As I present to executive teams and boards of hospitals throughout the country, I find that what I enjoy more than delivering my prepared remarks is engaging in the unscripted question-and-answer sessions that follow.
Event after event, I am asked truly insightful questions that yield important discussions. Frequently, I find myself wishing that I could capture these off-the-cuff conversations and disseminate them more broadly.
One question I was asked recently, a question that goes to the very heart of hospital strategy and operations moving forward, certainly bears capturing in a blog.
The question was this: In light of the decidedly atypical, and increasingly hostile, external environment for hospitals, what are today’s essential organizational characteristics for success?
The discussion that followed yielded what I consider a valuable list of near-term and longer-term priorities toward which hospitals should direct their best and most urgent efforts. To better understand those characteristics, let’s briefly set the context with a snapshot of the unusual environmental pressures, which seem to broaden and intensify on a daily basis.
On one side are active efforts to reduce hospital reimbursement, including future reductions to state-directed payments, the complex-to-manage 340B Rebate Model Pilot Program, and CMS’s recently finalized expansion of site-neutral payments for CY2026 (with the possibility for future expansion).
On another side, passage of the One Big Beautiful Bill is expected to result in 10 million fewer Medicaid enrollees by 2034. This will add to financial demands on hospitals, for which uncompensated and charity care already has risen 37% over the past five years.
Given these unprecedented pressures—pressures whose destabilizing effects are impossible to predict—the list of success characteristics developed from my recent conversations becomes not just theoretically interesting, but pragmatically critical:
- Close management of hospital operations leading to ongoing financial integrity
- Demonstrable quality performance with recognized patient outcomes
- Maintenance of a tolerable payer mix
- An “always” improvement in the overall skill and talent of the medical staff
- The creation of a welcoming journey through the care experience for all patients
Close management of hospital operations leading to ongoing financial integrity
For several years, hospital operating margins were on a roller coaster as hospitals dealt with the aftermath of COVID. Over the past 12 months, continuing increases in expenses and constrained revenue are producing a new period of financial challenge, with operating margins hovering between 1.0% and 1.9%. Such narrow margins demand that successful hospitals will need to intensify their operational discipline, including:
- Doubling down on areas of revenue growth, especially outpatient services
- Ensuring a high and consistent level of revenue integrity, with the goal that the totality of services provided result in appropriate reimbursement
- Managing length of stay through a hyper-focus on patient throughput, leading to appropriate and prompt patient discharge
- Implementing a coordinated and systematic approach to cost reduction and management, whether that means driving toward the lowest possible cost for each function or incremental cost reduction toward a specific goal
Demonstrable quality performance with recognized patient outcomes
Quality of care will always be the bedrock foundation of success for hospitals. For more routine diagnoses and modes of care, hospital quality is table stakes. However, once you move beyond routine care, and more so as you enter the realm of truly complex conditions requiring the most sophisticated care, quality becomes a highly distinguishing characteristic.
Particularly in the internet age, patients and families have access to information about quality, and they do their research. Patients want to know if your hospital is on the U.S. News Hospital Honor Role, or the lists for Best Regional Hospitals or Best Hospitals for Complex Specialty Care. What is your hospital’s Leapfrog Group Safety Grade? What is your hospital’s performance for published mortality, readmission and patient satisfaction ratings compared to others in the community?
At a minimum, hospitals need to demonstrate consistency and competence in quality. Hospitals that routinely demonstrate a level of quality that significantly distinguishes them from their competitors can translate that achievement into a reputation in their local markets that makes them essential for payer networks and routinely sought out by patients with the most demanding conditions.
Maintenance of a tolerable payer mix
Payer mix is shifting toward lower-paying government lines of business (that is, business with no price elasticity), putting more pressure on commercial business to subsidize hospitals and health systems.
In FY 2024, less than one-third of gross patient revenue represented a “negotiable” source of revenue. At the same time, commercial insurance premiums have increased significantly. This threatening situation requires careful strategic attention from hospital executives to maintain a payer mix that can sustain hospital operations and support longer-term strategy.
An “always” improvement in the overall skill and talent of the medical staff
Whether your hospital is a perennial frontrunner in the region or in some position short of that, continually enhancing the range and level of expertise among the hospital’s physicians is an important path toward improved performance and market position.
The most successful hospitals have doctors who excel in handling the most complex conditions and procedures. Such doctors can draw patients regionally and nationally.
However, even for hospitals starting from a less exclusive baseline, steady improvement in medical staff talent will benefit a number of areas, including quality, consumer preference, health plan network inclusion and options for strategic expansion of services valued in the community—and potentially beneficial to hospital financial performance.
The creation of a welcoming journey through the care experience for all patients
An essential strategy to combat financial and market pressures is providing a journey throughout the organization in which all patients can easily enter your care ecosystem at any point and feel welcome at every step. Organizations that succeed in this goal think of themselves as an “access company.”
A successful patient journey creates loyal patients, which in turn has real financial impact. A loyal patient (one whose percentage of healthcare spending with the health system is 75% or more) generates more than three times the revenue of an uncommitted one, and a 1% increase in loyal patients can yield a $40 million revenue increase for a $2 billion health system.
The bad news is that, currently, the patient journey is being severely undercut by an appointment meltdown. Consistent lack of timely appointments in both the doctor and hospital environments is spread across primary and specialty care and a very broken referral appointment process. Fixing this problem—no small feat—should be job one in mastering the patient journey.
Stepping back and moving forward
Taking another look at our list shows just how daunting each will be to achieve—so daunting that it may be tempting to focus on only a limited number of these characteristics. However, it is preferable to tackle these characteristics as a group for the simple reason that each item relies heavily on one another. The best doctors create the best quality. The best, and best demonstrated, quality creates a better position to improve payer mix. A patient journey that is not welcoming can undercut the patient volume critical to financially sustainable operations.
All of which begs the question of how an organization is to tackle this formidable to-do list.
Achieving these characteristics of success in times of extraordinary pressure in the operating and legislative environments will call for creative thinking, courageous choices and the ability to inspire those throughout the organization to move forward with a sense of resolve and optimism.
In short, accomplishing all of the above will depend on the quality of cooperation between, and leadership from, the board and C-suite over the next several years. Subpar leadership will lose, and good leadership will win. It’s as simple—and as complex—as that.
Look for future blogs to break down some of these new and necessary approaches to leadership.
