Is the Traditional Strategic Approach to Service Lines Obsolete?

By Warren Skea and Rita Morris

The past two decades have seen significant consolidation by many United States health systems, intended, in part, to drive scale and more financially competitive networks. Yet, despite these efforts, hospital and health system financial performance has deteriorated over the past several years, a Guidehouse analysis shows. According to Moody’s, hospital operating margins are at a 10-year low, and they “expect expense growth will continue to outpace revenue growth over the next year, suppressing margins.”

Health systems often claim “market synergies” as a rationale for consolidation. But the difficult decisions around clinical service line rationalization are frequently avoided to prevent upsetting physicians and system staff, as well as the healthcare consumer who expects tertiary services to be provided “in their neighborhoods.” The hesitation to fully integrate service lines means expensive overcapacity in specialty services was not addressed, and significant duplication remains. As a result, the provision of care remains fractured, impacting patient outcomes while contributing to operating margin erosion.

Many health systems have endured multiple rounds of operational belt tightening but still have not solved their financial challenges. Currently, expense gaps have become large enough to warrant rethinking traditional operating models as a key component of service line planning. Margin improvement is possible not only through growing those service lines where there is strategic opportunity, but by downsizing those that have been overbuilt or consolidating ones that are geographically maldistributed. It may also require rethinking existing physician employment strategies and moving traditionally inpatient focused activity to higher-margin ambulatory care sites, found to have a 30% higher margin than similar inpatient activities at a significantly lower cost.

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