In July, after the dust settled from the Supreme Court's ruling on the Patient Protection and Affordable Care Act, Moody's Investors Service issued a report that was a reality check for hospitals: Not much will change, folks.
Moody's analysts said the Supreme Court's decision to uphold most of the PPACA was "credit neutral," and if anything, non-profit hospitals should not get their financial hopes up in the short term. In fact, non-profit hospitals will be confronting a bleak future for the rest of this year, according to a recent Moody's report, due to all of the established and developing risks associated with hospitals' revenue growth and cost structures.
Lisa Goldstein, an associate managing director at Moody's and an author of several reports for non-profit hospitals, believes there are five abundantly clear trends facing non-profit hospitals right now — and it's up to those hospitals to take those challenges by the horns and adapt.
1. Different ways of being paid. Now that the PPACA has been upheld, non-profit hospitals can finally brace themselves for this payment reality: Medicare reimbursements will be reduced over 10 years by more than $150 billion, and $14 billion in Medicaid disproportionate share hospital payments will also be slashed. This does not factor in specific state budgets that are further cutting Medicaid reimbursements to hospitals, like Louisiana, which recently unveiled $859.2 million in Medicaid cuts.
"Hospitals need to focus on cost structures, but this is not new to the industry," Ms. Goldstein says. "Medicare has always been under review. Medicare represents 42 percent of the revenue base and is the single largest payor — but there will be lower payment per procedure."
Hospitals are officially entering a period where they will be paid differently (fee-for-service to value-based) and less. In addition, healthcare reform is expected to lead to more difficult negotiations with private payors due to their increasing federal scrutiny. Ms. Goldstein says hospitals simply have to embrace these payment changes as new facts of life, especially as more national deficit talks and sustainable growth rate fixes are coming down the pike.
2. Physician alignment. Physicians have always been the primary drivers of the healthcare system, and now hospitals are reverting back to the 1990s ideology that aligning with physicians will lead to the best results. The difference? Now hospitals know what not to do with physician contracts.
"Twelve to 15 years ago, the industry went into a physician employment strategy, and that did not go well for many," Ms. Goldstein says. "Contracts were not negotiated well with physicians, and many physicians saw it as an early retirement program because there were no goals or outcomes. Hospitals have to align with physicians to lower cost structures, and it appears to be more a sophisticated process now. There are productivity requirements embedded in the contracts and no more early retirement-type structures."
3. Growth strategies. The dollar volume of merger and acquisition activity among hospitals and other healthcare organizations more than doubled in the second quarter of 2012 compared with the first quarter of 2012, as there were 251 total deals worth $61.2 billion. Hospitals alone factored into 22 deals worth $4.5 billion.
Although the hospital M&A market this year has not been as vibrant as last year, the sector is still very much alive compared with a decade ago. According to Ms. Goldstein, hospital growth strategies via mergers and acquisitions are most likely here to stay due to healthcare reform's emphasis on shared risk and population management. "Healthcare reform favors size and scale," Ms. Goldstein says. "You can be much more efficient if you spread costs over more sites. You also negotiate better rates with vendors and payors. As the adage goes, there's safety in numbers."
4. De-risking the balance sheet. Ms. Goldstein says the balance sheet is an area that many non-profit hospitals have focused on to "de-risk" the financial position of the organization. For example, hospitals are moving away from variable-rate debt due to low interest rates and the instability in the financial markets, and more hospitals are moving toward defined contribution plans because they require less capital commitment from hospitals. "Many hospitals that have defined benefit pension plans have chosen to freeze defined benefit plans and start defined contribution plans," Ms. Goldstein says. "It's a long-term strategy, and it can reduce future pension liabilities."
Another area that hospital CFOs and executives have honed into is capital spending. Through fiscal year 2010, Moody's data shows there has been significant reduction in hospital capital spending due to the credit crisis of 2008, reform and uncertain volumes. However, Ms. Goldstein sees this only as a temporary balance sheet strategy because eventually, non-profit hospitals have to reinvest into their aging plant and equipment.
"You need to keep spending on the facility to maintain patient draw, so there may be a slight increase in capital spending," Ms. Goldstein says. "Not big jumps, but our thinking is you can only put off capital spending for so long because it's a very competitive business."
5. Management and governance. Hospital and health system boards are trying to keep their leadership structures as contemporary as possible, and Ms. Goldstein says this has resulted in CEOs and other C-suite leaders being brought in from industries outside healthcare, such as manufacturing, real estate and engineering.
While those individuals bring a unique financial perspective, there is another group — within healthcare — that is transforming the non-profit hospital governance structure: physicians. This is especially most common in situations where non-profit hospitals are forming accountable care organizations.
"Some [hospitals] are considering bringing in physicians as CEOs," Ms. Goldstein says. "They know the business obviously, and they work with fellow physicians. Even if it's not the CEO level, there is more physician leadership talent in the C-suite than we've seen in the past."
Moody's analysts said the Supreme Court's decision to uphold most of the PPACA was "credit neutral," and if anything, non-profit hospitals should not get their financial hopes up in the short term. In fact, non-profit hospitals will be confronting a bleak future for the rest of this year, according to a recent Moody's report, due to all of the established and developing risks associated with hospitals' revenue growth and cost structures.
Lisa Goldstein, an associate managing director at Moody's and an author of several reports for non-profit hospitals, believes there are five abundantly clear trends facing non-profit hospitals right now — and it's up to those hospitals to take those challenges by the horns and adapt.
1. Different ways of being paid. Now that the PPACA has been upheld, non-profit hospitals can finally brace themselves for this payment reality: Medicare reimbursements will be reduced over 10 years by more than $150 billion, and $14 billion in Medicaid disproportionate share hospital payments will also be slashed. This does not factor in specific state budgets that are further cutting Medicaid reimbursements to hospitals, like Louisiana, which recently unveiled $859.2 million in Medicaid cuts.
"Hospitals need to focus on cost structures, but this is not new to the industry," Ms. Goldstein says. "Medicare has always been under review. Medicare represents 42 percent of the revenue base and is the single largest payor — but there will be lower payment per procedure."
Hospitals are officially entering a period where they will be paid differently (fee-for-service to value-based) and less. In addition, healthcare reform is expected to lead to more difficult negotiations with private payors due to their increasing federal scrutiny. Ms. Goldstein says hospitals simply have to embrace these payment changes as new facts of life, especially as more national deficit talks and sustainable growth rate fixes are coming down the pike.
2. Physician alignment. Physicians have always been the primary drivers of the healthcare system, and now hospitals are reverting back to the 1990s ideology that aligning with physicians will lead to the best results. The difference? Now hospitals know what not to do with physician contracts.
"Twelve to 15 years ago, the industry went into a physician employment strategy, and that did not go well for many," Ms. Goldstein says. "Contracts were not negotiated well with physicians, and many physicians saw it as an early retirement program because there were no goals or outcomes. Hospitals have to align with physicians to lower cost structures, and it appears to be more a sophisticated process now. There are productivity requirements embedded in the contracts and no more early retirement-type structures."
3. Growth strategies. The dollar volume of merger and acquisition activity among hospitals and other healthcare organizations more than doubled in the second quarter of 2012 compared with the first quarter of 2012, as there were 251 total deals worth $61.2 billion. Hospitals alone factored into 22 deals worth $4.5 billion.
Although the hospital M&A market this year has not been as vibrant as last year, the sector is still very much alive compared with a decade ago. According to Ms. Goldstein, hospital growth strategies via mergers and acquisitions are most likely here to stay due to healthcare reform's emphasis on shared risk and population management. "Healthcare reform favors size and scale," Ms. Goldstein says. "You can be much more efficient if you spread costs over more sites. You also negotiate better rates with vendors and payors. As the adage goes, there's safety in numbers."
4. De-risking the balance sheet. Ms. Goldstein says the balance sheet is an area that many non-profit hospitals have focused on to "de-risk" the financial position of the organization. For example, hospitals are moving away from variable-rate debt due to low interest rates and the instability in the financial markets, and more hospitals are moving toward defined contribution plans because they require less capital commitment from hospitals. "Many hospitals that have defined benefit pension plans have chosen to freeze defined benefit plans and start defined contribution plans," Ms. Goldstein says. "It's a long-term strategy, and it can reduce future pension liabilities."
Another area that hospital CFOs and executives have honed into is capital spending. Through fiscal year 2010, Moody's data shows there has been significant reduction in hospital capital spending due to the credit crisis of 2008, reform and uncertain volumes. However, Ms. Goldstein sees this only as a temporary balance sheet strategy because eventually, non-profit hospitals have to reinvest into their aging plant and equipment.
"You need to keep spending on the facility to maintain patient draw, so there may be a slight increase in capital spending," Ms. Goldstein says. "Not big jumps, but our thinking is you can only put off capital spending for so long because it's a very competitive business."
5. Management and governance. Hospital and health system boards are trying to keep their leadership structures as contemporary as possible, and Ms. Goldstein says this has resulted in CEOs and other C-suite leaders being brought in from industries outside healthcare, such as manufacturing, real estate and engineering.
While those individuals bring a unique financial perspective, there is another group — within healthcare — that is transforming the non-profit hospital governance structure: physicians. This is especially most common in situations where non-profit hospitals are forming accountable care organizations.
"Some [hospitals] are considering bringing in physicians as CEOs," Ms. Goldstein says. "They know the business obviously, and they work with fellow physicians. Even if it's not the CEO level, there is more physician leadership talent in the C-suite than we've seen in the past."
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