The Rightsizing of Healthcare Delivery
I am back with my third blog in my new series on Healthcare Predictions for 2021! Last week, I focused on the reconfiguration of the healthcare industry landscape because of economic pressure caused by the pandemic and how the revenue shortfall for hospitals because of cancellations and decline of elective procedures is creating more M&A activities. This week, I want to draw attention to our prediction number three for 2021: Rightsizing of healthcare delivery.
Traditional fee for service models have incentivized hospital systems to add more personnel, facilities, and equipment to drive more revenue and operating margins versus managing the total cost of care. However, the pandemic had created an estimated $323.1 billion revenue shortfall in 2020 for hospitals, and the CARES Act and PPP provider relief fund combined have disbursed only $70 billion to the hospitals1. The relief was undoubtedly beneficial but not enough to cover all losses. Due to job losses, an estimated 6.4 million workers lost health insurance in 2020, creating a shift in payor mix2. As more people get on Medicaid and other government-funded programs, hospital revenues will take a hit due to lower reimbursement rates from government programs. We expect these changes in market conditions will make it hard for many hospitals to survive, and the ones that will survive will look different.
The COVID-19 pandemic has created a burning platform for health systems to prioritize managing their costs and creating a sustainable business. It has forced the adoption of virtual visits and demonstrated that non-emergent care could shift from hospitals and physician offices to lower-cost virtual sites and some acute care to outpatient sites, enabled by digital connectivity and clinical technology advances (Exhibit 1). In order for providers and hospitals systems to be financially viable, they need to consolidate their services and get more specialized, intentionally shift from traditional in-person delivery of care to virtual care wherever possible, and invest in value based care and home health and rightsize healthcare to meet the population needs versus building services for revenue and margins that their catchment area can support.
Exhibit 1.McKinsey’s Analysis of Segment Growth Rates, Sep 2020
One-size-fits-all may not fit anymore.
Loss of revenue caused by the pandemic and changing payor mix will push more hospitals over time to shift to specialized sites versus providing all services within multiple sites. Fragmentation and duplication of services over multiple sites create overhead costs that are not sustainable. Hospitals will need to prioritize and consolidate unique and differentiated services over less utilized or commodity services to gain efficiencies and reduce costs. We expect this shift to continue through 2021. Chicago-based Northshore consolidated orthopedics, urology, and open-heart surgery services into single sites recently to gain efficiencies and optimize costs.
New front doors into the world of healthcare.
Digital platforms have opened new doors for patients to interact with their healthcare providers and caregivers, to get educated, self-serve, and more. They are also helping replace in-person visits and making it easier for consumers to access care. Expect providers to improve their telehealth offerings and integrate them with payment and revenue cycle technology for an enhanced patient experience. Mental health and other specialties may also find a stronger footing via virtual visits. More payors and employers are positioning digital front-ends to mitigate avoidable admissions and redirect care to more convenient, higher-value, lower-cost service sites and care providers. There will be a need for better integration and care coordination to support physical and virtual visits, which advances in digital connectivity, data sharing, and clinical technology are making possible.
Innovation in value-based primary care and home health.
As the market shifts towards value-based care, several innovations have occurred in primary care and home health areas to address total cost of care. Innovative companies like Oak Street, ChenMed, CareMore, Iora Health, CityBlock, and Paladina have built their models around value-based care and risk-sharing. Expect more employer-payor-provider risk-sharing models to emerge in 2021. Another expected growth area is home health care for low-acuity admits and early discharge of stable acute patients. Home health start-ups like Contessa and remote monitoring technology start-ups like Vivify will get traction in 2021.
As we emerge from the pandemic, it is clear that provider organizations will have to develop efficient and effective ways to deliver healthcare services if they are to remain viable and relevant for years to come. As we move toward value-based payment models, it will be even more important to find ways to lower the cost of care. This will be done through investing in new models of care (e.g., hospital at home), consolidating services to gain efficiencies, increasing specializations, and leveraging virtual care. For hospital systems that do this right, they will emerge from this financial crisis stronger, better, and sustain their business.
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- Economic Policy Institute, Health insurance and the COVID-19 shock, August 2020