The COVID-19 pandemic continues to place a severe strain on regional health systems. Each day, healthcare workers perform heroically and demonstrate compassion, agility, and resilience in the face of extraordinary pressure. Provider organizations have marshaled all their resources to meet the operational and logistical challenges of the ongoing health crisis, exacerbated by the recent surge of the Delta variant.
At the same time, new operating and competitive headwinds have emerged. The past 18 months have exposed the financial vulnerability of health systems, many of which relied on government subsidies to address operating shortfalls.1 As providers focus on the frontline battle against COVID-19, patients and clinicians have rapidly shifted toward new ways of consuming and delivering care. In response to evolving consumer preferences, nontraditional competitors are entering the market and aggressively pursuing high-growth segments of the care continuum.
Regional providers may need to do more with less in the next normal. While the challenges they face today are familiar, providers should act with greater speed, ambition, and rigor than ever before—and address multiple priorities simultaneously.
We have consistently observed the benefits for organizations of going all in on large-scale change programs and resisting the urge to tackle an unfocused and near-term set of priorities. Launching an intensive, organization-wide transformation may help regional healthcare providers tackle the full set of value-creation levers and rebuild their organizational and financial backbone to deliver on their missions for years to come.
Elevated pressures threaten a vital mission
Regional provider systems face mounting challenges to long-term financial sustainability. Over the past decade, the growth of government-sponsored insurance segments relative to commercial segments has placed downward pressure on revenues, while rising input costs (for example, for clinical labor) have exacerbated margin pressures.2 The pandemic compounded these challenges by suspending elective procedures and causing unforeseen increases in both labor and supply costs. Of the largest 40 health systems by revenue, virtually all experienced margin compression in 2020.3 Although outsize investment-portfolio returns and CARES Act funding helped mitigate near-term financial pressure and strengthen balance sheets, the EBITDA4 margin has eroded for the ten largest nonprofit health systems.5
The COVID-19 pandemic intensified caregiver burnout and exposed existing health inequities. More than 40 percent of clinicians are experiencing symptoms of burnout, and 22 percent of direct care nurses indicated they may leave their position within the next year, exacerbating an already critical shortage of healthcare workers.6 The pandemic also disproportionately affected racial and ethnic minorities and revealed significant barriers to access.7
Collectively, these pressures pose a formidable challenge to the ability of regional health systems to effectively deliver on their missions in the months ahead.
Six imperatives for provider systems
The current environment calls for providers to increase their speed and agility and embrace a greater magnitude of change that is grounded in a transformational approach. Regional providers should address six imperatives going forward:
1. Scale and diversify sources of revenue
Many regional healthcare providers have found clear advantages from achieving greater scale. Revenue growth among the ten largest US providers has accelerated relative to prior years.8 This growth has become more sustainable over the long term as larger providers diversify revenue, share resources across regions, explore new geographies, and expand business segments. Many providers also are accelerating partnerships with disruptors and innovators across the value chain.
2. Accelerate vertical integration and value-based care
Many health systems are aggressively moving toward vertical integration of care and payment as the lines between provider and payer continue to blur. In 2018, nearly 36 percent of payments were in alternative payment models with some form of risk sharing.9 Risk-based models continue to expand, driven by Medicare Advantage (over 50 percent of Medicare Advantage payments are in alternative payment models), the Centers for Medicare & Medicaid Innovation Center (by 2020, the Medicare Shared Savings Program had more than 500 accountable-care organizations covering over 11 million beneficiaries),10 and payment innovation in commercial and Medicaid segments. By 2022, we anticipate value-based payments to grow to $1.4 trillion.
In response, regional provider systems should focus on launching provider–payer partnerships, joint ventures, and joint products to achieve a greater share of the premium dollar. While these partnerships require up-front capital investments, they will ultimately improve affordability and health outcomes over time.
3. Reinvest in frontline staff
The COVID-19 pandemic amplified existing issues concerning the mental health of healthcare workers, who are at heightened risk of burnout, anxiety, and depression. This has exacerbated already severe labor shortages. Regional provider systems should build upon existing efforts to address burnout and attrition, including offering mental-health and resiliency training programs, conducting regular risk assessments, and providing a greater breadth of resources to support clinicians.11
Over time, regional providers should redefine their value propositions in order to attract, retain, and inspire frontline workers in an increasingly competitive labor market. This includes investing in training, creating flexible and attractive career ladders, and ensuring competitive compensation and benefits. In addition, beyond addressing near-term pressures, providers should look for ways to improve productivity through the use of technology and redesigned care models. Many have increasingly sought renewed urgency to accelerate diversity, equity, and inclusion programs.
4. Bolster financial resiliency
The pandemic exposed vulnerabilities in the financial health of many provider organizations. CARES Act funding and other stopgap measures helped providers to address near-term cash-flow challenges. Some organizations took further action to boost operating margins, such as streamlining clinical operations, reducing nonclinical workforce, and deferring capital expenditures.
While these measures were enough for many regional health systems to weather the past 18 months, long-term financial sustainability may require bolder action across a comprehensive set of cost and revenue levers. These could include launching broad margin-improvement and productivity programs, pursuing alternative revenue streams and diversification strategies, evaluating scale and inorganic growth opportunities, optimizing managed-care contracts, and shifting to value-based care models.
While these measures were enough for many regional health systems to weather the past 18 months, long-term financial sustainability may require bolder action across a comprehensive set of cost and revenue levers.
5. Expand role in the community
Healthcare professionals maintain higher consumer trust than any other profession, and this trust has improved since the beginning of the pandemic.12 Health systems have played an increasingly important and vocal role as community advocates. This engagement includes communicating public-health policies (such as physical distancing, masking, and other workplace safety protocols), coordinating testing and vaccination efforts, securing personal protective equipment (PPE) and other supplies, and championing increased funding to meet the growing costs of the pandemic. We have also witnessed historic levels of cooperation among local delivery systems.
Regional providers have an opportunity to build on this new and expanded societal role to address health-equity issues more broadly in the community. Priorities could include expanding access to care and health coverage, addressing social determinants of health, scaling screening and prevention programs, and promoting health literacy and medical education.
6. Accelerating digital, analytics, and automation
Beyond traditional consumer-facing applications, digital is already permeating many more aspects of the health systems of the future, including access and care delivery, clinical operations, back-office functions, and population health management. Greater data liquidity and advanced analytics are powering major improvements in consumer experience, quality, and access and in managing total cost of care. Many providers have up to 20 domains where digital can deliver substantial performance improvements (exhibit).
Enhanced digital capabilities can also unlock decision-making speed and enable provider organizations to quickly adapt to the challenges that lie ahead.
The pandemic accelerated organizational speed and agility across industries. Most leaders expect speed to be increasingly important, given the link between organizational speed and outperformance. Regional providers can sustain this increased pace, in part, by embedding digital and automation across the entire hospital value chain—from patient acquisition and scheduling to virtual care delivery and follow-up. Administrative and clerical functions can also benefit from automation; even small regional systems deploy bots and other forms of automation to perform core processes.
Bringing it all together, all at once
The scale and urgency of these six imperatives should be met by an equally rigorous and comprehensive transformation program. Leaders who embrace the idea of holistic change will quickly realize that tackling all these imperatives at the same time is only possible after first assessing the organization’s ability to deliver on its mission, identifying the headwinds and tailwinds that affect its performance, and establishing the rigorous execution engine required to sustain this change in the next normal.
The scale and urgency of these six imperatives should be met by an equally rigorous and comprehensive transformation program.
Leaders of regional providers can learn from transformations in other sectors that have effectively changed the trajectory of organizations. The most successful transformations start with a clear analysis of the organization’s full value-creation potential. These companies typically set gross performance targets at 75 percent or higher of trailing earnings and engage the entire organization throughout the transformation journey. And they go well beyond cost-cutting measures: on average, 40 percent or more of overall transformation-program value comes from growth and revenue expansion.
But identifying the gaps and aligning on an aspiration is only the beginning. In our experience, achieving a successful transformation doesn’t happen without a few critical elements:
- A mission-driven case for change. The rationale for undergoing a transformation should be framed as part of the provider’s mission, grounded in clear conviction, and cascaded throughout the organization to emphasize the transformation’s impact and benefit for teams, patients, and other stakeholders.
- A strong link between bold targets and individual accountability. Big goals, whether financial, operational, or cultural, should be broken down into hundreds of smaller initiatives that can be owned “by the line”—not just the top team. Our research indicates the most successful companies break down ambitious, top-down targets into bite-size pieces that managers throughout the organization can execute. These smaller initiatives, which may engage 20 percent or more of the workforce, create greater ownership and enable more employees to personally drive the transformation program.
- A new execution engine. A transformation hub should go well beyond the typical “project management office” familiar to most leaders at healthcare providers. This hub should be fully empowered to set new rules of engagement that increase the metabolic rate of the organization. By taking a holistic view of financial, operational, and organizational health targets, the transformation hub can drive change at pace while helping teams build the execution muscle to achieve sustainable results that align with the organization’s overall goals and mission.
While regional provider systems are under immense stress and face profound challenges, leaders have a unique opportunity to rethink the care-delivery model to radically improve cost, quality, and patient outcomes. Achieving this goal will likely require a comprehensive and bold approach that challenges conventions, adopts learnings from other industries, and embraces new ways of working.