Pressures to perform and transform, merge, acquire or consolidate, and protect are building and converging on nonprofit healthcare organizations and, as such, 2015 promises to be a seminal year.
This pressure is informed by numerous data points that are combining to make the current operating model structure unsustainable:
- The Medicare Payment Advisory Commission’s 2014 Data Book shows a demonstrable decline in Medicare inpatient and outpatient margins from 2002 to 2012. For that period, the overall hospital Medicare margin decreased from 2.2 percent to a negative 5.4 percent.
- Modern Healthcare analyzed earnings for approximately 200 hospitals and health systems and included a mix of nonprofit and investor-owned through 2013. The study revealed a shrinking of margins for all hospitals to 3.1 percent in 2013.
- A Moody’s report on operating margins of nonprofit hospitals and health systems for 2013 showed overall operating margin deterioration to 2.2 percent
- Moreover, the typical hospital’s payer mix is 40 percent Medicare. This year, 8 percent of Medicare payments to hospitals will be value- or risk-based. Moreover, Health and Human Services (HHS) has just announced a goal of tying 30 percent of existing fee-for-service Medicare payment to value-based payment models such as ACOs or bundled payment models by the end of 2016 and ultimately 90 percent of all traditional Medicare payments by 2018.
The resultant tipping point faced by the healthcare industry is similar to that faced by another capital-intensive industry in the late 20th century: U.S. steel. In that emblematic case study, new, more nimble competitors eroded the country’s global market advantage by introducing more modern methods and technologies. A flurry of capital restructuring and operational redesign followed; the industry shifted to more efficient mini-mills structures. By the 1980s, the rush of competition not only forced the shutdown of aging mills, but also began to threaten some of the more thinly capitalized new entrants.
We posit that 2015’s outlook for nonprofit healthcare organizations will reflect a similar dynamic; nonprofit hospitals will need to access the right capital aligned with the new – and different – operating and delivery models, and they must monitor and adapt to outside factors that will impact both access to this capital as well as their operations and reimbursements. New regulations and stressed government budgets threaten access to grants and tax-exempt bonds, and even tax-exempt status itself. Compliance will be critical in the face of these evolving requirements and new scrutiny.
So what should nonprofit healthcare organizations consider for 2015 and beyond?
1. Understand your cost of care and cost of operations.
This is often easier said than done. Care delivery is complex, fragmented, and outcomes are disassociated from financial and market analytics. There is much market opportunity to reposition nonprofit healthcare organizations for future sustainability.
2. Understand your investment thesis.
Nonprofit healthcare CFOs can take a page from global corporations, whose CFOs must evaluate their enterprises from a portfolio perspective. In the same way that steel industry CFOs redeployed capital into new mini-mill models, so to can healthcare providers examine their assets in terms of ROI. Reduce or moderate investment in lower ROI assets in favor of aligning investments with higher-ROI businesses in emerging or growing markets or assets – think care design and new risk-based models.
3. Understand your market and your “customer.”
Nonprofit healthcare leaders need to understand the implications of the risk shifts from payer to provider and from provider to consumer, as well as the opportunities for investing in a customer-focused relationship. Understanding the market need through visual analytics will serve nonprofit healthcare organizations well in redesigning their models around the population they serve. Tapping into best practices from consumer focused industries will be helpful.
4. Understand who you are and what your organization means.
Do you have the vision, leadership, appropriate resources, ideas, capital and partners to mitigate the risks and take advantage of the opportunity for your organization? Each CFO must ask himself or herself: “Where are the gaps? Can we execute the change?”
5. Understand what your future state could look like – the art of the possible.
Look to the future – and assess what will be the successful models in five or 10 years, taking into account the first four recommendations.
The next step is to get started!
For additional nonprofit healthcare content, stay tuned to the Nonprofit Standard blog, and be sure to check out BDO Knows Healthcare, the blog of the BDO Healthcare practice.
Patrick Pilch, CPA, MBA, is a Managing Director and National Leader of The BDO Center for Healthcare Excellence & Innovation. He can be reached at ppilch@bdo.com.
Adam Cole is a Managing Partner of BDO’s Greater New York health care and nonprofit services group, a member of the national Nonprofit & Education practice, as well as a member of The BDO Center for Healthcare Excellence & Innovation. He can be reached at acole@bdo.com.
Cortney Marcin is a Manager with BDO Consulting and a member of The BDO Center for Healthcare Excellence & Innovation, and she can be reached at cmarcin@bdo.com.