Redefining healthcare economics: Finding, following the path to cost-effective care

With margins finally moving positive, providers will continue to explore strategies to curb healthcare spending and embed value-based care.

This article is part of the December 2023 COVERstory.

Healthcare spending continues to be nearly unrestrained in the U.S., and the need to do that – and receive more value for that cost – has been a decades-long challenge for the U.S. And the pressure continues to rise to do something to counteract that. 

It’s been more than 15 years since the Institute for Healthcare Improvement outlined the Triple Aim, one of the key provisions of which is reducing the per capita costs of care for populations. But reining in costs has proven to be difficult – the Centers for Medicare & Medicaid Services this year estimated 2021 expenditures on healthcare spending reached $4.3 trillion, an increase of 2.7 percent from the previous year and representing 18.3 percent of the nation’s gross domestic product. 

There are many systemic reasons why healthcare spending remains high, but there’s growing urgency to try to reduce the percentage of growth, which affects both the economy, healthcare organizations’ finances and consumers’ expenditures. 2024 will see a growing emphasis on reducing costs and trying to get more value for healthcare dollars. 

Value-based care gains more importance in restraining costs

Value-based reimbursement has long been seen as a way to put restraints on costs incurred under fee-for-service approaches. But uptake has been slow; the percentage of value-based care contracts that contain downside risk is far lower for organizations – in October 2021, KLAS Research estimated that only about 10 percent of healthcare organizations’ revenue comes from downside risk agreements. 

Value-based arrangements have struggled to gain significant shares of providers’ revenue streams. Data from the Health Care Payment Learning and Action Network noted that 59.5 percent of healthcare payments – from 63 commercial plans, five state Medicaid programs and Medicare – had some linkage to value and quality. 

But the compass needle is pointing toward the increasing use of value-based care. For one example, the Centers for Medicare & Medicaid Services is working toward a strategic goal of moving 100 percent of original Medicare beneficiaries and the majority of those covered by Medicaid into accountable care by 2030. As a major purchaser of care and influencer of reimbursement models, federal initiatives help to move the industry as a whole. 

But value-based care requires a massive mind-shift among providers that for years have based their strategies on fee-for-service reimbursement, and that portends reimagined ways to use their information systems. Organizations are expected to shift IT priorities to enable better population health management and applications that enable increased efficiency in care management. EHRs, rather than simply being used to maximize charges, contain valuable data that will increasingly be better used to optimize care. Organizations will need to continue retrain and reposition staff to meet requirements essential to succeed under value-based care. 

Doubling down on cost-reduction efforts

Hospital operating margins may be finally recovering after the financial pressures during the COVID-19 pandemic. Hospital margins just returned to the black in March 2023 after several months of negative margins, according to a September 2023 report from Kaufman Hall. For the period from January 2022 to February 2023, operating margins were in the red, hitting a low of -3.6 percent in February 2022, Kaufman Hall reports. Helping the recent recovery in margins is increases in revenue from more consistent patient volume. 

In an analysis written by The Advisory Board, rising costs appear to be the biggest drag on finances. Hospital expenses increased by 4 percent from July to August 2023, with 13 percent increases to supply costs and 11 percent increases to drug expenses.  

The American Hospital Association, in a report on the costs of caring, notes that providers are facing an “existential challenge — sustained and significant increases in the costs required to care for patients and communities putting their financial stability at risk.” It notes that cumulative hospital expense growth is more than twice the cumulative increases in Medicare reimbursement rates from 2019 to 2022.  

To maintain care delivery, providers will need to rein in expenses on major areas of expense. Typically, those include spending on labor, pharmaceuticals and supplies. There’s no easy answer for any of these areas. 

Labor costs have risen as providers compete for a shrinking supply of caregivers. That’s given rise to increased costs for temporary, agency or traveling staff, which command higher rates than clinicians who are on staff. Provider organizations will need to improve working conditions, staff management, scheduling and more to reduce dependence on more expensive temporary clinical help. That will be increasingly important in 2024, as organizations address expected long-term shortfalls in the numbers of nurses and doctors. 

The industry as a whole will need to look at ways to improve purchasing or provide alternatives for purchasing. For example, Civica is a non-profit that is partnering with hospitals and healthcare systems to “prioritize production of generic drugs and purchase Civica generic drugs, based on hospital systems’ clinical needs.” 

Addressing staffing shortages and burnout

As mentioned earlier, clinician staff shortages have resulted in rising expenses for hospitals. One report found that contract labor expenses for hospitals increased 258 percent from 2019 to 2022. 

Clinicians have faced a lot of stress over the past decade, with staffing reductions and pressures related to the COVID-19 pandemic only making things worse. That’s raising the importance for healthcare organizations to address the root causes of burnout, or to bring technology to bear to reduce workloads, automate redundant tasks and support caregiving. 

Organizations will need to become creative and empathetic to caregivers’ plight, or many predict that the burnout spiral will continue, adding to staffing costs and working against other efforts to reduce the cost of care. 

Shifting to alternative care delivery approaches and digital transformation

Healthcare organizations were exposed to different care delivery models during the COVID-19 pandemic, including virtual care, hospital or acute care at home approaches, and remote patient monitoring. 

Shifting care to less expensive sites, such as the home, help providers contain overhead expenses and enable patients to receive care in their homes, which is what many of them would prefer. Virtual approaches rely heavily on technology that connects patients to providers, especially when urgent needs arise. As providers try to deal with rising in-facility costs, they’ll be increasingly looking to these alternative approaches. 

Additionally, efforts to use technology in the hospital can enable staff-multiplying approaches such as virtual sitting. Using technology to keep an eye on patients, either visually or through the use of smart beds and other technologies, can lessen the need for direct staff-patient interactions, and potentially improve care and reduce patient safety incidents. 

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