In the face of financial headwinds that include reimbursement cuts, increasing bad debt, and patients’ desire for convenience, many hospitals have found that their best-paying patients continue migrating to outpatient locations. Patients are demanding more flexibility in both the sites where they receive care and in the way they pay for that care. That means the best-performing hospitals have to learn flexibility, too. But change can be expensive—so can building and expanding, not to mention adding programs and modalities to capture the patient population’s demands. How do hospitals know where to spend their scarce dollars? What new ways to reach potential customers have proved successful? How will hospitals compete in the future? HealthLeaders Media convened a group of experts to discuss these questions as the hospital industry makes what could be a historic transition to a more patient-centric mode of operation.
Philip Betbeze, senior editor—finance, HealthLeaders Media, Brentwood, TN,
David Brooks, chief executive officer, Providence Everett Medical Center, Everett, WA
Margaret A. Brown, president and co-head at CIT Healthcare, New York, NY
Scott Wooten, senior vice president and chief financial officer, Alegent Health, Omaha, NE.
Bob Seehausen, senior vice president of business development and sales, Novant Health, Winston-Salem, NC
Philip Betbeze: Let’s talk about threats and opportunities in the outpatient space. Outpatient has been something that has been a key part of most hospital strategies for years now. But you’ve got to fund it. One, how has the credit crisis affected hospitals’ abilities to fund new construction of outpatient bricks and mortar? Second, how do you make the best decisions about how to allocate your scarce resources for construction?
Margaret A. Brown, CIT Healthcare: It’s not just about funding the construction. Hospitals in general have been dealing with a big dislocation in their overall funding source, especially in the bond market. When you combine that with the dislocation in potential borrowings that hospitals may seek from lenders on a for-profit basis or a taxable basis, the overall picture is very disrupted. I deal with for-profit companies as well as joint ventures that are promulgated by developers that may have a hospital partner. It’s going to take a while for all of this to sort out, because the dislocation is so huge and so momentous.
Bob Seehausen, Novant Health: Marry that with the problems many hospitals have with their investment portfolios and the number of systems or hospitals across the country that have been relying on their investment earnings and squeaking by on operations. Now, if your portfolio earnings are gone, that’s going to put a real damper on some of the expansion that I think people probably have on the books.
Scott Wooten, Alegent Health: And packing it in for a while and waiting it out is not an option. But if your board members are saying, “Wait a minute, why would you go ahead and proceed with that project and why wouldn’t you put it on hold?” perhaps our governance members will be putting some pressure on us not to proceed when we’re not used to being that reactive to the financing market.
Betbeze: I wonder if it’s going to place the traditional health system at a disadvantage.
If access to capital for either niche expansion or fundamental expansion dries up or becomes more limited, the niche player is going to enter that market space regardless. So it creates even more tension on the nonprofit to grow in the outpatient space, even though capital may be more limited. Do you stay bold and offensive? The competitors will.
Brown: True, but capital for competitors will also be much more expensive.
Betbeze: How much more expensive?
Brown: The spreads have at least doubled and are going to continue to widen out. On an absolute basis they are still low, but on a relative basis over the past year, spreads have definitely widened out.
Betbeze: Let’s shift gears and talk about your current outpatient strategy. Dave, talk about what Providence Everett is doing in this area.
David Brooks, Providence Everett Medical Center: The core of our outpatient strategy is built around physician alignment, so where we have opportunities to bring in members of the medical staff as partners, we look to do that. It will benefit the community and, ultimately, ourselves for many years. We’re in discussions with the radiology group about what we can do in joint-venture radiology and imaging centers. We have a number of traditional physician practices that we own or that we are affiliated with. We just opened a four-way partnership-based comprehensive oncology center. We did it in a way that brought those medical groups from separate locations all together next to the hospital campus.
Betbeze: How much construction are you going to be doing over the next few years?
Brooks: We’re playing catch-up on outpatient and inpatient because of the population growth in our area. We’ve not invested enough in our own capacity. Most days, literally, every bed is full at our hospital. So we are now rapidly trying to catch up with what we should have done probably five to 10 years ago.
Seehausen: We’ve spent a lot of time over the past several years repositioning ourselves and rethinking how we needed to fit in our healthcare space. We never got out of having employed physicians. We had some dark days in terms of financial results and operating results, but we decided it was too important a component of healthcare to abandon. So we stuck with it and now it’s a major component of our strategy. We’re right at 1,000 employee-physicians, and then we’ve got a contracted network of independent physicians numbering about 900. We have a tiered strategy, with the most capital-intensive being the tertiary facilities with virtually all of the acute-care services. The next tier is community hospitals, and the third tier is what we refer to as medical plazas, where we’ve got surgery centers, some diagnostic space, imaging and physician offices. We can build several medical plazas for the cost of one moderate-sized hospital, and the patients love it.
Wooten: Alegent, very similarly, chose to collaborate equitably with our
physicians. While that has created some joint-venture opportunities
in imaging and surgery centers, it’s really changed the mantra for how we deliver care around the patient in any environment, whether there is equity alignment or not. So we’ve embraced the gamut—joint ventures, comanagement agreements—mostly on the outpatient side.
Betbeze: We’ve talked about soft ways to limit competition from physicians by integrating them into the leadership of the
organization, but do you fear that some of these physicians will compete with you or have inside information, so to speak?
Seehausen: We trust the physicians that we work with. We’ve got close relationships with them. I can’t think of any significant instances where any confidential discussions of business plans have been used against us. You know, we do have some very large independent groups that exert their own influence, and you’ve always got to factor that in. But, for the most part, it’s pretty open and pretty frank and collaborative with the physicians.
Wooten: And when you keep the patient in the center of the conversation, and what’s best for all of the members of your community, people become very mission-oriented, even with the dollar on the table. And, in fact, one of our motivators for initiating outpatient joint ventures was so that we could ensure that our financial assistance policies were in play even in a joint-venture market. It’s a diversification strategy.
Betbeze: Let’s talk about financing outpatient facilities. How are you guys doing it?
Wooten: Most of the ventures we’ve done have been equity funded. We’ve been amazed at the amount of capital that comes out of the physicians’ pockets in order to typically buy between 49% and 50% of a particular venture. In several of our joint ventures, it’s been 100% equity, and there is no debt in the transaction. That creates more risk, and it also lowers the return on investment because they have more skin in the game.
Betbeze: Dave, what about off-balance-sheet financing?
Brooks: When you go off-balance-sheet, that creates a way to put some golden handcuffs, if you will, on the physician. It creates an independence that makes that venture different for performance accountabilities than if it was just simply a hospital investment.
Wooten: Another benefit is that we see physician engagement going up dramatically, and it’s definitely worth the higher cost of capital in those ventures.
Brown: We’ve seen lots of financing models across the country with lots of healthcare systems, and you’re exactly right. The standalone model drives accountability; it drives performance, and more perfectly aligns the interests of the parties.
A changing business
Betbeze: Let’s switch gears again. What about the “hospital” is being redefined,
and what does that mean for your outpatient strategy?
Seehausen: We’ve talked about redefining how we view our business. It’s kind of like the old railroad business versus transportation analogy. As we were thinking about ambulatory, we talked about building hospitals without beds. Our industry has been so focused on the inpatient model, but just to use a personal example, my family has used a lot of healthcare, but we haven’t spent a night in the hospital in 14 years. We’re changing that because we recognize that there are more touch points in outpatient.
Brown: It’s a lower-cost setting.
Wooten: Consumers are going to
seek out those lower-cost venues. And the more individuals become responsible for their healthcare, the more they’re going to pursue more cost-effective options.
Betbeze: Now that you mention costs, I want to talk about reimbursements. How much does it matter if outpatient rates decrease relative to inpatient rates? Does that change the game?
Seehausen: A big part of it depends on whether you’ve anticipated that shift, or whether it’s done to you. Many in our industry have used the more flexible outpatient reimbursement terms to jam the margin on the ambulatory side of the business. Yet now, with families facing $5,000 deductibles and Medicare cranking down on a number of their categories piece by piece, that margin is quite exposed. It’s exposed to patient choice and governmental reimbursement changes. So you have to anticipate that. Look what Medicare did to imaging. It whacked 25%, effectively, overnight.
Betbeze: How do you make sure that these facilities are still viable regardless of where reimbursement cuts happen?
Brooks: Reimbursements are going to go up and down over time, but we’ve got to produce the service because the community needs it, and we’ve got an opportunity to use the service to create better alignment with our doctors. I’m not saying you don’t have to still pay attention to it, but reimbursement is almost secondary. We have to constantly push to make the service as efficient as possible. Reimbursement will ultimately work itself out if the service is efficient.
Remember the customer
Betbeze: What about customer service? Could the hospital benefit from the kind of service competition that drives efficiency in the outpatient setting?
Seehausen: One of the things that we learned from market research that was somewhat surprising was that the consumer places a lot of value on the transaction. Is the information coordinated? Is the scheduling consumer-friendly? Is the billing simple, possibly consolidated? There are a lot of things you can do to provide a more accessible service that is convenient to mom or to a family or to seniors that has value, and people will pay for that, too. So it’s not all about cutting prices.
Wooten: Amid all of the strategic and competitive stuff we’ve been talking about, making the complex simple for the benefit of the consumer ultimately is a great strategy.
Seehausen: One of the challenges that we’re trying to figure out is, how do we get paid for wellness? Right now the reimbursement model in our industry is geared toward sickness. If we really want to think about delaying the onset of severe disease and taking care of the community, we have to figure out how to be more involved with wellness and health—but we have to figure out how to get reimbursed for it.
Betbeze: How will the consumer’s growing involvement in decisions on care affect your outpatient strategy?
Wooten: You know, we’re headed to a world of a healthcare consumer report by an objective third party. It’s probably seven to 10 years out—maybe sooner. It will have cost and quality information, and it will be credible and it will be comparable. The truth will be known, and it will be known consistently and comparably. That creates even more of a market dynamic in healthcare, which then is going to get ultimately to a low cost of production.
Betbeze: Talk about some of the specific modalities and services you all are undertaking and how you are presenting and
marketing them to the community.
Seehausen: Our most prevalent model right now is a concept called medical plazas, which are really as much a real estate concept as a specific package of services. One of the things we stressed was getting the real estate development footprint correct. Then you customize the services for the market and for the needs of the community. For example, we’ve put sleep centers in the medical plazas, outpatient surgery, diagnostic imaging, physician offices. We’ve also even considered some freestanding retail space.
Wooten: We call ours villages, but they’re similar to what you’ve described as plazas. We’re partnering with the developer, so a lot of the nonhealthcare retail is on someone else’s balance sheet. We’re learning a lot. One, we outsourced the management of our health and wellness fitness centers. And then in retail … we just started to dip our toe into retail, and it’s amazing. We are the largest site in Omaha, next to Nebraska Furniture Mart, for sales of Tempur-Pedic mattresses. We sell them to people who walk through our medical office building.
Outpatient and consumerism
Betbeze: We’ve talked tangentially about consumer-directed strategies, consumer-friendly strategies—talk about embracing this consumer-friendly strategy and how outpatient can help you along that path.
Wooten: The service expectations are different for people in an ambulatory setting than they are in a hospital setting. They forgive us so much in an inpatient setting. If they have a 10 a.m. appointment in an outpatient CT scan, and it’s 10:05 and they’re still waiting in the lobby, then they’re up at the front desk asking why the appointment is delayed.
Seehausen: You know, we just opened a new imaging center. What we’re finding in marketing that new imaging center is that as much as you think that’s direct-to-consumer, it’s direct-to-referring physician and it has everything to do with scheduling. Our attitude is, send them over. Don’t schedule it. Just bring them over. They’re going to get in immediately. So whether it’s in-hospital or not, you have to figure out those components. What’s nice is that these concepts are transferable, so if you do one outside the hospital, those principles will transfer into the hospital.
Brown: Surgery centers, though, are still just very critical to any basic outpatient strategy. We like the surgery center model. As far as providing capital, we’ve seen that sleep centers and dialysis centers are also important. We also see a lot of outpatient rehab. We see a lot of home health. We see hospice care companies. We also focus on medical device companies and contract manufacturing, contract pharma, and specialty pharma, so what we’ve outlined here is a small sliver of what we do.
Betbeze: How important is it to feed the inpatient beast with these centers over time?
Brooks: The largest part of our asset base is inpatient, and therefore we can’t be naïve, then, to not recognize that when you have that many assets in inpatient, you have to have enough activity to spread that cost basis over or you won’t be able to serve your community for long. But to say that we’re creating all of these strategies to simply do that is inaccurate. It gets back to the traditional model of healthcare that leading organizations are trying to allow to pass away. People will access you in different ways, and then people flow in between the various pieces of the continuum.
Seehausen: There is a life cycle to healthcare consumption—much of it driven by biology, influencing how people use the system at different times depending on medical or lifestyle needs. If you just focus on inpatient, you’re only focusing on one piece of that life cycle.
Betbeze: One that has a lot of revenue attached to it, obviously.
Brooks: But it better have a lot of revenue if it has a lot of costs.
Seehausen: We aspire to be among the best providers of faith-based quality healthcare, but our primary goal is to measurably enrich the lives of those we serve, and that speaks to the intentional improvements in the area of quality, the use of evidence-based care from a clinical efficiency and consistency perspective. But we don’t tend to think of ourselves as an inpatient production line and an outpatient production line.
Wooten: We tend to think of ourselves in terms of an area of focus or service, and then we think about how we best serve the people in our community in those key service areas. So it’s a much more holistic service approach.
Brooks: And not that there’s not a marketing overlay of how you communicate to people what you happen to have for them and how to utilize it, but it’s much more about how you organize the delivery system.
Betbeze: And facilitate a continuum of care.
Brooks: If you were building health delivery systems from scratch, you would never organize them the way most of us are organized … We are trying to retrofit a 102-year-old legacy system. But given what healthcare should look like or is going to look like 20 years from now, I think we’re taking baby steps.
Betbeze: If you were able to take the big steps, what would you do?
Brooks: You’d totally reorganize how care is delivered. You would design the incentives to be around keeping people well.
Brown: And the kind of change, Dave, that you’re hinting at, I agree totally. But those are revolutionary changes.
Wooten: The voice of the consumer is what’s going to drive the change, and more progressive organizations are going to try to figure out how to meet the needs of the consumers in a more innovative way. But there’s a gathering storm in healthcare, and it’s a national issue. We can’t afford it. We use too much of it, and we did it to ourselves.