Multiple factors are contributing to increased performance pressure for hospitals and health systems as the nation migrates toward a value-based payment system. The challenges include federal and state budget pressures, rising supply and service costs, declining payments from commercial and government insurers, and decreasing demand for inpatient and certain hospital outpatient services.
It seems clear that the current operating pressures will intensify as value-based payment becomes more prevalent. Recognizing this trend, many organizations are grappling with the question of how quickly to move to value-based arrangements. It is difficult to predict exactly how long the national shift from a volume- to a value-based system will take. The transition is likely to extend over 10 years or more.
At a local level, the pace of change will vary by market, affected by variables that have an impact on the readiness of payers, healthcare organizations, employers, physicians, and other providers for change. The demographics, health needs, and other characteristics of the population also will have an impact.
Hospitals and health systems should be aware of the rate of change in their communities and begin planning for the move to value-based arrangements now if they haven’t already. Utilization rates have started to decline in markets around the country. Payment changes are decreasing hospital margins in the short term and likely will continue to generate downward pressure over time. In the long run, continuing to try to compete on volume and rate is a riskier strategy than beginning the shift to value-based arrangements.
To optimize performance during the transition, management must refocus on corporate finance fundamentals. An organization should chart its path with the help of robust, disciplined financial planning that provides a comprehensive view of its current capital position and the performance needed to support strategic objectives. Best-practice financial planning requires a corporate finance-based approach that includes comprehensive quantification and understanding of these key elements:
- Credit position
- Capital requirements (both routine capital committed into the next five to 10 years, and capital required to accomplish strategic goals)
- Debt capacity
- Minimum cash position required given future reimbursement challenges, competitive threats, and capital demand
- Overall capital position that defines profitability targets to meet the organization’s needs for long-term strategic positioning
Baseline financial projections should be developed using assumptions related to volumes; salary and nonsalary expenses; capital spending; investment income; and payments from Medicare, Medicaid, and commercial payers. This effort may be more difficult than it sounds given the transformational dynamics of the industry and of the organization’s particular market. At a minimum, the baseline assumptions will not truly reflect “business as usual”—such a scenario does not currently exist.
It is critical that scenario analyses be performed to quantify the effect of changing assumptions and new strategic initiatives on profitability and liquidity. Some key variables to consider in these analyses are expense-reduction efforts, increased physician alignment, and restructuring of payment arrangements from fee-for-service to value-based. This information will equip organizations to identify the strategic and financial implications of these key variables individually, or in combination, and plan accordingly. The results of these analyses will inform the organization as to the appropriate timing for implementing strategies, including those related to the transition to value-based arrangements and care.
This type of financial planning effort is not a one-time need. The dynamics of health care require that organizations routinely revisit their projections, assess the success of their strategic financial plans, and make needed adjustments to ensure the desired level of financial performance.
Such steps not only are essential to keep pace in a rapidly changing environment, but also are the right thing to do. The result of value-based arrangements will be improved quality and efficiency, which will benefit patients and help ensure the long-term success of hospitals and health systems.
Jason Sussman is a managing director at Kaufman, Hall & Associates, Inc., and leads the company’s financial planning and software practices.
Publication Date: Monday, June 17, 2013