Rising Healthcare Costs: Why We Have to Change

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We hear so often about rate pressures on hospitals and the risk these pressures pose for their future. With healthcare reform, the burden of rising healthcare costs is shifting from payers to providers. But do we always take in the true import of that warning? Does it become just another portent of doom and gloom that we can brush off?

Sometimes it’s more effective to make the warning concrete. The Advisory Board Company did just that in their 2011 report Running on Medicare Margins: Restructuring Costs and Building the Care Management Enterprise to Prosper on Radically Lower Pricing (updated in 2014). They examined all the numbers and evidence to determine this:

Hospitals that keep operating according to business as usual will have a -15.8 percent margin by 2021.

That’s a sobering fact.

The Burden of Rising Healthcare Costs on Employers And Employees

Healthcare costs in the United States are rising two to three times faster than the rate of inflation. This trajectory is not sustainable. Something is going to have to give. Pressure to reduce costs travels from employers to payers and on to providers. Providers must make the changes necessary to curb the cost trend.

Let’s review what current data tells us about this topic. Consider the following from the Kaiser Family Foundation. The chart below shows the increase over the last 15 years of premiums and employee contributions for an average family with health insurance sponsored by an employer.

Healthcare Costs

The graph clearly illustrates the steady—and steep—rise in healthcare premiums. Fifteen years ago, the average yearly insurance premium was less than $6,000. Today, it is more than $16,000—a 167 percent increase. Interestingly enough, employees’ percent contribution to that premium has remained steady: 27 percent in 1999 and 28 percent today. But in order to continue being able to provide insurance, employers have shifted costs to their workers through growing deductibles and coinsurance. We have seen an enormous rise in the average deductible over the past 15 years and the invention of a whole new kind of policy: the high-deductible plan.

Even with employees shouldering more of the burden, employers are really the ones paying for the increased cost of care. In fact, sponsoring health insurance is the fastest increasing expenditure for many large companies. They are nearing the end of their willingness to continue to sustain these increases in healthcare costs.

Pressure on Payers: The Consequence for Providers

Government payers have traditionally reimbursed at low levels. For 2014, the Medicare inpatient payment increase was .5 percent, and the outpatient payment increase was 1.8 percent. During 2013, hospitals felt the impact of sequestration with a 2 percent cut in payment. Medicare wants to move to a value-based system and has created different programs to accomplish this. Some programs are penalty-only such as Readmission and Hospital-Acquired Conditions. Under the Medicare Shared Savings Program (MSSP) and through Value-Based Purchasing (VBP) hospitals can earn incentives and also be subject to penalties. All these programs increase complexity for hospitals. Below is a chart showing the Medicare payment dollars at risk over the next few years. So we are having low increases in payments, added risk, and increased burden of tracking new programs.

Medicare at RiskThis means that, generally, government payers are a negative margin for hospitals.

The following graph, produced from American Hospital Association statistics, demonstrates the problem for health systems.

Problem for Health SystemsThose Medicare and Medicaid margins are getting squeezed tighter and tighter, and hospitals have long relied on profitable business from private payers to make up that loss. This profitable business from the private sector is the only thing saving hospitals from a negative margin.

Employers are increasingly reluctant to absorb these increases in healthcare costs. Let’s face it: payers need to keep their employer customers happy. They get business by having lower rate increases than their competitors. So they turn to providers and ratchet down on rate increases.

More and more, this trend will shrink the gap between the hospital’s cost of providing care and the reimbursement they get from private payers. Ultimately, this means that hospitals have less of a private-payer cushion with which to make up the negative margin from their government-payer business.

The change in our nation’s demographics exacerbates the problem. As baby boomers age and become Medicare beneficiaries, the payer mix changes accordingly. With more population moving into the unprofitable government-payer category, fewer patients have commercial plans that can carry the cost burden.

As I mentioned earlier, The Advisory Board Company examined this situation and projected what the future would look like based on these trends.[1] They translated the effect of Medicare and Medicaid cuts already on the books and considered trends in the private space. Here are two important conclusions from that report, in brief:

  • Hospitals that keep operating according to business as usual will have a -15.8 percent margin by 2021 as a result of these trends.
  • Traditional approaches to cutting costs, such as labor reduction, will be insufficient to counter these trends. Successful hospitals will have to pursue a comprehensive approach to restructuring that addresses the different forces driving change in the market today.

What Hospitals Can Do to Survive And Thrive

This all sounds pretty dire, right? Thankfully, there is a way forward. Here are four things hospitals can do:

  • Capture all available revenue in current VBP agreements (ex: meet readmission targets and disease management quality scores).
  • Ensure clinical documentation and billing records accurately reflect the care provided. Many organizations miss billing opportunities due to incomplete or insufficient documentation.
  • Increase revenue by negotiating shared savings agreements with payers.
  • Eliminate waste and increase efficiency to reduce operating costs.

These changes are not necessarily easy and can seem overwhelming. The question is whether your hospital will be a pioneer on the trail or will delay until it’s too late. The best way to get started is to understand exactly where you are today—your current cost structure and how each area of your organization is performing in terms of quality and cost.

Hospitals have numerous data assets that can clarify this big picture. But getting those data assets together to form one picture is a challenge. A single source of truth requires a healthcare enterprise data warehouse (EDW) that can aggregate clinical, financial, and patient satisfaction data to help hospitals not only understand their business but give them the insight and tools for improvement.

A hospital’s success will depend on ability and willingness to creatively collaborate with payers. It will also require efficient operations and an in-depth understanding of relationships between clinical quality and operational costs. An EDW gives hospitals the data foundation required to successfully plan, prioritize, measure, and sustain these improvements.

Learn the key to transitioning from fee-for-service to value-based reimbursement and see how an accountable care approach would change how a patient is treated.

What is your organization doing to prepare for the consequences of cost pressures in the industry? Have you formulated a strategy? How are you using your data assets to drive this strategy?

PowerPoint Slides

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[1] The Advisory Board Company. Running on Medicare Margins: Restructuring Costs and Building the Care Management Enterprise to Prosper on Radically Lower Pricing. 2011, updated 2014.
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