From the uncertainty surrounding health insurance exchanges and the anticipated influx of newly insured patients to RAC audits and the controversial two-midnight rule, providers are feeling the financial squeeze from all sides right now.
Area of largest capital investment by healthcare providers Source: Premier online survey for Economic Outlook, Fall 2013 |
As healthcare providers brace for the impact of new payment models, many hospitals and health systems are curtailing capital spending plans for 2014.
So says the Premier healthcare alliance in its Fall 2013 Economic Outlook for which it surveyed 426 respondents, primarily C-suite executives and materials and practice area managers. The report finds that growth in health system capital spending in 2014 is expected to be below 2010 levels. Only 36.8% are projecting an increase in capital spending next year, down from 42% in fall 2010, while 42.2% anticipate a decrease, up from 26% in fall 2011.
"We've been helping our member hospitals prepare for this type of environment for some time now, so these results come as little surprise to us," says Durral Gilbert, Premier's president of supply chain services. "For providers, the key is ensuring they use the right product, with the right patients, in the right way, to get the right outcomes."
These survey results don't seem unexpected to me either. As I speak with CFOs and finance executives from healthcare providers around the country, I hear all kinds of reasons why hospitals and health systems might want to hold back on their spending plans, at least in the short term.
From the uncertainty surrounding health insurance exchanges and the anticipated influx of newly insured patients to RAC audits and the controversial two-midnight rule, providers are feeling the financial squeeze from all sides right now, so being conservative with resources makes perfect sense.
According to the Premier survey, however, the tight reins on capital investing are largely the result of reimbursement cuts, which were cited by 46.7% of respondents as the trend they expect to have the biggest impact on the healthcare system in 2014—the single biggest reason noted in the survey.
"One of the big things driving the adjustment in capital spending is the reductions going on in the healthcare system in terms of reimbursement models. When less reimbursement goes to the hospital, they certainly need to manage their capital spending in a different way," Gilbert says.
IT is Top Area of Spend
Not surprisingly, the largest area of capital investment continues to be IT and telecommunications, which was identified by 38% of survey respondents as the place where their organization will spend the most next year. This number is trending down, however, compared to six months ago (40%) and a year ago (43.1%).
"We don't see this as a negative trend. We see it as a natural trend," Gilbert explains, saying that spending on IT reached a fever pitch in recent years as health systems tried to take advantage of Meaningful Use incentive dollars.
"There were incentives for health systems to spend faster on IT and the timeline was condensed for MU dollars and population health management. There is a natural decline now in IT spending. It will continue, but not quite to the same degree," he says.
Mark Bogen, senior vice president and CFO at South Nassau Communities Hospital in Oceanside, NY |
Gilbert says providers should not expect an immediate hard dollar ROI from their IT investments and should look to reduced use and duplication of tests, imaging, and medications to find the initial value markers.
"Systems will first see the soft return on investment and then the hard return," he says. "Hard returns are going to happen over a prolonged period of time, so hospitals are looking at the soft indicators such as if the EMR keeps them from prescribing unnecessary medications."
Mark Bogen, senior vice president and CFO at South Nassau Communities Hospital, a 435-bed institution in Oceanside, NY, took that sentiment one step further when he told me he doesn't expect to ever see a full return on his organization's EMR investment.
"The hope of the EMR is that it will help to produce better outcomes and better patient satisfaction and to assist us in identifying variations in clinical practices to drive down costs," he says.
"Whether the Meaningful Use aspect will create enough return to ever cover the actual cost, I don't think it will happen. I don't think it is something that can be envisioned as paying for itself, but we will hopefully get some gains in productivity and outcomes."
As health reform takes hold and the healthcare industry moves in the direction of population health management, Gilbert believes robust capital spending on IT will be necessary despite difficult economic conditions and a squishy ROI.
"I think the impetus was put into place with the Affordable Care Act with things like bundled payments and other elements to force providers to manage a patient holistically," Gilbert says.
"Regardless of where the patient is within the provider network, the system needs to understand consumption patterns. That is where more advanced technologies that integrate quality and cost data across the continuum come into play so that physicians' offices, long-term care, and acute care can all be on the same system."
That is exactly the reason Reading (PA) Health System is in the process of a $130 million, three-year EMR installation, Richard W. Jones, CPA, senior vice president, CFO, and treasurer of the 735-bed institution, recently told me.
"As more and more payers and consumers are measuring providers on quality and outcomes, it is putting pressure on providers to manage costs across the entire continuum of care as well as to reduce redundancy of services," Jones says.
"By having all of our patient information in one record, whether in the hospital or in an ambulatory setting, it will reduce redundancy and allow for better, faster care."
Increased Outpatient Volume Drives Spending
Another trend driving capital spending decisions is the shift in patient volume. The survey results reveal that 41% more respondents are projecting a decrease in inpatient volume as compared to 6 months ago, and 61% are projecting outpatient admissions will increase.
As health systems evaluate their existing brick and mortar assets versus their emerging needs, capital dollars are likely to be invested in outpatient facilities, Gilbert says.
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"There is a realization that we have an overcapacity on the inpatient side," he says, adding that as health systems begin to increase focus on ambulatory settings, they will think more about the setup and location of their physicians' offices.
Richard Rothberger, corporate executive vice president and CFO at Scripps Health, a five-hospital system based in San Diego, agrees that it is important to reevaluate real estate strategies and, in a recent conversation about capital spending plans, told me he sees major growth opportunities in the outpatient sector.
Scripps has plans to build an 85,000 square foot multi-specialty site in Oceanside, CA—a community it doesn't currently serve. The building is scheduled to open in 2016 at a cost of $60 to $75 million, Rothberger says.
"We are trying to feed our large infrastructure on our hospital campuses," he says. "We are also trying to reach into the community so people don't have to travel so much. We want to give them the opportunity to see their practitioners closer to home."