January 5, 2015 — Miami, FL — The 2015 economic forecasts for the hospital industry continue to come out from the rating agencies, and continue to favor the largest, most geographically diverse health systems in the market. The large (over $2 billion in revenue) non-profit hospitals and for-profit companies are expected to grow revenue by 3% to 4% in 2015 due to economies of scale, geographic spread, favorable commercial payment rates and the ability to achieve revenue growth through diversification and addition of new services, BDC Advisors Managing Director Steve Weylandt commented in a paper released today. Revenue growth for smaller competitors who lack scale, the physician base, or capital to grow is expected to be in the -0.5 percent to 1.5% range.
Moody’s, Fitch, and Standard & Poor’s have all had pretty much the same message, Weylandt commented. With some exceptions there is a negative outlook for the overall hospital market due to pressure on top-line revenue growth and offsetting expense reductions more difficult to achieve. The rating agencies attribute the pressure to the ongoing uncertainties surrounding the legality and continued implementation of the Affordable Care Act, the accelerating shift towards value-based payments, and growth in consumer directed, high deductible health plans (HDHP) in the large employer segment of the commercial market.
“Despite the rating agencies’ conservative forecast, operating results through the first three quarters of 2014 have been positive for large systems with the ability to achieve scale economies. There is some evidence the coverage expansion of the ACA is creating benefits for acute care hospitals with a drop in uninsured patients. The drop in uninsured patients has been most evident in the 26 states which expanded Medicaid, but it also occurred in the states which didn’t expand according to Fitch Ratings, indicating that enrollment in health insurance exchange products is also reducing the number of uninsured,” said Weylandt.
Looking Forward to 2015
Weylandt stated, “There is general agreement among my colleagues that the 2015 hospital market presents a challenging environment for providers with pressure on revenue growth and rising expenses due to a number of factors:
Declining inpatient utilization rates and the growth of lower cost ambulatory alternatives.
The uneven growth of the newly insured gaining coverage through insurance exchanges in terms of how many people will enroll and how frequently they will use services.
The continued decline of the large employer insurance market and the downward impact on utilization resulting from the growth of high deductible consumer directed health plans.
Expensive investments in information technology and the need to develop integrated information systems to manage quality and cost.
Poorly structured health system medical groups, which frequently do not generate great enough strategic advantage to offset operating subsidies.
Development of care management systems and structures to function effectively in a value-based contracting environment.
Continuing Republican attempts to de-fund key parts of the ACA are likely to be met by presidential veto, but will raise the level of uncertainty in the market and make business planning more difficult. Finally, a Supreme Court ruling against the federally created state exchanges in the King vs. Burwell case may further challenge the operations of hospitals and health systems.”
Implications for Hospital and Healthcare Systems
Weylandt continued, “Our experience in complex market situations leads us to conclude that innovative leadership focused on meaningful health service integration creates the most successful health systems. In 2015, health systems will need to address a number of factors:
While careful attention to cost management continues to be of paramount importance, strategic positioning and investment in change to a larger health care system with broad service capabilities will be required. These investments include:
Development of community-based, consumer-responsive ambulatory services including primary care access points, urgent care and emergency care service, and ambulatory diagnostic centers.
Consumer-focused solutions that allow the patient of the future to access care via on line and telemedicine services.
EHR and clinical analytics capabilities to manage care across a continuum and facilitate referrals across a health system for patient convenience and efficiency of care.
Effective integration of physician practices to a high performing medical group or clinically integrated networks.
Development of a consumer-centered strategy to respond to increasing decision making and financial responsibility of the individual consumer. Health systems must develop a strategy to address price transparency, bundled pricing and retail pricing, and delivery of services.
Need to make sure the health system has the pieces in place for a properly structured health system. In larger, metropolitan markets, several large, organized health systems have emerged and are focused on integrating hospitals, physicians, and ambulatory services. Each of these systems must also develop solutions for post-acute care and consumer focused access to the health system components.”
Weylandt added that he anticipated that the majority of the firm’s clients would continue to grow and strengthen their market position in 2015. [1] Nevertheless, as systems grow and expand they should keep a weather eye on the growing concern in the Federal Trade Commission which sees the increasing consolidation that has occurred among providers as a “worrisome trend.” He pointed out that Edith Ramirez, the Chair of the Federal Trade Commission wrote in a December article in The New England Journal of Medicine, “We have seen the pace of merger activity accelerate, and left unchecked, consolidation risks undermining some of the key objectives of health care reform.” Promoting competition remains a central element of the FTC’s agenda when it comes to health care markets. Health systems can expect to be required to prove that their merger activities will not lead to anti-competitive consequences such as higher prices or other harms—and will raise the quality of health services.
As a national healthcare consulting firm specializing in strategic business planning and business diversification for large integrated healthcare delivery systems, BDC Advisors has helped many clients develop consumer-focused strategies.
BDC Advisors is a national healthcare consulting firm headquartered in Miami, which specializes in strategic business planning and business diversification for large integrated healthcare delivery systems, academic medical centers, and managed care organizations. For more information, visit www.bdcadvisors.com. Follow us on Twitter @BDCAdvisors.
Footnotes [1] As indicated, data confirms that larger health systems perform better financially and are rated higher by external credit rating agencies. Standard & Poor’s rates 139 health systems and 1,362 stand-alone hospitals across a number of measures. Of these, health systems are typically rated higher with the highest rated categories of AA and A being almost exclusively health systems.
[2] Ramirez, Edith J.D., “Antitrust Enforcement in Healthcare—Controlling Costs, Improving Quality,” New Eng. J Med, Dec 11, 2014.
For more information, contact Pattie McCann, Marketing Manager at 805-428-2029 or via email: pattie.mccann@bdcadvisors.com
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