The calm before the storm

Anshu Gupta

2005

Providing universal, high-quality and affordable healthcare is an ongoing challenge for the leaders of the Dutch healthcare sector.

Providing universal, high-quality and affordable healthcare is an ongoing challenge for the leaders of the Dutch healthcare sector. While significant strides have been made in recent years, Dutch hospitals will face two fundamental challenges in the coming decade.

How to finance the growth in demand?

The first challenge is how to finance the growth in demand. An aging population with exponentially higher healthcare needs, and a declining working population, will result in an ever-increasing financial burden that must be borne by an ever-shrinking group. The affordability, universality and quality of the Dutch healthcare system could be at serious risk. Unlike the Dutch pension system, our healthcare system is very likely to encounter acute financial problems if the sector does not act quickly to develop new and innovative financing models.

The second fundamental challenge is how to manage healthcare supply chain operations efficiently. Despite being formally "semi-private", hospitals are still run and managed with a predominantly public mindset. The government has set upon an ambitious strategic program of gradual deregulation, introducing "free markets" first for about 10% of the hospital volume in 2005. It remains to be seen whether the common belief that free markets will result in lower prices through better allocation of resources applies to healthcare, or whether easing budget caps will enhance "consumption" or unit prices, and thus increase system costs. But irrespective of the outcome, on a macroeconomic level, demographic and innovation trends will drive total demand and costs. And hospitals will increasingly be pressured to boost efficiency and accept more responsibility for their performance.

Six issues that are central to the hospitals' future

Based on a comprehensive benchmark study of Dutch hospitals, Roland Berger Strategy Consultants has identified six issues that are central to the hospitals' future:

• The healthcare sector is facing a tremendous growth challenge, as its growth levels are well above the overall economic growth rate. The hospital sector is expected to double in size by 2020, to more than EUR 100 billion. As share of GDP, healthcare could be well above 20%, compared to 12% in 2002. This is a gigantic shift that will bring unforeseeable challenges. The sector urgently needs to address this growth challenge, since it is inevitable given the aging population and the priority citizens accord to healthcare. The hospital sector grew by 10% each year between 2000 and 2003. This is well above the historical average of 6% realized in the 1990s. The doubling in 2020 is based on the premise that growth through 2020 will be more in line with the historical 6%, corresponding to nominal inflation-adjusted growth of 4%;
• The average financial performance of the sector has improved, but it still has a long way to go to achieve financial robustness. The sector showed improved average financial performance on most counts. In 2003, net results as a percentage of revenues increased slightly to 0.6%, operational cashflow improved to 8.5% and investment cashflow grew to 11.4%. Only solvency decreased slightly, to 7.6%. But in absolute terms, financial performance is still too weak. Hospitals need to embark on their own strategic course, but to do so, they must create the financial means. Improving their own financial position must thus become a top priority. Boosting efficiency provides a clear means to strengthen the financial position;
• Increasing polarization in hospital performance implies that the gap between leaders and followers will widen and become more entrenched. Historically, hospital performance tends to huddle around the average, which is perhaps a fair reflection of its public-driven business models. In 2003, however, increasing polarization was evident. More hospitals showed extreme performance, in both the positive and the negative sense. The performance ranges also expanded. For example, while only 2 hospitals reported net results above 3% in 2000, there were 9 such hospitals in 2003. Similarly, while 19 hospitals had negative net results in 2000, that number had swelled to 27 in 2003. We expect that average results will become even less important as further polarization emerges in performance. Also in 2003, hospital performance became more entrenched; it became more difficult for hospitals to move out of their performance range;
• A significant shift in the production mix to more day treatments will continue. But the resulting cost reduction still needs to materialize. Day treatments grew by more than 10% annually between 2000 and 2003, while nursing days shrank in the same period. The average nursing day per admission dropped to 7.2 days in 2003 from 8.3 days in 2000. Numerous Dutch hospitals have significant potential to further optimize their product mix. Based on national benchmarking, international comparisons and specific project experience, Roland Berger expects further significant growth in day treatments and reductions in nursing days. Despite the reduction in nursing days, the cost of operations has not declined yet. Hospitals must redesign their operations to reap the financial benefits of this structural shift in the product mix;
• Costs, wages and procurement have increased much faster than production, pointing to a large productivity gap (sections IV and V)
  Production increased by 7% (on an un-normalized patient entity basis) between 2000 and 2003. In contrast, total costs increased by 31%. The 10% increase in personnel was basically in line with the increase in production, but the 35% increase in wages and 27% increase in procurement clearly points to the need for major productivity improvements. Large differences between the hospitals analyzed confirm this potential. Specifically in procurement of goods and services, hospitals need to improve their performance significantly. We estimate that upto 20% procurement savings, or nearly half a billion in costs are at stake and must be recovered by the hospitals by analyzing and redesigning their procurement strategy;
• Steady leaders and steady followers, as well as those who improved and those who fell behind, still have significant performance improvement opportunities.

There were 9 hospitals that ranked in the top quarter in both 2000 and 2003, but even they were not best-in-class on all of the eight indicators defined for the benchmark. Most hospitals stayed in their respective quarter (34 out of 81). However, 25 hospitals found ways to improve their performance. All hospitals have significant performance improvement opportunities in one or more of the eight core indicators used for the ranking.

The study is available upon request. Please call us in Amsterdam at +31 20 79 60-600.