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Investments in new IT tools are helping hospitals steer clear of the margin cliff

Over just the past few months, I have noticed that hospitals and health systems are making bigger investments in virtual health and relationship tools that connect clinicians to patients, clinicians to other clinicians, and clinicians to virtual information that allows them to improve patient care. As traditional fee-for-service (FFS) gives way to payment models that reward value over volume, hospitals are also investing in new technologies that can manage tremendous amounts of data, produce detailed analytics, manage population health, and help coordinate patient care.

The transition to value-based payment models is only going to accelerate, and hospitals that don’t have the right technology could find themselves struggling to catch up. Consider this: On January 1, hospitals began seeing payment adjustments for the first performance year under the Medicare Access and CHIP Reauthorization Act (MACRA). Last month, Blue Cross Blue Shield of North Carolina said it had inked value-based payment agreements with five of the state’s seven largest health systems (see the January 22, 2019 Health Care Current). Growth in value-based contracts—combined with an aging US population and shrinking reimbursement from government payers—could push hospitals and health systems toward a margin cliff if they don’t keep pace with technology.

Many hospitals are making bigger and bolder IT investments

Between 2012 and 2016, hospitals that received some payments tied to quality and value were more likely to invest in new technology compared to hospitals that relied largely, or entirely, on FFS payments, according to Beyond the EHR—a new report from the Deloitte Center for Health Solutions. The report examines data from 4,500 US hospitals gathered between 2012 and 2016 (the most current data available).

Quite a bit has changed since 2016. Just two years ago, FFS made up virtually all revenue generated by hospitals. Even among pioneering hospitals, value-based contracts and other alternative payment models rarely made up more than 10 percent of revenue. Today, most of our health-system clients see at least 20 percent of their revenue from risk-based or shared-risk contracts. For some health systems, these contracts now account for more than half of overall revenue.

A few years ago—as value-based payment models were beginning to take root—hospitals that had risk-based contracts were more likely than others to invest in new types of technology, according to our research. With MACRA’s Merit-Based Incentive Payment Systems (MIPS) and Alternative Payment Models (APMs) now in place, many hospitals and health systems are taking bigger and bolder steps in the adoption of new IT systems that go beyond electronic health records (EHRs).

Hospitals have also been investing in digital tools that use artificial intelligence (AI) and cognitive analytics to quickly sift through massive amounts of EHR data to identify patients who might be at risk for various health conditions. A health system, for example, could use this information to identify people who might be at risk for developing Type 2 diabetes or congestive heart failure. Early intervention and preventive care could help keep a medical event from occurring. As hospitals take on more financial risk, revenue will be generated by all patients and members, no matter how often they walk through the doors. However, members who get hurt or sick more than expected, on the other hand, will erode margins that come from per-member-per-month payments.

Physicians, patients are warming up to virtual health care

Virtual interactions with patients rose from 56 percent of total interactions in 2015 to 59 percent in 2017.1 We are likely to see that percentage increase this year now that Medicare—as of January 1—began paying for virtual doctor visits to determine if an in-person visit is needed.

Virtual health can reduce clinical costs and improve members’ experiences by keeping them healthy and out of the hospital—and both patients and physicians are interested in it. The Deloitte 2018 Surveys of US Health Care Consumers and Physicians have found that both stakeholder groups agree on the benefits of virtual care. Consumers point to convenience and access (64 percent) as important benefits. The top three benefits from physicians’ perspectives are improved patient access to care (66 percent), improved patient satisfaction (52 percent), and staying connected with patients and their caregivers (45 percent).

Virtual tools extend beyond telehealth and include email, texting, and video chat applications. While the technology that drives virtual care has been available for several years, adoption is just beginning to ramp up—driven largely by Medicare’s changing payment models. By focusing on return on investment and value of investment, organizations can develop a comprehensive vision, define goals, prioritize and sequence virtual care investments, and decide how to measure success. Consider these examples:

  • Mercy Virtual Care Center, a three-year-old, 125,000 square-foot hospital outside of St. Louis, has four floors bustling with 850 nurses, doctors, technicians, and other personnel. What it doesn’t have is patients…at least not inside the facility. All of Mercy’s patients are seen virtually by specialists and other clinicians who meet with their patients electronically through remote real-time video appointments. Patients might be at home or in a more traditional hospital.
  • An East Coast health system with more than 50 hospitals has an app that allows its patients to have virtual consults with their clinicians. The interface mirrors technology like video calls, which many consumers already know. This has allowed the health care system to shift high-touch, in-person care toward more emergent conditions.
  • DeloitteASSIST is a digital assistant that is being used by some hospitals in Australia (we are awaiting approval for use in the US). Existing nurse-call systems can’t distinguish between a patient who has fallen and a patient who can’t figure out how to work the television remote. The digital assistant responds to patient voice commands and uses AI and cognitive software to triage requests. Patients receive immediate responses to their requests, confirming they have been heard—and that someone is on their way.

As FFS revenue recedes further, hospital leaders could find it more challenging to pay for new technology. Once the industry reaches a tipping point, revenue based on outcomes and risk could exponentially increase, leaving even fewer resources for new investments. For hospitals and health system leaders that haven’t yet made investments in virtual health and tools that can help digitally connect to patients and to each other, now is the time.


1 Healthcare IT News, How AI command centers are helping hospitals harness analytics and manage operations, May 2018

Author bio

Steve, a partner with Deloitte LLP, is the vice chairman and national sector leader for Deloitte’s Health Care practice. He leads a multi-disciplinary team who serves clients through consulting, advisory, audit, and tax services. Steve also leads the overall strategic direction and market eminence of the health care sector, including client-facing leaders’ development and succession, business development efforts, and cross-functional go-to-market strategies. With more than 33 years of experience, Steve has served clients across the health care spectrum–complex large systems, academic medical centers, children’s hospitals, and single location entities–and has led large transformational projects involving acute care hospitals, ambulatory operations, clinics, and physician practices.