Margins, Management, and More: One Industry Expert’s Look at the Future of Hospitals

March 13, 2019
Rob Lazerow, a senior leader at The Advisory Board Company, looks at issues around cost, revenue cycle management, and the economic-model issues facing hospital-based organizations in the U.S. in the next decade

In part one of this two-part interview, Rob Lazerow, managing director, research and insights, at The Advisory Board Company, a Washington, D.C.-based consulting and advisement organization that since late 2017 has been a part of the Eden Prairie, Minn.-based Optum (itself a component of UnitedHealthcare), spoke with Editor-in-Chief Mark Hagland about some of the more immediate threats facing hospital-based organizations in the evolving U.S. healthcare policy, payment and operational landscape, including intensifying pressure from federal healthcare officials for providers to take on increasing downside risk, shifting alliances and partnerships in what has been called the managed care world, and changing dynamics around medical practice. In this part of the interview, Lazerow expands into discussing cost control issues, revenue cycle management, and strategic planning for the coming decade. Below are further excerpts from their interview of earlier this week.

What are CEOs saying to CIOs, CMIOs, and other healthcare IT leaders, right now?

One of the first issues that emerges in those kinds of discussions is interoperability across the enterprise, as we’ve built health systems partly through affiliations, acquisitions and mergers, and we’re trying to make the enterprise into a system, we’re needing to share information and data across the enterprise. More broadly, how are we sharing across the community? Second, there is heightened emphasis on cybersecurity. We created an infographic recently on how to be a cybersecurity sentinel, and asked, what’s the c-suite’s role in advancing cybersecurity? We wanted to be slightly playful in graphical design, around a very serious topic. It was fun to collaborate with our IT leaders on that. And third, I’ve been impressed with,  and a little bit surprised by, executive teams this year, around the idea of creating an ongoing electronic relationship with patients—that’s achieved a c-suite-level awareness now. How to advance the goal of better engagement with patients, in the pursuit of better population health, etc., is very important. And some of that comes from seeing some primary care groups really doing well right now.

What issues have you been studying recently?

For the past year and a half, almost all of my team’s research has been focused around margin management work, along with studying the impact of the opioid crisis on provider organizations. We started by looking at the question of how to tackle runaway expense growth. We were seeing operating expenses running away. We created a model, average, $1 billion health system, which we called “Antares”—named after the fifteenth brightest star, which is burning through its hydrogen and will eventually collapse. We found that by 2021, Antares had a negative operating margin. That was the metaphor.  And we projected a negative 4.2 percent margin in 2025 for Antares, absent intervention. So we looked at, OK, how do we slow its expense growth? Building off that, for this year’s research, we looked at the other side of the equation—what’s the revenue growth that Antares needs? We’ve now quantified that and put the two halves of the model for a new infographic. Basically, for this model $1 billion, average health system, its leaders need to find $595-630 million in bottom-line margin improvement by 2025, and of that, we think 55 percent of the opportunity will come from cost avoidance, and 45 percent will come from revenue growth.

Isn’t it the case that the leaders of patient care organizations have achieved all the obvious cost-cutting already?

Actually, we’re seeing that there’s still opportunity. We looked at hospital systems around that size, and also, for six of the nine largest health systems in the country, their single biggest line item for expense growth was outsourcing—operations, housekeeping, clinical services.

One example there is the overuse of agency nurses in many hospital-based organizations, correct?

It is a labor substitute in many cases. And I think we’ll continue to see a lot of outsourcing. One hospital CEO told me, I will not pay someone else’s margin, I will not outsource things. And I said, but what if they can do it more economically? He said, OK, you got me. One example could be outsourced revenue cycle management.

In that case, sometimes, outside organizations have great expertise, correct?

Yes, that’s correct. We tell our members, make sure that you get better performance, whether you do something yourself or outsource.  Meanwhile, the first half of that study that we executed was focused on the question of how you rebase external spending. How do you get everything at a lower price point? Supplies, pharmaceuticals, and purchased services, were the three biggest areas we found, as significant areas of concern. There’s a huge focus now on pharmaceuticals—hospitals, payers, and the federal government, want to focus on that. But the other area is on the labor side: 50-60 percent of every dollar hospitals spend, is on people or benefits. And our guidance isn’t to slash your labor force, but to slow your growth.

That could apply to the use of agency nurses, for example?

Yes, and also, a lot of the decisions have been devolved to the frontline. And something like 90 percent of decisions don’t go through a process. And so we’ve tackled the question of what the c-suite’s role is in cost discipline. So, what kinds of decisions can stay at the front lines? And what decisions need to actually get kicked up a level, so you get more scale, more rigor in decision-making, more consistency?

But we’re not advising absolute cuts; the key is to slow growth of expenditures. As long as organizations can slow their growth, that can be sufficient. So this isn’t about slash-and-burn or mass layoffs, but about bringing the expenses and revenues more into line. And the goal for Antares, our theoretical multi-hospital system, isn’t growth for growth’s sake, but how does our model health system achieve the revenue growth it needs, to achieve a sustainable future, with the whopping goal of reaching a 3-percent operating margin? We started in 2017 with $1 billion in revenues and a 3-percent operating margin, at Antares, and our goal is to get back to a 3-prcent margin by 2025; that’s what led us to the $600 million cost reduction, over a period of eight years, from 2017 to 2025.

Part of the solution set of getting the revenue growth they need, is about growing the share of lucrative procedures; and not everyone can do that. So we could be approaching a world of winners and losers, where some organizations will reach the margin mandate, and others won’t. But back to our conversation about risk, if we know there are all these organizations taking on risk; and physician groups getting into risk are still referring patients to procedures; so hospitals have to learn how to compete effectively to provide acute-care services. They have to do so with affordable services and greater reliability and access.

It’s in that context that revenue cycle management becomes a more strategic kind of activity, isn’t it?

Yes, and the key phrase is, “reduce avoidable revenue leakage”—and that is largely a revenue cycle management conversation. How do we make sure we’re actually collecting what we’re owed? By our benchmark, the average hospital system is only collecting 87 percent of what they’re owed. Recently one day, I asked my team, what if we didn’t talk about revenue cycle? If we had this research without revenue cycle? They quantified how much more volume growth our model health system would need, if we didn’t address revenue cycle management at all; and what we found was that, if they had a $50 million opportunity through revenue cycle management over this eight-year period, that was the equivalent of needing to perform 1,600 additional inpatient CABGs [coronary artery bypass grafts], or nearly 7,500 partial knee replacements. So there are two reasons why we start with revenue cycle management, in all this: one, you can grow revenue without increasing volume. And second, it accelerates over time.

The second set of strategies is about how you grow market share. Typically, people talk about acquiring patients and retaining them. We flipped that: we said, patients already came to you once. This is about improving your efficiency for growth, both your revenue cycle piece and your loyalty piece. And then let’s talk about acquiring new patients. Who in market is critical for growing market share—a health plan, or maybe one of these physician groups? And how do I get them to work with me, to be my partner?

And then, what do we do if growing patient care revenue isn’t enough? Some will have to grow through some sort of diversification. For some, philanthropy will be enough. But we also looked at health plan investment in health systems, and partnering. That’s looking at the revenue opportunity coming from the health plan. Those are the more traditional diversification options. And then some emerging ones—including retail or specialty pharmacy businesses. Second, venture capital opportunities, with organizations investing in innovation. Or IP commercialization.

Those patient care organizations involved in IP commercialization are highly resourced already, though, correct?

Yes, and they have remarkable brands already. One thing we’ve been advising is, if you’re thinking about investment options or IP commercialization, the goal is to fill the gap between what you’re earning through operational revenues and what you need for sustainable margin management. It’s another input into sustainable financial futures.