Michael AlkireIt’s a question that’s likely on the minds of many health system executives—from CEOs to physicians to supply chain managers. 

Unfortunately, the answer for many of these leaders may be “no,” according to data from the American Hospital Association (“The Fragile State of Hospital Finances”). For some, barely breaking even under Medicare, the largest payer to just about every hospital in the United States, may be equivalent to success these days. 

With sequestration, Affordable Care Act (ACA) changes, and other payment cuts, Medicare payment to hospitals has been sliced by more than $270 billion since October 2010. That’s on top of the fact that Medicare underpays the cost of delivering care by 6 percent, according to the Medicare Payment Advisory Commission. And all of these circumstances are occurring at a time when private payers provided only marginal 2014 rate increases (Evans, M., “Outlook 2014: Not-for-Profit Hospitals,” Modern Healthcare, Jan. 4, 2014)) and health plans sold on ACA exchanges are estimated to pay hospitals 20 to 30 percent less than other commercial plans.

It explains why Fitch Ratings lowered its outlook on not-for-profit hospitals to negative for the first time in five years. And not since 2008 have not-for-profit hospital expenses outpaced revenues, according to Moody's Investors Service. Looking toward 2014, Standard & Poor's predicted that “all but the strongest hospitals will see margins shrink.”

Taking all of this into account makes you wonder if the question really should be, “How in the world can we break even on Medicare margins!?” 

But a number of health systems are no longer asking questions. Instead, they’re making a statement: “We will break even on Medicare margins.” 

Take the Cincinnati-based Catholic Health Partners (CHP). 

Rebecca Sykes, CHP’s senior vice president of resource management and CIO, summed it up well when she said “If we can’t make money on the Medicare population—or at least breakeven— we don’t have a sustainable business model.” 

So Sykes and her team decided to face the situation head-on. First, they set a goal of reducing weighted equivalent inpatient admissions by $25 per discharge. A diverse team composed of subject matter specialists, project managers, and analysts was deployed to work with CHP clinicians and physicians. Their target: reducing unjustified variation by ensuring appropriate use of the right products and procedures, at the right price, place and time.

Together, the teams set targets in areas of clinical utilization with high variance, including: 

  • A significant decrease in blood transfusions, lowering costs without compromising quality and safety
  • A reduction in patient days in intensive care settings such as ICU and telemetry beds
  • A better understanding among CHP physicians of how their role in choosing orthopedic and cardiovascular implants can significantly improve costs and outcomes 

The teams designed and helped implement processes to reduce unjustified utilization across CHP’s 23 hospitals. Central to all of this effort was the use of quality and cost data to benchmark against top performing peers, identify opportunities, and drive and monitor improved performance.

The result: More than $22 million in identified clinical variation, and a savings of about $9 million in 2013, with much more on the way. 

Upstate in Akron, Ohio, Summa Health System targeted a $5 million to $10 million reduction in operational costs. Summa also addressed clinical variation through process improvements. Now, they’re implementing $10 million in labor productivity, revenue cycle, and supply chain opportunities. Their ultimate goal is to align with their three-year strategic targets to streamline and shore up processes that improve the patient experience and create value. 

Fairview Health Services in Minneapolis is taking a more unique approach to addressing supply chain costs, partnering with suppliers to go “at risk” on commodities products. 

“As the Affordable Care Act gained momentum several years ago, it made us think differently about care delivery in this new environment,” says LeAnn Born, Fairview’s vice president of supply chain. “In turn, I began reaching out to suppliers to test the waters on which suppliers are really ready to try something new.” 

As a result Fairview’s supply chain team will begin a pilot program with Covidien later this year that changes supplier sales representatives into “utilization managers,” paid a percentage of shared savings from resource utilization improvement. Fairview aims to save $200,000 to $300,000 in the first year of the program. 

One of my colleagues recently referred to breaking even on Medicare as “a mindset or rallying cry for hospitals and health systems.” 

A number of providers have taken this to heart. They’ve stopping asking questions, and are working with physicians, supply chain managers, and CEOs to come up with systemwide solutions. By doing so they’re making a statement around reducing clinical variation across healthcare settings. And they’re seeing the successes first hand. 

Because when it comes to making a statement, results speak louder than words. 

Michael J. Alkire is COO, Premier healthcare alliance, Charlotte, N.C.

Publication Date: Tuesday, March 11, 2014