Financial Concerns May Lead to High-Margin Line Imbalance

Warren Skea, Modern Healthcare

Opportunity Cost

Not every system is going to have the same playbook. It will vary depending on the system’s infrastructure, patient mix, and other elements. But service line rationalization is inevitable, particularly as operating margins wane, consumers decry overutilization and high costs, and skeptics dismiss consolidation’s purported efficiencies, experts said.

At Bon Secours Mercy Health, one question often asked is: Is it more impactful to offer certain service lines at multiple hospitals or centralize specialized care and increase access points for lower-acuity operations, said David Cannady, Bon Secours Mercy’s chief strategy officer.

The Cincinnati-based health system then looks at its community health needs assessment, as well as capacity, growth opportunity, market position, operational needs, product life cycle, volume, and physician availability, among other factors. 

In areas where Bon Secours Mercy is the sole provider, it offers a wider array of services and supplements those with telehealth and partnerships with other providers, Cannady said. It is more selective in more competitive markets. 

Mayo Clinic decided to consolidate services in Albert Lea, Minn., last year, transferring inpatient services involving overnight hospitalization for illness or major surgeries, the intensive-care unit, and childbirth to its Austin, Minn., campus, about 23 miles away. 

Mayo executives said it was no longer feasible to duplicate some of its most complex and expensive healthcare services in neighboring communities given the financial struggles community providers face as well as ongoing labor shortages. Former CEO Dr. John Noseworthy admitted that Mayo didn’t adequately explain why the change was happening. 

But Albert Lea residents said the area economy would not be able to sustain the cuts from one of its biggest employers. Quality of life and healthcare have suffered, community members argued. 

Redundancies are typically left in place after a merger, often due to pushback from staff, said Warren Skea, a managing director at Navigant. Then the organizations lose out on the expected synergies, and it is deemed a failed attempt. 

“A lot of systems haven’t had the discipline to go through the proper strategic planning process,” Skea said. “It can happen both ways — they consolidate when they shouldn’t and conversely don’t consolidate when they should.”

Balancing Act

Investor-owned hospital chain HCA Healthcare declined an interview but pointed to its first-quarter earnings call for details on service-line management. In it, CEO Samuel Hazen said its cardiac volumes were up 3%, electrophysiology was up 5%, and cardiovascular surgeries were up 4%. As HCA builds out service line capability across the system, that yields more revenue per patient, he said. 

HCA has a service-line team that supports physician recruitment, program development, technology deployment and patient navigation that has boosted those volumes, he added. 

Generally, lower-margin business like obstetrics, behavioral health and primary care seem more vulnerable. Obstetrics, for instance, has been declining throughout the country — about half of rural counties lack the capacity, according to a 2017 study published in Health Affairs. 

Providers have to think about their affiliated network when it comes to obstetrics, pediatrics, mental health, and other services that have traditionally been loss leaders, Skea said. The University of Alabama at Birmingham Health System, for instance, has shared some of its specialists, administrative capacity, and telehealth solutions with struggling rural hospitals.

“Some of those things can be done in smaller, lower-cost settings,” he said. “Systems need to act like systems rather than an affiliation of competing entities.”

 

WARREN SKEA
Managing Director
+1.214.712.1544

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