As we enter boldly into 2019, hospitals find themselves in a somewhat precarious environment of rising costs, declining reimbursements, and shrinking margins. What is the impact and what trends are we likely to see in the year ahead?
While a new year is a great time for fresh, new beginnings and the promise of what’s possible, the reality is that nothing turns on a dime in healthcare. We start 2019 exactly how we left 2018. Margins will continue to deteriorate, down from 4.2% four years ago to an estimated 1.8% in 2019. A primary culprit is declining reimbursements for outcome-based, bundled services, including reductions in Medicare payments. Hospitals should know that they will never be reimbursed at a higher rate for services than they are today.
Just to drive home that razor-thin 1.8% margin, that means a profit of $100,000 requires $5.6M in revenue. In other words, hospitals can’t “revenue” their way out of financial peril. Something else is going to have to give.
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Hospitals have been closing at a rate of about 30 per year, according to the American Hospital Association (AHA). This unfortunate trend will likely continue or even accelerate in 2019, with hospitals in rural areas being hardest hit. A shift to new services, such as telehealth, will help stem the tide.
Since we can’t “revenue” our way out of financial difficulties, focused scrutiny on expenses is in the offing. Labor has traditionally held the number one spot, coming in at 33% of overall spend last year. Most hospitals have leaned this out as much as they can without sacrificing quality of care and safety.
Supply chain is the second-largest spend and will likely take the top spot by 2020. The area of supply chain is a shining opportunity to make a positive impact on financial performance. Why? The system is inherently riddled with waste. Minimum purchase agreements lead to overstock, much of which is simply thrown away. Product outdates and conversions result in the same. Physician preference items are also tossed when physicians leave. Restrictive manufacturers’ return policies, equipment upgrades, product overstocks – it all results in pure, unadulterated waste. It is not sustainable.
As a result, we will see more focus on technology that enables collaboration and gives greater visibility into supply chain costs. Hospitals know they have inventory waste, but most do not – or cannot – quantify the dollar value of that waste. It is important to merge data silos for a more complete analysis of supply chain costs that aids in optimizing purchasing decisions. Therefore, data visualization, communication and collaboration platforms, and artificial intelligence will become more fashionable in the year ahead.
Blockchain will likely be another technological trend in the coming months. It has the potential to be transformational, eliminating fraud and human errors through track-and-trace and secure data.
The focus on cost reduction will give way to new purchasing models. Hospitals will begin purchasing directly from OEMs and product manufacturers versus distributors and GPOs. New purchasing deal structures will sprout from deals like CVS/Aetna, which are disrupting the status quo, using their purchasing power to hold down costs.
As GPOs get creative in this changing environment of tightening margins, new technologies, population health, and changing reimbursement models, they will assist hospitals and members in transforming the traditional supply chain cost center into a revenue center. This has been done successfully with Information Technology departments and Accounting services via a shared services model. In these situations, the supply chain department becomes a stand-alone entity that provides services to the hospital or network, as well as non-member facilities for additional fees. The fees for services cover not only the associated costs to provide the services, but also provide a profitable revenue stream.
GPO consulting groups will hire talent with extensive supply chain optimization experience inside and outside of healthcare. The fresh influx of skills will allow them to offer services to assist their members, differentiate themselves from their peers, and help hospitals and GPOs succeed.
Lastly, it will be necessary to view supply chain as strategic instead of transactional to unleash its full value. This will lead to a change in how supply chain departments are structured, staffed, and held accountable.
2019 is on course to be yet another banner year of change for hospitals and healthcare, in general. Declining reimbursements, rising costs, and tighter margins have hospitals searching for ways to improve financial performance without sacrificing quality of care and safety. It will be interesting to watch trends unfold that allow hospitals to adapt to changing conditions and thrive in providing services to their communities.
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