2011 Financing Healthcare 01 - Transformation of America's Hospitals (Kaufman Hall), Wisniewski, Hurley Medical Center

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Part1, presented 05-Dec-2011 at Hurley Medical Center Combined Graduate Medical Education lecture.

Part1, presented 05-Dec-2011 at Hurley Medical Center Combined Graduate Medical Education lecture.

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  • 1. The Transformation of America’s Hospitals Kenneth Kaufman, Kaufman Hall © 2011 Kaufman, Hall & Associates, Inc. All rights reserved.
  • 2. A Remarkable Period for the Management and Governance of Hospitals: An Endless List of Questions, Problems, and Challenges What does it take to move your organization from a “fee-for- service” to a “fee-for-value” payment system? Should you be a “first mover” in your market area? Will you eventually need to own all of your physicians? What steps do you need to take in order to take risk contracting? How fast will the payment transition occur away from fee-for- service? What does future utilization look like given a new business model? How much money do you need to make these transitions? Do you need a partner or can you go it alone? 1
  • 3. The Word of the Moment in Healthcare Is “Unsustainable” The size of the federal budget deficit is unsustainable The annual increase in the Medicare budget is unsustainable The percentage of healthcare spending to GDP is unsustainable State Medicaid programs are unsustainable The continued transfer of costs to employers and consumers is unsustainable 2
  • 4. Understanding the Macro Environment1 The cost of care in the United States2 The relationship of Medicare to the federal deficit3 The future impact of utilization on hospitals4 The change in top-line revenue 3
  • 5. 1 The Cost of Care in the United States 4
  • 6. Healthcare Spending per Capita, 2008 Adjusted for Differences in Cost of Living* 2007.Source: OECD Health Data 2010 (Oct. 2010) 5
  • 7. International Comparison of Spending on Health 1980-2008Source: OECD Health Data 2010 (Oct. 2010) 6
  • 8. Hospital Spending per Discharge, 2008 Adjusted for Differences in Cost of Living* 2007.** 2006.Source: OECD Health Data 2010 (Oct. 2010) 7
  • 9. Costs by Age Categories Healthcare Costs by Age U.S. is spending much more for older agesSource: Fischbeck, Paul. “US-Europe Comparisons of Health Risk for Specific Gender-AgeGroups.” Carnegie Mellon University; September, 2009. 8
  • 10. Family of Four – Total PPO Cost Versus Median Family Income PPO Cost Family Income $120,000 $105,000 $96,000 $90,000 $90,000 $73,000 $75,000 $63,000 $60,000 $41,000 $41,000 $41,000 $30,000 $19,000 $13,000 $9,000 $0 2002 2006 2011 2020 Trended 2020 3% 2020 4% Growth Growth % of Income 15% 18% 26% 45% 42% 38%Sources: PPO cost 2002-2011, Milliman; median family income 2002-2011, Census BureauNotes: 2011 family income is an estimate for Federal FY12; total PPO cost = employer contribution, employeepayroll deduction, and employee out-of-pocket co-pays/deductibles. Numbers rounded to nearest hundred. 9
  • 11. 2 The Relationship of Medicare to the Federal Deficit 10
  • 12. Federal Government Outlays and Revenues (% of GDP) CBO Scenario Based on Expected Law 2010 through 2040Source: Goldman Sachs Investment Strategy Group, using data from the Congressional Budget Office’s 2011 Long-Term Budget Outlook, June 2011 11
  • 13. 3 The Future Impact of Utilization on Hospitals 12
  • 14. Milliman Projections for National Inpatient Use Rates 2009 National Inpatient Use Rate = 116 (per 1,000 population) Inpatient Use Rates Loosely managed High admitting Moderately managed Medium admitting Well managed Low admittingSource: Milliman, Kaiser State Health Facts, AHA 13
  • 15. 4 The Change in Top-Line Revenue 14
  • 16. Median Hospital Revenue Growth Rate Reaches Low Point of 4% in 2010Note: The data prior to 2007 are from different sample sets, however, the 10 years of data still accurately reflect the trend in the industryover this period.Source: Moody’s Investors Service: “Hospital Revenues in Critical Condition; Downgrades May Follow.” Special Comment, Aug. 5, 2011. 15
  • 17. A Few Conclusions and Observations1. Healthcare in America is unaffordable for patients, for employees, for state and federal governments2. Solving the federal deficit requires a solution to the Medicare budget3. There is a high likelihood that utilization of inpatient hospitals will decline precipitously over the next five to ten years4. There is no revenue solution to the survivability of hospitals – it is now a “cost game” and a “care organization game” 16
  • 18. The Degrading of Healthcare’s Financial andBusiness Model Is Creating Powerful Thematic and Contextual Changes for Hospitals 17
  • 19. Thematic and Contextual Changes1 A change in the “classes” of providers2 Dramatic change to the competitive landscape3 The “job shop” to “manufacturing shop” challenge4 Creating a new cost curve/ not bending the old one5 Facing up to the variability of quality and cost 18
  • 20. 1 The New Business Model Creates Three Classes of ProvidersClass I Class II Class IIIContracted Providers Major Participants Population HealthSmaller, niche providers, Community hospitals Managerssome of which may be and systems that will Large, regional healthin rural communities, work within a network systems that will be ablethat will serve as managed by a larger to provide (either directlynecessary access Population Health or through managedpoints; important, but Manager (PHM) to relationships) a fullnot critical, components. efficiently provide a continuum of services, broad portfolio of across all service lines services. These and levels of acuity. organizations will be These organizations will critical components of have significant PHM networks. alignment with their medical staffs and will be in a position to accept and manage risk. Narrow Scope of Operations Broad 19
  • 21. 2 Dramatic Changes to the Competitive Landscape The blurring of lines between The blurring of lines between healthcare’s traditional not-for-profit and for-profit participants – insurers, hospitals, healthcare creates new and and physicians – resulting in more pragmatic competitors new market entrants Joint Venture to Joint Venture to AcquireForm New System Catholic Hospitals acquires acquires 20
  • 22. 3 The Challenge of Transitioning from a “Job Shop” to a “Manufacturing Shop”Healthcare is currently a “job shop,” which is a series of one-offpatient encounters with individual physicians and individualhospitals. This results in significant variability in cost and qualityand in unpredictable revenue.Given the new value proposition, we are moving to amanufacturing or production problem, which asks an entirelydifferent question.How does a healthcare system “produce” a certain amountof healthcare at a stated and consistent quality and provide that care to a population at a “predetermined” price? 21
  • 23. 4 Creating a New Cost Curve/ Not Bending the Old One Business Clinical Reduction Restructuring Restructuring Budgets and controls Portfolio scrubbing Care processes Supply chain Service delivery Physician integration planning Measurement/ Enhanced capital Relationships with reporting allocation other providers Productivity Optimized surplus Effective transitions returns Revenue cycle Enterprise Risk Management Progress Toward Comprehensive Cost Reduction Hard Harder Hardest Many providers Selected leading providers 22
  • 24. 5 Facing Up to the Variability of Quality and Cost Cost and LOS Variation by Surgeon, Major Joint Replacement (MS-DRG 470) Avg. Cost ALOSAvg: $14,962 Individual Physicians 23
  • 25. A Predictive “Point of View”1. Provider revenues will be under severe pressure as payment mechanisms migrate toward value-based approaches2. Inpatient and outpatient use rates will decline3. Providers will consolidate at an accelerated pace – horizontally and vertically4. The competitive landscape will be reshaped5. Technology will become a major disruptive change agent in healthcare 24
  • 26. True Change Requires New Values, Culture, and Attitude Highest and Best Values Old Business Model Autonomy and Independence New Business Model Humility, Discipline, and TeamworkSource: Atul Gawande, M.D., Presentation on October 21, 2010. 25