Diagnosis: Mass. Hospitals Require a New Direction

Diagnosis- Mass. Hospitals Require a New Direction

Jessica Bartlett
Reporter- Boston Business Journal

Massachusetts hospitals are in the early stages of what is shaping up to be one of the most dramatic, industry-wide reorganizations in their long and important history in the commonwealth. And while change is nothing new to the men and women who run these esteemed institutions, the speed and agility required to adapt to the waves of regulatory and economic challenges crashing at their front doors today is nothing short of exceptional.

To be sure, many are shedding their traditionally staid and predictable operating models and instead are shifting to more nimble, market-driven strategies that promise financial stability in an era of prolonged upheaval. To some that has meant expansions into new and more profitable lines of care. For others, survival has so-far boiled down to difficult decisions concerning the retention — or elimination — of workers and assets.

How and why local care providers have arrived at this moment is complicated, although one thing is clear: Those that fail to adapt are likely destined to one of two outcomes as the sector’s operating margins are compressed by changing consumer behavior and ever-tightening reimbursement rates enforced by both government and private insurers. Eventually, they will either need a life raft in the form of a buyer or outside investor, or they will simply cease to operate.

The trend has been most obvious among the state’s cadre of smaller, regional hospitals, but even the biggest players are responding through acquisitions and investments in new operations that compete on volume and the efficient delivery of profitable, non-emergency lines of care; Partners Healthcare, Beth Israel Deaconess Medical Center, Steward Health Care and Lahey Health have all been active in that regard.

At the same time, other entrepreneurial efforts can be seen in the corridors of the commonwealth’s smaller hospitals eager to protect both their independence and roles as pillars in their local communities. Some, like Cape Cod Healthcare, have sought to capitalize on a growing emphasis among payers on outpatient care. Others, like Signature Healthcare in Brockton, are targeting higher-margin speciality care such as oncology. And still others, like UMass Memorial Health Care in Worcester, have prefaced any new investments by first eliminating less-profitable lines of care, moves that have resulted in thousands of job losses throughout the state.

“The payers tell (hospitals) what they can afford and the hospitals have to develop a delivery system consistent with that revenue,” said Stuart Altman, a professor at Brandeis Universityand chair of the state’s Health Policy Commission, who suggested that the cost pressures could be part of a larger cyclical trend in the health care sector dating back to the 1990s. He added: “There’s growing evidence that we could be in a longer-term slow growth (period), and that will require institutions to be more innovative.”

The shift to outpatient care

The 2010 Affordable Care Act and employer health insurance trends have prompted patients to take on a greater share of their health care costs, and that has pressured care providers to keep pricing for services and care in check, said Peter Markell, CFO for Partners HealthCare. Insurers have subsequently sought to be more judicious with premium dollars, changing procedure classifications from inpatient to outpatient, for example, in cases where a patient doesn’t spend more than two nights in the hospital.

Coupled with the advent of less-invasive procedures and, as a result, shortened recovery times, many hospitals have started shifting into outpatient lines of care to drive volume and revenue.

Ed Kelly, Milford Regional Medical Center president, said Milford has added three locations for physical therapy and rehab services amid an effort to de-emphasize the use of higher-cost surgeries and emergency care and cater to an aging population.

Those strategies have contributed to higher patient revenue, which increased from $213.2 million in fiscal 2013 to $221 million in fiscal 2014. The revenue uptick came despite a drop in inpatient admissions, which declined from 7,767 in fiscal 2013 to 7,277 in fiscal 2014.

Winchester Hospital, too, has sought to bolster outpatient volume, opening its own urgent-care center in Woburn in October while also adding more outpatient surgery offerings. Other institutions to follow similar paths include Cape Cod Healthcare, which recently opened outpatient facilities in Sandwich, Chatham, Harwich and Barnstable, and UMass Memorial Health Care, which after slashing inpatient nursing jobs last year is now experimenting with new, virtual-interface technologies to evaluate patients.

“Our ability to do things remotely will reduce our cost and give us a competitive advantage,” said Eric Dickson, CEO of UMass Memorial, in an investor call.

Specializing in higher margins

The compression of operating margins, brought on by changes in insurance and more-informed shopping among patients are prompting many caregivers to rethink some of their traditional lines of care. Instead, a number of hospitals are making significant investments and reorganizing their services to better target higher-margin specialized services.

In 2013, Beth Israel Deaconess Milton opened its new Center for Specialty Care that brought bariatric and neurology services under one roof. The move also helped the former Milton Hospital incorporate the expertise of its new parent, Beth Israel Deaconess Medical Center in Boston, in surgical specialties targeting spinal, thoracic, colorectal and podiatry care.

Peter Healy, CEO of BID-Milton, said the specific service lines depended on demand in the community, ability to offer the services at a high quality, and the economics and sustainability of the services themselves. “Our strategy is to grow, not necessarily so much growing in terms of the number of things we do, but the population we serve. That’s where the economics are heading,” he said.

Milford Regional is targeting investment in bariatric programs after seeing an increased community need and sometimes losing patients, who were seeking lower-cost alternatives to Boston and heading to other community hospitals. Likewise, Berkshire Health System and Signature Healthcare in Brockton have made investments in new oncology services, with Berkshire now in the final stages of construction for a $30 million facility, while Signature is beginning a project after refinancing all of its existing debt.

Meanwhile, Boston Children’s Hospital has sought to broaden the reach of its specialized services by targeting more patients in other states as well as abroad.

“There are a lot of capabilities to do complex care throughout the U.S. But the ones we provide best, there are only a handful of hospitals capable of providing it,” said Doug Vanderslice, CFO of Children’s.