What lies ahead for the healthcare industry in 2004? To help prepare for the changes that healthcare will undergo, Cap Gemini Ernst & Young U.S. LLC challenged its healthcare team to look ahead and examine the issues that will face the industry and how healthcare organizations will likely respond.

December 2003
Healthcare’s Top Business Issues:

• Increasing costs. Health costs have risen as a proportion of GDP, and are now at record levels.

• Scarce labor. Economic recovery continues to generate more job opportunities in other industries, but continues to result in nursing and other ancillary clinical area shortages.

• More demanding consumers. As consumer directed health plans and cost sharing grow more common, consumers will have greater influence in selecting and directing their own care.

• Competition eroding profits. Specialty providers are “carving out” premium business, drawing profits away from the core delivery system.

• Limited access to capital. In order to improve their cost position, healthcare organizations need to make major infrastructure and technology investments.

Healthcare Organizations’ Responses

1. A new level of business rigor in technology investments.
2. Transformation of clinical care through technology.
3. Detailed redesign of core business processes.
4. Outsourcing of non-core functions.
5. Protracted efforts to comply with HIPAA requirements.
6. Collaboration between payers and providers at an operational level.
7. Proliferation of “new” benefits models.
8. Redirection of medical management efforts.
9. Emphasis on organizational ethics and institutional governance.
10. Community approaches to new biological threats.

Healthcare Organizations’ Responses

We expect healthcare organizations to adopt a variety of specific strategies in response to financial pressures in 2004.

1. A new level of business rigor in technology investments.

Historically an under-investor in technology, healthcare companies are making major commitments to information systems. Technology is evolving to be portable, accessible, and reliable. Standards are being developed. Compared to other industries, healthcare is expected to show the strongest IT spending growth in the coming year, according to industry analysts. For payors, priorities will include: claims, billing, membership, integration of front-end with legacy systems, etc. But despite pressing business needs, health executives will be reluctant to make any investments without a demonstrable payback. Executives will need to look at the total cost of ownership, including not only hardware and software costs, but investments in process-related changes as well.

2. Transformation of clinical care through technology.

Increased IT investments create an opportunity for technology to begin affecting care delivery. For hospitals, there will be a heightened emphasis on using IT to improve patient care and safety (e.g., bar coding on medicines, electronic medical records, prescriptions). Some insurers will offer higher reimbursement for providers that demonstrate quality outcomes — that can only be achieved through technology.

3. Detailed redesign of core business processes.

Healthcare organizations must scrutinize all areas of their operations for any opportunities to minimize costs. Managed care organizations will attempt to achieve greater economies of scale in back-office functions through additional mergers. Driven by continued declines in health insurance coverage for employees, providers will implement tighter front-end identification of co-payments and deductibles, to address patients’ financial responsibility earlier in the revenue cycle. Hospitals will look at creative capacity management solutions to facilitate better patient flow, including modifications to patient admission and placement, throughput and bed control procedures, and discharge planning processes

4. Outsourcing of non-core functions.

Healthcare organizations are struggling with where to find gains in efficiency and service in light of increasing costs and decreasing reimbursement. Many have outsourced functions like IT, food service, and laundry/linen. Industry analysts estimate that 75 percent of US hospitals currently outsource at least one function.

5. Protracted efforts to comply with HIPAA requirements.

The deadline for healthcare organizations to comply with the privacy and transactions and code sets requirements of the HIPAA regulations was October 16, 2003. However, Medicare has already given itself an extension. Commercial health plans have put contingency plans into place. All 42 Blue Cross Blue Shield plans have agreed to accept non-conforming transactions after the deadline (for an unspecified time period). Industry analysts estimate that fewer than 50 percent of providers have achieved true compliance with transactions and code sets. Throughout 2004, healthcare organizations should expect to deal not only with security requirements (which have a deadline of April 21, 2005), but also with privacy, document management and integrating applications for secure communication among members, care managers and physicians.

6. Collaboration between payers and providers at an operational level.

Substantial regional consolidation has provided many health systems with an exceptionally strong negotiating position. Managed care organizations see the need to create less of an adversarial and more of a “partnership” relationship with providers, but not through capitation or risk-based joint ventures, since those approaches have not been successful. Instead, payers and providers in some markets will collaborate to mutually improve their operational performance.

7. Proliferation of “new” benefits models.

In an attempt to reduce health costs, employers are demanding new types of benefits, and payers are responding. These “consumer-directed health plans” include increased cost sharing, tiered benefits levels, defined contribution, and savings accounts. Although these models may eventually change behavior in the average consumer, few have been shown to have impact on the small percentage of patients who consume the largest amount of healthcare.

8. Redirection of medical management efforts.

With efforts to reduce administrative costs largely exhausted and medical costs continuing to rise, healthcare organizations are taking a new view of medical management. They are looking at advanced care management, or population health management approaches. This involves the use of predictive modeling techniques to identify “at risk” patients who are about to incur large claims. The goal is to reduce the amount of inpatient and acute care, while increasing the amount of outpatient care, office care, non-physician based interventions and drug utilization. Organizations that are adopting this approach are generating a 3:1 return on their investment and reducing their medical expenses by two to three percent.

9. Emphasis on organizational ethics and institutional governance.

Shock waves from corporate financial scandals in other industries are rippling through healthcare. In a high-profile case, the federal government is investigating billing practices of a healthcare system. This will affect the entire industry from an investor perspective. Even not-for-profit hospitals are now feeling the impact. Burned by the unexpected bankruptcies of several prominent not-for-profits, municipal bondholders are examining hospitals’ books with a critical eye and demanding more detailed financial reporting. Many CFOs will look toward revenue cycle solutions to strengthen their financial position and improve their bond ratings. Others will undergo business reorganizations and board management changes due to the Sarbanes Oxley legislation.

10. Community approaches to new biological threats.

The US healthcare system is confronting new challenges from diseases such as SARS and from bioterrorism. Despite much national media attention, the industry is still in the early stages of responding. The federal government is funding a myriad of activities that impact the disaster preparedness agenda.

Industry players will need to do more than react to the challenges ahead. They will need to proactively incorporate these issues into their strategic plans and continuously reinvent their operations. In this era of disclosure and financial transparency, healthcare CFOs must be able to clearly substantiate what makes their organizations creditworthy.

More information about Cap Gemini Ernst & Young Group’s services, research and publications can be found on their web site.

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