Sea captains navigate with an eye on the horizon, not on the point of the bow. That’s because a ship doesn’t turn on a dime; it needs as much advance notice as possible to make a course correction. By its nature, the health care industry calls for a similarly long view. Health care leaders must always be looking forward, preparing for obstacles or changes in the environment that might emerge and require a shift in course.  

The resources available from the Vizient Research Institute provide that forward-looking information about emerging health care trends and market obstacles for members.

“For more than two decades, the Research Institute has conducted strategic research focused on major economic challenges facing our health care systems,” said Erika Johnson, MHSA, vice president, strategic research, at Vizient. “The research and investigations provide new insights and uncover practical solutions that promote measurable improvement in clinical and economic performance. One resource that provides a holistic view of the health care landscape is the Strategic Viewpoint, an annual environmental assessment that helps health care leaders make well-informed and evidence-based strategic planning decisions.”

The 2016 Strategic Viewpoint offered readers a macroeconomic point of view focused on four key economic changes on the horizon and offered five steps to avoid losing sight of how to navigate them. For more details, click here.

This year’s Strategic Viewpoint focuses on three basic economic principles – demand, supply and price – to help members adapt to a volatile political environment and the uncertainties surrounding health care policy while they develop their strategic and operational near-term priorities.

The following insights into the future outlook on demand, supply and price are excerpted from the 2017 Strategic Viewpoint.

Demand: A see-saw of offsetting factors

Between 2017 and 2027, inpatient demand is projected to be relatively flat. The aging baby boomer population and epidemiologic trends will drive significant increases in demand for inpatient services. However, this demand may be offset due to benefit design payment mechanisms, technological advances, and improved care coordination and disease management, resulting in relatively stable inpatient demand overall.

In contrast to inpatient demand, outpatient demand is expected to increase. While bundled payments, policy changes and technological advances may reduce advanced imaging utilization, physician office visits, and emergency room use, the migration of services from an inpatient to ambulatory setting will result in a net increase in outpatient visits.

Strategic adjustments required to manage facility and physician supply

Given the flat inpatient demand projections, very little, if any, increase in inpatient bed capacity should be needed over the next 10 years. Even if some of the impact factors were slow to materialize over the next 10 years, most markets appear to have sufficient inpatient capacity to absorb the anticipated surge in demand arising from the aging population alone. Based on the Research Institute’s analysis, the majority of the country would be able to continue operating at or below 75 percent occupancy after accounting for the projected increase in demand. However, for medical centers already operating at or near capacity today, the expected demand surge may require action.

Rather than increasing inpatient capacity, medical centers need to shift their focus to more effectively managing their existing capacity. With the aging population there will likely be an increased demand for high-acuity care, which may require some organizations with limited capacity to shift lower-acuity volume to appropriate health system partners with capacity.

To prepare for the increase in outpatient demand, the first step medical centers should take is to maximize existing ambulatory capacity by increasing throughput and extending hours of operation into evenings or weekends, a strategy far more economical than adding space.

Other issues affecting existing capacity include a projected physician shortage ranging from 40,000 to 100,000 primary care physicians (PCPs). The rate at which we can train new physicians and the costs of doing so may not allow us to sufficiently meet the demand. Therefore, new divisions of labor such as embedding advanced practice nurses (APNs) into primary care practices will likely help close the workforce supply gap.

Cost of care outpacing revenue growth

The aging population and surge in demand among the baby boomers will result in a payer mix shift to more Medicare and Medicaid business for health care organizations, where prices are set, not negotiated. Most hospitals today have a net operating loss on Medicare inpatient business. The traditional solution to public sector payment shortfalls has been to negotiate higher payment rates from commercial insurers, a practice known as cost shifting. In 2001, the annual impact of cost shifting on a typical family of four – which manifests in the form of higher insurance premiums – was $104. By 2015, the impact of cost shifting had grown to $1,348. The current levels of cost shifting are expected to continue to increase resulting in higher insurance premiums which will impinge on the typical family’s budget and potentially limit spending in other areas of the economy.

If the hospital’s percentage of Medicare business continues to increase as a result of aging baby boomers, it’s possible that overall operating margins could decline by 10 to 15 percent. If these trends continue over the next 15 years, along with government payment rates lagging hospital costs, the impact on hospital margins will be significant.

In summary, the anticipated spike in outpatient demand is a virtual certainty. Concerning supply, capacity management becomes mission critical and new divisions of labor hold promise for alleviating the projected physician shortage. In terms of pricing, the aging population represents a shift away from profitable commercial insurance payment rates toward lower government rates. As higher deductibles and rising medical costs displace discretionary consumer spending, cost shifting to consumers becomes an unsustainable pricing strategy. Forward-thinking providers should continue to focus on the shift from volume and revenue to cost reduction.  

For more information about joining a member network and accessing the resources provided by the Vizient Research Institute, contact Cindy White.

*Vizient-AAMC Faculty Practice Solutions Center data, 2016

Published: August 17, 2017