John JohnstonAcross the past 25 years—almost my lifetime in the healthcare industry—many things have changed about hospital economics. Community hospitals have merged to become large health systems, and these systems now employ a high percentage of their medical staffs. Payer rates have fallen and often are accompanied by quality incentives and penalties. Patients play a greater role in choosing, and paying for, their health care. 

Through all these changes, hospitals have remained at the heart of the health system enterprise and the center of its strategy. Fueled by reliable annual volume and revenue growth, hospitals could consistently be counted on to generate a predictable margin. Until now. For two consecutive years, the rate of hospital revenue growth has declined, and the most recent Moody’s report predicts 2019 will continue this trend. Although hospitals are making some headway on reining in expense growth, it won’t be enough to make up for the revenue slowdown. The reality is that patient care is leaving the hospital at an unprecedented pace, never to return. 

As the calendar turns to 2019, we are entering into the “post-hospital era” of health care, and health systems are struggling to respond to this new reality. If you are looking for a sign that your organization may be behind the curve, look no further than your monthly board report. Most health systems continue to primarily emphasize volume and other traditional hospital metrics in monthly performance scorecards: admissions, emergency visits, deliveries, patient days, and occupancy rates. These are the success metrics of yesterday. Yet the metrics that increasingly point to success today—non-hospital business growth, efficiency of clinical care, avoidable care, denial rates, profitability by line of business or by payer—receive very little, if any, attention at the executive or board level. If there is any truth to the old adage “we manage what we measure,” these key performance indicators suggest many health system leaders are not guiding their organizations toward future success.

Health systems can take a strategy lesson from hockey legend Wayne Gretzky. While everyone else was focused on chasing the puck, he transformed the game of hockey with his strategy to “skate to where the puck is going.” Health system leaders need to adopt a similar, forward-looking mindset. It’s time to shift focus away from traditional volume and entity-based performance goals, and create new performance goals that will guide your system into the post-hospital era. 

Key Metrics to Watch

We are still in the early stages of transition, so the full suite of necessary performance metrics is still a work in progress. Here are some guidelines for key measures that financial leaders should begin to track and emphasize in monthly performance reports:

Non-hospital business metrics. This area will be the engine for future growth so it is critical to develop measures of the organization’s effectiveness in capturing and capitalizing on this business. Key questions include:

  • What percentage of total system revenue is generated outside the hospital walls? Is this percentage growing at the appropriate rate?
  • What are your utilization trends for key strategic investments like telehealth and physician offices?
  • What are your referral capture trends from your medical staff investments? 

Financial metrics. With margins and cash flow under duress, systems must be much more rigorous in prioritizing strategic investments. Measuring performance return on investments in key clinical service lines is necessary to be able to align system assets with opportunities for profitable growth. Key questions include:

  • What are your profit margins by key line of business and by key payer contract?
  • What is your total cost per case by line of business and what is its trendline?
  • What is your return on hospital and non-hospital capital? 

Clinical efficiency metrics. As organizations transition to value-based care models, leadership must be able to measure the efficiency of clinical care delivery. Key questions include:

  • What are your avoidable admission and readmission rates?
  • How many patient days exceed Medicare geometric mean?
  • What percentage of admissions and observation claims are being denied?
  • What percentage of ancillary capacity is being used?
  • What is your contribution margin for each of your core service lines?

Population health and risk metrics. As organizations take on greater risk, they must understand their success within current risk arrangements and predict future margin strength or vulnerability. Key questions include:

  • What is your performance under any risk-based payment models you are in today, and what would be the impact on the organization if performance was extrapolated to all patients?
  • What is your Medicare Advantage performance?

The adoption of new system performance metrics is an important step toward guiding a health system into the post-hospital era. It’s time to leave behind yesterday’s measures and the outdated strategies they feed, and replace them with new measures that line up with “where the puck is going.” 


John Johnston, CPA, MHA, is a client partner at Optum Advisory Services, Nashville, Tenn.

Publication Date: Tuesday, December 18, 2018