Is Your Hospital at Risk for Disruption? 3 Strategies to Consider
posted on Jan. 17, 2019
An overwhelming majority of healthcare executives believe the hospital industry faces significant risk for disruption—and 65 percent say their organizations are willing to self-disrupt to prepare for the future, a survey by Hammond Hanlon Camp LLC (“H2C”) and The Health Management Academy found.
Among healthcare organizations willing to engage in self-disruption, 76 percent would focus on their delivery model, according to the survey of leaders from the nation’s 100 largest health systems. However, executives admit that the actual roll out and implementation of a self-disruptive strategy will be a slow process.
While the types of disruptive risk hospitals face vary by organization, the following stand out.
Consolidation. Across the industry, hospitals are becoming more consolidated, with a record 134 hospital and health system mergers and acquisitions (M&As) announced in 2017—and 2018 showed strong activity as well, with larger hospital transactions dominating the M&A landscape. The risk: Hospitals could lose essential inpatient or outpatient market share, physician specialists, or sources of referrals to newly merged or affiliated entities.
Technological innovation. Technologies that reduce the need for hospital inpatient services could have a significant impact on hospitals and health systems. Such technologies range from virtual care technologies that provide immediate, ongoing access to care to digital therapeutics.
“Technological disruption is so widespread, there are non-healthcare technologies coming in to offer solutions,” one chief nursing officer who responded to the survey said. “Other industries understand consumer experience better than we do, so they’re entering to fill in the gaps.”
Regulatory change. An American Hospital Association (“AHA”) study found healthcare providers spend $39 billion per year solely on the administrative tasks associated with regulatory compliance. For the average 161-bed community hospital, this equates to $7.6 million annually, or $1,200 per hospital admission.
In recent years, both the level and complexity of healthcare regulatory and compliance audits has increased. The impact on hospitals and health systems is substantial: operational limitations, enforcement and liability risks, and increased costs.
How can hospitals bolster their ability to withstand disruption? Here are three strategies to consider.
Strategy No. 1: Strengthen balance sheet health. As the rate of growth in expenses among U.S. not-for-profit and public hospitals exceeds the annual revenue growth rate, “A healthy balance sheet provides a hospital with a buffer against unexpected liquidity demands and is a strong measure to credit quality,” Moody’s Investors Service states in a recent research report. That’s why rating agencies tend to give higher ratings to hospitals that have higher levels of days cash on hand. A five-year analysis of days cash on hand by Moody’s shows only Aa-rated and A-rated credit medians meet or exceed median days cash on hand for hospitals (see the exhibit below).
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Hammond Hanlon Camp LLC (“H2C”) is an independent strategic advisory and investment banking firm committed to providing superior advice as a trusted advisor to healthcare organizations and related companies throughout the United States. H2C’s professionals have a long track record of success in healthcare mergers and acquisitions, capital markets, real estate, and restructuring transactions, acting as lead advisors on hundreds of transactions representing billions of dollars in value. Hammond Hanlon Camp LLC offers securities through its wholly-owned subsidiary H2C Securities Inc., member FINRA/SIPC. For more information, visit h2c.com.
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For not-for-profit hospitals, the need to boost financial health is especially high. Median operating cash flow declined from 9.4 percent in FY16 to 8.1 percent in FY17, according to Moody’s, while operating margins are at an all-time low. The Congressional Budget Office predicts that by 2025, 40 to 50 percent of hospitals will have negative operating margins.
Strategy No. 2: Develop new revenue streams. Among healthcare leaders surveyed by H2C/The Health Management Academy, 67 percent plan to grow and develop new revenue streams in response to disruption. These leaders say diversification of service lines will be important to remain competitive and offset losses in traditional revenue streams.
“It’s becoming more difficult to generate any margin on government-insured patients, and there will only be more of them,” one CFO who responded to the H2C/The Health Management Academy survey said. “It’s important that we develop new profit streams that can offset those losses.”
As healthcare leaders explore opportunities for new revenue streams, they should consider the value proposition for consumers. Questions to consider include:
Will a new revenue stream displace another?
Will the new revenue stream increase costs for consumers?
If cost increases are expected, can this increase be justified by tangible improvements in quality or convenience?
Strategy No. 3: Be judicious about the technologies and services in which you choose to invest. New investments should support greater efficiency, improved quality, and better customer service. Among survey respondents, 71 percent have invested in technology and digital health to help withstand disruption. Many of these leaders’ organizations are looking to new partners to assist them in making care more efficient, accessible, and ultimately more cost effective.
For More Information
Healthcare disruption presents significant challenges for hospitals—and some hospitals may not have the capital capacity to withstand disruption. If your hospital is struggling under the weight of disruptive market forces, we’re here to help.