Brief

Radical Medicine for Healthcare Providers

Strained by Covid-19, leading providers are slashing costs, investing in digital services and looking to merge.

By Michael Brookshire, Joshua Weisbrod, and Erin Morrissette, MD

First published on septiembre 17, 2020
min read


Executive Summary Revenue for most large, diversified providers is likely to decline by more than 10% in 2020 as a result of Covid-19. Leading providers are making fundamental changes to their business models and cost structure. Providers can increase customer retention by creating their own telehealth offerings. Consolidation among providers is likely to increase in the coming months. Healthcare providers are taking bold steps to reshape their businesses as they prepare for the postcrisis era. Declining revenue, high fixed costs and low margins have hit many hard, especially health systems—large, diversified companies that include hospitals, physician groups and other assets. To emerge from the downturn stronger, leading provider groups are transforming their business models by adding digital capabilities, investing in new areas such as ambulatory surgery centers and improving the physician experience. Health system transformation Diversified provider groups already were grappling with tough economics before Covid-19 struck. The pandemic added to their pain by reducing patient volume, particularly for higher-margin elective procedures. We expect revenue for most health systems to drop by more than 10% in 2020, a dramatic contraction in a sector where margins typically average 5%. Bain’s 2020 US Front Line of Healthcare Survey showed hospitals are taking immediate steps to reduce costs. Ninety-five percent of hospital finance administrators say their organization is likely to roll out cost savings initiatives in response to the Covid-19 crisis. These include new guidelines on medtech purchasing and programs to ensure that physicians consider cost when making clinical decisions. Hospitals are also undertaking a thorough review of IT projects and other major investments, and are reducing staffing. More than 40% of surgeons expect to reduce the number of medtech vendors used in each service line, and 60% of procurement administrators plan to renegotiate vendor contracts. And yet these steps may not be enough. Health systems grappling with a sharp drop in revenues, stubbornly high fixed costs and low margins won’t be able to reverse the financial decline by shaving off 2 to 3 percentage points of variable costs. And as traditional provider groups struggle to restore financial stability, new rivals including digital giants, payers and innovative care organizations are starting to grab a growing share of the business. Leaders are using Covid-19 as a catalyst for radical business model and cost transformations. Designing the healthcare system of the future—one that delivers better outcomes at lower cost—won’t be easy. Providers embarking on transformations need to achieve four major objectives. The first is improved top-line revenue and a new business model. Forward-looking provider groups are diversifying into new nonacute care settings to meet patients where they want to be treated. They also are enhancing digital health services to make it easier for patients to enter their front door. At the same time, leadership teams are preparing for a post–Covid-19 landscape by streamlining operations and decreasing costs. Three important steps can help achieve significant gains: rebalancing unprofitable and inefficient care sites and service lines; improving clinical labor models by optimizing skill mix and staffing; and automating shared services. Importantly, these leaders ensure the entire organization is aligned on the cost and business-model transformation. They orient the business toward markets and service lines, not individual sites of care such as hospitals. And they focus on the top line as well as the bottom line, managing both revenue and cost. Finally, winning health systems use Agile management to improve the chances of meeting their transformation goals. Executive teams reset expectations about the competition to ensure the organization is prepared to go head-to-head with payers and digital-first companies, not just other healthcare systems. They move fast to fill talent gaps in areas such as digital services and data analytics, and choose technology and digital partners that enhance their own expertise and scale. One major US health system started this journey before the Covid-19 crisis. The leadership team diversified the group’s assets and type of care delivered. It streamlined the cost structure, reshaped the organization and invested heavily in technology infrastructure and a digital consumer experience. Agile teams helped the group move quickly and with greater ease across different functions than it had in the past. The results: Net margins increased significantly and are on track to more than double in five years. Another important benefit was increased competitiveness. The transformation improved the group’s value proposition, making it more relevant to patients, clinicians, payers and employers. Telehealth and digital capabilities Before Covid-19, only a few providers, consumers or payers fully embraced telehealth. The pandemic rapidly changed attitudes, spurring a surge in demand from patients to connect with their doctors digitally. A growing number of patients now expect virtual physician visits to be a standard channel of care. As telehealth services expand, providers must decide whether they want to return to legacy telehealth models or meet consumer demand. Leading providers are taking advantage of the shift and using telehealth to enhance existing patient relationships and increase retention. Providers are in a unique position to use digital health services to increase customer loyalty by creating an attractive alternative to urgent care to solve health needs and strengthen the customer relationship. As telehealth becomes a standard method of care, providers and provider groups are considering how to extend telehealth and digital care to a broader patient population, including those without digital access. This group is also likely to benefit significantly from more regular medical care. Providers can segment their patient populations to determine the right digital access approach (e.g., SMS communication, telephone calls) for each one. While telehealth is a top strategic priority for most providers, leaders are investing in other digital capabilities as well. Diversified provider groups are likely to have different digital needs based on their investments to date and varied patient populations. But three digital capabilities are core to each health system. The first is linked to consumer access and experience, and it includes digital tools to improve the patient experience, such as online appointment booking. The second capability underpins care delivery, including remote patient monitoring, prescription adherence apps, clinical decision support and advanced patient analytics. Third, digital technologies support efficient administrative services. These include analytic tools to improve costs, pricing and coverage comparison support and billing systems. Finally, successful providers are using Agile management as a powerful tool to help redesign care delivery. They deploy Agile teams to implement new digital services in order to directly involve new users including physicians, nurses and administrators. Consolidation The financial fallout from Covid-19 has increased the likelihood of mergers and acquisitions in the healthcare industry. For cash-strapped, smaller hospitals and physician groups, M&A offers a liquidity lifeline. For larger health systems, horizontal and vertical integration can increase market share within a region, offer opportunities to add service lines and referral sources, and enable expansion in new markets. Leading providers keep four strategic options in mind as they peruse M&A opportunities: First, acquisitions that enhance vertical integration allow a provider to own a greater share of the patient experience across physician clinics and other outpatient care facilities, particularly in the case of site-neutral payments. With many local physician practices facing financial challenges, health systems will divest underperforming businesses and invest in higher-margin assets. Second, horizontal acquisitions increase scale. Given the financial squeeze imposed by the pandemic, a growing number of smaller facilities face liquidity challenges and are likely to be open to acquisition. The third M&A option is investment in digital systems, which facilitates expansion and integration of new systems. Finally, providers may target smaller physician groups, since many physician-owned businesses face financial pressure. Physician experience US doctors on the front lines of the Covid-19 crisis have overcome extreme mental and physical obstacles in recent months. Successful provider institutions are reaching out to their physicians in this stressful period to build sustainable and productive relationships. That approach delivers multiple benefits. Engaged physicians contribute innovative solutions, and physicians are more satisfied when involved in strategic decisions. Physicians value having a say in organizational strategy, including which specialties to grow or what sites of care to open. Forward-looking providers are soliciting physicians’ input into these strategic decisions. In particular, large management-led physician organizations and hospital systems can improve the physician experience by involving physicians in decisions on cost-saving models and care management teams. Top providers also are adopting digital tools to enhance the physician experience, deferring to doctors on their preferred telehealth models. They are investing in time-saving tools and simplified electric medical records, such as scheduling software and dictation resources. Finally, they are implementing digital tools including remote patient monitoring.

Executive Summary

Revenue for most large, diversified providers is likely to decline by more than 10% in 2020 as a result of Covid-19.
Leading providers are making fundamental changes to their business models and cost structure.
Providers can increase customer retention by creating their own telehealth offerings.
Consolidation among providers is likely to increase in the coming months.

Healthcare providers are taking bold steps to reshape their businesses as they prepare for the postcrisis era. Declining revenue, high fixed costs and low margins have hit many hard, especially health systems—large, diversified companies that include hospitals, physician groups and other assets. To emerge from the downturn stronger, leading provider groups are transforming their business models by adding digital capabilities, investing in new areas such as ambulatory surgery centers and improving the physician experience.

Health system transformation

Diversified provider groups already were grappling with tough economics before Covid-19 struck. The pandemic added to their pain by reducing patient volume, particularly for higher-margin elective procedures. We expect revenue for most health systems to drop by more than 10% in 2020, a dramatic contraction in a sector where margins typically average 5%.

Bain’s 2020 US Front Line of Healthcare Survey showed hospitals are taking immediate steps to reduce costs. Ninety-five percent of hospital finance administrators say their organization is likely to roll out cost savings initiatives in response to the Covid-19 crisis. These include new guidelines on medtech purchasing and programs to ensure that physicians consider cost when making clinical decisions. Hospitals are also undertaking a thorough review of IT projects and other major investments, and are reducing staffing. More than 40% of surgeons expect to reduce the number of medtech vendors used in each service line, and 60% of procurement administrators plan to renegotiate vendor contracts.

And yet these steps may not be enough. Health systems grappling with a sharp drop in revenues, stubbornly high fixed costs and low margins won’t be able to reverse the financial decline by shaving off 2 to 3 percentage points of variable costs. And as traditional provider groups struggle to restore financial stability, new rivals including digital giants, payers and innovative care organizations are starting to grab a growing share of the business.

Leaders are using Covid-19 as a catalyst for radical business model and cost transformations. Designing the healthcare system of the future—one that delivers better outcomes at lower cost—won’t be easy. Providers embarking on transformations need to achieve four major objectives. The first is improved top-line revenue and a new business model. Forward-looking provider groups are diversifying into new nonacute care settings to meet patients where they want to be treated. They also are enhancing digital health services to make it easier for patients to enter their front door.

At the same time, leadership teams are preparing for a post–Covid-19 landscape by streamlining operations and decreasing costs. Three important steps can help achieve significant gains: rebalancing unprofitable and inefficient care sites and service lines; improving clinical labor models by optimizing skill mix and staffing; and automating shared services.

Importantly, these leaders ensure the entire organization is aligned on the cost and business-model transformation. They orient the business toward markets and service lines, not individual sites of care such as hospitals. And they focus on the top line as well as the bottom line, managing both revenue and cost.

Finally, winning health systems use Agile management to improve the chances of meeting their transformation goals. Executive teams reset expectations about the competition to ensure the organization is prepared to go head-to-head with payers and digital-first companies, not just other healthcare systems. They move fast to fill talent gaps in areas such as digital services and data analytics, and choose technology and digital partners that enhance their own expertise and scale.

One major US health system started this journey before the Covid-19 crisis. The leadership team diversified the group’s assets and type of care delivered. It streamlined the cost structure, reshaped the organization and invested heavily in technology infrastructure and a digital consumer experience. Agile teams helped the group move quickly and with greater ease across different functions than it had in the past. The results: Net margins increased significantly and are on track to more than double in five years. Another important benefit was increased competitiveness. The transformation improved the group’s value proposition, making it more relevant to patients, clinicians, payers and employers.

Telehealth and digital capabilities

Before Covid-19, only a few providers, consumers or payers fully embraced telehealth. The pandemic rapidly changed attitudes, spurring a surge in demand from patients to connect with their doctors digitally. A growing number of patients now expect virtual physician visits to be a standard channel of care. As telehealth services expand, providers must decide whether they want to return to legacy telehealth models or meet consumer demand.

Leading providers are taking advantage of the shift and using telehealth to enhance existing patient relationships and increase retention. Providers are in a unique position to use digital health services to increase customer loyalty by creating an attractive alternative to urgent care to solve health needs and strengthen the customer relationship.

As telehealth becomes a standard method of care, providers and provider groups are considering how to extend telehealth and digital care to a broader patient population, including those without digital access. This group is also likely to benefit significantly from more regular medical care. Providers can segment their patient populations to determine the right digital access approach (e.g., SMS communication, telephone calls) for each one.

While telehealth is a top strategic priority for most providers, leaders are investing in other digital capabilities as well. Diversified provider groups are likely to have different digital needs based on their investments to date and varied patient populations. But three digital capabilities are core to each health system. The first is linked to consumer access and experience, and it includes digital tools to improve the patient experience, such as online appointment booking. The second capability underpins care delivery, including remote patient monitoring, prescription adherence apps, clinical decision support and advanced patient analytics. Third, digital technologies support efficient administrative services. These include analytic tools to improve costs, pricing and coverage comparison support and billing systems.

Finally, successful providers are using Agile management as a powerful tool to help redesign care delivery. They deploy Agile teams to implement new digital services in order to directly involve new users including physicians, nurses and administrators.

Consolidation

The financial fallout from Covid-19 has increased the likelihood of mergers and acquisitions in the healthcare industry. For cash-strapped, smaller hospitals and physician groups, M&A offers a liquidity lifeline. For larger health systems, horizontal and vertical integration can increase market share within a region, offer opportunities to add service lines and referral sources, and enable expansion in new markets.

Leading providers keep four strategic options in mind as they peruse M&A opportunities: First, acquisitions that enhance vertical integration allow a provider to own a greater share of the patient experience across physician clinics and other outpatient care facilities, particularly in the case of site-neutral payments. With many local physician practices facing financial challenges, health systems will divest underperforming businesses and invest in higher-margin assets.

Second, horizontal acquisitions increase scale. Given the financial squeeze imposed by the pandemic, a growing number of smaller facilities face liquidity challenges and are likely to be open to acquisition. The third M&A option is investment in digital systems, which facilitates expansion and integration of new systems. Finally, providers may target smaller physician groups, since many physician-owned businesses face financial pressure.

Physician experience

US doctors on the front lines of the Covid-19 crisis have overcome extreme mental and physical obstacles in recent months. Successful provider institutions are reaching out to their physicians in this stressful period to build sustainable and productive relationships. That approach delivers multiple benefits. Engaged physicians contribute innovative solutions, and physicians are more satisfied when involved in strategic decisions.

Physicians value having a say in organizational strategy, including which specialties to grow or what sites of care to open. Forward-looking providers are soliciting physicians’ input into these strategic decisions. In particular, large management-led physician organizations and hospital systems can improve the physician experience by involving physicians in decisions on cost-saving models and care management teams.

Top providers also are adopting digital tools to enhance the physician experience, deferring to doctors on their preferred telehealth models. They are investing in time-saving tools and simplified electric medical records, such as scheduling software and dictation resources. Finally, they are implementing digital tools including remote patient monitoring.