Driven by consumer demands, a shift to value-based care, regulations, and advances in technology, the increased utilization of alternative care settings is contributing to the inpatient business model losing its sheen.
INPATIENT hospital services are making up less and less of health system revenue and could soon become liabilities to a health system. Gone are the days of a one-week hospital stay after surgery, when health systems were only focusing on making money from “heads in beds.” Many patients now have procedures in ambulatory centers and go home the same day. This shift will likely continue, spurred by:
In our future of health vision, we expect most care to be delivered at home, or through virtual, outpatient, and other settings. The focus will increasingly shift to preventing illness—for example, through wellness and prevention strategies, remote monitoring of biological markers, and “fixing” defective genes and cells—rather than allowing a disease to occur and then treating or managing it.1 We expect these to become commonplace by 2040, but our research shows many aspects of this vision, including the shift to outpatient and home settings, are already happening today.
Having studied hospital outpatient revenue trends previously,2 the Deloitte Center for Health Solutions sought to update that analysis and dig deeper to find out what health systems are doing to influence these trends. Research included hospital financial data analysis and interviews with 20 health system executives (see sidebar, “About the research”).
Our findings are a call to action for health systems to invest in care delivery in outpatient, home, virtual, and other alternative settings. Instead of focusing on capturing more hospital inpatients, health systems should start planning for a future where buildings full of beds will likely be a memory. Organizations not yet meaningfully committed to value-based care and still focused on generating more inpatient hospital services may soon find themselves struggling.
Our analysis of hospital revenue trends found that:
Much of this past shift is due to technological advances in clinical care delivery. Moreover, technologies like digital consumer apps, predictive analytics, and virtual health are accelerating it further today and are expected to continue to do so in the next few years. Our executive interviews revealed that some health systems are reactive (and still rely heavily on inpatient revenue), while others are intentionally growing their organizations’ capacity in outpatient and home settings. Through investments in nonhospital settings, the latter group is likely better positioned to shift away from inpatient hospital services and be prepared to deliver care in the future of health.
Interviewees recognize the need to shift away from hospital settings and are strategizing in two broad areas:
Those with population health strategies are putting in place capabilities and services to help reduce unnecessary inpatient services. This is largely because of incentives in risk-bearing contracts, and their goals to improve consumer engagement and quality and reduce the total cost of care. In our prior study, we found that hospitals with greater revenue from quality and value-based contracts provided more outpatient services than other hospitals.3
Health care is shifting toward value-based care; the days of volume-based care delivery are numbered. Organizations without a meaningful commitment to value-based contracts should start making these changes today and reconsider their current capital strategies. Health systems also should steer their organizations toward outpatient, home, virtual, and other alternative settings. They can do so by considering investments in:
The Deloitte Center for Health Solutions analyzed hospital financial data of Medicare-certified institutions from the Medicare Cost Report to understand inpatient and outpatient revenue trends for 2011–18. The Medicare Cost Report includes reporting on all patient types, not just Medicare. We also conducted 20 interviews with health system executives who are leading their organizations’ efforts on this front, including population health executives, chief medical officers, chief transformation officers, presidents, strategy executives, ambulatory executives, and others. The executives represented a wide range of health systems, including academic medical centers (AMCs), integrated delivery networks, nonprofits, and for-profits.
Over the last decade, efforts to provide access to low-cost, high-quality health care have been changing how care is being delivered. Consequently, health system reliance on revenue from inpatient care, which traditionally has been a cash cow for most organizations, is declining and will likely decline even further. Health systems have been witnessing a gradual but significant movement toward outpatient care in the last three decades. This trend is expected to only grow in the coming years. As the industry moves toward fully embracing value-based care, nonhospital settings such as outpatient, home, and virtual care may become the preferred care models for organizations and patients.
Analysis of the latest available hospital financial statement data shows that the gap between inpatient and outpatient revenue is narrowing (figure 1). Between 2011–18, hospital outpatient revenue grew at a higher compounded annual rate (9 percent) than inpatient revenue (6 percent). As a result, the aggregate share of outpatient services in total hospital revenue has grown from 28 percent in 1994 to nearly half (48 percent) in 2018 (figure 2). In recent years, hospital outpatient revenue has nearly equaled inpatient revenue and is likely to surpass it in the coming years.4
Much of this change is driven by an increase in the volume and scope of outpatient services due to technological advances in clinical procedures. According to our interviewed executives, regulations, consumer preference, and early adopters of value-based care have also played a role. Specifically, the following factors have recently contributed heavily:
In Deloitte’s 2019 Health Care CEO Perspectives Study, CEOs from major health systems said the shift in care settings, proactive consumers, and quality-based payment models are the most important drivers affecting the industry in the next 10 years.5 CEOs explained that, enabled by technology, multiple drivers are increasingly pushing care to noninpatient settings. This phenomenon is affecting hospitals’ financial models—compelling them to reconsider their strategies and how they might have to repurpose their hospitals.
“All of my investment now is in outpatient—anything that is not beds. Our ability to create that network outside the hospital is huge.”
—CEO of a health system
Going forward, the move from volume to value-based care will reward health systems that shift patients toward outpatient, virtual, and other lower-cost settings. In our prior study, we found that hospitals with greater revenue from quality- and value-based contracts provided more outpatient services than other hospitals.6 While the adoption of value-based care may be slow in some markets, leadership within the US Centers for Medicare and Medicaid Services (CMS) continues to strongly encourage this movement. Seema Verma, administrator for CMS, said: “Value-based payment … is the future. So, make no mistake—if your business model is focused merely on increasing volume rather than improving health outcomes, coordinating care, and cutting waste—you will not succeed under the new paradigm.”7
All the interviewed executives agreed that more care will shift out of hospitals in the future. They discussed how certain orthopedic and cardiac procedures and populations, among others, do not belong in the inpatient setting, and recognized that hospitals should shift these to alternative settings. The reliance on inpatient services, and the shift away from it, varied among the organizations we spoke with. The interviewees reported that their share of revenue from inpatient services versus other sources ranged from 35 to 75 percent. While many said the inpatient revenue share for their organization should (and will) decline, some thought it would be stable if they get paid more for complex patients who will continue to need treatment in inpatient settings.
For those intentionally growing their organizations’ capacity in outpatient and home settings, we found that their strategies fall under two broad categories:
“The focus of the past 10 years has been on preventing readmissions, and now in the next 10 years, the focus will be on preventing admissions.”
—President of a health system
“Our mission is to provide health care to the community. If we can deliver care to the community in a better-quality manner that is less capital intensive, then that is better for our fiduciary commitment to the community.”
—Population health executive of a health system
Interviewees recognize that technology is moving beyond being a mere enabler to playing a much bigger role in driving care into outpatient settings. The following are some of the ways in which technology can be used to shift care toward outpatient, home, virtual, and other alternative settings, which the interviewees stated as being critical investments for value-based care:
“We are trying to take care of more people using less money. To the extent technology can allow us to deliver care in less expensive physical spaces, it gives us scale without having to make traditional capital investments.”
—Chief transformation and experience officer at a health system
While acknowledging that steering their organizations away from the traditional hospital-revenue-generation mindset is challenging, interviewees agreed that health systems should focus (strategically and financially) away from inpatient hospital services and instead begin investing in outpatient, home, virtual, and alternative settings. They advise their colleagues, who are trying to accelerate the shift to develop the following capabilities and attributes, to better support those investments:
“We need to give ourselves license to take the bolder steps to increase affordability and convenience.”
—Senior vice president and chief strategy officer at a health system
The shift toward outpatient is happening and will likely have a tremendous impact on operations, business models, staffing, and capital. Health systems should prepare for the future today and start thinking not only about how to manage their traditional business model but also how to invest in and create new competing business models at the same time. Organizations that do not prepare for a future, driven by value-based contracts, are likely to struggle. With multiple drivers shifting care toward outpatient and other alternative care settings, decision-makers could do better to turn their focus away from inpatient settings.
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