Health Delivery Organizations (HDOs) are finding their margins squeezed. Reimbursements are becoming more challenging with increasing denials and decreasing payments. It is a negative spiral, but there are non-traditional ways to diversify revenue and secure long-term sustainability. A new trend, proving to be highly-viable, is to spin-off your high-impact internal IT services into a profit center.
In this article, we will look at operational headwinds facing healthcare leaders, understand how IT can act as a profit center, and identify keys to success for HDOs.
Operational Headwinds in a Challenging Business Environment
Today's healthcare leaders face a particularly challenging business environment and narrowing margins due to several operational headwinds. We have identified three operational headwinds that are creating the most significant challenges for HDOs.
For 2018, Moody’s downgraded the healthcare sector due to reimbursements that are below the inflation rate, leading to a decrease in cash flow. It predicted a decline in cash flow of 2% to 4% over the next 12 to 18 months. Additionally, federal policies will reduce hospital payments by $218 billion from 2010 to 2028, as reported by the health economics consulting firm Dobson | DaVanzo and Associates.
A December 2018 SAP survey of healthcare executives reveals that the problem is not getting any better. 62% of respondents listed healthcare reimbursements as a top challenge. That's ahead of the 53% response for patient experience. With declining reimbursements, executives are looking for ways to cut costs. 37% said investments in technology would lead to efficiencies and decreased cost.
Moody's also found that the not-for-profit and public sector expenses hit a high of 7.2% for 2016. That is well above the historical range of 5%-6%. The Center For American Progress found that much of the increased cost is due to provider consolidations. Many providers claim that such mergers/alliances will provide additional services and reduce patient costs but have struggled in meeting that goal.
A February 2019 study, published in Health Affairs, looked at the cost of inpatient and hospital-based outpatient care. The study noted that "Prices for hospital-based services grew substantially over the time-period we studied with prices for inpatient services increased by about 37% and prices for outpatient services grew by about 21%."
Mercer's Healthcare Workforce Analysis report found that by 2025, key healthcare positions will face shortages, including:
- 446,300 home health aides
- 95,000 nursing assistants
- 98,700 medical and lab technologists and technicians
- 29,400 nurse practitioners
The report discovered that the main culprits behind these shortages were large numbers of workers retiring, increasing demand for the above positions, and few graduates making their way into these positions.
Leverage IT to Diversify Revenue, Increase Operational Efficiency, and Offset Operational Headwinds
It's a relatively simple dilemma to understand. Lower revenues plus higher operational costs will put any business into jeopardy (if not already). To mitigate this dilemma, HDOs must break the mold and learn to diversify their revenue in addition to increasing operational efficiencies.
High-impact IT services can be spun-off into a profit center. They can create additional revenue and increase operational efficiencies. Below, we will look at common concerns and analyze gaps that may exist between your existing IT services and what is necessary to be a successful external service provider.
Penetrating the Market
There is hesitation. We get that. Most HDOs believe they can't compete with big tech, and they are partially right. Direct competition won't work. Offering general IT services is an oversaturated market, and there is little opportunity for HDOs to be successful.
There is an unmet demand in the market and an opportunity to diversify revenue.
What if the IT service offering is not general? What if HDOs leverage what they do best: maintain and improve the health of people? Packaging full health solutions, not general IT services, that leverage your strengths as an HDO creates a strategic advantage. Your future clients (other HDOs) may not have ample capital to invest in high-impact IT services. They required a turn-key solution from a trusted HDO.
Becoming a Service Provider
To diversify revenue, you must provide services beyond the organization's doors. HDOs are excellent at delivering patient care within their doors but not acting as vendors. Offering the same level of service to other HDOs involves more than flipping the model from internal to external. You must become a service provider.
A robust Service Delivery Framework (e.g., principles, standards, policies, constraints) is vital to guide the designing, developing, deploying, and operating of services delivered by a service provider. DeWitt provides the leadership and guidance necessary to create a Service Delivery Framework (SDF) and become a successful service provider.
The good news is that you can leverage several existing capabilities when creating a strong SDF. Although an investment will likely be needed to mature high-risk service capabilities, minimize operational and financial risk, and maximize profits.
The DeWitt Approach
Following the status quo means repeating history and is what most healthcare organizations do well. It's the least risky, "tried and trued" way of doing business. For some, it's all they know. However, organizations must think outside of the box to diversify their revenues.
Having the majority of revenue originate from reimbursements is a losing strategy.
Below are a few thoughts that can help you begin to explore revenue diversification at your HDO.
Start with broad strokes by exploring what the market needs and wants. Most importantly, what will it pay. Then work into more specific areas that your organization is familiar with and currently provides solutions for internally.
Which services can we sell? Can we leverage our internal outcomes to demonstrate service value? Would our solution be unique? How will the revenue model look? Such thinking will begin generating new ideas around needed diversification.
Developing a Service Delivery Framework (SDF) will help drive pricing, how services delivered, and how much start-up investment is required.
Service Delivery Framework
What are the essential capabilities that we must possess to be a successful Service Provider? Yes, you will need to become a service provider. There are several foundational and service-line specific capabilities required to be a capable Service Provider. Many of these capabilities may already exist but will require maturing to meet the higher demands associated with offering services externally.
An operating model analyzes the type of staff that will be needed to stand-up and maintain the service. Thinking in layers, how should the foundational layer look? What is the customer-facing layer, and what bridges those layers? Can your current leadership support the service? Do we have the skills and competence? Do you need to hire new people? This type of introspection will help you look at your organization differently while also building out the framework for a new service(s).
Any new service or product requires an upfront investment. Part of analyzing the viability of a service is to understand how long it will take to break even on the initial investment. After break-even, the service should begin earning a profit. What do profit margins look like in the first year, the second year, and on? What is the pricing strategy? Will the service have enough profit margin to be worthy of the risk?
Key Success Factors
Several key factors will increase a venture's probability of success. While specific factors will vary for each organization, the considerations below apply to most organizations:
- Set realistic and explicit goals
- Follow a methodical and prudent approach
- Determine the organizational risk appetite
- Formalize venture with proper legal support/structure
- Invest in improving and maturing necessary capabilities
- Optimize pricing model and price competitively
- Tie your service value to meaningful measures
Lastly, do not lose sight of your original mission. Your primary goal is still to provide health services. Ensure you approach the new venture as a means of delivering beneficial improvements for your organization first, not (just) diversifying revenue. As you invest in a new Service Delivery Framework, your organization will also reap operational rewards as internal capabilities mature to support the new service(s).
Ensure you approach the new venture as a means of delivering beneficial improvements for your organization first, not (just) diversifying revenue.
HDO revenues are split mainly between private insurance companies and the government, along with a small amount coming from cash payments. These few revenue sources exist because that is how it works and how it has always worked. But what's working now is sealing the fate of many HDOs. Margins are dwindling with fewer and fewer options available to do anything about it.
Knowing the obstacles is critical to understanding the challenges. Once these challenges are understood, organizations can begin exploring a new landscape. One that opens up additional revenue streams outside of the traditional reimbursement model and increases operational efficiencies.
For HDOs to thrive, they need to supplement reimbursements with different sources of revenue.
For HDOs to thrive, they need to supplement reimbursements with different sources of revenue. We have proven that IT service supplementation works. The only thing required is for your organization to take the first step by contacting us today.
DeWitt has successfully helped many HDOs with this journey. We can do the same for you. Contact us, and let's talk about the road ahead and how to secure your long-term sustainability.