Spe­cial re­port: Hos­pi­tals’ grow­ing de­pen­dence on out­pa­tient rev­enue

Am­bu­la­tory ser­vices continue to ac­count for a grow­ing share of sys­tems’ rev­enue, as they work to bring care closer to the cus­tomer

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Wel­lS­tar Health Sys­tem en­vi­sions a health­care mall, of sorts, where mom can get a mam­mo­gram, dad can re­fill his choles­terol med­i­ca­tion and ju­nior can get his sports phys­i­cal, all in the same place.

The idea of of­fer­ing stream­lined care in a sin­gle lo­ca­tion helped shape the sys­tem’s “health park” con­cept, an ef­fort that has been un­der way for the past five years. The Ma­ri­etta, Ga.based sys­tem has spent $109 mil­lion build­ing two such health parks, and opened the first in Ac­worth, Ga., in July.

A gleam­ing brick and glass build­ing—half hospi­tal, half community cen­ter—the three­story, 70,000-square-foot Wel­lS­tar Ac­worth Health Park will of­fer ser­vices such as ur­gent care, di­ag­nos­tic imag­ing, pread­mis­sion test­ing and car­diac and sleep labs. The fa­cil­ity also will have a cafe and re­tail phar­macy on­site.

“In health­care, there’s com­pe­ti­tion to cre­ate a dis­tinct cus­tomer ex­pe­ri­ence,” says Chris Kane, Wel­lS­tar’s se­nior vice pres­i­dent of strate­gic busi­ness de­vel­op­ment. “All of that raises the ex­pec­ta­tion of con­sumers.”

Hospi­tal sys­tems such as Wel­lS­tar in­creas­ingly have been mov­ing more of their ser­vices from in­pa­tient to out­pa­tient. It’s a shift that be­gan two decades ago, as new tech­nol­ogy al­lowed for­mer in­pa­tient pro­ce­dures to be per­formed more cost-ef­fec­tively in doc­tors’ of­fices.

And as am­bu­la­tory surgery cen­ters en­abled doc­tors to per­form pro­ce­dures in just about ev­ery cor­ner of sub­ur­bia, hos­pi­tals be­gan to re­al­ize that they need to of­fer the same ac­cess and con­ve­nience to re­main com­pet­i­tive.

But with the fi­nan­cial in­cen­tives lin­ing up for health sys­tems to fo­cus on to­tal pop­u­la­tion man­age­ment rather than just acute care, the shift has been ac­cel­er­at­ing.

In the early 1990s, out­pa­tient care ac­counted for only 10% to 15% of hospi­tal rev­enue, says Guy David, as­so­ciate pro­fes­sor of health­care man­age­ment at the Whar­ton School of Busi­ness at the Univer­sity of Penn­syl­va­nia. To­day, that fig­ure is closer to 60%. It’s also a shift that’s been hap­pen­ing across the board—sweep­ing along aca­demic med­i­cal cen­ters, community hos­pi­tals, for-profit chains and not-for-profit providers alike. And it’s show­ing no sign of slow­ing.

Yet David notes that health­care re­form can’t ac­count for the whole story be­hind the re­cent ac­cel­er­a­tion. “I wish it were ac­count­able care or­ga­ni­za­tions, be­cause that would make the story more benev­o­lent in a way,” he says. “It was also a very prof­itable move to switch to out­pa­tient.”

The mar­ket for out­pa­tient ser­vices has got­ten big­ger—and hos­pi­tals, which used to con­trol about 90% of it, now have just 50% of a much larger pie, David says.

“The other el­e­ment is it’s some­thing pa­tients value,” he says. “That was an­other im­pe­tus.”

At Wel­lS­tar, the sys­tem doesn’t just want to be a place where peo­ple come when they’re fac­ing an ill­ness, but where they seek in­for­ma­tion about stay­ing healthy. There­fore, when Kane talks about who the sys­tem serves—cus­tomers, con­sumers—he’s choos­ing his words de­lib­er­ately.

“Many of these peo­ple will not be pa­tients; they’re not sick and they will not be treated,” he says. “You’re try­ing to cre­ate a busi­ness re­la­tion­ship be­fore a need for treat­ment oc­curs.”

The sys­tem also sees out­pa­tient care as a way to ex­pand its tra­di­tional ar­eas of ex­per­tise— such as open­ing a back pain cen­ter to ex­pand its or­tho­pe­dic and neu­rol­ogy ser­vice lines.

As a re­sult, Wel­lS­tar has seen out­pa­tient ser­vices ac­count for a grow­ing per­cent­age of its rev­enue. In fis­cal 2008, out­pa­tient care repre-

sented 49% of rev­enue; in fis­cal 2012, ended June 30, that share grew to 54%.

Ad­vo­cate Health Care, a not-for-profit sys­tem based in Oak Brook, Ill., has also seen steady growth in out­pa­tient care. In 2007, out­pa­tient ser­vices rep­re­sented 36.4% of rev­enue, but that num­ber had grown to 42.9% fore­casted for this year, ac­cord­ing to the sys­tem.

Ad­vo­cate has been cre­at­ing what it calls “out­pa­tient zones of care,” which are ei­ther ded­i­cated ar­eas in an ex­ist­ing fa­cil­ity, a sep­a­rate lo­ca­tion within the community or even part of its “Ad­vo­cate at Work” pro­gram, which brings health­care ser­vices into of­fice build­ings.

“We are pretty bullish on those sorts of ac­tiv­i­ties,” says Scott Pow­der, Ad­vo­cate’s se­nior vice pres­i­dent of growth and busi­ness de­vel­op­ment. “The more care we can take and get closer to the pa­tient, the bet­ter.”

Pow­der at­tributes the growth in out­pa­tient ser­vices to new tech­nol­ogy that al­lows pa­tients to be treated less in­va­sively, with less in-hospi­tal mon­i­tor­ing, as well as new pay­ment mod­els that en­cour­age ear­lier care as a way to pre­vent costlier ill­nesses and com­pli­ca­tions later on.

“We are in­creas­ingly be­ing re­im­bursed in a way that em­pha­sizes both the qual­ity and the to­tal care of the pa­tient,” he says. “There’s an eco­nomic is­sue, too, in that the eco­nom­ics of out­pa­tient ac­tiv­ity are bet­ter than in­pa­tient.”

Michael Co­hen, a prin­ci­pal in the health­care prac­tice at Deloitte Con­sult­ing, notes that out­pa­tient care has also be­come more strate­gic for hos­pi­tals, as it’s not only rev­enue but also in­come that’s in­creas­ing from out­pa­tient ser­vices. “I do think this is one of those over­ar­ch­ing trends,” he says. “This is some­thing that’s on the agenda at ev­ery health sys­tem.”

In earn­ings re­ports ear­lier this year, the largest for-profit sys­tems re­ported solid rev­enue growth even as many of the chains saw de­clines in ad­mis­sions. Life­Point Hos­pi­tals, Brent­wood, Tenn., for ex­am­ple, saw a 4.2% boost in first-quar­ter same-fa­cil­ity rev­enue de­spite an ad­mis­sions drop of 3.9%. Health Man­age­ment As­so­ci­ates, Naples, Fla., also re­ported a 5.7% same-fa­cil­ity rev­enue in­crease even though ad­mis­sions de­clined 4.2%.

An­a­lysts at­trib­uted the per­for­mance to a strong show­ing in out­pa­tient care, which helped coun­ter­act weak in­pa­tient vol­ume. Not only is out­pa­tient care more cost-ef­fec­tive to de­liver, but it also at­tracts more pa­tients with com­mer­cial health plans at a time when Medi­care and Med­i­caid re­im­burse­ment is be­ing squeezed.

Jes­sica Nantz, pres­i­dent and founder of Out­pa­tient Health­care Strate­gies, a con­sult­ing firm, es­ti­mates that about 60% to 70% of all surg­eries are now done on an out­pa­tient ba­sis. “The ris­ing cost of in­pa­tient care has led to the ex­pan­sion of out­pa­tient care,” she says. “Out­pa­tient ser­vices are key to (hos­pi­tals’) suc­cess.”

Jim Burgess, pro­fes­sor of health pol­icy and man­age­ment at the Bos­ton Univer­sity School of Pub­lic Health, notes that ques­tions about how to de­liver care of­ten be­gin in the emer­gency depart­ment, when doc­tors need to de­cide whether to ad­mit pa­tients to a floor, send them to an ob­ser­va­tion unit or dis­charge them.

For­ward-think­ing hos­pi­tals, he says, are con­sid­er­ing how to achieve the right bal­ance as they’re in­creas­ingly tasked with manag­ing pop- ula­tion health. The cur­rent def­i­ni­tions of in­pa­tient and out­pa­tient care “are very last cen­tury,” Burgess says. More­over, the trend now is to bring more ser­vices out of ur­ban cen­ters, where most ter­tiary-care hos­pi­tals are lo­cated, and into the sub­urbs, he notes. “Where is out­pa­tient care go­ing to be de­liv­ered? Well, it’s go­ing be de­liv­ered ide­ally closer to the pa­tient.”

HealthEast Care Sys­tem, St. Paul, Minn., is one sys­tem that’s mov­ing to­ward a model that Dr. Bren­don Cul­li­nan, vice pres­i­dent and ex­ec­u­tive med­i­cal di­rec­tor of HealthEast Clin­ics, de­scribes as “am­bu­la­tory-cen­tric and pri­mary-care-driven.” The sys­tem has been fo­cus­ing on im­prov­ing the co­or­di­na­tion of care, such as align­ing its clin­ics with other out­pa­tient ser­vices.

Cul­li­nan points to the sys­tem’s re­cent move to open a spine cen­ter in a for­mer re­tail space as well as the ef­fort to place di­ag­nos­tic ser­vices like mam­mog­ra­phy closer to pri­mary-care providers. “When our com­peti­tors have done this, their rates of uti­liza­tion in­creased dra­mat­i­cally,” Cul­li­nan says. “From a pa­tient stand­point, who wants to go to a hospi­tal base­ment to get a mam­mo­gram? Pa­tients are driv­ing this to some de­gree.” Health­care providers across the coun­try have been set­ting up free-stand­ing emer­gency de­part­ments as well as part­ner­ing with su­per­mar­kets and drug­stores to of­fer ur­gent care, Co­hen notes. “You need to pro­vide ac­cess points close to home,” he says. Co­hen adds that providers are also in­creas­ingly turn­ing to vir­tual care as part of that same idea. “That’s re­ally the next gen­er­a­tion—health­care with­out walls.”

Yet the change is not with­out its grow­ing pains. As hos­pi­tals move more health­care ser­vices into the community, they’re look­ing at new ways to staff their fa­cil­i­ties—such as hav­ing hospi­tal­ists treat pa­tients once they’re ad­mit­ted while other physi­cians work al­most ex­clu­sively in an out­pa­tient set­ting.

“The model now is that you have highly paid physi­cians who are highly spe­cial­ized, and you don’t want to move them around that much be­cause mov­ing around costs money,” Burgess says. “That’s an on­go­ing ten­sion in the health­care space.”

Texas Health Re­sources, Ar­ling­ton, un­der­stands that in­her­ent dis­com­fort. “The term is de­mand de­struc­tion,” says Jonathan Scholl, ex­ec­u­tive vice pres­i­dent and chief strat­egy of­fi­cer. “We re­al­ize that we have to ac­cept the de­struc­tion of de­mand for acute-care ser­vices.”

The 25-hospi­tal sys­tem has grown its out­pa­tient ser­vices on a num­ber of fronts. And it

ex­pects that side of its busi­ness to keep grow­ing. The sys­tem now at­tributes 39.6% of its rev­enue to out­pa­tient care, com­pared with 36% in 2011.

“It’s tempt­ing to fall back on our roots,” Scholl says. “But we are ask­ing our­selves the ques­tion of how do we keep peo­ple out of this place?”

It’s a new shift for hos­pi­tals to try to keep pa­tients out of their fa­cil­i­ties, but providers have changed the way they view their role in the community. “We’re no longer a hospi­tal com- pany; we’re an in­te­grated de­liv­ery sys­tem,” says Drew Rec­tor, ex­ec­u­tive vice pres­i­dent and chief strat­egy and growth of­fi­cer at Health First, Rock­ledge, Fla.

Rec­tor stepped into the new po­si­tion ear­lier this year to fo­cus on what he de­scribed as “strate­gic de­vel­op­ment of clin­i­cal de­liv­ery plat­forms.” As part of his role, Rec­tor is also head­ing the sys­tem’s new out­pa­tient and well­ness division, which puts all of those ser­vices un­der a sin­gle re­port­ing struc­ture.

“We feel like we’ve been pre­par­ing for the fu­ture,” Rec­tor says, adding that the in­creased fo­cus on out­pa­tient and well­ness is “to pre­vent un­needed ad­mis­sions, de­crease the cost, in­crease pa­tient sat­is­fac­tion and (adapt to) changes in re­im­burse­ment.”

As the in­vest­ment in out­pa­tient ser­vices grows across the in­dus­try, there’s less con­sen­sus about what will hap­pen to de­mand on the in­pa­tient side—with some sys­tems pro­ject­ing flat or de­creased rev­enue growth while oth­ers ex­pect pop­u­la­tion ex­pan­sion and an ag­ing de­mo­graphic to keep beds filled.

The Whar­ton School’s David says hos­pi­tals have steadily re­duced the num­ber of in­pa­tient beds as the av­er­age length of stay has been short­ened and out­pa­tient care has spiked. “Hos­pi­tals have been de­creas­ing their ca­pac­ity very dra­mat­i­cally over the last two to three decades,” he says. Acute-care fa­cil­i­ties “don’t have to be as large.”

At the same time, those pa­tients who are ad­mit­ted are al­most uni­formly sicker and re­quire more com­plex care than in the past. And hos­pi­tals are still spend­ing sig­nif­i­cant amounts of cap­i­tal to main­tain their acute-care fa­cil­i­ties. “It’s more an ‘and’ strat­egy than an ‘or’ strat­egy,” Deloitte’s Co­hen says. “What you’re hav­ing is ad­di­tional cap­i­tal spend­ing rather than (a shift in) cap­i­tal spend­ing.”

And that means in­de­pen­dent hos­pi­tals are pur­su­ing more part­ner­ships, in­clud­ing more un­tra­di­tional al­liances, as well as seek­ing to join larger sys­tems to gain ac­cess to the cap­i­tal they need, Co­hen notes, adding that pri­vate eq­uity firms are also be­com­ing more ac­tive in the sec­tor.

But not all part­ner­ships have been fi­nan­cially mo­ti­vated; oth­ers are about ac­quir­ing new skills. Texas Health Re­sources ear­lier this year forged a 10-year agree­ment with Franklin, Tenn.-based well­ness com­pany Health­ways. The part­ner­ship in­cludes health man­age­ment tools that physi­cians can share with pa­tients in their of­fices as well as new ser­vices at the sys­tem’s fa­cil­i­ties that pro­mote life­style changes, such as phys­i­cal fit­ness.

In July, the sys­tem also formed a joint ven­ture with LHC Group, Lafayette, La., and Methodist Health Sys­tem, Dal­las, to co­or­di­nate home health ser­vices with the aim of ul­ti­mately re­duc­ing read­mis­sions.

Scholl notes that the need to ac­count for cost and qual­ity re­quires sys­tems to have greater con­trol over the en­tire spec­trum of care, from pro­mot­ing well­ness and preven­tion to of­fer­ing post-acute and home health ser­vices.

“It’s a drive to de­liver more ac­count­able care,” he says. “We’re now nec­es­sar­ily and will­ingly and en­thu­si­as­ti­cally think­ing about the pa­tient when they’re not a pa­tient.” TAKE­AWAY: With re­im­burse­ment mod­els chang­ing,

for­ward-think­ing hos­pi­tals and health sys­tems are max­i­miz­ing

ad­van­tages of ex­panded out­pa­tient ser­vices.

Texas Health Re­sources CEO Dou­glas Hawthorne, left, and Health­ways CEO Ben Lee­dle chat at a THR fit­ness cen­ter. The or­ga­ni­za­tions have teamed up on health man­age­ment tools that physi­cians can share with their pa­tients.

Wel­lS­tar Health Sys­tem opened its first “health park” last month in Ac­worth, Ga.

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