8 observations on the state of healthcare for the year ahead
1. The existing slow down in growth of healthcare inflation and spending is largely due to the slow growth of the U.S. economy. CMS recently released a report, which found that in 2012, national health spending growth remained slow for the fourth consecutive year. According to the report, which was published in Health Affairs, national health spending in 2012 increased by 3.7 percent to $2.8 trillion, compared with a 3.6 percent increase to $2.7 trillion in 2011. Since 2009, annual growth in national health spending has remained between 3.6 percent and 3.8 percent, which is lower than years prior. In 2007, for example, the annual growth rate for healthcare came in at 7.6 percent.
Spending growth in 2012, compared to 2011, was just 0.4 percentage points higher, which represents the lowest rate increase since 1960. CMS analysts found, though, the law had little effect on growth rates. Instead, the authors argue the growth reflects the reverberating effects of the economic woes that began in 2008. According to the CMS report:
"This pattern [of slowing growth] is consistent with historical experience when health spending as a share of GDP often stabilizes approximately two to three years after the end of a recession and then increases when the economy significantly improves. Recently, however, the question has arisen about whether a more fundamental change is occurring within the health sector and whether this stability will endure. From our perspective, more historical evidence is needed before concluding that we have observed a structural break in the historical relationship between the health sector and the overall economy."
2. Healthcare inflation will continue to experience lower-than-usual growth due to the increased use of high-deductible health plans and the migration toward lower-paying payers. When dollars are tight, such as is the case during an economic downturn, consumers are unsurprisingly hesitant to spend money on elective healthcare. This hesitancy is compounded by the fact consumers are taking on more financial responsibility for their health coverage — a trend that is expected to increase.
A study by the National Business Group on Health found that more than 1 in 5 U.S. employers (22 percent) plan to offer only HDHPs to their employees in 2013 as a way to rein in the costs of providing health coverage. This year, these plans have a minimum deductible of $1,250, though many employers opt for higher deductibles in their benefit plan design. In 2012, for example, 14 percent of U.S. workers had health plans with a deductible of $2,000 or more, according to the Kaiser Family Foundation.
When patients feel the costs of healthcare directly, they consume services more cautiously. They also begin to demand more information on cost and quality to help them make more informed purchasing decisions. Additionally, when healthcare spending is scrutinized by patients, providers are less likely to increase prices — which will likely play a role in what we expect will be a sustained leveling off of healthcare inflation growth.
Additionally, the introduction of health plans purchased through exchanges is expected to shift more beneficiaries into lower-paying plans. As expected, many new marketplace plans' reimbursement rates are significantly lower than traditional employer-sponsored plans. If more Americans use these marketplaces to find coverage, as is expected, an increasing number of healthcare services will be paid at lower reimbursement rates. While this certainly will create major challenges for providers, the net result will be lower spending growth.
3. Health systems' acquisition of smaller hospitals, the merger of chains and practices acquisitions will slow down somewhat in 2014 as systems look to refine their existing operations. 2013 was marked by a great deal of merger and acquisition activity in the sector. Within the for-profit space, Tenet Healthcare acquired Vanguard Health Systems, and Community Health Systems announced the acquisition of Health Management Associates, which is expected to close this year. On the nonprofit side, Trinity Health merged with Catholic Health East to create the third-largest Catholic system in the country; Baylor merged with Scott & White to form the largest nonprofit system in Texas; and Mount Sinai and Continuum came together, forming the largest private health system in New York City.
In 2014, however, we expect some slowing of true transaction activity as health systems acutely focus on lowering cost and improving quality in preparation for new payment models and the proliferation of consumer-driven healthcare. Health systems that do acquire or merge will be even more selective about which organizations they bring into their fold; others will enter into non-ownership collaborative agreements to achieve economies of scale while protecting governance.
4. Hospitals will again need to retarget their efforts away from an "everything for everyone" mentality and instead focus efforts on the core areas and partnerships that drive profitability. Many hospitals are currently struggling to keep up with their objective of "being everything to everyone." Due to reimbursement and other pressures, hospitals will need to identify their strongest service lines or other strengths and align strategy around growing these services. Among regional systems, 2014's focus on improving operational efficiency could mean a restructuring of services (for example, consolidating cardiovascular services to two of four hospitals).
5. There will be a great deal more small hospital bankruptcies, and a few decent-sized system bankruptcies, in 2014. Hospitals and small systems that struggle with their financial situation may look to bankruptcy protection as a solution to their ongoing financial woes this year. Reimbursement pressures are expected only to increase throughout the year, and hospitals looking for partners to improve their situation will find their pool of potential partners pickier than ever, and with more suitors knocking at their doors.
6. There will continue to be a huge shortfall of IT talent needed help healthcare organizations manage their operations, optimize EHRs and make use of big data. In 2014, healthcare organizations IT staff will be forced to deal with a number of competing priorities: preparing the organization for the ICD-10, continued work toward meaningful use requirements, and implementing IT tools required for risk-based payment and population health management. At a time when hospitals need more IT talent than ever, they're more challenged than ever to find the workers they need. A 2013 survey by the Society of Actuaries found a vast majority (84 percent) of all respondents, and 79 percent of provider respondents, report difficulty finding employees with training in advanced data analytics. Additionally, one-third of healthcare provider organizations say they have placed a major IT project on hold due to a lack of qualified IT workers on staff, according Healthcare Information Management Systems Society survey. Organizations may need to prioritize IT recruiting, or set aside funds for significant outsourced work, to be able to complete their planned IT projects for the year.
7. While urgent care profitability will decrease as payers get tougher on reimbursement, there will be continued proliferation of urgent care as consumers increasingly seek out convenient care. Consumers, increasingly, will seek out providers that offer convenient access to care. Retail health and urgent care facilities have made finding same-day care easier than ever, and many physician groups have expanded hours into the evenings and weekend in response. A survey by health website Vitals found that adults under 30 are now more likely to seek care at an urgent care facility than through a primary care provider. Roughly 60 percent of all urgent care centers have a wait time of less than 15 minutes to see a physician or mid-level provider, and 65 percent have a physician on-site at all times. Hospitals and health systems that do not yet have an urgent care strategy will need to consider taking steps to "win" some of this market in 2014.
Worth noting, the urgent care center market is highly fragmented. Most operators own fewer than three centers and don't have a dominant market presence, according to Healthcare Appraisers, making the market ripe for consolidation.
8. Overall, growth in the ambulatory surgery sector will slow. Growth in overall centers and in same-store growth has greatly slowed over the past few years. Here, the slowdown is due to reductions in available centers and decreases in reimbursement. While ASCs and chains will continue to attempt to improve centers through recruiting physicians, adding higher acuity cases and managing supply expenses, profit growth will be somewhat tepid. ASC chains will keep looking at other avenues to raise revenues and increase profits (e.g., more work with hospital systems, and offering or adding other types of services).