Annual Industry Outlook

The healthcare industry faces an unprecedented number of challenges in 2017, including the move to value-based care, high infrastructure investment costs, and cost containment requirements.

This article first appeared in the January/February 2017 issue of HealthLeaders magazine.

As the healthcare industry continues its steady metamorphosis from a fee-for-service to value-based model, the stakes keep getting higher for those lagging behind. While providers at the forefront of the trend certainly have their own risks to contend with, such as the need to make large investments in both infrastructure and care delivery enhancements that depend on still-evolving payment models for repayment, providers trailing the trend run the risk of falling too far behind to catch up.

Annual Industry Outlook: The Road to Value-Based Care

There are no quiet waters in which to seek refuge—the healthcare industry is facing a multitude of challenges. Along with managing the transition to value-based care, provider organizations must focus on enhancing care coordination, optimizing financial performance, and driving organizational performance in order to remain viable. Aggressive cost containment programs are also critical, as well as initiatives for expanding market share and increasing revenue through outpatient expansion.

Transition to value-based care
While progress is being made, the pace of the transition to value-based care is still slow moving. According to the 2017 HealthLeaders Media Annual Industry Outlook Survey, two-thirds of respondents (66%) say that their organizations are either fully committed and underway with the transition to value-based care (35%) or have experimental or pilot programs underway (31%), indicating that value-based care is a priority for most providers. Another 17% say they will pursue value-based care but have not begun yet. While 13% are not committed and only examining how or whether to pursue, only 2% of respondents say they don't plan to pursue value-based care.

Survey results reveal that financial resources play a role in successful implementation of value-based care. For example, based on net patient revenue, a greater share of large organizations (47%) than small (31%) or medium organizations (34%) say they are fully committed and underway with the transition to value-based care. Investments in infrastructure and care delivery in particular require a certain level of scale and financial health in order to be successful.

While the transition to value-based care is widespread in the healthcare industry, and 83% indicate some level of commitment, it is notable that a minority—only 35%—are fully committed and underway now. Given the long lead times for program and infrastructure development, many organizations are at risk of falling behind; although those not yet fully committed and underway expect to be there in three (49%) or five years (21%).

"I think the thing that's worrying is, you have nearly two-thirds of the folks that are nowhere near prepared to actually do anything, and the preparation to be able to fully participate is something that requires years of work," says Mark Laney, MD, CEO of Mosaic Life Care, a St. Joseph, Missouri-based health system with more than 60 clinical facilities serving a 23-county area of northwest Missouri, northeast Kansas, and southeast Nebraska, and the lead advisor for this Intelligence Report. "And so my concern would be that even if the pace of change remains slow, there's a lot of folks that are way behind in prepping for what I think is an inevitable shift."

Although respondents indicate a degree of optimism with regard to their value-based timeline, these expectations may not hold up to operational realities. Among respondents not currently fully committed and underway with value-based care, nearly half (49%) say they expect to be fully committed and underway in three years, one-fifth (21%) expect this in five years, and a small number (4%) say 10 years. A significant number of respondents indicate that they don't know (26%) when they expect this will happen.

Survey responses reveal that it is mostly small and medium organizations that plan on playing catch-up in the shorter term. For example, based on net patient revenue, a greater share of small (53%) and medium organizations (58%) than large organizations (33%) expect to be fully committed and underway with a value-based model in three years, and a greater share of large organizations (40%) than small (22%) and medium organizations (13%) expect this to happen in five years.

"The challenge for hospitals and health systems is that it takes a tremendous investment to be good at this," says Laney. "It takes a lot of experience and talent to be good at this, and there's a lack of appreciation that this is something that you can't just pivot quickly into. It's something that requires careful foresight, careful planning, and years of implementation and practice to be good at it."

Providers facing the necessity of making large investments in value-based care must reconcile this requirement with uncertainty around new payment models and incentives, leading them to proceed with caution. In fact, revenue stream uncertainty (44%), inadequate payer incentives (42%), and inadequate IT infrastructure, tools (36%) are the top three barriers respondents cite as preventing their organization from pursuing the transition to value-based care with more vigor. Clearly, the financial side of value-based care is a concern.

Care continuum and postacute care
It comes as no surprise that respondents say that the top element considered very important to respondents' organizational care continuum strategy is primary care (84%), due to the critical role it plays in value-based care. This is followed by specialty care (70%), and then a second tier of responses consisting of acute care (58%), home health (54%), and skilled nursing (51%).

"I think the importance of primary care is right on, because it's really about the right care at the right time, the right place at the right cost, and that all starts with really strong primary care," says Laney.

Note that home health and skilled nursing are also key components of a value-based care approach, something that health systems have identified early on in the transition to this model. For example, a greater share of respondents from health systems (73%) than hospitals (61%) and physician organizations (26%) cite home health, and a greater share of respondents from health systems (65%) than hospitals (47%) and physician organizations (27%) mention skilled nursing as a very important element in organizational strategy when considering the care continuum.

When asked about care continuum and postacute care organizational plans, respondents mention looking to develop stronger relationships (67%), followed by looking to partner with providers (55%) and looking to acquire providers (22%). Interestingly, responses are inversely correlated with the level of commitment required by their organizations, indicating that respondents see value in more informal relationships and recognize that care continuum and postacute care plans don't necessarily require spending financial resources or entering into complex agreements.

"This shows that folks understand that to move to value you have to have better handoffs, better coordination of care, but the other thing is, you don't have to own everything," says Laney. "It's a great realization that there's a lot of ways to provide seamless care and you don't necessarily have to own all of it."

However, financial resources may also play a role in the degree to which respondent organizations seek to acquire providers in the care continuum. For example, based on net patient revenue, more large (31%) and medium (27%) organizations than small organizations (17%) say they are looking to acquire providers. And financial resources also impact the degree to which respondents say they are looking to partner with providers, with more large organizations (69%) than small (57%) and medium (51%) organizations saying this.

Interestingly, respondents who cite looking to acquire providers indicate they have a greater share of value-based net patient revenue (27%) than those who mention looking to partner with providers (19%) and those looking to develop stronger relationships (18%). Respondents who say care continuum and postacute care plans are not a significant part of their business have the lowest value-based care percentage (7%). This indicates that as providers make increasingly greater commitments to value-based care, such as owning parts of the continuum associated with postacute care, there is a corresponding increase in value-based net patient revenue.

Note that internal investment priorities reveal a focus on value-based care delivery. For example, respondents say that the top investment areas over the next three years are data analytics (71%), care redesign efforts (65%), patient experience improvement (61%), and care coordinators (60%).

Financial resources are also correlated with future investment, with responses for health systems and large organizations receiving the highest responses. For example, a greater share of respondents from health systems (87%) than hospitals (65%) and physician organizations (63%) cite data analytics as an investment their organization will begin or increase over the next three years, and a greater share of health systems (76%) than hospitals (69%) and physician organizations (59%) mention care redesign efforts. Further, a greater share of respondents from health systems (73%) than hospitals (58%) and physician organizations (51%) cite care coordinators.

Based on net patient revenue, a greater share of respondents from large organizations (83%) than small (69%) and medium (76%) organizations cite data analytics as an investment their organization will begin or increase over the next three years, and a greater share of respondents from medium (73%) and large organizations (72%) than small (63%) organizations mention care redesign efforts.

Financial results
According to the survey results, 18% of respondents report negative operating margin for the most recent fiscal year, and 65% posted positive margin. These results are relatively comparable to last year's survey in which 15% reported negative operating margin and 70% positive margin. Three percent report that results are flat.

Hospitals and small and medium organizations appear to be having the most difficulty financially. For example, a greater share of hospitals (25%) and physician organizations (18%) than health systems (9%) report a negative operating margin, and based on net patient revenue, a greater share of small (17%) and medium (19%) organizations than large (4%) organizations say this. Likewise, a greater share of nonprofit organizations (21%) than for-profit organizations (13%) have a negative operating margin, and a greater share of rural organizations (39%) than non-rural organizations (16%) say this.

Laney points out that low levels of margin performance may spell trouble for some providers as they make the journey to value-based care. "I'm not surprised that there's 21% who responded in the survey zero or below regarding operating margin. The worrisome thing is that when you go from volume to value, it is my belief that you take a dip in your financial performance, because it's not as profitable to share savings versus get 100% of fee-for-service.

"It's different than if we just went to capitation and you got 100% of the shared savings. So for these folks that are barely hanging in there, it's going to make their situation worse, and they're not going to be able to make the journey. They're not going to make the investment in the infrastructure to make the journey, and ultimately, they are going to either merge or go under."

The financial outlook for the current fiscal year is roughly the same. Forty-one percent of respondents say they expect their organizations will produce positive financial results in their current fiscal year, and another 9% expect strongly positive results. Conversely, 11% of respondents project a negative outlook for their organizations, and 4% have a strongly negative forecast. Thirty-two percent expect results to be flat.

The results indicate a slightly negative trend compared with last year's survey. For example, the combined results for positive or strongly positive outlook (50%) are seven percentage points lower compared with last year (57%), and the combined results for negative or strongly negative outlook (15%) are four points higher (11%), indicating that financial conditions continue to be challenging for many providers. The results for flat (32%) are five percentage points higher (27%) than last year.

Financial targets and growth
Nearly half of respondents say that cost control (49%) is among the top three areas having a positive influence on their organizations' efforts to reach financial targets over the next three years, followed by care models (e.g., population health, medical home; 39%) and strategic partnerships with providers (37%).

The results reveal some important differences compared with last year's survey—while cost control remained relatively flat from last year (up three percentage points), care models increased eight percentage points from the 31% level reported in both the 2016 and 2015 surveys, and physician-hospital alignment declined five percentage points from last year's survey and is down 11 points overall from the 2015 survey level of 44%. The response for care models is an indication that the trend toward value-based care is expected to start paying dividends in the relatively near future.

More than half (55%) of respondents say that expanding outpatient services is how their organization will fuel financial growth over the next five years, followed by develop or join a shared risk, shared savings effort (50%) and a campaign to extend an existing market (39%). This year's survey results are comparable to last year's, where the top three were expand outpatient services (56%), develop or join a shared risk, shared savings effort (49%), and a campaign to extend an existing market (46%).

Organizational performance
To successfully execute on their mission, provider organizations must run at optimal levels at all times. Performing at optimal levels is an especially complex organizational undertaking because of the industry's transition to new care delivery and payment models. The good news is that respondents generally report positive reviews of organizational performance.

Exemplary organizational performance starts at the top, and the results are encouraging. When looking at the current overall performance of groups and individuals in healthcare organizations, 43% of respondents rate their CEO's performance as very strong, making them the top-performing group/individuals. The result is up four percentage points over last year's survey (39%). Thirty percent of respondents rate the leadership team's performance as very strong, giving them the second-highest response.

The groups receiving the lowest responses for very strong are data analytics staff (10%) and IT staff (15%). While only 6% of CEOs and 11% non-CEOs say data analytics staff performance is very strong, 46% of CEOs and 26% of non-CEOs indicate that performance is strong, leading to an overall rating of 28%. Last year, the response for data analytics for very strong was just 8%, indicating that progress in this important area has been slow in coming.

In a similar vein, while only 17% of CEOs and 15% of non-CEOs say IT staff performance is very strong, 46% of CEOs and 35% of non-CEOs indicate that performance is strong, leading to an overall 36% rating for strong. Last year, the response for IT staff for very strong was 11%, four percentage points lower than in this year's survey.

Looking at organizational performance more broadly, nearly three-quarters (71%) of respondents say that their prospects for growth are very strong or strong, with responses for fiscal management (67%), collaboration/relationships with providers (62%), and strategic planning (61%) following closely behind. A greater share of CEOs (80%) than non-CEOs (70%) say their organization's prospects for growth are very strong or strong, and a greater share of CEOs (80%) than non-CEOs (65%) rate their organization's fiscal management as very strong or strong.

The area receiving the lowest response for very strong or strong is price transparency (33%), which continues to be a challenge for the industry. Based on net patient revenue, a greater share of small organizations (37%) than medium (28%) and large (26%) organizations say price transparency is strong or very strong. And a greater share of rural organizations (44%) than nonrural organizations (14%) say this.

The organizational performance results for healthcare functions are very positive. Eighty-five percent of respondents say that their organizations' performance on dedication to mission is very strong or strong, with responses for clinical quality and patient safety (82%) and patient experience (64%) completing the top three.

The function receiving the lowest response for very strong or strong performance is population health (30%), which is perhaps an indication that providers are still in the early stages of developing competency in this area. A greater share of health systems (40%) than hospitals (26%) and physician organizations (14%) say their organizations' performance on this is very strong or strong.

The healthcare industry faces an unprecedented number of challenges, including the move to value-based care, high infrastructure investment costs, cost containment requirements, and a new administration in Washington. Providers will have their work cut out for them in 2017.