April 22, 2013
The healthcare industry remains volatile, with various sub-industries expanding and contracting for a variety of reasons, including the economy, changing reimbursement and spending, and market consolidation. This article provides an overview of the current status of certain sub-industries, and discusses some of the specific factors that are contributing to these trends. This article also provides specific considerations regarding the status of the economy and how it is impacting healthcare providers; discusses the trend of large health system mergers and questions whether these “mega-mergers” are positive or negative; and presents observations related to independent physician practices that are staying independent.
1. Observations on 17 Niches. Healthcare reform, the economic landscape and the continual regulatory changes that characterize the healthcare industry have created certain shifts in the prospects of various healthcare niches. While the success of a specific company or provider within a sub-industry depends a great deal on its individual strengths, the proficiency of its management team and its available resources, specific trends emerge across the broader sector. Below is a brief overview of the current status of 17 healthcare markets.
| Industry | Industry Status/Prospects |
| Hospitals and Health Systems | Slow erosion to stable: political power in part offsets substantial reimbursement risk; reduced inpatient cases; increased risk on patient receivables and increased deductibles; serious pricing pressure if movement of patients to exchanges; continued consolidation across industry. Certain hospitals and health systems that have the best quality, that develop leadership in taking on risk, that have market dominance, or that treat a specialized niche and are very lean in their operations will thrive. |
| Ambulatory Surgery Centers | Slow erosion: reduced number of available physicians; core specialties remaining fairly independent; pressure on case numbers; reimbursement risk; some access to payor issues. Despite the slow erosion in the overall ASC industry, ASC business remains a very good industry and business in the greater context. It remains remarkable how different the revenue equation can be for ASCs from geographic market to market. |
| Dialysis Facilities | Stable to growth: continued increasing patient demand offsets some reimbursement risk; continued consolidation; reduced number of physician-owned facilities. |
| Physician Practices | Slow to moderate erosion; reimbursement risk depending upon specialty (see below); pressure on referral base and payor access. |
| Medical Device | Slow erosion to stable: political power in part offsets some pricing pressure (e.g., relationship with Senator Orrin Hatch); better international opportunities; patient demand continues to increase; substantial mid- and long-term pressure on domestic pricing. |
| Health Information Technology | Stable to slow growth: customer budget constraints (increased risk to customer-available capital) offset by need to expand and improve systems in hospital and health systems. |
| Urgent Care | Growth: strong alignment with consumers and payors; slim margins. |
| Dental Practice Management | Stable to growth: growth dependent on payor mix — pressure on Medicaid-dependent companies; increased state regulatory pressure. |
| Home Health | Stable: little political power; fragmented industry undergoing consolidation; some reimbursement risk. |
| Hospice | Stable: some political power; reimbursement risk; utilization risk constraints; consistent consumer demand. |
| Nursing Homes | Slow erosion to stable: reimbursement risks for Medicaid-dependent providers and timing of payment from states impact cash flow. |
| Behavioral Health | Growth: high patient demand for services; alignment with payors and consumers. |
| Anesthesia Practice Management | Stable to growth: alignment with payors and hospital sector. |
| Pain Management | Stable: influx of physicians; increased reimbursement and utilization controls. |
| Orthopedics | Slow erosion to stable: reimbursement risk; mature orthopedic practices seem to be very resilient in terms of their referral base and remain critical to the overall delivery of healthcare (i.e., as to the percentage of total dollars spent in orthopedics and the reliance of all facilities on orthopedics). |
| Spine Care | Slow erosion to stable: reimbursement risk; increased payor controls on surgery. |
| Gastroenterology | Stable: while some pressure on pricing at all levels, gastroenterologists in many spots remain in very high demand and remain very busy. |
2. Healthcare Spending. Following are seven observations on the current economic climate surrounding healthcare providers.
A. Government Debt and the Need to Reduce Spending. No matter how you slice it —and the sequester seems to be the most simple and obvious example of it — there is an increased recognition that the federal government must rein in its spending. Even those on the tax-and-spend side seem to view it as such. Through Medicare and Medicaid, the government is responsible for around 30 to 50 percent of the payments healthcare providers receive and, as a result, even small reductions in federal spending could amount to a lot of money coming out of healthcare.
B. Increased Taxes. Increased taxes on high-earning individuals will only further compound the impact of sequestration by taking more money out of the economy that would be otherwise spent on goods and services, including healthcare. These increased taxes being paid by the largest tax payor blocs will take serious dollars out of the economy that won’t cleanly recycle back in and may just go to service government debt. Where a larger and larger portion of the healthcare bill is paid by consumers, whether via deductibles or other means, this has a significant impact on the economy.
C. Tepid Economic Growth. Even before accounting for the sequester and increased taxes on income and the payroll, the economic growth rate was at 1 to 2 percent. When you then take another 3 to 5 percent out of the economy through taxes and cost reductions, it is hard to see where the country will have any economic growth. In March, the unemployment rate was steady at 7.6 percent. Real job creation was below zero when job growth (a 88,000 increase in nonfarm payroll employment) is balanced with those exiting the workforce. Overall, the civilian labor force declined by 496,000 during the month.
D. Shifts to Healthcare Exchanges. As insurance companies raise rates to meet the requirements of healthcare reform, it is increasingly projected that more of the population will move to healthcare exchanges. This shift to exchange-based health plans is concerning for healthcare providers, because the payment rates for these plans are uncertain. A small movement of well-paying commercial insurance patients to lower-paying exchanges bodes very poorly for providers.
E. Tightened Spending on Healthcare. Economic problems will provide more pressure on employers and employees to cut costs, including what is paid for healthcare. Employees selecting health plans — either offered through their employer or exchanges — may move toward lower-premium or high-deductible health plans with less comprehensive coverage. These plans shift more healthcare cost responsibility on patients, which can create collections difficulties for providers. Similarly, employers looking to cut costs will reevaluate healthcare spending and and may elect to cost-shift to employees.
F. Provider Profitability Under Pressure. Health systems are reporting lower profits in 2012 than in 2011, and the decrease in reimbursement and inpatient cases coupled with the percentage of healthcare costs patients are responsible for out-of-pocket will exacerbate these changes. The loss in some types of cases by systems leads to increased competition for other types of cases; this puts more pressure on the providers who survive based on such cases and patients.
G. Mergers and Acquisitions. Earlier this month, the New York Times reported that the first quarter of 2013 saw the lowest M&A deal volume since Q1, 2010 (See “Mergers Slowed to a Snail’s Pace in the First Quarter, the Fewest Since 2003,” New York Times, April 2, 2013). However, we are still seeing a steady flow of deals in the healthcare sector.
3. Mega Hospital and Health System Mergers. During recent months, the concept of “Big Medicine” has been increasingly discussed. Brigham and Women’s surgeon and writer Atul Gawande, M.D., propelled the phrase in his New Yorker op-ed last summer, in which he drew analogies between American healthcare and The Cheesecake Factory restaurant chain. “Big chains thrive because they provide goods and services of greater variety, better quality and lower cost than would otherwise be available,” Dr. Gawande wrote in the piece. The reality is that the U.S. healthcare sector is rapidly consolidating. Data by Irving Levin Associates shows that 2011, the latest year available, brought 86 hospital merger or acquisition deals — the highest number in the past decade.
Recently, more large health systems, e.g., systems with $3 billion dollars or more in revenue, are looking at merging with each other. Last fall, Detroit-based Henry Ford Health System and Beaumont Health System in Royal Oak, MI, announced their signing of a letter of intent to begin merger discussions. If they do consolidate, the systems would form the largest health network in southeast Michigan, with more than 42,000 employees and roughly $6.4 billion in annual revenue. In Texas, Temple-based Scott & White Healthcare and Dallas-based Baylor Health Care System announced plans in December 2012 to merge into a 42-hospital, $7.7 billion organization with approximately 34,000 employees. The deal would drive the newly created organization to one of the top 10 largest nonprofit systems in the country. There’s also the pending merger between Livonia, MI-based Trinity Health and Newtown Square, PA-based Catholic Health East, which will create an 82-hospital system across 21 states — potentially the fifth-largest hospital system in the country.
When already significant systems propose to merge, many questions arise with respect to whether the combination really makes sense from a cost-savings or strategy perspective. For example, will the combined system achieve a truly dominant position where payors and employers must have the system in their health plans or will the merger leave the system so burdened with costs and employees that it will ultimately need to engage in layoffs or other efforts to drastically cut costs? Will it allow for more strategic management or simply lead to a large system without clear priorities? Will the merger allow the health system to better serve managed care payors, deliver quality care and manage costs? Will the depth in revenues allow for better investments in management, outpatient services, information systems and other capital projects? Time will tell whether these mega-mergers succeed or create inefficient, misaligned systems.
4. Specialty Physician Practices. Despite the trend of migration of independent physicians to hospital and health system employment, many specialty physician practices are looking to remain independent. The decision to stay independent is largely driven by concern regarding future income. This concern mainly stems from a lack of control over referral patterns and decreasing professional and ancillary reimbursement. Small changes in income lead to an explosion in physician/hospital transactions. For example, when the average cardiologist’s reimbursement fell by about 15 percent, a significant number of cardiologists migrated from private practice to hospital employment. With most other specialties, once reimbursement falls by more than 10 percent, the interest in joining a hospital or health system tends to become significantly more acute. Until that point, practices seem more eager to remain autonomous, particularly if it’s a group that has enjoyed long-term independence. Practices that elect to remain independent are also evaluating strategies for affiliating with other practices, either through ownership or collaborations designed to achieve increased bargaining power with payors.