Changes, Challenges Are Sole Certainties in Healthcare’s Uncertain Future
Date May, 2017
Featured in the Journal of Corporate Renewal
The future of healthcare in America has never been so uncertain. Amid continuing political tensions, payer and patient pressures, and changes in the way that care is delivered, there doesn’t appear to be a clear and distinct path forward. And there may not be for quite some time, given Congress’ recent unsuccessful attempt to replace the Affordable Care Act.
Fear of the unknown is creating a great deal of stress for individuals, hospitals, and healthcare providers alike. What is known, however, is that the healthcare industry will face significant change and challenges in 2017 and beyond. Most of these challenges will continue to stem from reimbursement cuts, the continuing shift from inpatient to outpatient services, and rising costs to maintain or update technology to meet industry standards.
A number of factors contribute to this overwhelming feeling of uncertainty, starting with the future of the ACA. As most know, the ACA is a primary reason that hospitals have been seeing higher volumes of insured patients. If the law is eventually repealed or replaced, those volumes would drop significantly and adversely impact payments. The repercussions on providers would be substantial, especially since one of the ACA’s primary objectives is to reward quality of care as opposed to quantity of care—a change that has impacted hospitals serving Medicare patients the most. Regardless of how everything works out, the shift in payments will force providers with high Medicaid/Medicare patient populations to determine the best way to move forward with lower reimbursements.
In addition to reduced reimbursements, necessary investments in personnel, equipment, and technology have also led to significant margin compression in the traditional hospital setting. And maintaining compliance with the Health Insurance Portability and Accountability Act (HIPAA) and the Health Information Technology for Economic and Clinical Health (HITECH) Act, as well as keeping up with a host of anti-kickback and medical malpractice guidelines, has created financial pressures that are simply unavoidable.
Changes in consumer behavior, specifically consumer reactions to high-deductible plans, are creating further uncertainty for hospitals in projecting patient volume and revenue. Patients are now considering all options for care, and rightfully so, given the high out-of-pocket costs typically associated with a traditional hospital setting. Convenience is no longer the primary consideration when it comes to seeking care; hence the rise of specialized outpatient services.
And consumers have taken notice. Specialty providers, such as orthopedic clinics and urgent care clinics, provide the speed, availability, and affordability that hospitals can’t. These consumer-friendly outpatient services have created a surplus of traditional hospital beds, leading to an increasing number of hospital consolidations and closures, particularly for rural and community hospitals. Survival has become increasingly difficult for smaller hospitals, forcing many of them to align with larger healthcare systems to remain profitable.
Impact on the Industry
These financial challenges have led to a steady increase in healthcare bankruptcies and consolidations over the last three years, a trend that initially began in Q4 2014. According to data compiled by CapitalIQ, the number of distressed M&A deals involving healthcare providers in the U.S. increased an astounding 86 percent from 2013-2014 to 2015-2016.
This impact is most acutely seen in rural America, as more than 80 hospitals in rural areas have closed since 2010, according to the National Rural Health Association. This trend is likely to continue, particularly since the reduction in Medicaid/Medicare reimbursements and the increasing availability of alternative outpatient options have the greatest impact on hospitals in rural areas. The failure of some states to expand or opt out of Medicaid makes this problem even worse.
Rural hospitals also continue to suffer from an inability to attract and retain top medical talent, especially in primary care and specialized areas, such as cardiology and oncology. This not only contributes to the consolidation and closure of rural hospitals, but it also has an adverse impact on the communities in which those hospitals operate. And, if the ACA is repealed or replaced and Medicaid funding is cut even further, this would almost certainly exacerbate the problem.
In addition, and this impacts hospitals and communities of all sizes, independently employed physicians are leaving private practice in favor of hospitals and healthcare systems. Larger entities offer the technology, equipment, and economies of scale that private practice does not. This is also a way for independently employed physicians to relieve their own financial obligations, especially since the growth of retail clinics has severely hampered their ability to remain profitable.
These retail clinics, which are found in pharmacies such as CVS, Rite Aid, and Walgreens, meet the needs of the consumer in ways that private practices cannot. The clinics are usually closer, have extended hours, and are staffed by nurses and nurse practitioners like those that a patient would see at a physician’s office. They also typically offer greater financial incentive for most patients in the form of lower cost flat-rate care. In fact, according to Accenture, there will be more than 2,800 retail clinics by 2018, a 47 percent increase over the number operating in 2014.
Competing with this model will prove difficult if traditional service providers don’t make changes in the way in which they provide care. The expansion of clinic offerings and the creation of partnerships with retail clinics are two options to counteract this trend.
Surviving the Uncertainty
So what’s the best way to ensure survival in a time when there is no clear indication of what’s next? There are multiple considerations, of course, but none is more important than an honest and careful evaluation of the business plan. At a minimum, healthcare providers must make sure their core services are supported and the business model provides room for continued growth and sustainable margins. Disposing of nonessential and nonstrategic facilities or expansions that don’t make practical or financial sense is a given, especially if they don’t support the provider’s long-term vision.
At the same time, providers should consider expanding service line offerings and specialty programs, especially those that generate long-term revenue streams. For some, that could mean treating cancer and other serious illnesses or injuries. Given the nature of the illness or condition, these types of services require extended outpatient care and/or rehabilitation in a hospital setting. While not all providers are equipped to deliver all potential service lines, they should consider those that they’re best-suited to handle and that help them avoid relying on competitive streams that go head to head with low-cost retail clinics.
Providers might also consider taking advantage of less common and nontraditional avenues such as asset-based lending facilities, especially since hospitals are asset-intensive and typically have major investments in machinery and equipment.
One way or another, the coming months will reveal more about the future of healthcare in America. Outside of the new administration’s approach to policymaking and regulatory matters, which everyone is watching closely, there are certain indicators that may provide clues on where the industry is headed. Some of these signs include bankruptcies, reported cash flows from major hospitals and clinics, reports from major manufacturers and industry associations on reinvestments in equipment, and hospital facility expansion.
Questions about reimbursements, incentives, and the insured pool will persist. And healthcare providers will continue to face pressure from consolidation. One thing that can be controlled, however, is education on the issues and working with trusted advisors to plan and prepare for next steps in the face of change, wherever that change takes the healthcare industry.