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Health systems increase operating margins through diversification strategies

Health systems can create a risk-adjusted portfolio of initiatives that leverages their ecosystem and competitive advantages.

Jeff Lagasse, Associate Editor

A benchmarking study of health system efforts to generate new revenue streams has evaluated a range of effective strategies to sustain overall operations, fuel innovation and advance patient care missions. The report by Partners Healthcare and Fitzroy Health finds that successful health systems have increased operating margins as much as five points through diversification strategies.

Health systems can create a risk-adjusted portfolio of initiatives that leverages their ecosystem and competitive advantages, findings showed. In sum, health systems possess the ability to create market value through innovations that have transformed their own operating and clinical models.


Researchers conducted comprehensive interviews with C-suite executives, board members, venture executives, and others at 74 U.S. health systems and academic medical centers. All participants acknowledged the need to diversify revenue, and 90 percent indicated novel revenue streams were an urgent priority.

In the research, three primary levers for value creation emerged.

The first is to bring care model innovations to market, such as  University of Colorado Hospital's co-development with RxRevu. The second is to transform cost centers into profit centers, like Navicent Health's Flex Health, a workforce management company spin-out; and the third is to generate royalties from drugs, devices, and diagnostics, such as with Children's Hospital of Philadelphia's $35 million investment in Spark Therapeutics.

The researchers evaluated more than 1,400 initiatives that health systems have pursued to generate new revenue and categorized those initiatives into 10 different options. The white paper features case studies with their value proposition and success factors.


Diversification isn't the only way to boost margins.

Ask a hospital leader if supply chain optimization improves margins, and you're likely to get "yes" as an an answer. In fact, according to a recent survey from Sage Growth Partners, almost all of them -- 98 percent -- say improving the revenue cycle can lead to improved finances.

Of those, 52 percent said better supply chain management could potentially boost margins between 1 and 3 percent. And 3 percent say it could improve margins 3 percent or more.

Twitter: @JELagasse

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