Mark GrubeThe shift toward a more retail-oriented healthcare system presents global and market-specific risks for hospitals and health systems.

Global risks relate to the strategic and financial implications for an organization’s business mix as consumers begin to approach healthcare purchases as they would retail purchases. Market-specific risks are a consequence of competition on price-sensitive services from other area providers, including potential nonhospital market entrants.

Multiple considerations related to price versus non-price factors will influence patients’ healthcare choices and, as a result, affect provider risk. Such considerations, for Andrew Cohenexample, include the extent that a patient’s out-of-pocket cost (price) differs among provider options compared with the extent to which the patient perceives differences in quality and access to services among the providers. How effectively hospitals, health systems, and other providers communicate with potential patients and garner consumer loyalty will play a significant role.

Price variation is expected to be a key driver of choice, particularly for services that fall within the range of most health insurance deductibles and out-of-pocket maximums. For example, a hospital might charge $1,700 for a magnetic Dan Clarinresonance imaging (MRI) procedure, while a freestanding radiology facility might charge $600 for the same procedure. Hospital radiologists could argue that hospital’s MRI device produces much higher-quality images than the freestanding center’s device can produce, but the patient is not likely to either understand or value this difference, so for practical purposes, cost will be the primary consideration influencing the patient’s choice.

The chart provides examples of price differences between certain ambulatory services offered at hospital outpatient departments compared to community-based facilities. The more a service is viewed as a commodity, the less variation consumers perceive in quality, the more likely they are to price shop.

The Complexities of Risk Increase with Size

Understanding risk becomes more complex for multihospital systems that operate in multiple states or in multiple markets within the same state. Such systems will have diverse competitors and/or arrangements with multiple payers that will affect their revenues and level of at-risk contribution margins on a market-by-market basis.

For example, an analysis comparing one statewide health system’s mean payment for colonoscopies with that of other hospitals and freestanding facilities found that the health system was paid more than other facilities in each of the three regions it serves. The differences were most significant in the southern and northern regions, where the health system received at least twice as much as community hospitals in the regions, and three to four times as much as freestanding facilities. This payment differential represents significant risk for this organization going forward as consumerism increases and as payers and employers attempt to steer patients toward lower-cost providers.

Quantifying the Financial Impacts of Risk

Quantifying the total net revenue and contribution margin at risk is essential. An analysis at one Midwest health system, for example, disclosed that as much as $154 million of the health system’s outpatient revenues could be at risk for moving to other providers, including revenue from colonoscopies, laboratory tests, and imaging and rehabilitation services. Loss of even a moderate percentage of this business would compromise operating income, so it was critical that the organization take steps to meet this challenge.

All hospital and health system leaders should evaluate the relevance and potential threats posed by such risks, and identify those services most likely to lose market share to other providers and settings. In many cases, the services that are most at risk are important, if not critical, financial contributors for the organizations, so strategies to stem attrition will be important.

Mark E. Grube is a managing director, Strategy Practice, Kaufman, Hall & Associates, Inc., Skokie, Ill.

Andrew S. Cohen is a vice president, Strategy Practice, Kaufman, Hall & Associates, Inc., Skokie, Ill.

Dan Clarin, CFA, is an assistant vice president, Strategy Practice, Kaufman, Hall & Associates, Inc., Skokie, Ill.

Publication Date: Friday, July 11, 2014