A study of inpatient and outpatient data from 71 hospitals in seven counties covering the greater Chicago area finds that hospital systems will need to reinvent their business models if they hope to survive in a post fee-for-service world.

The consulting firm KaufmanHall, based in the Chicago suburb of Skokie, Ill., used the hospital data to try to determine why inpatient volumes were continuing to decline for all age groups. Was it due to the economy, the shift to more surgeries in ambulatory settings, and/or regulatory changes like the “two-midnight” rule? Or was it due to structural factors at work in changing health care for the long term?

The report authors looked in particular at 16 Ambulatory Care Sensitive Admissions (ACSAs), which the Agency for Healthcare Research and Quality (AHRQ) defines as patient admissions “for which good outpatient care … can potentially prevent the need for hospitalization, or for which early intervention can prevent complications of more severe disease.” And indeed the report authors found that ACSAs were dropping. This suggests that doctors and hospitals have started to change how they care for patients to put a greater emphasis on disease prevention and management, which in turn reduces the need for inpatient care.

While everyone can embrace achievements in keeping patients healthier and less in need of hospitalization, the decline in admissions hurts hospitals and health care systems that have traditionally made most of their money from fee-for-service inpatient claims. The KaufmanHall report advises that all health system boards and executive teams should consider the following four questions:

1. What size will our inpatient and outpatient businesses be going forward? This “rightsizing” of the business will likely involve shifting capital investment from adding new hospital beds to consolidating and restructuring inpatient service settings while moving more care delivery into the outpatient setting.
2. How will we reengineer our care delivery? This includes figuring out how to change physician behavior to achieve higher value care, not just higher volumes, and how to effectively partner with other providers.
3. How will we keep the cost curve below the revenue curve and achieve operating sustainability? Flexibility will be key because revenue going forward will be much less predictable than it was with fee-for-service contract arrangements, the KaufmanHall report predicts.
4. How will we transform our clinical and management teams? “Today’s competencies are not tomorrow’s competencies,” the authors warn. This may include making leadership changes as the inpatient-centric health care model is replaced by a community-centric model.

Read the full report here.