market consolidation and limited strategic capital, service lines must achieve new levels of care coordination across the enterprise network. Hospitals and health systems must ensure that clinical services are distributed in a way that maximizes ease of access, capacity management and quality outcomes - in some cases making the difficult decisions to centralize or consolidate services such as coronary artery bypass graft surgery, OB, or neurosurgery.
Clinical portfolio rationalization provides the opportunity to shed underperforming services, excess capacity and non-core assets; and redirect the pursuit of new growth opportunities, such as direct-to-employer contracting and launching new service lines to fill unmet or emerging regional demand. It is important to remember population management incentives will drive service lines to expand outside the acute care setting to begin management of complex patient care in lower-acuity outpatient sites and post-acute such as skilled nursing, rehab and home care.
This effort requires an innovative forecast model to address financial performance taking into account the implications of health care reform, emerging payor models, changing patient trends and the need for cash to reinvest across the organization. The forecast will help managers estimate the strategic gaps—both in economics and in clinical delivery—that threatens the organizational mission as well as the means available to improve performance.
A critical review of service lines should be segmented into one of three strategic categories as shown below:
Each category includes predetermined “value drivers” based on a criteria guided by the mission and vision of the organization. The outcome of this exercise allows executives and governing boards to make data-driven, objective decisions for future investment or redeployment.
Expense Management Aligned with Asset Rationalization
Proactive asset rationalization needs to be an integral part of any organization’s drive to reduce operating costs. Rationalization does not necessarily mean draconian cuts but more strategic and economically efficient deployment of clinical services. Most organizations have launched traditional expense management efforts to reduce cost including: supply chain, improvement in staff productivity and enhancements to revenue cycle operations. However, a deeper analysis is now needed to optimize the system’s clinical asset portfolio. Industry experts predict that in order to thrive under a value-based reimbursement environment, health systems will need to reduce their operating costs by as much as 40 percent in the coming years.
Through a proactive approach to asset optimization, health systems can impact their costs by four-to-six percent allowing these savings to be reinvested into programmatic and staff development.
Asset Optimization Across the New Health Enterprise
There are key tenets to ensure a health enterprise is optimizing its clinical assets appropriately:
- Asset investment and deployment should align with the overall clinical program portfolio.
- Where are the opportunity gaps in your market? Careful analysis of competitive trends, population demand and changing market conditions will reveal opportunities to develop assets and services in a cost-effective and rational manner. Insure the opportunity for acceptable margin and return on investment are considerations in any new expansion of asset deployment.
- The industry is evolving. Strategic and economic decisions on asset optimization must be made in the context of tomorrow’s delivery environment. Past performance and historical trends have a lesser value today in forecasting future strategy and investment. Develop an ongoing dialog with payers and key employers across your service area.
- Accelerate discussions with other local and regional providers on asset and programmatic distribution and investment in clinical service assets. This should always be undertaken with the advice of legal counsel to avoid conflicts and regulatory landmines.
- Do not discount the value and importance of geographic location. Clinical programmatic assets should be deployed/located to address the demands of:
- Younger populations now seeking faster access to local practitioners
- Adopting the lessons learned from retail operations
- Access, ease of transportation, service hours, patient flow
- Alignment with community support partners to support seniors or economically marginalized populations
Simply stated; forward-looking health systems need to conduct an analysis of the value, distribution, and contribution of each clinical asset across their delivery continuum—be it programmatic or traditional “brick and mortar” assets. This analysis should be viewed through the lens of both value-based reimbursement and clinical effectiveness to gain the best possible outcome for effective program and asset deployment. In addition, this type of analysis is most beneficial prior to entering into any new risk-based contracting agreement. Difficult and complex decisions may need to be made to position the organization for success under emerging payment models, demand for capital and growing competitive pressure. It is also important to take this opportunity to share outcomes and educate your governing board and medical staff leadership to the value of such an evaluation. An analysis of the enterprise clinical asset portfolio should become a key element of any new strategic planning process or financial forecasting activity in the near future.
Mr. Agnew is a vice president with The Camden Group, with more than 30 years of executive leadership experience in the healthcare industry in hospital operations, financial, and corporate development for both not-for-profit and investor-owned healthcare organizations. He has successfully led transaction teams for complex acquisitions, mergers, and restructuring of multiple hospitals and health systems across single and multi-market environments. In addition, he has provided due diligence guidance and oversight and post-transaction integration planning. Mr. Agnew is experienced in restructuring hospital-physician alignment and multiple economic partnerships, ensuring market stability and strategic growth for both hospitals and medical staff. He may be reached at firstname.lastname@example.org or 617-936-6900.