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
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.