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Value-based Care is Ripping Into Health System Profits

By Gregory A. Freeman  
   September 12, 2016

More of a Reset Than a Trend
Successful health systems with regional strength will turn the tables on payers, Hoffman says, and set the terms for narrow networks and direct-to-employer contracts to secure and grow share, manage appropriate utilization, and take more risk—and share—of the premium dollar.

Hoffman doesn't think the drop in profits is a trend so much as a reset. Healthcare providers need to adapt to the reality that no hospital, no doctor, and no medical device manufacturer or pharma company will be able to charge what they previously could, he says. Every player in the healthcare industry is now tied into this new paradigm where value must be defined and measured before anyone is compensated.

"Will we see some players grow, gain market share, justify that value, and increase profits? Absolutely. In high-population centers, for example, health systems that embrace retail, digital and telemedicine platforms will realize big gains in brand value and set the stage for essentiality to shift from physical assets to service and results," Hoffman says. "But the industry overall cannot sustain the costs it's seen to date."

Hoffman expects provider merger/acquisition and partnership activity to remain strong in 2016 as providers continue to partner in an effort to achieve scale, especially in response to the market transition to value-based care. Federal and payer challenges to hospital asset mergers and even virtual mergers will force many health systems to revisit vertical (payer and medical group) integration as an alternative foundation of their strategy, he says.

"One place we might see quick changes in response to reduced profits and reduced revenues is in the pediatrics space. Downward financial pressure means community hospitals will face the closure of their NICUs and smaller pediatric programs, and children's hospitals will step in to either manage these units or create new capacity on their own campuses," Hoffman says. "Simultaneously, integrated health systems holding on to their pediatric platforms will look to freestanding children's and academic medical centers for subspecialty support."

Partnerships across key pediatric programs, and across state lines, will broaden research populations, and further advances in pediatric research will require a push for even greater collaboration in the future, Hoffman predicts.

Sandefur says the healthcare players that come out ahead will be the ones that effectively manage both the top line and the bottom line. Managing the expense side of the equation will be just as important as working to bring in more revenue, he says.

"It will be critical to know the costs to treat your patients, knowing the cost of service lines, the cost to compete in the market," Sandefur says. "That's why we're seeing heavy investment in predictive analytics, business intelligence, and the data around population health management. It allows the better health systems to make smarter decisions."

Gregory A. Freeman is a contributing writer for HealthLeaders.

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