For many hospitals across the country, business is booming. After a number of tenuous years caused by the Great Recession, followed closely by uncertainty around the impact of the Affordable Care Act, hospitals are adding jobs and profit margins are up. Nevertheless, things have changed. With the rise of Medicare enrollment, more individuals purchasing health plans through exchanges, and fewer employers interested in offering health benefits, the payment model is shifting dramatically. To be successful in this new world, hospital leaders need a new approach.

An Economy on the Rebound

Five years ago, the national unemployment rate was 10 percent. Today, it’s hovering around 5 percent. Many of those once-unemployed workers have found employment in healthcare. Since the passage of the Affordable Care Act in 2010, the healthcare industry has added more than 1 million jobs, making it one of the top sectors for job growth in the country. According to the Bureau of Labor Statistics, the industry added 503,000 jobs in 2015 — that’s nearly 42,000 new jobs every month. Not only are jobs up, but total operating margins are also. An American Hospital Association survey reports that during the 20-year span from 1993-2013, margins for not-for-profit hospitals jumped from 2.7 percent to 5.7 percent. A few factors have contributed to the spike, including increased insured patient volume due to the expansion of Medicaid and the introduction of health insurance exchanges. However, a strong economy comes with some drawbacks for employers. More open healthcare jobs means physicians and other providers have more options to choose from. Back in 2009, there were six job seekers for every job. Today, there are less than two candidates for each open position. As a result, it cost 16 percent more to hire a doctor in 2015 than it did in 2014, and it took in-house recruiters an average of 204 days to fill each job. Here’s an even more alarming number — last summer, for every family medicine resident entering the job market, there were 56 open jobs to choose from. It’s no wonder that physician recruiters are busier, and more stressed out, than they’ve ever been.

A Changing Landscape

Despite the job growth and increase in operating margins, hospitals have definite challenges ahead. Chief among them are changes to the current payment models, which have been on shaky ground for years. Hospitals have long made a living from commercial insurance, which reimburses facilities at around 150 percent of the cost of care. This overpayment has helped keep underpayment by the public in check (government plans pay just 86 percent of hospital costs). With an aging population and enrollment in Medicare plans skyrocketing, hospitals will continue to see more patients and earn less per visit. In 2012, Medicare accounted for 42 percent of the average hospital’s payer mix. And according to Centers for Medicare & Medicaid Services, Medicare payment is projected to account for 58 percent by 2022. Thanks to exchanges, the number of individual purchasers is also on the rise. More than 9 million people have now purchased an insurance plan through an exchange—and they’re gravitating to low-cost plans. A number of high-profile employers, including IBM, Caterpillar, and GE have determined that it is better for them to push their employees to exchanges, rather than administer insurance plans themselves. All of these changes mean hospitals are no longer insulated from market forces. According to the Advisory Board Company, a global research, technology, and consulting firm, there are a few reasons for shifting consumer demands:

• More individual buyers — Thanks to their employers, employees have long been isolated from the true cost of care. Now that they’re buying their own coverage, they’re much more sensitive to cost.
• There are more product options — Broad network options are gravitating to narrow, custom networks.
• More transparency — Exchanges allow consumers to make apples-to-apples plan comparisons.
• It’s easier to change plans — When individuals aren’t tied to an employer plan, they’re more likely to change plans more often.
• Greater consumer cost exposure—Constant employee premium contribution and low deductibles will give way to variable individual premium contribution and high deductibles.

How to Win in the New World

With so many changes on the horizon, what can hospitals do to thrive in a market driven by individual consumers? The Advisory Board Company says there are a few attributes every hospital needs to be successful in the new world of healthcare delivery.

• Strong business acumen—New challenges demand robust executive leadership. Hospitals must develop and execute on a system-wide strategy to survive.
• Expansive cost accounting—In the past, some hospitals have paid little attention to their cost structure. In order to alter expense structures in a sustainable manner, cost transparency is a must.
• The right mix of volume and value—Shifting from fee-for-service to a fee-for-value model doesn’t happen overnight. Hospitals need to maximize accountable care success without destroying fee-for-service profits.
• Highly aligned network of care—Care transitions remain the source of high costs and low quality. Hospitals need to make sure they are aligning sites of care to provide expertise at the proper place and time.
• Defined value proposition—The consumer is now the customer. In order to win business, hospitals need to provide a more convenient patient experience.

Times are changing. Hospitals that don’t evolve will be left behind.