Hospital-Physician Integration Increases Outpatient Prices

Hospital-physician practice integration has been shown to increase outpatient prices in some metropolitan statistical areas (MSAs) according to a national analysis of the effect of such deals over several years. The results were published in JAMA Internal Medicine in mid October.

 

The study comprised practices in 240 MSAs with seven million enrollees in preferred provider organizations or point-of-service plans from 2008 to 2012. The published results include:

 

  • Markets with greater increases in hospital-physician integration had greater increases in outpatient spending stemming from price increases and not increased utilization.
  • Higher inpatient prices were not associated with hospital physician integration.
  • During the study period, hospital-employed physicians increased in the studied areas by 3.3 percentage points to 21.3 percent.
  • The integration resulted in at least a $75 increase in average annual outpatient spending.
  • Price differences between office visits at independent physician offices and physicians integrated with hospitals were larger and more varied among commercially insured patients than among the Medicare population.
  • Pricing patterns resulted from both market differentials in the Medicare payment system and enhanced market power of the provider organizations.

 

The authors of the study noted that utilization did not decrease after hospitals purchased practices, suggesting “provider integration has not produced efficiency gains through improved care coordination or management.” They theorized that efficiencies might depend on the emergence of alternative payment models with incentives to limit utilization rather than consolidation. (“Hospital-Physician Practice Mergers Drive Some Price Increases: Study,” HFMA Weekly News, October 23, 2015)

 

Hospitals will need to work with the physicians in the integrated practices to reduce utilization and lower cost. Authors of a commentary following the report noted that, “This skill is one that hospitals might postpone developing only at their own peril.” (“Association of Financial Integration Between Physicians and Hospitals With Commercial Health Care Prices, JAMA Internal Medicine, October 19, 2015)

 

Hospital advocates noted some of the limitations of the study:

  • The study did not assess whether quality of care improved when seen by the integrated physicians.
  • The data were collected several years ago and do not reflect changes in today’s healthcare marketplace.
  • The data do not reflect recent drops in provider prices; for example, physician prices fell by 1.2 percent for the 12-month period ending September 2015, according to the Bureau of Labor Statistics and hospital price growth is at an historic low.

 

 

 

iProtean subscribers, the advanced Finance course, Integrating Population Health Management into Your Strategic and Financial Plans, Part One, is now in your library. Marian Jennings, Mark Grube and Nathan Kaufman discuss physicians and population health management, the infrastructure required, return on investment for population health initiatives, risks for smaller organizations and evaluating capital allocation priorities.

 

 

For a complete list of iProtean courses, click here.

 

 

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More Local Governments Look to Hospitals for Help

Local governments want not-for-profit hospitals to provide financial support to help them meet their rapidly increasing fixed costs. Reluctant to increase tax rates, municipalities want not-for-profit hospitals to make payments in lieu of taxes (PILOTs) or, in some cases, to pay property taxes, according to a recent Sector-in-Depth report from Moody’s Investors Service.

 

The authors of the report noted that the amounts are fairly small for not-for-profits, but still are credit negative for hospitals “which are operating in a revenue-pressured environment.” (Local Governments Increasingly Turn to Universities and Not-for-Profit Hospitals for Support, Moody’s Investors Service “Sector in Depth,” September 18, 2015.)

 

Historically, most not-for-profits have been exempt from property taxes under state law, and historical legislative efforts to allow local governments to levy a property tax have failed. Instead, many local governments, especially in the Northeast, have entered into arrangements to collect PILOTs, which usually generates less revenue than a direct tax on property.

 

Large not-for-profits such as hospitals and universities pay an average of 92 percent of existing PILOTs. These larger organizations are more capital intensive and generate more revenue than smaller not-for-profits such as churches and cultural organizations.

 

To date, most PILOTs paid by not-for-profit hospitals have been “manageable” at less than 5 percent of their operating budgets. But even the smallest of these payments adds expenditure pressure to hospitals operating in a revenue-constrained environment.

 

PILOTs typically are voluntary contributions; and they have tended to work well.

Local governments have recognized the importance of hospitals to the local economy and their impact on jobs and essential services. But the pressure is mounting to allow municipalities to tax not-for-profits.

 

There have been legislative initiatives in at least 15 states in the past two years to mandate contributions to local governments. In 11 states, these proposals included property taxes. Some proposals have failed, but Connecticut has passed a bill that allows collection of property taxes from certain universities and hospitals, effective October 1, 2015. And the senate president in New Jersey said he will work toward moving a bill that requires hospitals to financially support the municipalities in which they are located.

 

 

 

(Source: Local Governments Increasingly Turn to Universities and Not-for-Profit Hospitals for Support, Moody’s Investors Service “Sector in Depth,” September 18, 2015.)

 

Read the full report in iProtean’s upcoming Finance course Integrating Population Health Management into Your Strategic and Financial Plans, Part Two.

 

(iProtean again thanks Moody’s Investors Service for allowing us to share this and other reports with our subscribers.)

 

iProtean subscribers, the advanced Finance course, Integrating Population Health Management into Your Strategic and Financial Plans, Part One, is now in your library. Marian Jennings, Mark Grube and Nathan Kaufman discuss physicians and population health management, the infrastructure required, return on investment for population health initiatives, risks for smaller organizations and evaluating capital allocation priorities.

 

 

For a complete list of iProtean courses, click here.

 

For more information about iProtean, click here.

Hospitals Starting Health Plans Face Credit Risks

An emerging trend among not-for-profit hospitals positions them well for population health management but also carries significant credit risks, say Moody’s Investors Service analysts in a recent report. The trend is to enter the commercial health insurance business to both improve care management and gain market share, the analysts wrote.

 

The effect on credit primarily depends on the pace and the magnitude of the strategy. A hospital/system can either start a plan from scratch or acquire an existing health plan business. But both carry significant credit risks. Three key challenges must be overcome:

 

  • Developing or obtaining a skill set focused on operating/managing a business where lower utilization by enrollees improves profitability. Until the majority of a hospital’s reimbursement revenue is based on treatment outcomes, financial performance today depends on volume; i.e., higher utilization
  • Competing effectively with large established insurers
  • Financial resources to absorb start-up costs

 

The report notes that:

 

More providers will enter the commercial health insurance market despite risk of margin dilution.

Owning a health insurance plan gives health systems a way to control costs, diversify revenues and efficiently track and measure patient outcomes (i.e., population health management). However, an insurance strategy can negatively affect cash flow before the system can achieve sufficient revenues and critical mass. “The median operating cash flow margin for hospitals with insurance plans is 9.7 percent and they have a median rating of Aa3, well below the Aa median operating cash flow of 11.0 percent.”

 

Embarking on a health insurance strategy is very complex and requires new management skills.

These include actuarial skills for pricing models, specific marketing and service acumen, significantly different information technology demands, additional regulatory burdens and effectively managing competition from other health plans and other hospitals.

 

Healthcare systems with successful health plans share characteristics helping offset risks.

Common success factors include:

  • Experienced health plan leadership that operates the insurance business as a separate enterprise from hospital operations
  • Expansive and well-established physician networks
  • Critical mass of enrollment
  • Strong balance sheets and ample reserves to fund growth strategies and subsidize years when the plan operates at a financial loss
  • Fully-deployed electronic medical record
  • Strong and leading market position for acute care operations, which help management develop population health strategies
  • Track record of strong operating margins from acute care operations

 

 

(Source: Hospitals Entering Insurance Business Gamble on Long-Term Payoff, Moody’s Investors Service “Sector in Depth,” September 24, 2015.)

 

Read the full report in iProtean’s upcoming Finance course Integrating Population Health Management into Your Strategic and Financial Plans, Part Two.

 

(iProtean again thanks Moody’s Investors Service for allowing us to share this and other reports with our subscribers.)

 

iProtean subscribers, the advanced Finance course, Integrating Population Health Management into Your Strategic and Financial Plans, Part One, is now in your library. Marian Jennings, Mark Grube and Nathan Kaufman discuss physicians and population health management, the infrastructure required, return on investment for population health initiatives, risks for smaller organizations and evaluating capital allocation priorities.

 

 

For a complete list of iProtean courses, click here.

 

For more information about iProtean, click here.

What Do You Know About Cybersecurity?

As a board member, you may consider cybersecurity to be an operational issue for senior management and the IT department, but experts say, “its weighty implications for the entire organization now require directors to consider it as a critical risk management concern” that requires trustees to play an active role its oversight.

 

2015 has been a bad year for cybersecurity breaches in hospitals, systems and health plans; e.g., Anthem cyber-attack affected 78.8 million individuals; UCLA Health cyber-attack affected 4.5 million patients. Electronic health records combined with the significant profitability of acquiring protected health information ensure that cyber-attacks will continue to increase in the coming years.

 

How profitable is protected health information? Stolen medical records sell for approximately $10 per record—10 to 20 times greater than the value of a stolen credit card.

 

The authors of “From the Internet to the Boardroom: Health Care Director Oversight of Cybersecrity,” a new member briefing from the American Health Lawyers Association, outlined seven trustee responsibilities related to cybersecurity. They are:

 

  1. To be cyber literate
  2. To oversee the entity’s risk assessment of its information security practices
  3. To ensure that appropriate resources are dedicated to cybersecurity
  4. To consider obtaining cyber insurance
  5. To oversee relationships with third-party service providers
  6. To assign responsibility for cybersecurity oversight
  7. To ensure the organization has a crisis management plan in place

 

Ensuring effective oversight of cybersecurity is a “must do” for boards of directors. There are many laws that require providers to protect the confidentiality of their patients’ information, and a breach can cause significant damage to the organization. Boards should understand their responsibilities for oversight of the information security program—these are similar to their oversight responsibilities for other risks facing the organization. The authors of the report noted, “Directors must use their judgment and knowledge to provide effective guidance to management to ensure that the provider’s information security program is appropriately designed and operated given the business realities facing the organization.” (“From the Internet to the Boardroom: Health Care Director Oversight of Cybersecurity,” AHLA Member Briefing, October 2015)

 

 

iProtean subscribers, the advanced Finance course, Integrating Population Health Management into Your Strategic and Financial Plans, Part One, is now in your library. Marian Jennings, Mark Grube and Nathan Kaufman discuss physicians and population health management, the infrastructure required, return on investment for population health initiatives, risks for smaller organizations and evaluating capital allocation priorities.

 

 

For a complete list of iProtean courses, click here.

 

For more information about iProtean, click here.