- In a survey of hospital strategic planners, larger health systems were substantially more likely to report that their volumes had reached or exceeded pre-COVID-19 levels.
- Larger systems potentially reaped the benefits of “systemness,” or the ability to implement cohesive system-oriented approaches.
- The capacity to achieve service rationalization often is greater in larger systems, but survey results don’t indicate a surge in interest in consolidation.
Large health systems appear to have significantly outperformed smaller organizations in surgical volume recovery during the COVID-19 pandemic, and the discrepancy may be partially attributable to the advantages gained through “systemness.”
In an Advisory Board survey (log-in required) that was conducted in early February and drew on responses from 83 hospital strategic planners, those who worked at systems with more than five hospitals were substantially more likely to report that their volumes had reached or exceeded pre-COVID-19 levels.
Specifically, respondents who worked at larger systems were more likely than those at smaller systems to report that volumes were back to pre-pandemic levels for elective inpatient surgeries (45% to 18%), overall surgical volume (40% to 20%) and recovery of postponed procedures (33% to 14%).
“This is perhaps a factor of being more diversified across markets,” Colin Gelbaugh, a director with Advisory Board, said during an April presentation of the survey data and insights.
Larger organizations “can use the full capacity of their system. If one hospital was nearing capacity, they might perform a surgery somewhere else with excess capacity rather than postponing the procedure,” he added.
Such trends indicate the advantage that large organizations can derive from implementing a cohesive strategy across their sites of care.
“You're really talking about leveraging the value of systemness,” said Christopher Kerns, vice president of executive insights with Advisory Board. “The hypothesis here is that those systemness structures that they put in place really did enable them to recover a bit faster than otherwise. It’s heartening to see in a lot of ways that the benefits of systemness are finally being realized, even if it's been as the result of such a painful year.”
For the industry generally, volumes for surgeries and outpatient visits should be close to pre-COVID-19 levels by the end of Q2 2021. However, Gelbaugh said, certain factors could prevent a full recovery, including:
- Sustained care avoidance
- Site-of-care shifts
- Case mix shifts
Inpatient admissions are projected to remain 5% to 10% below pre-pandemic volumes over at least the next couple of months, with continued reductions in emergency department volumes among the reasons.
Divergence also seen in financial trends
As with volumes, measures of financial recovery to date seem linked to organizational size, according to the Advisory Board survey. Of strategic planners with larger systems, for example, 42% said patient care revenue had returned to pre-pandemic levels. The shares were much smaller among respondents with smaller health systems (13%) and community hospitals (11%).
The gap among the size categories was narrower for operating margin: 32% of respondents with large systems said that metric had returned to normal, compared with 18% at smaller systems and 22% at community hospitals.
“It tells us that [smaller providers] were good at cutting expenses to make sure that their margins were sustainable,” Gelbaugh said.
Margin recovery throughout the industry is projected to lag volume recovery, Kerns said. One reason is that even as procedural volumes return, the shift of other types of services to nonhospital settings likely will continue. Also, labor costs will be a drag on balance sheets.
As a result, Advisory Board projects hospital margins to reach only between 0.5% and 1.8% this year. That would be roughly half of historical operating margins, Kerns said.
How hospitals are responding to trends
Cost management will remain vital given the expectation of slim margins. With labor costs apparently off the table for many organizations as indicated by the survey responses, said Anna Yakovenko, a managing director with Advisory Board, strategy planners have identified two key sources of savings:
- Supplier contract renegotiation
- Service rationalization
In the survey, 36% of respondents said they were more likely or “significantly” more likely to seek to rationalize services, and another 43% said they were “slightly” more likely.
Service rationalization is aligned with the concept of “systemness,” as organizations seek to leverage their assets to make their operations as efficient as possible.
“When it comes to rationalizing services, this is an often-touted value of becoming a system — [the] ability to rationalize services across different sites of care and across markets,” Kerns said. “During the pandemic, a lot of organizations were forced to do this, and now that they have done it, they want to keep doing it.
“It's fascinating that this is likely to be a big source of cost savings because even though it's harder to do, it certainly has longer sustainability than a lot of the labor-cost cuts that a lot of orgs would have historically done.”
In 2018, a Kaufman Hall report described service rationalization as the strategic area with the greatest potential to transform hospital cost structures. But a survey accompanying the report found that six in 10 hospitals had made no progress in that area during the preceding year.
Amid the pandemic, more seem willing to try, Yakovenko said, citing conversations with strategy leaders. But even though hospitals and health systems aren’t turning to additional layoffs or furloughs, service rationalization may give way to a reduction in labor costs.
A streamlining of roles, Kerns said, can be part of the “long-term value proposition of service line rationalization.”
Implications for M&A
If more organizations seek to emphasize service rationalization, it stands to reason that more would look to consolidate with other entities. But any such intentions weren’t necessarily highlighted in the survey results.
Among respondents with larger health systems, about half said they were more likely than previously to seek to absorb smaller organizations. In the overall pool of responses, the share was about 30%.
As to whether organizations would seek to be acquired by a larger operation, 22% of representatives viewed such a strategy as becoming more likely. That was down from 41% the year before.
“It's telling that the financial supports that we've seen across the past year have made a lot of the expectations from a year ago less bullish on the view that M&A is going to be the solution,” Kerns said.