Legacy hospitals and health systems face intense volume and revenue pressures as they seek to improve performance, reduce costs, and build new capabilities for a changing business model.
This month’s Spotlight article is part 1 of a 2-part series. Part 1 examines key stress factors identified in a recent survey of hospital and health system leaders nationwide, and actual trends in volume and revenue performance metrics that are contributing to the pressures. In the December issue, Part 2 will delve into trends in expense metrics, survey data on hospitals’ performance improvement efforts, and recommended strategies to help optimize those efforts.
The trend data come from Kaufman Hall’s proprietary database, which consists of more than 800 hospitals and provides the foundation for the monthly National Hospital Flash Report. The survey data are from Kaufman Hall’s third annual State of Healthcare Performance Improvement report, published in partnership with the Healthcare Financial Management Association (HFMA).
The report examines the state of performance improvement and cost transformation efforts at hospitals and health systems across the country. To provide insight to what healthcare executives view as some of the most significant forces impacting their organizations, the survey asked respondents what factors were putting the greatest pressure on revenues.
Flat or declining inpatient volumes were identified as the No.1 factor, as cited by 30 percent of survey respondents (Figure 1). Other common contributing factors include downward pressure on commercial insurance rates (27 percent), increasing percentage of Medicare/Medicaid patients (19 percent), and growth in high-deductible health plans/patient financial responsibility (13 percent).
Figure 1: Revenue Pressures
Dig into Comprehensive Hospital Performance Data from over 600 Hospitals
A Look at Volumes
Volume performance has indeed been volatile at hospitals and health systems across the country in recent years. Year-over-year volume performance throughout 2018 and 2019 illustrates the rocky road that legacy healthcare organizations are experiencing. Such turbulence makes it difficult for healthcare leaders to accurately predict demand in order to maximize performance and control costs.
Looking back at 2018 relative to 2017, national volume indicators demonstrated eroding performance. Volume trends consistently underperformed relative to the previous year, and a few indicators showed worsening underperformance. Discharges steadily declined throughout the year, while growth in Adjusted Discharges and Adjusted Patient Days slowed. Any increase in Adjusted Discharges was driven largely by the adjustment factor, with the continued shift of care toward outpatient settings.
Those trends have continued in 2019, with volumes fluctuating throughout the first 10 months of the year (Figure 2). Performance was particularly low at the start of the year, with Discharges experiencing a significant -6.7 percent year-over-year drop in January, followed by two more consecutive months of declines. To date, Discharges were down compared to prior year for four months of the year, and showed modest gains compared to prior year for six months.
Adjusted Discharges saw year-over-year increases five months, were flat one month, and decreased four months so far in 2019. The most significant variance was in April, when Adjusted Discharges rose 5.4 percent compared to the same period in 2018, following declining-to-flat performance the first quarter of the year. Year-over-year gains in Adjusted Discharges have held steady at 2.9 percent for the past two months. Adjusted Patient Days have been more consistent, demonstrating year-over-year growth of 1.5 percent or more each month for nine consecutive months, following a dip in January.
Figure 2. Year-Over-Year Variances in Key Volume Metrics (January-October 2019)
A Look at Revenues
Despite declining volumes, most revenue indicators showed improvements in 2018 compared to 2017, and those trends have continued in 2019. Net Patient Service Revenue (NPSR) per Adjusted Discharge and NPSR per Adjusted Patient Day both rose 1-2.5 percent overall over the course of 2018. Even so, performance in those metrics fluctuated significantly, with year-over-year declines for about half the months of the year, and improvements for the other half.
The Inpatient/Outpatient (IP/OP) Adjustment Factor showed a consistent upward trend, as the shift of care to outpatient settings accelerated throughout 2018. Bad Debt and Charity Care as a Percent of Gross also continued to rise, but the pace of change slowed toward the end of 2018.
Revenue performance has stabilized somewhat in 2019 relative to 2018 (Figure 3). While gains have fluctuated significantly each month, key revenue indicators generally have shown consistent improvements over prior year performance.
NPSR per Adjusted Discharge, for example, has had year-over-year gains every month for the first 10 months of 2019, with a low of 1.0 percent in January and a high of 4.6 percent in July. NPSR per Adjusted Patient Day increased year over year for nine out of the 10 months. The most significant variance was in September, when NPSR per Adjusted Patient Day jumped 3.7 percent year over year, after being flat in August.
Overall, 2019 trends in the IP/OP Adjustment Factor continue to illustrate the sustained movement of care away from inpatient settings. The IP/OP Adjustment Factor increased year over year seven of 10 months so far in 2019, was flat two months, and fell only slightly one month (-0.6 percent in June).
Trends in Bad Debt and Charity care have been particularly erratic throughout 2019, with hospitals and health systems across the country experiencing dramatic year-over-year spikes in April, June, and July. To date, Bad Debt and Charity as a Percent of Gross has seen four months of year-over-year increases, and six months of year-over-year decreases.
Figure 3. Year-Over-Year Variances in Key Revenue Metrics (January-October 2019)
Despite some year-over-year gains in select metrics, these trends in both volumes and revenues clearly indicate the sustained instability being experienced by the nation’s legacy healthcare providers. Fluctuating revenues, volumes, and the migration of care to outpatient settings are just some of the factors placing immense pressures on organizations seeking to adjust to a changing business model. These pressures add urgency to the need to transform the cost structure of legacy operations to preserve margins and free up the resources needed to navigate change.
The data from the performance improvement survey suggest that hospital and health system executives have put a high priority on realizing targeted cost reductions. The survey also identifies several key areas where healthcare leaders will need to improve performance to achieve their cost reduction goals. These include:
- Improving data and insights, including comparative insights to peer organization performance
- Providing physicians better information to improve engagement
- Creating a culture that supports achievement of performance improvement goals
- Establishing greater accountability for results
Next month’s Spotlight will examine additional factors impacting the performance of the nation’s healthcare organizations—including trends in labor and non-labor expenses—and look at performance improvement efforts occurring across the country as hospitals strive to reduce those expenses. The article also will feature four key strategies healthcare leaders can use to help overcome obstacles to performance improvement, establish clear and sustainable performance improvement goals, and more fully tap major opportunities for cost transformation throughout their organizations.