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The New Economic Realities of Hospitals: Cloud to the Rescue?

There is little doubt that Healthcare is an enormous part of the national discussion agenda and is transforming itself at an astonishing rate. Hospital board rooms are buzzing with new approaches to the provision of healthcare and most are loaded with new risk factors. As part of that discussion, there has never been any greater focus on curtailing the rapid rise in the cost of care. Soaring expenses, along with the steady erosion of revenue stability, has prompted many organizations to look for ways to bend the cost curve to ensure long term survival.


Revenue Confidence – A Burning Platform of Change

For the last several years, it is clear that financial margins are a top of mind issue with healthcare executives.  Revenue sources have increasingly become fixed or semi-fixed, with little or no leeway to recover cost through the hospital chargemaster. Raising rates like the good old days simply increases contractual allowances and rapidly becomes self-defeating.

What’s more, there is movement within the Centers for Medicare and Medicaid (CMS) to tie reimbursement to a variety of performance parameters which, taken as a whole, will likely bring down the rate of increase in the cost of care, but will definitely complicate financial forecasting. The lack of certainty and predictability for reimbursement has caused many institutions to take a cold hard look at where costs originate, how to control them, and what options exist without a falloff in patient quality of care. This is also in conjunction with efforts to outline frameworks for future reimbursement models. Both carrot and stick are well represented in the current funding philosophy being pursued by CMS.

The centerpiece of the Medicare changes is the shift to a system in which the government pays hospitals based on patient outcomes versus the type and number of services they provide. In some instances, Medicare will allow hospitals to share in the savings they produce for a group of patients and receive bonus payments if they meet certain quality standards. The government also is levying penalties on hospitals that fall short in performance measures like unnecessary readmissions and hospital-acquired infection rates. Just a few examples of new ideas sought for sustainable healthcare financing. 

As the largest payer in the system, Medicare casts a long shadow of influence with other payers.  Time and time again, when Medicare changes the landscape for reimbursement rules, the vast majority of third party payers follow suit.  In essence, Medicare provides the political cover in order for insurance companies to maintain their margins. As the front line of contact for patient care, hospitals and physicians bear the brunt of current cost control efforts.

Based on information from the American Hospital Association, the most significant cost component for hospitals is salaries and professional compensation for employees and members of the hospital staff.  US hospital salary cost reached about $330 billion in 2009. Given the enormity of the cost at stake, juxtaposed with the absolutely central role all caregivers play in the provision of care, reductions in this area are impactful to say the least. Maintaining the quality and cost balance at its optimal titration point is examined nowhere in more detail than in staffing patterns. Indeed, in states with active healthcare union activity, these staffing ratios are actually hardwired by regulations.

But hospitals have been cutting staff for decades, how much is left?  

Historically, many of the legacy information systems within a hospital, such as Human Capital Management and Finance system have had a history of underinvestment. After achieving system automation in the ‘80s and ‘90s, not much has been done to improve them or bring them in sync with modern HR practices. Today those systems need upgrading and replacing, and intelligent institutions are considering options for remote hosting – the “cloud” option for new system development.

Cloud is the answer

It comes down to investing for growth, even with the constraint of future reduced revenues, hospital must continue to provide services which benefit their population of patients. Many analysts also believe that the cloud for human resource applications in particular has a strong potential to knock out significant areas of cost. Gartner has devoted an entire Magic Quadrant to the subject and others have detailed information outlining the advantages and disadvantages

Hospitals may reluctantly be forced to look at the cost advantages for operating enterprise IT systems in the cloud and the cost disadvantages of on-premise software. There are hard choices to be made to achieve the dramatic and sustained reductions in the cost of doing business in healthcare.  Providers will choose to move their operational systems to the cloud long before other more painful cuts have to be made. 

A key business model difference is that companies buy on-premise solutions, but subscribe to cloud solutions. Subscriptions are pay-as-you-go, and thus offer lower initial investment with an easier exit option if things should not go as envisioned. This means the vendor has to earn the business on an ongoing basis, and owns more of the business risk.

Support for successful business strategies not only includes the ability to execute on current initiatives, but also to react to unforeseen changes in the business environment when changes inevitably occur. In some cases, moving to the cloud is not an option. But in many other situations, particularly those which require the flexibility to increase or decrease computing capacity based on workload, cloud computing is an ideal way to take cost out of operations.

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