November 25, 2014

Hospital revenue is up—but so are operating costs

Daily Briefing

A Modern Healthcare analysis of the fiscal year (FY) 2014 results for 59 not-for-profit health systems found that overall revenues increased by 6.7%, but the gains were largely cancelled out by a 6.2% increase operating costs. 

Hospitals are reporting higher volumes as a result of reforms in the Affordable Care Act (ACA), but they are finding that many of the newly insured patients require higher-acuity care, driving up costs. For example, Nashville-based HCA, the nation's largest hospital chain by revenue, says that the acuity of newly insured patients who purchased coverage via an insurance exchange is about 8% to 10% higher than that of non-exchange, managed-care patients.  

At the same time, lower-acuity patients are moving into outpatient settings, leaving inpatient units with a high proportion of patients requiring expensive care and tests. HCA expects to see the average acuity of inpatients to increase as lower levels of care continue to move out of hospital inpatient units.

Meanwhile, an uptick in the cost specialty drugs is further increasing operations costs, some hospital officials say.

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As a result of the new pressures on operations costs, more than half of the systems evaluated by Modern Healthcare reported a decrease in operating surplus from FY 2013 to FY 2014.

How hospitals are responding

To capitalize on the move toward outpatient care, HCA and Dallas-based Tenet Healthcare are focusing on expanding their specialty service lines to increase volumes and attract physicians. However, investing in new service lines can increase costs in the short term, putting more pressure on hospitals to find savings.

At Sentara Healthcare in Northern Virginia, officials have asked employees to identify cost-saving opportunities that would not compromise care quality. In the first nine months of 2014, the 12-hosptial health system saw a 10.7% increase in the costs of medical supplies, contracted and purchased services, and licenses and taxes.

Officials say the response has been positive, with employees making hundreds of suggestions. One simple idea was to stop using outside vendors for catering at meetings and events. That change will save the system up to $745,000 by the end of next year.

Others suggestions focused on standardizing care across the system. For instance, the system eliminated continuous passive motion machines as the standard of care for patients who had undergone knee surgery. Researchers have found little evidence of clinical benefit for patients who used the machines. The change is expected to save the system $224,000 in 2015.

Michael Gentry, the corporate vice president at Sentara who supports the cost cutting initiative, says the changes are needed to guard against the tendency "for expense creep" at large organizations.

In addition, Sentara has also partnered with other regional providers to coordinate purchasing of physician preference items as a way of controlling costs. These informal partnerships have grown in popularity because they allow smaller systems to have more bargaining power without giving up their independence.

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Struggling with more expensive drugs

Echoing broader concerns in the industry, Gentry says, "Pharmacy is the area where we're most challenged." He notes that even the prices of generic drugs are increasing.

Hospitals that run health plans feel the full effects of those additional costs. Partners HealthCare in Boston says its health plan incurred $10 million in costs from Sovaldi, the $84,000 hepatitis C drug that is not yet covered by Medicaid in the state.

One new drug could help drive up Rx spending by 12%

New cancer drugs that have been priced aggressively by pharmaceutical companies are also cutting into margins.

In response, Froedtert Health in Wisconsin says it is giving more scrutiny to the value of new drugs and their benefits for patients. Froedtert CFO Scott Hawig says, "If there's a cost anomaly, it's really in specialty drugs" (Kutscher, Modern Healthcare, 11/22 [subscription required]).

A closer look: How Froedtert Health is reinventing its pharmacy department

Let’s be honest—the pharmacy department hasn’t traditionally been the epicenter of a hospital’s strategic vision. In truth, the pharmacy has been a siloed department that’s often viewed as a cost center.

However, recently we’ve seen growing interest in the role of the pharmacy department in managing population health. And really, this shouldn’t come as a surprise. Non-adherence to medications post-discharge is one of the largest drivers of patient readmissions. In fact, more post-discharge adverse events are related to drugs than to any other causes.

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