The healthcare market is an exciting yet precarious place to do business. The current fiscal path and mounting political pressures are accelerating the change required to transform healthcare into a sustainable industry. What's at risk is the entire healthcare system, and we must act to find solutions to alleviate the growing financial strain before it overwhelms the system.
According to a June 2012 report from the Congressional Budget Office, the federal government recorded the largest budget deficit since 1945, both in dollar terms and as a share of the economy. If we follow on the current path, the aging of the U.S. population and rising cost of healthcare would cause spending on major programs and Social Security to outpace economic growth projections. With this spend consuming almost 18 percent of the GDP today, it is projected to grow to 19.6 percent by 2021, according to the Centers for Medicare and Medicaid.
Without an increase in federal revenues, this growth will result in greater debt burdens than the country has ever experienced. In addition, we have experienced a period of historically low interest rates. These low rates cannot be sustained, and once they begin to increase this will only add to the burden. This is the healthcare fiscal cliff.
The Need to Embrace Change and Consolidation
There really isn't a choice for healthcare organizations. They simply must embrace change in order to survive.
With the changes resulting from the Affordable Care Act, among a host of other market dynamics, the coming months will be about accelerated change in order to avert healthcare's fiscal cliff. Financial executives must anticipate the critical changes that will occur in healthcare this year and beyond, and focus on how they can lead this change within their own organizations. The best hospital CFOs are looking at today's environment and managing how their organizations will survive.
Financial pressure is accelerating industry consolidation in an attempt to create greater economies of scale. Survival today means that traditional boundaries continue to blur as companies acquire complementary healthcare offerings, such as insurance companies acquiring hospitals or other sub-acute services.
This consolidation is evidence of the change sweeping the industry both as a result of market economics and the impact of reimbursement changes tied to the Affordable Care Act. As a result, the industry may eventually consolidate down to as few as 100-200 large integrated delivery networks (IDNs) serving an exponentially expanding patient population and delivering care at the most efficient location.
Facing consolidation, provider financial executives can focus on what they will do to stand out from the pack - and keep their job. If five hospitals consolidate, then five executives are suddenly competing to be the last one standing as the larger organization's financial leader. To stand apart, financial executives will need to understand what levers their organization has to improve in the cost/quality equation and be prepared to make the moves that will differentiate them in the market.
Look for Areas to Gain Efficiencies
Consolidation will likely result in greater centralization, which affords the industry an opportunity to seek out areas to gain efficiencies, including elevating the supply chain for retail-style effectiveness. Hospitals and suppliers today are working toward greater business process and model changes to achieve the efficiency levels required to move forward in this demanding economic environment.
The brutal fact is that there is only so much money to go around in a hospital, and an effective financial executive must look at all avenues to grow his or her business and make financial targets by leveraging all opportunities, including the supply chain.
While consolidation will happen in the industry, it will not impact every hospital. With the uncertainty of whether consolidation will impact a particular hospital, financial leaders must maintain their focus on controlling those factors they can in order to meet more demanding financial targets.
How can areas like the supply chain be leveraged for savings and a competitive advantage? Can healthcare look to other industries to see how they have optimized supply chain processes, and implement them within their institutions?
In my next blog post, I will explain how every organization can and should look for these opportunities, and determine if they have the right resources in place to exploit them.
Bruce Johnson is CEO of GHX.