Aftermath of Reform


Some hospitals are ‘repurposing’ to target increased outpatient service offerings where the majority of revenue is being generated

With the ongoing implementation of the Affordable Care Act, the shifting healthcare landscape is continuing to shake up long-standing business models and force hospitals to reevaluate how they currently operate.

After all, revenue generation for hospitals was directly impacted due to reduced reimbursement levels on Medicaid and Medicare payers going forward. At the same time, the ACA assigned incentives and corresponding penalties to healthcare providers to drive higher quality care and cost savings.

Additionally, a fee-for-value model will eventually replace the fee-for-service model. Physicians will no longer be incentivized to perform more procedures to generate revenue. Instead, the fee-for-value model will compensate based on outcomes, thereby incentivizing a greater effort on using preventative and holistic measures. It also will promote the real-time exchange of information through the use of electronic health records to lower healthcare costs and improve clinical decision making.

Traditionally, hospitals have charged for extended stays and
testing, been reasonably reimbursed, then spread that revenue over high fixed costs attributed to their equipment and infrastructure. As the healthcare industry adapts to the new requirements, providers are assessing their current operations and profit margins, and adjusting their services accordingly. As a result, hospitals are accelerating the change from an inpatient to an outpatient model.

Transition from Inpatient to Outpatient Services

Driven by decreased levels of reimbursement and lower profitability margins for healthcare providers, hospital boards will be providing greater scrutiny over capital projects going forward. Advanced technology will continue to be an investment for most hospitals as well as the reuse of space previously allocated for lower acuity patients in the hospital. This repurposing is targeting increased outpatient service offerings where the majority of revenue is currently being generated.

Hospitals across the country have experienced declines in inpatient admissions since 2009, driven by the slow U.S. economic rebound, continued rise of high deductible insurances plans, advances in technology and medicine, birth rate decline and the implementation of the ACA. Most industry experts, including analysts at Standard and Poor’s and Moody’s Investor Services, predict a continuing falling off of inpatient volumes. Healthcare consulting firm Sg2 in its 2013 outlook predicted a 3% decline in inpatient admissions over the next five years and a 17% increase in outpatient services, where hospitals generate more than half of their revenue.

This shift to outpatient services has been most evident across rural hospitals. From 1990 to 2009, rural hospital outpatient services as a percentage of total gross revenue increased 27% as opposed to only a 17% increase for urban hospitals, according to the American Hospital Association. The higher outpatient revenue for rural hospitals is driven by the fact that many act as the sole site for patient care in the community and market demand dictates the need to offer those additional services.

Hospitals are beginning to assess how to best use their respective facility’s space as a result of changing market and regulatory demands. As technology has advanced and more equipment has come into the market along with electronic medical records and corresponding need for computer access, some of this space is being used to accommodate that technology. With the implementation of the ACA, patient satisfaction also has become an indicator of provider performance and an important aspect of value-based healthcare. Patients have more of a say about their care provider, and hospitals will adapt. An example of how this feedback plays out is an increased demand for observation units in hospitals affiliated with emergency room traffic; these units accommodate a 23-hour stay. Within the inpatient space, shared rooms are being renovated into private rooms to meet patient preferences.

Outsourcing is trending as acute care hospitals seek ways to align with physicians to achieve cost-effective and quality care delivery, which accountable care organizations are already set up to do. Areas where outsourcing has increased substantially include information technology and clinical services like anesthesia, emergency department staffing, dialysis services, diagnostic imaging and hospitalist staffing.

Current Capital Project Trends

In response to the current marketplace, hospitals are expected to direct lower-cost care through increased outpatient services. Some trends in capital projects include the following:

  • Now that patient care is moving back into the community, more providers will locate outpatient services off campus where space is less expensive.
  • To maintain competitiveness and revenue generation, hospitals are continuing to be cognizant of the aging demographic and tackling capital projects that tailor to that demographic, such as orthopedics and mental health for dementia.
  • Hospitals are also focusing on the implementation of the latest technology to have greater patient data access and the ability to share information for educational purposes and holistic treatment. When considering radiology and other ancillary services, new technology will help hospitals capture and maintain a greater patient base as patients are beginning to have more purchasing power and preference as to where they seek care.

Built for Better Patient Experience

Sauk Prairie Healthcare is a 36-bed community hospital in Prairie du Sac, Wis. Hospital leadership decided to replace its aging facility, originally built in 1956, on a new site that would include more space for outpatient services and be flexible to accommodate changing demographics and future growth. Enhancing patient experience and focusing on holistic care influenced the project design.

After input from stakeholders, including physicians, staff, volunteers and the community, the newly opened hospital still has the same number of beds, but with larger patient rooms, operating rooms, and labor and delivery rooms. To further enhance the patient experience, it was designed with emphasis on patient privacy and dignity. Examples of this are separate public and patient corridors in the surgical services area as well as labor and delivery being located in a secluded and secure area of the new hospital. Additionally, natural light and access to nature was a design feature carried throughout the building to create a healing environment, including a meditation room and walking trails on the campus.

As evidenced, it is essential for hospitals to remain competitive in the marketplace and maintain and improve profitability by adapting to the changing healthcare landscape driven, in part, by the implementation of the Affordable Care Act. A hospital’s decision to align itself with the intended goals of the ACA and purpose its facilities accordingly, if needed, will give it a head start on competitors in the marketplace and better position it for the road ahead.


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About Author

Susan Harrison
Susan Harrison

Susan Harrison is an associate with Lancaster Pollard in Columbus.

Steve Kennedy
Steve Kennedy

Steve Kennedy is a managing director with Lancaster Pollard in Columbus and Austin.

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