Congress is on a path to cut $2.5 trillion in mandatory federal spending over 10 years, including $880 billion from Medicaid. That equates to over $200 million per U.S. congressional district and $1,100 per Medicaid enrollee in 2026, alone. Cuts to Medicare provider payments—everything from site-neutral payment reform to 304B payment reductions to eliminating bad debt coverage—are on the table. Enhanced Marketplace subsidies expire this year, and, unlike tax cuts, no one is talking about renewing them.
Bottom line:
Provider payments from federal healthcare programs will shrink while the percentage of the population without insurance will grow. These changes promise to leave no component of the provider revenue model unscathed. Significant belt-tightening is inevitable.
Historically, providers have responded to reduced reimbursement with “coupon clipping.” The CFO calculates the impact to system revenue—call it x%—and directs managers to find a like x% reduction in expenses to rebalance the margin equation. Departments then look to the usual cost reduction suspects: labor, supplies, purchased services to come up with their portion of x%. The CFO adds up the portions and, voila!, problem solved. Though hardly a strategic, system-level approach, coupon clipping has worked.
This time, however, the scale of potential revenue reductions is simply too great; no amount of coupon clipping will rebalance the margin equation. Now is the time for fundamental clinical enterprise rationalization.
Clinical Enterprise Rationalization: How It’s Been Avoided
The idea of clinical enterprise rationalization—a strategic process of reorganizing and eliminating redundant, low-volume, or inefficient clinical services to optimize resources and improve quality—is not new. But providers have been able to avoid the hard work it requires. How and why? A variety of reasons, including these:
- The reimbursement model. Fee-for-service reimbursement provides a safety net: No matter the challenge, more volume is the solution to balancing the margin equation. There is limited financial incentive to pursue efficiencies to deliver better value to patients and purchasers.
- Ownership and governance models. The dominance of not-for-profit ownership precludes the weak from being culled. Hospital boards resist any service reductions in the name of serving “community need.”
- Incentive alignment. Physician/hospital relations (regardless of whether physicians are employed or independent, primary care or specialists) have been fraught throughout the industry’s history. True transformative change has been a casualty of that reality.
- Extended economic calm. One significant disruption aside,[1] healthcare delivery has been in an expansionary phase for the past 30 years. Policymakers have focused on how to pay for care (health insurance reform) rather than reducing the cost of care (delivery system reform).
While certainly not ideal (always better to operate with a scalpel rather than a machete), looming cuts to federal healthcare programs may be the force to overcome the inertia and/or obstructionism that has prevented the industry from evolving into a rational, high-functioning system.
Success Indicators
Clinical enterprise rationalization is a must-do for provider organizations serious about sustainably serving their communities into the future. As PYA engages with providers on rationalization efforts, and despite the uniqueness of market and organizational circumstances, a number of leading success indicators are emerging:
- Be inclusive…within reason. Broad participation by internal and external stakeholders is a must, given they will be the source of many creative solutions. Their role, however, is advise and align, not to be a thousand points of no.
- Define the outcome and the timeline; then engineer to it. Create quantified goals, objectives, measures, and aligned incentives for the rationalization effort. Without buy-in to the rationale, quantified targets, and a path, planning will be confused and execution hopeless.
- Lead, and then get out of the way. Set the parameters for success, as described above, but empower cross-functional teams to derive approaches and solutions. An iterative process is likely to bear the most fruit.
- Let the data drive decisions but not induce paralysis. Data must be recognized for the directional indicators they represent. Decisions are made by people with data as an input to their thinking. Trust and challenge the people you’ve empowered to lead.
- Be ready for the tough decisions. Make no mistake, sacred cows will be gored as part of any successful rationalization process. Backed by thorough data and analysis, as well as comparative relative scenarios, the path(s) become clear.
Clinical enterprise rationalization is difficult, complex work. It is also necessary and the right thing to do—for the communities we serve, most of all. The delivery systems that emerge will be of higher value—patient-centered with better quality, access, and affordability—than those of today. These are exactly the objectives our clients have been telling us they’ve been pursuing for years.
Having successfully advised health system clients through components of comprehensive clinical enterprise rationalization and systemness efforts, PYA understands through experience that fundamental change is possible and, in fact, may represent the greatest opportunity afforded the healthcare industry in the past 40 years. If addressed intentionally and transparently, real change is possible. Watch for more from us on the subject.
[1] We recognize the massive disruption from COVID-19 was counterbalanced by expansive governmental intervention in the form of relief funding, effectively maintaining economic calm.