Productivity Growth Remains a Key Success Factor in the New Healthcare Economy

Recent data from the American Hospital Association (AHA) show that uncompensated care costs fell in 2015 to their lowest level in 25 years. Such findings suggest the nation’s healthcare system is on track to a positive future. Yet other, more cautious reports are painting a picture of a potentially challenging economic reality for 2017 and beyond. 

Conflicting economic reports could really reflect the complexity and diversity of the U.S. healthcare economy. There are always winners and losers in industries—every day, month, and year—but uncertainty creates a heightened state of awareness about the economic or operational indicators that could illuminate a path forward.

As the industry awaits more information to assess the financial and operational impact of the Trump administration’s pledge to repeal and replace the Affordable Care Act (ACA), many analysts predict a continued march toward value-based care.

As recently reported in HFMA’s Healthcare Business News, the AHA’s data indicate that uncompensated care costs in 2015 represented 4.2 percent of hospitals’ total expenses for that year. The statistic was down from 5.3 percent the year prior. Some experts theorize that a drop in uncompensated care reflects the growing ranks of those patients with insurance. Yet the AHA also reported that Medicare and Medicaid underpayments were also on the rise. (See Daly, R., “Uncompensated Care Falls to Lowest Level in 25 Years” hfm, February 2017.)

As Daly’s article indicates, these data follow a Congressional Budget Office (CBO) report that attempts to better understand the overall profit picture of hospitals. The report analyzed data from 3,000 acute care hospitals (rural hospitals were excluded from findings). ^a

Some of the key conclusions: 

• To hold their aggregate profit margins in 2025 at about the 2011 level of 6.0 percent, the hospitals that we examined would have to increase total revenues or reduce total costs by an additional 0.2 percent per year (if they can increase productivity at the economywide rate [0.8 percent]) or by an additional 0.5 percent per year (if they are unable to reduce costs through higher productivity). In those calculations, hospitals would have to increase revenues without increasing costs, reduce costs without reducing revenues, or achieve a combination of revenue increases and cost reductions.
• If a hospital was faced with a negative profit margin before ACA changes took effect, CBO reports, the hospital could face “significant pressure in the future,” but it will be largely based on productivity growth.
• The report also concludes that the share of unprofitable hospitals could increase to 60 percent by 2025—up from 27 percent in 2011.

There is little question that 2017 will be another year of unprecedented change, and one result of that change could be that the industry will take another positive step forward in solving one of health care’s most difficult challenges: better aligning systems to achieve the Triple Aim.     

Footnotes

a. Hayford, T., Nelson, L., and Dioro, A., Projecting Hospitals’ Profit Margins Under Several Illustrative Scenarios , Working Paper Series, CBO, September 2016.