Performance Improvement Plus Portfolio Repositioning

Non-profit health system boards are demanding stronger performance improvement plans as their enterprises confront the macro- and market-forces called out by Paul Kusserow and David Johnson in their book The Coming Healthcare Revolution.

Those forces are not theoretical; they are showing up in our day-to-day operating model and financial performance. For many systems, management has succeeded in responding to these forces with focused efforts on performance improvement, reducing hospital length of stay, accelerating patient throughput, and improving labor productivity in the inpatient hospital setting.

Yet many organizations feel more fragile, not less. That discomfort is warranted.

We know that performance improvement can absolutely improve near-term cash and quality. It is essential. But it does not change the underlying economics of a hospital-centered portfolio fast enough, to respond to Kusserow and Johnson’s cited ten forces reshaping health care.

In short, performance improvement is a non-negotiable priority for future success. But it is a matter of doing things differently at a time when market forces are compelling systems to double down on doing different things.

Tenet as a Signal

So the question becomes: if performance improvement isn’t enough, what is the market rewarding as the system shifts?

Tenet offers a useful—if imperfect—signal. Tenet has recently been in the news for its rise in valuation. Those gains correlate to the repositioning of its portfolio to reduce exposure to capital-intensive inpatient hospitals and increase exposure to capital-light ambulatory surgery and outpatient specialty platforms. The result has been a meaningful valuation re-rating that, while perhaps not a replicable blueprint for nonprofits, is a signal that nonprofit boards and management should not ignore.

To be clear, Tenet’s valuation change is not clean proof that ambulatory surgical centers are causal to its success.  Tenet’s improved performance may reflect a bundle of factors including hospital divestitures, deleveraging, strong capital returns, and improved cash flow alongside portfolio mix.

Still, the message is relevant. The market rewards enterprises that can grow while lowering fixed costs and capital risk. This is especially true as consumers and payers push care out of the hospital.

That reward structure, though, collides head-on with the nonprofit reality that most systems still depend on inpatient economics to fund the enterprise.

The Nonprofit Paradox

Which brings us to the gating issue: if we shift volume to the outpatient setting, can we take cost out of the hospital? This is a relevant question as most nonprofit systems are pursuing two goals at the same time:

• Reduce ED and inpatient utilization through access, care redesign, and value-based contracting.
• Preserve the hospital as the financial engine of the enterprise.

These goals are increasingly in tension. When utilization falls but the cost structure stays, margins erode even as performance improves. If we get better at keeping people out of the hospital but still depend on the hospital to pay the enterprise bills, we can hurt ourselves financially by succeeding clinically.

I often hear this expressed by leaders as “doing the right things but still getting the wrong results”. They are delivering better care and outcomes but still ending up with worse financial results because they have not changed the core economics of the portfolio.

That reality forces leaders to broaden the question from “how do we run the hospital better”, to “should the hospital remain the economic core of the enterprise?”

The Elephant in the Room: Inpatient Fixed Costs

Ambulatory growth can happen relatively quickly. Inpatient fixed-cost reduction is slow, politically difficult, and operationally complex. Staffing models, unit closures, service consolidation, call coverage, and community expectations do not change quickly.

If ambulatory growth outpaces inpatient right-sizing, the result is predictable: self-inflicted margin compression as the hospital loses profitable volume while retaining overhead.

When evaluating a shift of enterprise strategy from inpatient acute to ambulatory care focused, Boards should insist on clear answers to three questions:

1. Which inpatient capacity will close or be repurposed and when?
2. What low-volume services will we stop doing (or consolidate)?
3. How will we maintain readiness, quality, and access with a smaller footprint?

If the answer is “we’ll figure it out,” skepticism is appropriate.

The Backfill Problem

Some leaders worry that shifting care to outpatient settings creates unrealistic pressure to “backfill” newly available inpatient capacity with profitable volume. That concern is real. In many markets, demand for beds remains high due to aging populations, behavioral health gaps, and access failures elsewhere in the system.

However, that backfill demand is often low-margin, high-complexity cases that are poorly aligned with hospital cost structures. It may keep beds full, but it does not necessarily improve payer mix, reduce fixed costs, or strengthen long-term economics.

In fact, backfill can delay the point at which inpatient capacity can be safely reduced, masking the underlying mismatch between demand and cost.

Backfill also cuts both ways. When hospitals become the default safety valve for system failures, they grow more capital-intensive and operationally constrained. Without a credible ambulatory platform to absorb demand upstream, reliance on inpatient care only increases—even as new outpatient capacity is added elsewhere.

In that environment, hospitals are not relieved by ambulatory growth; they are trapped by it, carrying the highest-cost care while the system struggles to realign its economics.

Three Board-Level Questions to Guide What Comes Next

The real discussion is not “ASCs vs hospitals.” It is portfolio design:

1. What percentage of future EBITDA should come from ambulatory platforms versus inpatient care?
2. What inpatient fixed costs can we realistically shrink or repurpose over five years and what decisions will that require?
3. How do we align physicians as owners and leaders in ambulatory growth without hollowing out hospitals faster than we can resize them?

The Uncomfortable Conclusion

You cannot improve your way out of a hospital-centered portfolio if the portfolio itself is being repriced by utilization shift and capital risk.

Nonprofit boards do not need to copy Tenet. But they do need to confront the same reality: the hospital cannot be assumed to remain the enterprise growth engine.

The winners will stabilize hospital performance and deliberately build a new economic core around physician-aligned, capital-light ambulatory platforms paired with a realistic plan to shrink inpatient fixed costs over time. This “dual transformation” is critical to enterprise sustainability. It warrants a disciplined and focused discussion at the Board and executive level in 2026.

J. Michael Eaton — SVP, Healthcare Strategy, Nexcurve

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