Broadening the Base
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Hospitals are searching for ways to supplement lost inpatient revenue, but many are discovering that options are limited.
Hospital leaders depend on inpatient revenue. It's reimbursed better, and it fits the traditional notion of the hospital as a place where people not only receive complex medical care, but where they stay to recover. That view of the hospital's business model has gradually receded over the years as hospitals diversify into outpatient and other lines of business. But the truth is, hospitals still depend on inpatient revenues to a disproportionate degree.
The recession, in many cases, has underscored the importance of shifting to other lines of business, however. As the recession has deepened, it has contributed to a significant volume decline among many inpatient-focused hospitals and health systems. According to a regular quarterly survey by Independence, OH-based Longbow Research, inpatient admissions have declined sharply in the past year. Some 47% of respondents reported year-over-year declines in admissions in 2008's fourth quarter versus 49% of hospitals that reported year-over-year increases in admissions in the third quarter.
"We've heard from our contacts in hospitals that with knee or hip replacements, for example, patients are looking at other treatment options rather than going ahead with more expensive, invasive procedures," says David Bachman, vice president and senior equity analyst for healthcare at Longbow.
Secular versus cyclical declines
But that anecdote doesn't tell the whole story. That's because outpatient and other services are suffering as well during the economic downturn. While analysts and those on the healthcare frontlines expect both inpatient and outpatient to improve during any economic recovery, "what we're seeing here is a convergence of a cyclical downturn as well as a secular change within the healthcare system," says Bachman.
The declines in both segments mask a long-term trend away from inpatient stays to deliver care in the lower cost outpatient setting as patients deal with higher deductibles and co-pays. Developing ways to grow outpatient services will be a critical moving forward.
"Whether that's tying up with outpatient surgery centers, buying those centers outright, or moving to freestanding ERs and critical care units—those sorts of things are going to be more critical moving forward, as traditional inpatient care will not be the margin driver," Bachman says.
Hospitals have responded to the statistics. Cory Reeves, chief financial officer at Gordon Hospital in Calhoun, GA, an Adventist Health System hospital, has seen between 5% and 6% year-over-year declines in inpatient admissions over the past two years or so.
"We feel OK about it because we've kept our market share pretty consistent," he says. But that doesn't mean he isn't concerned about the ugly long-term trend line, and while Gordon Hospital is developing outpatient strategies to combat the trend's affect on the bottom line, it isn't ignoring strategies to build inpatient back.
"As a small hospital, we currently don't have a hospitalist program, so we're starting one to create a relationship between an emergency room physician and admissions and to follow up during length of stay," he says. "We're doing that not only to grow inpatient admissions, but also to improve quality and capture more admissions out of the ER."
Further, Gordon Hospital is using a vendor, Executive Health Resources of Newtown Square, PA, to develop better case management oversight to defend denials from commercial insurers. The vendor will also help decide whether patients meet inpatient admission criteria in order to proactively defend against Recovery Audit Contractors, as well.
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