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Value-based Care is Ripping Into Health System Profits

By Gregory A. Freeman  
   September 12, 2016

Large health systems and hospital operators are reporting falling profits, revenue, income, and share value. The promise of population health management may eventually restore financial order, says one industry expert.

This article was originally published on March 10, 2016.

It has not been a good revenue year so far for health systems and hospital operators. Some of the largest players report massive slides in profits and stock prices.

The good news, analysts say, is that health systems will see a turnaround once the industry more fully adopts the value-based care model.

The bad news is that probably will take a while.

In February, the 2015 annual and fourth quarter financial results from Kaiser Foundation Health Plan, Kaiser Foundation Hospitals, and its subsidiaries showed a $1.2 billion drop in profit year over year. Kaiser's net income was $1.9 billion in 2015, compared to $3.1 billion in 2014.

Community Health Systems, the country's second-largest chain of for-profit hospitals, also reported falling revenue. On February 15, the company's stock fell 22% to $14.53 and had dipped as much as 31% to $12.86, marking the lowest intraday price for Community Health since December 2008.

Community's shares lost more than 75% of their value since hitting a 52-week high of $64.04 on June 26, 2015. Tenet Healthcare also reported in February that its financials were down 5.9% at $22.58.

The falling profits are a side effect of the healthcare industry's move to value-based care, says Jeff Hoffman, senior partner and health care strategist in the global management consulting firm Kurt Salmon's Health Care Group.

"This is an awkward and ironic in-between time. The shift to value-based care tasks hospitals with reducing the number of procedures or inpatients for which they now receive payment and instead be pre-paid or receive a risk payment," Hoffman says. "That's not traditionally a recipe for profit growth. But there are ways to make it work. There just aren't any fast solutions."

Industry in Transition
Reimbursement shifts are taking longer than most providers expected, Hoffman notes. Most are focusing attention on the expense side, he says, removing unnecessary procedures and imaging, and developing protocols for better and more efficient care. Some of this does have a negative revenue impact, as well, he notes.

Providers are investing in value-based care delivery models, but the large payoffs on any significant scale haven't come yet, Hoffman says. Meanwhile, new technologies to improve care and patient access, such as telemedicine, cost money. Providers are also buying primary care medical groups and refocusing their processes and protocols to create narrow networks that serve defined populations.

That's a huge expense that will continue to drain health system resources, whereas achieving real value under population health models remains elusive for many as health systems struggle to manage chronic patient populations and transitions into, and from, post-acute environments, he explains.

Gregory A. Freeman is a contributing writer for HealthLeaders.

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