John JohnstonFollowing months of uncertainty regarding healthcare reform and anxiety about provider margins, Moody’s August report confirmed the assumptions of many hospital executives: Not-for-profit operating margins declined in FY16, and for the first time in several years, annual expense growth significantly outpaced revenue gains. Moody’s forecast for tighter margins for the not-for-profit hospital sector going forward is troubling news for all, but it is especially troubling for community hospitals, which typically have lower margins and fewer resources to fall back on than their large-system peers. Industry analysts have responded by emphasizing the structural challenges facing the industry, and some have noted the growing difficulty for independent hospitals to go it alone, while speculating on a possible uptick in mergers.

A community hospital’s decision whether to remain independent depends on a host of strategic questions that the institution must consider over time. That said, community hospitals should take steps now to solidify their operating margins and balance sheets to preserve their economic viability—and thereby strengthen the ability to control their own future. This effort requires looking beyond traditional, short-term margin levers. What is required is a lower, sustainable cost structure that can support the development of innovative strategies for increasing revenues.

We see two areas emerging as priorities in the current environment: strategically growing profitable procedural volumes and building out a comprehensive program for managing chronic medical patients across the entire episode of care.

Target Procedural Volumes

As more procedures shift from inpatient to outpatient settings and competition for these procedures intensifies, community hospitals need to determine which procedural business lines to invest in for strategic growth. Key questions they should be asking include the following:

  • Which procedures are the most financially attractive, both directly and indirectly?
  • For which ones do we realistically have a competitive advantage and the possibility of growth?
  • Do we have the clinical technology and volume to deliver reliably high-quality care?
  • Is there a benefit to delivering the services locally?

If the hospital can answer yes to these questions, the challenge becomes how to craft a compelling value proposition for physicians within the context of local referral dynamics. A main component of this strategy is to become the “workshop of choice” for surgeons and proceduralists by furnishing an efficient, high-performing facility in which to practice. Such a facility requires clockwork operations, optimized scheduling, and strong clinical support staff.

Implementing such a strategy also can require some significant shifts in the status quo. Consider, for example, the experience of a four-hospital system in the Northeast that recently renewed its focus on growing surgical volumes. When surgeons began to complain about a lack of available operating room (OR) times, the hospital discovered that block schedules posed an obstacle to its growth objectives. An analysis of room utilization showed that a large portion of OR block time was taken up by a podiatry group. Recognizing that these procedures can be performed in an outpatient setting, the hospital was able to shift most of the podiatry procedures to an off-campus location.

In one move, the hospital opened up the schedule for more inpatient procedures and reduced the cost per case of the podiatry procedures. In today’s environment, it is important for hospitals to make sure rooms and locations are being appropriately utilized and surgeons have appropriate access to schedule their patients in their facilities.

In addition to ensuring appropriate utilization and access, it is essential to truly understand the intricacies of referral relationships among primary care physicians and specialists in the community. As one chief medical officer recently observed: “We are pretty good about educating our medical staff about our strategy and what we need to do together to succeed. We still have a lot of work to do in terms of connecting our broader network of primary care physicians with our surgeons and proceduralists. Especially as we take on more risk, we really are all in this together, and we need to foster mutually beneficial relationships.”

Manage Chronic Medical Patients

Meanwhile, as healthcare organizations chase profitable volumes, there is no shortage of chronic medical patients. With the patient population aging, patients in growing numbers are presenting with increasingly complex conditions, often including multiple comorbidities that must be managed simultaneously. In most of these cases, DRG payments do not cover direct costs, creating a situation where the services delivered to a large percentage of inpatients are unprofitable. To be able to meet these patients’ care requirements and remain profitable, now is the time to put the building blocks for population health in place.

This effort doesn’t have to mean huge added expenditures. Modest investments in predictive analytics, innovative care transitions programs, patient-centered medical homes, and community partnerships all offer community hospitals cost-effective means to better manage patients’ care across the continuum. And as the local providers of inpatient care, community hospitals have a unique opportunity to identify and align with higher-performing post-acute providers to meet the needs of key patient populations.

One hospital in a rural market in the Midwest, for example, has developed strategic partnerships with a few long-term care providers that demonstrate better quality performance and fewer readmissions. The hospital and long-term care providers are sharing quality data, developing protocols for patients with sepsis as they transition from inpatient to long-term care settings, and even training some clinical staff in the long-term care facility to address the common challenges faced by such patients in the first 30 to 60 days after discharge. By more effectively managing the full continuum of patients’ care, the hospital has shortened inpatient stays, reduced readmission rates, and improved its patients’ overall health status.

A Two-Pronged Strategy

Given the structural changes in the provider market, community hospital leaders should consider a dual approach to getting their organizations on firm financial footing: becoming the local provider of choice for a niche of growing, profitable procedural business, and building out capabilities to cost-effectively manage lower-paid medical care. Neither strategy is easily executed on its own, let alone in combination, but community hospital leaders should regard finding the balance to drive margin sustainability as the utmost imperative, if they are to be effective in charting their organizations’ success for the long term.


John Johnston, CPA, MHA, is senior vice president and national partner at Advisory Board, Washington, D.C.

Publication Date: Friday, November 03, 2017