This remains a challenging time in the healthcare industry. Unfortunately, it is also an interesting and fascinating time in the general economy as a whole. This article outlines 15 short observations regarding trends and concepts in the healthcare industry.
1. Political power. Political power provides a strong defense against federal reimbursement and regulatory changes. As a corollary, a lack of political power in certain sectors can be devastating. The necessity of political power as a hedge against the risk of reimbursement cuts and negative regulatory developments varies depending on the industry subsector. For a copy of an article entitled “Investing in Health Care — A Story of Political Clout, Successful Niches, and Recurring Cycles,” please go to www.BeckersASC.com. The article offers a comparative analysis of some of these industry sectors and how they have fared politically over time.
2. Payor consolidation. The consolidation of payors in many markets is starting to have a significant impact on commercial reimbursement. It took a couple of years to work such changes through the system and to have the payors start to understand and utilize their strength across markets, but this is beginning to happen and is increasingly evident in negotiations between payors and providers.
3. Healthcare-direct versus healthcarelite. In analyzing healthcare sectors, we often divide the universe into two distinct categories. First, there are healthcare providers and provider-based companies. Second, there are companies that provide services, items and real estate to healthcare providers. The core difference is often the direct risk as to reimbursement and regulatory changes, as opposed to indirect as risk to the same. For example, while ambulatory surgery centers (ASC) provide services directly to patients and, as a result, would feel the full impact of a reimbursement reduction, a company that sells medical supplies to ASCs is one additional step removed from the direct payor and, therefore, would likely still feel the effects of a reimbursement cut, but more indirectly.
4. Hospitals and health systems. Several general observations can be made as to the hospital and health system sector. First, both for-profits and not-for-profits generally are tending to have strong results in 2008. The for-profit chains such as HCA, Community Health Systems and Universal Health Systems, are reporting relatively strong earnings. For example, for the six months ended June 30, 2008, CHS (post-merger) generated $5.418 billion in net operating revenues, a growth of 130.33 percent over the six months ended June 30, 2007, and $108 million of net income, consistent with the six months ended June 30, 2007.1 Furthermore, UHS net income increased $14 million to $116 million during the sixmonth period ended June 30, 2008, as compared to $102 million during the comparable prior year period.2
There are approximately 1,000 to 1,500 hospitals in the country that are extremely healthy. In contrast, several of the rural and critical-access hospitals lack substantial volume and higher-acuity services, and tend to be struggling. The hospitals that are most likely to go bankrupt often include some of the urban hospitals that have a difficult reimbursement mix and hospitals that are smaller but are large enough to have very serious overhead.
5. Physician-owned hospitals. Physicianowned hospitals lack political clout and continue to be under siege from a regulatory and legislative standpoint. They tend to have few allies and, unfortunately, some powerful enemies. In contrast, relatively few serious legislative threats have been seen in recent years as to physician-ownership of ASCs. See “Physician Hospitals and Ambulatory Surgery Centers — What Causes the Political Chasm?” at www.HospitalReviewMagazine.com
6. Imaging. The attack on the imaging sector continues to be relentless from a regulatory and reimbursement perspective. There is a widely held perception that supply creates demand; thus, the greater the supply available, the more that supply will drive up demand for imaging services. There is also a general perception in Washington and in CMS that physician-ownership of imaging and profiting from imaging is bad. From a business perspective, this remains an area in which to be cautious.
7. Ambulatory surgery centers. The ASC business continues to be a good business. That stated, the easy profit in that sector is either under pressure or gone. Medicare reimbursement remains relatively stable. Higher-acuity procedures are doing better and lower-acuity procedures have been cut. The easy profits from commercial payors and from workers’ compensation programs are largely under pressure or being reduced. Payment that is at a certain discount from usual and customary charges, out-ofnetwork and high-paying workers’ compensation business are all becoming less common. The big three in terms of procedures performed in ASCs and reimbursed by Medicare are orthopedics (often 20 to 30 percent Medicare business), gastroenterology (often 25 to 35 percent Medicare) and ophthalmology (often 75 percent and higher Medicare).
Current Medicare reimbursement cuts resulted in ASCs being reimbursed at approximately 65 percent of hospital outpatient department rates. This will have an impact on reimbursement of certain specialties and procedures performed at ASCs. Although a four-year transition period will soften some of the blow, the American Gastroenterological Association has calculated that reimbursement in gastroenterology will be reduced by approximately 5 percent in 2008 with the transition period (and 15 percent with no transition period).3 Kathy Bryant, JD, president of the Ambulatory Surgery Center Association, calculates that in the year 2009, both gastroenterology and pain management reimbursements will be reduced by approximately 6 percent.4
8. Practice management. Physician-management companies are reemerging in many markets. In these markets, the solvent physician-management companies are built around specialties where the physicians are not responsible for referrals; rather, the organization of the company can drive business. For example, the development of physician-management companies has been seen in anesthesia, hospitalists, emergency physicians, dental and a few other areas. This is unlike the last iteration of this sector where 25 of the 30 or so physician-management companies went bankrupt. In that prior situation, the business deals relied largely upon taking money off the top in exchange for buying such interests, but physicians really continued to own and operate their own practices.
9. Healthcare REITs and medical office buildings. The strength in the healthcare REIT market is stronger than in the general REIT market. That stated, it is starting to run into serious headwinds. The strength of healthcare REITs and medical office buildings depends greatly on their portfolios of providers and tenants. For example, are they diversified? Are they highly dependent upon higher-risk areas such as block leasing, imaging, LTACHs, skilled nursing facilities or “under-arrangements” transactions? Like many “healthcare-lite” businesses they are highly dependent upon the types of tenants they have.
10. Licensing. State and federal licensure agencies are suffering from serious shortfalls in funding. The inability to get licensed or certified in relatively short order is leading to gaps and delays in reimbursements. Where available, certain providers have been able to short-circuit this process and obtain deemed status through approved accreditation organizations. Still, in many states, licensure delays remain.
11. Lending market. The tight lending market and the credit crunch are causing some impact on the pricing of private-equity deals as well as on the ability of many deals to close in a timely manner. We are also seeing large premiums in interest rates for situations where there is less collateral or guarantees. For example, on a recent transaction, we saw an interest rate premium of nearly 4 percent based on a lower required amount of collateral and guarantees. We are starting to see a greater depth of lenders returning to the market. Almost universally, credit conditions, financial covenants and due diligence on a borrower’s credit worthiness are all much tighter and much more closely scrutinized in today’s market.
12. Buy-and-resell or per-click. Buy-andresell providers and per-click lease arrangements are both under great pressure in areas such as cardiac catherization, gamma knives, radiation therapy (where a recent advisory opinion ruled against block leasing) and lithotripsy (where there have been Department of Justice settlements based on perclick over-payment arrangements). Another sector under pressure relates to businesses built around inoffice testing and pharmacies where infrastructure companies provide physicians with the ability to provide these services. A related concept is the “pod” model of satellite location pathology and diagnostic testing labs, a type of arrangement equally under siege by regulatory challenges.
13. Hospital bankruptcies. We are seeing some increase in hospital bankruptcies, but it is not overall significant. For example, since 1996, approximately 70 community hospitals have closed across California due to financial distress.
14. Uninsured patients. The nation as a whole is seeing a small decrease in the number of uninsured patients. The percentage of people without health insurance was 15.3 percent in 2007, down from 15.8 percent in 2006; and the number of uninsured was 45.7 million, down from 47.0 million.5
15. Patient payments. We are also seeing a situation in which most provider businesses are seeing an increased need to collect reimbursement co-pays and co-insurance from patients, and these parts of the payments will reflect a larger and larger part of reimbursement. Here, a great percentage of overall payment responsibility is being shifted to patients, and the ability to efficiently collect from patients is becoming a more important gauge of overall profitability.
References
1 Community Health Systems 10-Q, filed August 5, 2008.
2Universal Health Systems, Inc. 10-Q filed August 8, 2008
3CMS Freezes 2008 ASC Payments, American Gastroenterological Association.
4Kathy Bryant, Ltr. To Centers for Medicare & Medicaid Services, August 29, 2008.
5U.S. Census Bureau.
Mr. Becker (sbecker@mcguirewoods.com), Mr. Walker (bwalker@mcguirewoods.com) and Ms. Gilmer (egilmer@mcguirewoods.com) are attorneys for McGuireWoods.