Looking back at 2013, what has been the impact on the hospital industry of sequestration and the recent government shutdown? How are hospitals coping with the uncertainty coming out of Washington?
Sequestration and the recent government shutdown haven’t seemed to have a large impact on hospitals, per se. New Medicare/Medicaid regulations such as penalties for readmissions and the two-midnight rule have had a larger effect.
Margin compression due to reduced insurance reimbursements, plus aspects of the ACA, such as greater risk for hospitals as they move away from fee-for-services towards a value-based, population health reimbursement model, have also had a much greater impact. Hospitals have lived with the uncertainties in Washington for a long time now and it makes for a very difficult planning process. Hospitals know that Medicare and Medicaid reimbursements will decrease year to year, they just don’t know by how much. Any hospital that plans for price growth as a strategy will be looking for trouble.
Consolidation is a big issue these days. How do you think the hospital consolidation trend will play out in 2014?
Hospital consolidation needs to be assessed in the context of the challenges that hospitals are currently facing. Hospital boards are grappling with the question of whether they want to continue operating solely as hospitals – which is a dying business – or expand to provide more healthcare services in order to survive. To survive independently, hospitals have to be in the “health business” and a part of an integrated system that offers a variety of services.
For larger hospitals, the decision about whether to consolidate centers around buying power. In order to successfully achieve economies of scale, they need to take out some costs and drive growth from the top line. Coming together to access various patient bases and gain best practices are other reasons consolidations can be attractive to these hospitals. One issue for larger hospitals looking at acquiring smaller hospitals is the obligation of a debt structure. Many hospitals don’t want to take this on. If they can’t control a hospital without having to take up this debt, we may see consolidation activity slow down. This may also be a reason why smaller rural hospitals aren’t being included as much in the M&A activity we are seeing.
A lot of these small hospitals may be too small to achieve economies of scale and have come together to form small regional health systems. This way, they are not competing for patients and at the same time can outsource back office tasks.
In any consolidation or merger, hospitals need to make sure they can successfully integrate both clinically and operationally in order to drive margins.
On the subject of consolidation, do you expect that hospital/physician alignment will continue to be a major issue in the next few years? Are we seeing the end of the independent physician practice, as hospitals increasingly buy local practices?
I think that is essentially right. Hospitals need doctors and doctors need hospitals or they need to join larger physician practices where they are no longer responsible for their back offices and malpractice insurance premiums, which are sky high.
Hospitals need the primary care physicians to help drive volume in their institutions and to the hospital-owned ambulatory sites. The hospital/physician alignment has become a real partnership and will continue to evolve.
What are some of your expectations for 2014 in the hospital industry?
Hospitals are in trouble and seeing margin compression due to a number of cost and pricing issues. In our view, for 2014 and beyond, successful hospitals will be those that have moved away from fee-for-services to value-based medicine. We are already seeing some hospitals make this shift.
One key issue is that price is no longer an effective growth strategy (as it was in the ‘90s). This is something we are continually seeing in the hospital industry. In fact, hospitals are facing their largest price drops in 17 years as public pressure for transparency and for hospitals and insurance companies to reveal prices is growing. This shift means there is increasing risk to account for as well.
To drive growth, hospitals need to focus on cost control, value-based medicine and managing populations in the coming year.