This article was significantly expanded and updated on March 12, 2013.
The Healthcare segment has shown some of the strongest growth in the U.S. foodservice market over the past year and is poised to do the same in 2013, according to the annual market forecast released by Technomic, the leading, Chicago-based foodservice consulting firm.
2012's 5.4 percent and 2013's 5.5 percent growth are “a result of retail sales, more outpatient services, ambulatory care centers and new facilities,” says Technomic Vice President Joe Pawlak, who notes that demographics also favor continued expansion of outpatient and employee services elements in the future. “The first boomers turn 70 in 2015—that’s when healthcare needs start to increase.”
Longer term, even as Pawlak sees foodservice in nursing homes as flat or declining because of Medicaid budget cuts, he says senior living in CCRCs is also set for further expansion. “It’s a segment tied very closely to the general housing market," he says.
"During the recession, many seniors who might have moved into these facilities couldn’t sell their homes and get their money out of them.” As the economy—and existing home sales—pick up, it should release some pent-up demand. The quality of food and foodservice's ability to contribute to the senior living atmosphere remains an important way these kinds of facilities compete with one another, he adds.
Meanwhile, consolidation continues, especially in the not-for-profit side of healthcare, as networks acquire community hospitals and larger networks merge for more leverage.
Recent examples include the proposed “mega-merger” of Detroit-area Beaumont Health and Henry Ford Health in Michigan; that of Michigan-based Trinity Health and Catholic Health East (Michigan-based and Pennsylvania-based); and of Summa Health and Catholic Health Partners (the largest hospital system in Ohio).
As an example of impact, the Trinity merger (if completed) will reportedly create the third largest not-for-profit health system in the country, comprised of 70 hospitals with 87,000 employees in 21 states.
The reasons for consolidation are well known and usually include strengthened fnancials and balance sheets in the new entities. Administrations are also looking for increased market share in the coming era of Accountable Care as they see a need for more negotiating clout in dealing with government and health insurance company regulations.
Some experts are predicting that this trend will eventually result in 100 or fewer regional healthcare systems (more on the implications of that for foodservice in a minute). Going even further in a recent presentation, Toby Cosgrove, CEO of the Cleveland Clinic, reportedly said he thought there might eventually be as few as 50.
The Accountable Care Act is creating waves across the healthcare segment, including healthcare insurance markets, especially with its expansion of Medicaid in states that embrace that option. Both for-profit and not-for-profit insurance organizations and hospitals are maneuvering to tap the increased spending this represents, despite its many uncertainties. (You can read how Florida's largest insurer, Florida Blue, is responding to this opportunity here.)
Some of the Act's requirements were buttressed in a major report released by the Institute of Medicine (IOM) in September. It concluded that America's health system has become too complex and costly and that a variety of inefficiencies and other factors in it are hindering progress in improving health outcomes, costs and equity. The IOM estimate suggests 30 percent of healthcare spending—more than $750 billion—is wasted on unnecessary services each year (Access the report, as well as various infographics, associated presentations and executive summaries here.)
A key recommendation of the IOM report is that healthcare systems implement payment models that link performance to patient outcomes and better healthcare delivery team coordination.
It is clear that a strong emphasis on cost management will continue to drive the overall healthcare environment. And while foodservice departments are not major contributors to hospital cost structures, they remain under the same scrutiny as other departments in terms of offering potential cost savings via FTE cutbacks and other measures.
Meanwhile, Accountable Care will
Carrots and Sticks
On the carrot side, pay for performance incentives are being tried as a way to improve Medicare outcomes while reducing costs. (For example, a major initiative begun last October will test whether a pilot project run by the Premier hospital network several years ago along these lines can pay dividends nationally). Nearly $1 billion in bonus Medicare payments will be paid out this year to the most highly rated hospitals as part of such efforts. And because this will be measured partly by patient surveys, hospitals are focused intently right now on improving the patient experience, which will mean a greater emphasis on face time with patients (including spoken menu and room service meal programs).
On the stick side, reimbursement penalties for hospitals that have too many readmissions will give administrators a strong taste of what Accountable Care will be like in coming years. By October of 2015, Medicare re-admission penalties can go as high as three percent of reimbursements and the (now limited) list of conditions covered by re-admission evaluations is set to expand.
Last fall, Medicare began implementing its first round of penalties for those hospitals it rated as having excessive re-admission rates. More than 2,000 hospitals were affected, with several hundred hit with the maximum penalty—a one percent reduction in Medicare payments for all regular Medicare patients in 2013.
The policy is controversial: hospitals with large percentages of patients who are sicker than average, who come from high risk groups or who live in poverty or other circumstances where post hospitalization care is limited believe they will face penalties for re-admission rates beyond their control.
Similar policies are being tried in New York City in plans to pay public hospital doctors based on patient discharge rates and followup outcomes and more programs along these lines are likely coming down the pike.
“Big systems are preparing for the lost revenue because of the ne re-admission regulations," says Maggie Stefanek, RD, senior associate at Innovative Hospital Solutions, a foodservice consulting organization.
“What this means for foodservice is that efficiency has to improve. The buzzwords are ‘faster, better, cheaper.’” Cost containment efforts "means there will be much more accountability in terms of hitting your financial and performance key performance indicators."
Multi-department management remains an important trend, especially in smaller systems.
Frequently, such changes are implemented via matrix-type management relationships that complicate lines of authority. It also means more directors will struggle to maintain food quality as larger campuses and regional networks require more satellite production and cross campus transport from central kitchens.
One result is that as systems consolidate, foodservice directors often find themselves managing services and logistics at multiple locations and on larger campuses. Stefanek notes that even as cashless payments and sophisticated point-of-sale (POS) systems are becoming more important to retail initiatives, "implementation has been complicated by the integration issues resulting from consolidation."
In such an environment, getting administrations to understand that expanded foodservice retail operations can more than pay for themselves can be difficult and remains a major challenge for directors. But the idea that well-run retail food outlets can generate meaningful added revenue is a concept whose time may finally be coming.
Stefanek believes the interest in retail programs will also grow as administrations "begin to focus on this as a wellness industry, rather than ain illness industry. increasingly, there will be an interest in connecting healthy choices with wellness outcomes on a clinical basis. In retail, that means loyalty and pricing programs to change meal choice behaviors."
Unprecedented public access to healthcare databases, another trend that will accelerate under Accountable Care, means that public posting of hospital outcome metrics, patient satisfaction scores and other data will have a significant impact on healthcare in both acute and long-term care, says Bill Klein, CEO and President of DM&A.
Such data also will be influential in terms of adjusting a hospital’s reimbursement rate up or down under the new Medicare and Medicaid guidelines and “Informed patients will use this data to make their hospital, physician and provider choices," he says.
This is not a trend limited to acute care. In January, for example, nonprofit new organization ProPublica made available unredacted writeups of problems found in nursing home inspections around the country.
In acute care, the new, national HCAHPS program (Hospital Consumer Assessment of Health Plans Survey) that measures patient perceptions of hospital care is the benchmarking system now on all hospital radars. It is quickly augmenting or displacing traditional benchmarks used internally by hospitals, but results will also be publicly available on the Internet, influencing consumer choices and used to calculate reimbursement rates.
(To see how HCAHPS will look to consumers, go to http://www.hospitalcompare.hhs.gov).
Seeing more of the same ahead, Klein says that by 2016 comparisons will go beyond simple peer group comparisons. "Programs like HCAHPS will include more qualifying questions that allow deeper drill downs into the data and more specific comparisons.
"Administrators will need every tool they can get—including room service— to bump satisfaction scores up,” he says. “When foodservice is rendered properly, patients are more forgiving about other aspects of their experience.”
Klein also believes ACA’s financial pressure will make administrators look more closely at management fees associated with outsourced contracts as well as requiring contractors to buy through hospital GPO networks. “This puts additional pressure on contractors in terms of the margins they can expect,” he says.
Fast Food Brands and Snacks are Under the Gun
On the nutrition front, fast food brands like McDonald’s are under increasing scrutiny where they have hospital locations.
Several prominent institutions, including Parkland Hospital in Dallas and Truman Medical Center in Kansas City, have terminated their relationships with such chains as existing contracts ran out, often at the aggressive urging of top on-staff physicians. Hospitals that do so typically choose to instead emphasize more healthful in-house meal concepts or to bring in alternative franchises with more healthful food profiles.
At the same time, long term fast food contracts have been a cash cow for hospital administrations in the past. They are also popular among visitors and staff, and replacement concepts usually don't generate the same revenue for the institution. Meanwhile, employees and visitors looking for favorite comfort foods can often find them on the street outside, where there are no restrictions.
This puts pressure on hospital foodservice departments to at least partly replace the lost revenue. But the most common way to do that—expanding retail food sales in the cafeteria—is also growing more difficult as snack items and other “less healthy” choices come under the same scrutiny. Nutrition advocacy groups are also targeting hospital food (see this story), demanding that both patient and retail offerings represent idealized meal choices. And new projections from the Robert Wood Johnson Foundation (RWJF) show soaring adult obesity rates over the next 25 years (see Our Big Fat American Future).
RWJF warns that the number of new cases of Type 2 diabetes could increase ten times in the next ten years, then double again by 2030. It also estimates the lost economic productivity that will result might reach as high as $580 billion annually. Such trends are not limited to the private sector, are are causing significant concern for hospital administrators as well, especially as work populations continue to age. Wellness programs to address such issues are being adopted widely in the private sector and most believe the same will happen in not-for-profit institutions, including healthcare.
"Health and wellness is the wave of the future and is where hospital institutions will focus, but it runs askew of revenue generation," says Paul Hysen, president of The Hysen Group. "A hospital director I spoke to recently told me that '57 percent of our menu represents healthful choices, but the other 43 percent is where we make our money.'
"How do you deal with that? It will have to be a gradual process, with calorie counts printed on receipts and with other efforts to change behavior that make it very easy for customers to see the implications of their food choices."
Healthcare institutions and healthcare insurers are both beginning to also promote the kinds of wellness programs that have become common in corporations, sometimes linking participation in them them to reduced health insurance premiums and other incentives (or disincentives.) (See this story about the way several medical centers are taking that approach)
When it comes to renovating hospital facilities, foodservice continues to have trouble competing with other capital investment projects. And efforts at overall cost control are putting a damper on such initiatives generally.
"There are not as many RFPs for large design projects these days," says Christine Guyott, RD, FCSI, a principal with Robert Rippe and Associates. "The large hospitals aren't doing as much as they once did." The big projects that are going on tend to involve towers, a move from double rooms to single rooms and aging government facilities that require modernization, she says.
"As systems have become larger and absorbed smaller hospitals, it is also becoming harder to reach the decision makers for these systems. A system person may be in charge, but he or she may not be the ultimate decision maker. The individuals who select the design team are the decision makers at a system level, rather than at the hospital level. you might be part of a system in which the headquarters is a few states away.
At the same time, this can give the smaller hospitals resources they did not have before, she adds, including access to more powerful menu management systems, executive chefs and programs that are implemented across a system.
"For foodservice directors, the same issues are causing an interest in standardization, whether that implies outsourcing or a structuring with one director over several hospitals. Things are swinging back to more top-down management and control."
Guyott also observes that many administrators like the ideas of making healthcare campuses "hubs" within their communities and there are often efforts to make them more attractive to patients and staff by adding resources that can include foodservice. At the same time, "the challenge of foodservice in outpatient facilities is that it can be hard to make money in them. Directors will need to plan carefully to meet these demands" while keeping such operations financially viable.
Not everyone is convinced that room service is an inevitable model for best practice hospital foodservice, and Hysen is one of those who takes a contrarian view.
"Improved outcomes and rising healthcare costs will continue to be primary concerns," he says. "Is patient satisfaction going to contribute to reduced re-admissions and shorter stays in a hospital? If something doesn't contribute to these things, and it has costs, it will be cut.
"The top four complaint areas for hospital customers are parking, nursing service, housekeeping and foodservice. But when you ask the same people 'why did you pick this hospital,' foodservice doesn't show up in the top ten reasons that are given."
Hysen thinks "spoken menu" and similar models will prove just as functional in the accountable care era as do room service models. Further, he makes the point that agility will be a highly valued characteristic of any hospital department in future years.
Guyott echoes a similar view. "The idea that a patient should be able to order what they want when they want it is very popular. But that is not the only system that is successful. Any approach that gives a patient a greater sense of face-to-face contact and control over their options has many of the same benefits."
As directors seek to plan for the future, "You don't know what is going to happen, so you need to be flexible," concludes Hysen. "If cost reductions hit your department hard, and you are faced with an immediate ten percent reduction, you need to have a Plan B to deal with that."
Hysen also believes that traditional "net cost per patient day" accounting for food and nutrition services in hospitals will come under scrutiny. "It is archaic methodology," he says. " It is 'cigar box accounting.'
"Accountable care means that hospitals will be expected to know what an appendectomy will cost, what a gall bladder removal will cost. In contrast, in foodservice accounting, you typically take total cost, then subtract cafeteria revenue, and the result is patient cost per day.
"We should have separate accounting for retail, for catering, for patient services, for clinical services. Each should have its own P&L, with an honest allocation of true cost. Management companies do this for their internal use, but it should become standard practice for all oprations."
The shape of healthcare in the future remains a moving target. “Accountable Care still presents many unknowns," says Hysen." It puts a lot of emphasis on patient satisfaction, but that is not always linked to better outcomes, to reduced readmissions and other metrics that will affect reimbursement rates.
“The dust hasn’t settled,” he adds.
What’s Trending: Healthcare
✓ HCAHPS satisfaction surveys are the new hot button in acute care and are driving efforts to improve teamwork and coordination among nursing, foodservice and other patient-facing staff.
✓ Upscale coffee kiosks are popping up more frequently in high traffic hospital lobbies and satellite buildings, supported by administrations impressed by high margin revenues and rave customer reviews. With careful design, planning and staffing, these can support "campus community" initiatives and generate profitable revenue.
✓ Employee wellness programs tied to HR initiatives and healthy choice “loyalty” programs, modeled after those at corporate dining facilities, are becoming more common.
✓ There’s no free lunch. Poorly-managed floor stock and late tray orders that increase patient meal costs are receiving more scrutiny. Room service helps control them, but an emphasis on keeping nursing staff happy and engaged remains a top administrative priority, even if it means entails some costs in this area.