SOURCE: L.E.K. Consulting

L.E.K. Consulting

June 20, 2011 08:58 ET

Healthcare Reform May Hemorrhage Hospitals Financially

L.E.K. Consulting Finds Hospitals and Payers Struggling to Establish a Viable Model for Holistic Care, Outlines Keys for a Successful ACO Framework

BOSTON, MA--(Marketwire - Jun 20, 2011) - A key U.S. healthcare insurance reform goal is to shift care from the current fee-for-service (FFS) model, which revolves around individual treatments and payments, to a more holistic approach to care. As proposed in the Accountable Care Act (ACA), this will require the federal government to expand coverage to more Americans, while dramatically reducing cost to make healthcare reform economically viable. L.E.K. Consulting's research shows that the primary changes stemming from reform and the subsequent shift in the payer mix (i.e., more government, less commercial) will likely cause the majority of hospitals to operate at an annual net loss unless these institutions begin pursuing major strategic changes now.

Historically, the fiscal health of U.S. hospitals and health systems has been precariously maintained by using profits from commercial health insurance plans to cover losses generated when caring for the uninsured, or individuals covered by Medicare or Medicaid (which have lower reimbursement rates). L.E.K. believes that the market changes driven by healthcare reform will swing the average hospital operating budget from an average 4% annual profit today to -1% (or lower) within the next decade.

Factors causing this shift will include companies discontinuing their employer-sponsored coverage plans and instead subsidizing employees' healthcare benefits on health insurance exchanges. Alternately, businesses may determine that it is cheaper to pay government penalties than to provide employee coverage at all. As employer-sponsored coverage dwindles, the ranks of lower-reimbursement Medicaid membership will grow by 16-18 million individuals during the next decade.

In addition, demographics of an aging population and the wave of "baby boomers" will continue to increase Medicare membership at roughly 3.1% per year. Medicare currently provides approximately 30% of all reimbursements to hospitals -- nearly five times the percentage of the American population that it insures. The dramatic shift to a much larger percentage of government reimbursements will substantially reduce profitability for most hospitals and health systems (despite the reduction in bad debt associated with fewer uninsured).

Addressing the Shift Toward More Holistic Care
Federal healthcare reform also focuses more on holistic patient care, which poses new challenges for providers and insurers. As a part of this, the Accountable Care Organization (ACO) model has been put forth as a potential way to address more comprehensive care. The ACO blueprint has payers (government or private insurers) establish financial incentives and risk-sharing with healthcare providers, who will be held accountable for improving overall patient health and the quality of care.

"ACO sustainability is predicated on hospitals and other providers having the appropriate financial incentives and infrastructure to treat patients across a continuum of care, and manage their costs more efficiently," said Martin Graf, Vice President of L.E.K. Consulting's Healthcare Services practice. "However, the majority of providers don't have the programs in place to treat Medicare and Medicaid patients without incurring financial losses, which is an Achilles' heel of healthcare reform. Both hospitals and payers must change their mindsets and operations to be effective in the new healthcare landscape."

Establishing a Sustainable Model for Hospitals and ACOs
L.E.K. has drawn from its extensive research and work with hospitals, health systems, and payers to identify key considerations that hospitals and payers should address to establish ACOs:

Create and Administer New Care Models:

  • Hospitals: Providers should begin reorienting themselves to support a more holistic approach to patient care across all settings. This is especially important as hospitals establish their role in ACOs, and as the Medicare ACO compliance mandates come into effect in 2012. The ability to manage patients across the continuum of care will be critical as new models are developed and explored.
  • Payers: Experience working with a variety of providers makes insurers well equipped to establish a process of effective care choreography (e.g., coordinating health and wellness initiatives among hospitals, doctor practices, ancillary care providers, post-acute settings, etc.). There are currently a number of pilots where payers are collaborating with providers to develop ACOs that demonstrate many of these attributes.

Institute Incentives Focused on Holistic Care:

  • Hospitals: Will increasingly consider acquisitions, joint ventures and alliances to create a more cohesive health ecosystem that aligns hospitals, health centers, primary care and specialty physicians more closely to improve patient care. In addition, they will develop risk/gain sharing models that align financial motives among participants across the continuum of care.
  • Payers: Develop and implement new risk management strategies by partnering with ACOs or other care networks to address alternative payment models such as capitation (revisited), bundled payments and gain sharing.

Measure Performance:

  • Hospitals: Enhance the ability to track quality and outcomes across multiple patient populations to prioritize measures that will have the greatest influence on reimbursements.
  • Payers: Track and help improve provider behavior to drive better quality. For example, variations on the Medicare Star Quality ratings system, which is currently applied to Medicare Advantage plans by the Centers for Medicare & Medicaid Services (CMS), illustrates a measurement model that state government (i.e., Medicaid) and other payers are likely to use in the future to measure quality and determine reimbursements.

Additional background and recommendations are available in the Will ACOs Keep Hospitals and Insurers Out of Critical Care? Executive Insights report.

About L.E.K. Consulting
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and analytical rigor to help clients solve their most critical business problems. Founded more than 25 years ago, L.E.K. employs more than 900 professionals in 20 offices across Europe, the Americas and Asia-Pacific. L.E.K. advises and supports global companies that are leaders in their industries -- including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns. For more information, go to www.lek.com.

Contact Information

  • For further information contact:
    Alex Wallace
    L.E.K. Consulting
    (617) 951-9507
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    Siobhan Ford
    BlissPR
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