The ‘Shot Clock’ in Health Care: Margin Challenges as a Function to Force Change

Mike Eaton, Market President, Navvis

In basketball, the shot clock serves as a forcing function to keep the pace of play moving. It allows teams enough time to set up their play, while preventing the pace of the game from stalling out as players wait for an open shot.

In health care, there is no shot clock. Historically, there has been no real penalty for being slow to make and execute on the strategies needed to improve performance. This has been especially true for productivity and cost efficiency. Growing demand usually created enough new revenue to offset flat productivity and rising organizational costs. Even in cycles when utilization did slow, episodic cost-cutting campaigns were enough to maintain operating margins until demand recovered.

That dynamic continues to challenge many large health care organizations postpandemic. Even with some operating margin improvement evident at the end of 2023, it is likely that low operating margins in the 1% to 2% range could become the norm for many health systems and hospitals across the country in the years to come.

At a macro level, the margin challenge is likely to create further shakeout in the health care industry. Congressional Budget Office (CBO) estimates, for example, show that unless providers increase productivity or reduce cost growth in some other way, it is possible that 60% of hospitals will have negative profit margins by 2025 and the average profit margin will fall to -0.2%.

The Path Forward Starts With Leadership

Launching another cyclical, cost-cutting campaign is not enough to resolve the gap between revenue and expense growth rates. Structural change is needed. Governing boards and executive teams must directly confront the challenging questions about the value of being a system or network, and how they might restructure to deliver greater value at radically lower cost.

Frequently, identifying how to restructure is not the greatest challenge facing health systems. It is acting on the critical strategy decisions and mobilizing people to execute them. System and network leaders often avoid conflict, re-litigate strategy decisions and short-arm accountability for change. Frequently, they simply “pave the cow paths,” applying new technology to old, inefficient processes without making the difficult decisions needed to radically improve productivity or change cost trends.

Even when confronted with a potentially existential threat like the growing gap between revenue and expense growth rates, some of the health system leaders I speak with struggle to see their situation differently. As the famous economist John Kenneth Galbraith once observed, “faced with the choice between changing one’s mind and proving that there is no need to do so, almost everybody gets busy on the proof.”

Yet, in these challenges there is great opportunity. Just as a shot-clock forces disciplined ball movement and a sense of urgency for finding and taking the open shot, near-term margin pressures are clearing the path for leaders to accelerate essential payment and care model transformation as needed for a more durable business model.

In the face of these difficult industry economics, health care leaders need to understand the unique and nuanced characteristics of each market where they want to build meaningful market advantage. Working with all relevant health care stakeholders within each market is critically important. Leaders at health care organizations should build out their strategic roadmaps with their unique market realities in mind, with an approach that links planning at the board and executive level with operational changes within and across the system. Strategies that improve access and patient flow, reduce avoidable emergency department and bed utilization, and build stronger balance sheets are an impactful place to start. Importantly, rethinking the entire care delivery model, with a focus on physician enablement and education, improved quality and experience, and lower total cost of care is the ultimate end game to improved financial performance.

Waiting is not an option; health care organizations need to start now before the shot clock goes off.