My Parking Lot is Full; What Happened to My Bottom Line?

Jeff Goldsmith, Tim Kinney, Bill Hannah, and Jeff Leibach, Becker's Hospital Review

From 2015 to 2017, in the wake of a historic expansion in insurance coverage from the Affordable Care Act (ACA), health systems experienced a 39% drop in their operating earnings, the steepest decline in over 40 years.

Two-thirds of health systems in a Guidehouse study saw significant drops in earnings, including many who had dominated their regional markets for decades. This completely unexpected downdraft was the product of a sharp deceleration in patient care revenue growth that was unmatched by expense reductions.

As health system CFOs conducted an autopsy on these troubling two years, they discovered fundamental flaws in their budget assumptions about the revenue side of their business. In the wake of the ACA, many systems signed complex new “value-based” insurance contracts with health insurers they did not fully comprehend. Some systems gave up steep front-end rate discounts to avoid being excluded from the ACA’s health exchanges, expecting value-based bonuses and increased commercial volumes to make up the difference.

When the smoke cleared, they discovered several things. One key thing was that the expected volume of new customers from the new value-based contracts failed to materialize. This was because the health exchanges enrolled only about half the customers expected by the Congressional Budget Office and most independent analysts. Very few systems recovered those steep front-end discounts through a surge of new exchange customers.

Health systems also failed to generate the performance bonuses they expected from many of these contracts or incurred penalties for underperformance, despite numerous new expenses related to organizing their physicians and acquiring the performance information the contracts required. The net effect: the new value-based contracts have proven to be a drag on earnings.

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