Hospitals and health systems are constantly refining their strategies based on changes in market dynamics. While these dynamics can include varying factors from changes in market competition to introduction of new medical technologies, perhaps nothing impacts the need for a hospital to reassess its market strategy more than changes in legislation. Importantly, while periodic changes in key legislation, including updates to federal Stark and Anti-kickback statutes, can dictate the scope and pace of strategy and transactions within a hospital system, the advent of major healthcare reform in the context of the recently passed Patient Protection and Affordable Care Act has started to and will continue to drive dramatic change in healthcare over the next two decades. Notwithstanding the impact to consumers, the effect of healthcare reform will drive strategy and transactions that impact hospital structures, physician practices, ancillary services and the relationships between physicians and hospitals.
What hospital leaders are thinking about
Hospital leaders are confronted with a dizzying amount of challenges that may be overcome in the context of a strategy that will best position their organization for success over the long term. Unfortunately, many, if not most, of those challenges and the approaches to overcome them are ill-defined. Some examples of these include the following:
Patient Protection and Affordable Care Act. This piece of legislation has been rightly characterized as a major milestone for legislators and has been hailed as the most significant piece of legislation in a generation. However, for most hospital leaders, it represents a very broad and poorly understood challenge. Realistically, aside from general statements regarding numbers of new enrollees in government sponsored programs, there is little to guide hospital leaders to understand what changes should be made to strategic and business plans to meet the challenges of the future.
32 Million Medicaid enrollees. At its core, healthcare offers the promise of health insurance coverage for a vast number of the currently uninsured population. How, when and where this mass of people will receive care and its impact on hospital strategic imperatives is a question placed squarely on the desk of hospital leaders.
Accountable care organizations. ACOs offer a theoretical framework for increasing quality while reducing costs. They are theoretical because outside of a few new pilot projects, none has been implemented. Moreover, while most hospital leaders understand (and thus embrace) the concepts of improving quality and reducing costs, few have any real understanding of the new organizational structures, relationships, mechanisms and metrics that are supposed to characterize an ACO.
Bundled payments and episode-based payments. The prospect of changes in reimbursement structure is perhaps one of the most significant topics on the minds of hospital leaders. How hospital organizations will adjust and perhaps even take advantage of these changes is being scrutinized by almost every hospital CEO. Importantly, these payment mechanisms are credited with significant reductions in cardiac procedures based on pilot programs conducted several years ago. However, while a few payors are currently conducting additional pilot programs for orthopedic care, they are far from implementation on a broader scale.
Measuring quality. As a component of healthcare reform, hospitals are continuously being told by healthcare experts and pundits that they must institute quality measurement systems, and align physician interaction and behavior to improve quality.
Shortage of 150,000 primary care physicians by 2025. Several national studies have indicated a significant shortage of physicians over the next 10-15 years. Given the direct relationship between the physician and patient, and the referral relationship between physicians and hospitals, the prospect that the hospital with the most physicians will win (and the risk that their hospital will not have those physician relationships) puts many hospital leaders in a challenging position.
The responses to these and other vexing issues by hospital leaders are as varied as the issues themselves. However, one common element seems to be the imperative to start doing something. As a result a wide variety of transactions are currently being conducted in an unparalleled effort to prepare for the future. Unfortunately, although many transactions have a stated purpose of getting prepared for the aforementioned challenges, how they fit into a well thought out business strategy is often a missing component. The responses include the following:
Develop an integrated delivery network — Much like the mantra of the 1990's when physician hospital organizations and gatekeeper models were in vogue, the IDN has once again become the elixir for meeting the challenges of the future.
Acquire physician practices — While many hospitals learned painful lessons relating to the acquisition and management of physician practices, either the hangover of those experiences has faded or there is a belief that current market factors are different. In any case, while the drumbeat of physician practice acquisition has become louder, more hospitals are viewing practice acquisitions as part of the solution to meeting new challenges.
Acquire ancillary services — Over the last 20 years, hospitals have been in the unenviable position of watching outpatient service lines moved out of their provider entities by entrepreneurs and participating physicians. Some were captured within the physician practice under Stark exceptions and others were stripped away from hospitals into outpatient ventures. Now with significant cuts in reimbursement (imaging) or more limited ability to obtain out-of-network reimbursement (surgery centers), hospitals have an increased opportunity to reacquire those services into their provider entities and enhance their opportunity to once again envision an IDN.
Structure quality measures — Almost any objective to measure and improve quality metrics within a hospital requires the active participation of physicians, especially those with direct involvement with the service line in question. A number of factors have improved the opportunity for hospitals to structure quality measures with physicians. These include more defined financial incentive structures, greater realization on the part of physicians for the need to align with hospitals and higher risk of ventures outside the hospital. For hospitals, the opportunity to preserve services and revenues under the provider umbrella while creating an alignment with physicians is not only a welcome market change, but also fits with perceived strategic needs.
Hospital acquisitions — As the prospective impact of more realistic financial scenarios associated with healthcare reform become evident, many hospital leaders recognize that smaller or weaker hospitals will not survive the economic fallout. While this is sad news for small or independent community hospitals, it represents and opportunity for many health systems to expand their reach through market acquisition. The potential added benefit is more negotiating leverage with payors.
Progression of change
Amidst the backdrop of challenges being presented to hospital leaders are questions regarding how the proposed reform of healthcare will actually unfold. A significant part of this question is rooted in the ever changing estimates of cost. Two tables illustrate the precarious nature of the current expectations regarding the affordability of current legislated healthcare reform.
The first demonstrates that total healthcare spending is projected to grow from 16 percent of GDP ($2.5 trillion) in 2009 to 25 percent of GDP ($4.5 trillion) by 2025.
The second table illustrates the ability of federal budgeters to effectively estimate program costs at the time of enactment.
The logical conclusions that one can reasonably draw from these two tables (as well as other evidence) would be: 1) healthcare reform as currently envisioned is not economically viable; 2) current cost estimates could be wildly optimistic; and 3) healthcare reform is far from over and the unforeseen changes will be dramatic relative to the current healthcare environment.
While the ultimate impact of healthcare reform is difficult to imagine, one can draw some realistic conclusions relating to various components of the market. These include the following:
Conclusion 1: Current estimated levels of future healthcare spending are not sustainable. At a level of 25 percent of GDP, one in every four dollars would be spent on healthcare and that is only if current estimates are correct.
Result: Significant restructuring will occur in the healthcare market. These will include cuts in reimbursement, changes in payment structures and other reforms that will slow the rate of spending
Conclusion 2: Physicians across a variety of specialties will struggle. Similar to recent cuts in cardiology reimbursement, other physician specialties will certainly face fee cuts in both professional and ancillary services.
Result: Similar to the effect on cardiology practices, physicians will seek the security of hospital systems that can purchase their practice and employ the physician at a compensation level that reserves their level of income.
Conclusion 3: Ultimately, as a result of the imperative to decrease spending, largely through either direct cuts in hospital fees or changes in payment structures that yield the same economic effect, an estimated 20-25 percent of hospitals (approximately 1,000) will fail.
Result: As hospital reimbursement is decreased, or the impact of changing reimbursement model that are designed to cut costs go into effect, many hospitals that currently struggle with low margins will be unable to survive independently. As a result, most of these hospitals will either be acquired by healthier hospital systems, converted into specialty facilities or be closed.
Conclusion 4: As stated above, the estimated level of future healthcare spending is not sustainable. As a result, one can only conclude that significant additional changes will be required to maintain a solvent Medicare system. These changes may, among other things, include changes in enrollment age, eligibility based on income or asset testing and limitations on access for certain medical conditions.
Result: Over time, as more affluent baby boomers are ineligible for participation in a government-funded program, or the level of access and care in the program is decreased, other public/private or private models will evolve to provide desired levels of service. This could ultimately evolve into a two-tiered healthcare system.
Characteristics of a two-tiered healthcare system
While the evolution towards a two-tiered healthcare system similar to that of the United Kingdom is a hotly debated issue, based on current trends in the market, it is certainly a possibility. Additionally, those same trends might provide some insight as to some of the characteristics of a public system as compared to a public/private or private system.
Public healthcare
- Non-Profit (or, more accurately, tax-exempt) hospitals will be required to participate in federally sponsored healthcare programs (Medicare and Medicaid). These hospitals will have to determine how to restructure to serve the estimated 32 million additional enrollees and how to operate under new reimbursement systems
- Given the unsustainable prospective increases in healthcare spending, and the inevitable level of payment cuts, public hospitals will have to operate as high volume, low margin deliverers of service. They will be forced to adopt a 'Walmart' perspective.
- As competitive and financial pressures grow, a significant number of public hospitals will struggle to offer new delivery models (ACOs, bundled payments, episode-based payments) for government plans. These 'at risk' hospitals will wither, be acquired or, in the most extreme cases, require direct government support.
- As hospitals seek to determine how to serve a growing publicly insured population, and seek to control and manage a more limited pool of available dollars, larger public hospitals will accelerate the employment of physicians into their networks. These physicians will see the opportunity for employment by hospitals as a way to maintain their economic security in the face of reimbursement cuts and limitation on the ability to provide ancillary services.
- Physicians employed by public healthcare systems, largely as a function of physician practice acquisitions, will be required to provide services to all patients for whom the healthcare system provides services.
- Ultimately, as physician reimbursement decreases, or hospitals fail to effectively manage the financial aspect of physician practices, compensation for employed physicians will decrease.
Public/private or private healthcare
- Private healthcare will evolve in different ways in various parts of the healthcare landscape. In most cases, private healthcare will be offered along specific services including inpatient and outpatient surgery, cancer care, women's services and other areas.
- Specialty providers of private healthcare will ultimately consolidate to be able to offer either regional or national scope to patients and private healthcare insurers.
- Public healthcare systems will recognize the need to offer separate services to affluent consumers in order to maintain higher margins associated with consumer health plans that offer wider access.
- Physicians in private practice will either participate in both public and private healthcare, or, in some cases, opt out of participation in pubic plans and focus exclusively on private healthcare.
While the specific evolutionary path of the healthcare market is far from clear, what is clear is that the healthcare environment will go though dramatic changes. The current level of projected spending is not sustainable, and the only realistic outcome is a restructuring of the market that will yield lower spending growth though decrease utilization and lower costs. While healthcare reform is intended to accelerate mechanisms that will yield improved outcomes, the process will entail a myriad different strategies that will drive transactions that impact hospital structures, physician practices, ancillary services and the relationships between physicians and hospitals. As in many sectors of the domestic economy, market dynamics, financial opportunities and consumer needs will play a part in the evolution of healthcare. Only time will tell which of these strategies and resultant transactions will yield their intended results.
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