Hospital Deals Slow Down in 2nd Quarter

Hospital merger & acquisition (M&A) activity in the second quarter of 2018 decreased by nearly 50 percent from the first quarter according to a M&A tracking company. Analyses by other companies that track M&A activity reported a similar decrease.

 

However, physician practice acquisition remained steady in the second quarter.

 

Irrespective of these numbers, hospital M&A activity is expected to remain high in upcoming months because many health systems are in the beginning stages of discussions. Also, regional health systems are positioning themselves for future growth, according to a tracking company, citing letters of intent to affiliate issued by several organizations.

 

A recent survey of system executives by Premier found that nearly half of the systems had completed a merger or acquisition in the past two years and 77 percent expected to do so in the next two years. (To read the survey results, click here.)

 

Some analysts have questioned whether aggressive M&A is financially benefiting hospitals and health systems. And CMS has frequently questioned whether consolidation has benefited communities.

 

HFMA reported on a not-yet-released Navigant analysis of 104 of the largest U.S. health systems. The analysis “found 22 locally dominant systems each had operating earnings declines of more than $100 million from FY15 to FY17.” (“In Q2, Hospital M&A Slows, Practice Acquisition Stays Flat,” HFMA Compass, August 2, 2018)

 

From FY15 to FY17, two-thirds of the 104 health systems had declines in operating income that totaled about $5.5 billion. More than 20 percent of the health systems Navigant studied lost money on operations in both 2016 and 2017. However, those losses were masked by their investment earnings.

 

“It is so sudden and it is so weird because it’s happening at the top of the economic cycle,” a Navigant adviser said. “Usually hospitals’ profits disappear after a recession.” (“In Q2, Hospital M&A Slows, Practice Acquisition Stays Flat,” HFMA Compass, August 2, 2018)

 

The financial challenges have been compounded by expenses that have risen three points faster than revenues, consumer-directed health plans that have cut into consumer demand (particularly for surgeries), and “mergers that didn’t make sense,” the analyst added. (“In Q2, Hospital M&A Slows, Practice Acquisition Stays Flat,” HFMA Compass, August 2, 2018)

 

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, is in your library. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

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Moody’s: Integrated Planning Essential for Financial Viability Part 2

We’re continuing the summary of the Moody’s Investors Service report on integrated planning and financial viability. Last week we covered investments in off-campus sites while maintaining high-margin inpatient services.

 

Today we focus on the remaining components of integrated planning: digitalization, investment in talent and operational and funding flexibility.

 

Digitalization

 

Information technology investments will continue to expand digitalization. This focus includes:

 

  • Data from electronic medical records to improve clinical outcomes and for predictive and preventive medicine
  • Requirement to track value and risk-based contracts spurred by reimbursement shifts
  • Data to spur innovation
  • Comprehensive cybersecurity safeguards

 

Investment in Talent

 

Clinical staff will account for a growing portion of operating costs, particularly if the nursing and physician shortage continues. With a limited supply and rising cost of nurses and physicians, there will be a careful drive toward improving productivity and redesigning workflows.

 

Moody’s analysts noted, however, that “too strong an emphasis on productivity may increase the likelihood of clinician burnout, exposing the system to safety risks or lawsuits, or penalties under value-based reimbursement models.” Telehealth will become increasingly used as a cost-effective means of delivering care, and improving access and throughput, as opposed to staffing physicians 24/7, or paying on-call wages.

 

Operational Funding and Flexibility

 

Operational and funding flexibility in a changing healthcare environment, and the ability to grow or contract when needed, will be crucial to overall credit quality and financial sustainability, Moody’s noted in its report.

 

  • Hospitals will need to evaluate service lines and divest those that are underperforming or not core to their long-term strategy to preserve margins and rationalize capital.
  • The shift to outpatient care, combined with reimbursement challenges and increasing costs, will put pressure on margins and limit the ability of hospitals to increase cash reserves through operations.
  • Hospitals with higher liquidity will be better able to manage volatility and adapt to evolving markets.

 

With respect to capital, the analysts offered the following points:

 

  • Timing and scope of strategic capital deployment are key credit considerations.
  • Phasing in large capital programs over time may provide flexibility to respond to unexpected shortfalls.
  • Deferred capital on the other hand can put the organization at a competitive disadvantage.
  • If not implemented appropriately, execution of simultaneous large-scale strategies will weaken credit quality.
  • However, long-range financial plans and a demonstrated ability to execute and respond to market conditions will be crucial to maintaining a strong credit profile.

 

Summary

 

Analysts concluded that it pays to “remain nimble” when planning for change. Various tactics include:

 

  • Commitment of the board to approve multi-year strategies
  • Willingness to embark on various strategies without short-term returns on investment
  • Ability to assess performance at various midpoints and change course
  • Integrated long-term financial, capital and strategic planning
  • Commitment to change skill set of management as strategies change
  • Willingness to change the culture of the organization through growth or merger strategy
  • Physician participation and buy-in

 

(From Flexibility, integrated planning key to the healthcare system of the future, Moody’s Investors Service Sector In-Depth, May 16, 2018.  iProtean thanks Moody’s Investors Service for its permission to excerpt portions of this Sector In-Depth.)

 

 

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Moody’s: Integrated Planning Essential for Financial Viability

Evolving industry pressures will require hospitals/systems to focus on their business strategies and prudent allocation of limited capital and financial resources.  Financial viability and competitiveness will require expanded patient access, digital efficiencies, top talent and financial flexibility.

 

Moody’s Investors Service analyzed each of the above components in its recent Sector-in-Depth, Flexibility, integrated planning key to the healthcare system of the future. We present a partial summary of its report today and will continue with the remaining components next week.

 

Balancing investments in access points with maintaining high-margin inpatient services

 

Outpatient facilities will continue to be an efficient and cost-effective way of treating lower severity cases and of expanding into underserved areas; however, margins are generally weaker than for inpatient services. Moody’s anticipates that traditional bed space will be reserved for scheduled cases of mainly higher acuity and surgical patients. Most medical cases, particularly unplanned, will be cared for as outpatients in ambulatory or micro-hospital settings. This evolution will eventually lead to hospitals, especially academic or more advanced tertiary facilities, becoming large intensive care units.

 

Some key points in the inpatient/outpatient discussion include:

 

  • Outpatient visits tend to be reimbursed at lower rates than inpatient stays.
  • Outpatient sites generally require less capital investment and have lower overheads than inpatient facilities, allowing them to be operated profitably.
  • Hospitals that are disproportionately dependent on lower acuity inpatient admissions will be at a disadvantage with the shift toward greater outpatient care. (However, Moody’s noted its data show hospitals with greater dependency on inpatient admissions generally have higher margins.)
  • The number of available inpatient beds will not remain aligned with overall population growth as hospitals shift lower acuity cases to outpatient settings.
  • Capital investment in traditional inpatient facilities will be increasingly targeted towards higher acuity, more intensive cases that cannot be treated in an outpatient setting.
  • Moody’s analysts expect growing investment in intensive care units and larger operating rooms to accommodate newer technologies such as surgical robots.
  • Consumerism and changing standards of care will continue to drive the shift to single-occupancy rooms, sometimes reducing overall bed count as double-occupancy rooms are converted.

 

The analysts also pointed to the acceleration of joint ventures with physicians and non-acute care providers and disruptive strategies by health insurers—for example, acquiring and integrating with physician groups and outpatient service providers—as increased direct competition with hospitals, putting further pressure on volumes and margins.

 

 

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, will be in your library later this week. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

 

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Capital Markets: Balancing Opportunity with Uncertainty

Capital markets, which have been relatively stable over the last several years, have begun a slow but consistent rise in interest rates. This means healthcare organizations should prepare for a higher cost of capital.

 

The outlook becomes confusing, however, because of “recent significant policy developments” from the current congress and administration, notes the author of a recent article in hfm Magazine.

 

“The policy changes, coupled with the dynamic of new players entering the healthcare business, suggest that over the long term the healthcare industry can expect to see new debt structures, new sources, and eventually, new metrics for monitoring and assessing the credit strength of an organization.” (“Healthcare Capital Markets Outlook: Short-Term Opportunities Versus Long-Term Uncertainty,” hfm Magazine, May 2018)

 

Some of the changes will result from the new tax law, others from volatility in the debt and equity markets and changing investors’ perceptions. Nontraditional healthcare organizations entering the healthcare market also will have an impact.

 

Although some minor changes in the status quo for borrowing will occur in 2018 going into 2019, healthcare borrowers can expect to see more radical changes with the ongoing effects of tax reform and the further influx of nontraditional players changing the healthcare business landscape, the author noted.

 

Today, both large and highly rated multihospital systems and urban medical centers, and smaller community and rural hospitals that may be below investment grade or unrated by the major credit rating agencies are experiencing favorable market conditions. However, as policy changes begin to bring about shifts in the cost and availability of capital, the likely future effects of the Tax Cuts and Jobs Act (TCJA) and the Federal Open Market Committee’s (FOMC) recent motions in shaping the new normal are worth considering.

 

The Federal Reserve already has made one interest-rate hike in 2018, and another two are expected this year. So the cost of capital has increased and can be expected to increase further.

 

It’s more difficult to predict the impact of the reduced corporate tax rate on tax-exempt providers. The benefit of tax-exempt debt for hospitals is that the bondholder does not pay taxes on the interest received and, in exchange, accepts a lower interest rate. Note that the relationship between the interest rate and the benefit to the borrower has roughly corresponded to the corporate tax rate.

 

However, with the drop in the corporate tax rate under the TCJA from 35 percent to 20 percent, the benefit of avoiding taxes is reduced, and “if this relationship holds, tax-exempt institutions will see a significant increase in capital costs.” (“Healthcare Capital Markets Outlook: Short-Term Opportunities Versus Long-Term Uncertainty,” hfm Magazine, May 2018)

 

Hospitals and systems should consider changes likely to occur with their tax-exempt direct placement debt. Direct placement refers to debt purchased by a single bank or other investor. The loan documents usually have a clause that notes that a change in the corporate tax rate will trigger an interest rate increase or, in some arrangements, an automatic reissuance of the debt.

 

“Few paid attention to such clauses in years past,” the author noted. (“Healthcare Capital Markets Outlook: Short-Term Opportunities Versus Long-Term Uncertainty,” hfm Magazine, May 2018)

 

In the first quarter 2018, many borrowers received notification that their interest rate would increase by amounts ranging from 0.25 percent to 1 percent. For organizations that are potentially subject to such increases, or that have debt clauses that require reissuances, it may be time to renegotiate the capital structure and gain greater flexibility for managing changes in interest rates, the author wrote.

 

The author concluded, “It is generally believed that, for the near term, average long-term tax-exempt bond fixed rates will continue to range between 4.25 percent and 5 percent. Over the long term, however, the new corporate tax rate will drive the cost of tax-exempt debt further upward. How much and when remain to be seen.” (“Healthcare Capital Markets Outlook: Short-Term Opportunities Versus Long-Term Uncertainty,” hfm Magazine, May 2018)

 

 

 

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Internalizing Enterprise Risk Management

As the healthcare market expands and evolves, the inherent risks also are increasing. These risks include:

  • The shift from volume to value
  • The rise of the consumer and expansion of consumer options
  • New payment models
  • Mobile strategies
  • New entrants
  • An aging population
  • Continued political and regulatory uncertainty

 

Whereas hospitals/systems have traditionally done well at risk identification and assessment, analysts wrote in a new report from the Healthcare Financial Management Association that “The industry has been less proficient at prioritizing and managing risk.” To do better, healthcare providers must invest more in building effective enterprise risk management (ERM) capabilities. (“ERM: Evolving From Risk Assessment to Strategic Risk Management,” HFMA’s Healthcare Finance Strategies, April 25, 2018)

 

“By giving an organization insight into how to take the right risks at the right time, an effective ERM program can help the organization more successfully execute its strategic imperatives,” the analysts wrote.

 

Key Components

 

Regardless of the initial ERM maturity level in the organization, an important starting point for developing the program begins with clearly defining or reviewing the program’s purpose and value proposition for key stakeholders. This exercise will help determine whether the current program is effectively serving the organization and is well positioned to drive the level of change needed while managing risk in a dynamic and complex environment.

 

The organization should create a risk culture and governance in alignment with its strategic planning process and build out risk processes with the support of governance, risk and compliance (GRC) technologies.

 

The five key components of the program include:

 

Building a risk culture.  Identifying, understanding and managing risk should be a priority and responsibility of all members of the management team. Risk topics should be part and parcel of day-to-day operations discussions as well as committee meetings and executive team discussions.

 

“Organizational risks should be defined more broadly than simply as events that result in challenges and issues that must be avoided. It is important that all stakeholders within the hospital or health system understand both the risks and opportunities presented, and the uncertainties that need to be balanced to make an informed decision on whether to pursue the opportunity.” (“ERM: Evolving From Risk Assessment to Strategic Risk Management,” HFMA’s Healthcare Finance Strategies, April 25, 2018)

 

Formalizing risk governance. The board, senior management and functional management should have specific roles within the risk-management process and recognize their active roles within the risk-governance process. They should be accountable for their participation in the process, and guides and protocols should be created to clearly define when and how issues of risk are to be escalated.

 

Aligning ERM with strategic planning. To achieve greater alignment to the organization’s strategic planning process, organizational leaders should leverage the results of the risk assessment to promote a discussion around the implications of the risk profile. These conversations ultimately should lead to integration of the ERM processes within key functions such as planning, mergers and acquisitions, and program management for strategic initiatives.

 

Standardizing the risk management process. A standardized risk management process relies on data analysis to define the qualitative and quantitative impact of risk on an organization’s ability to accomplish its strategic initiatives and execute its day-to-day business decisions. Organizational leaders should review all risk scenarios to understand the implications of changing business models, industry events and trends and the interrelatedness and combined impact of risk. Using this information, as well as risk appetite, risk management professionals can incorporate the changes over time and drive further resource allocation discussions.

 

Leveraging GRC technology to capture and coordinate risk management activities. As the risk environment evolves, enhanced and more sophisticated tools help to support an advancing risk management process and improve coordination of core risk management activities. These tools provide greater access to shared data and information across the organization and improve resiliency. (“ERM: Evolving From Risk Assessment to Strategic Risk Management,” HFMA’s Healthcare Finance Strategies, April 25, 2018)

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

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Merger Transactions Trend Upward in 2018, But at Higher Rate

Several deal-tracking companies reported an increase in hospital transactions in the first quarter of 2018—from 25 to 36 transactions depending on the tracking company. All noted it’s the second highest number of quarterly transactions in the last 10 years.

 

Transactions included:

  • For-profit divestures
  • Mega mergers worth more than $1 billion
  • Announced transactions involving teaching hospitals and academic medical centers

 

Moody’s Investors Service noted that industry pressures will continue to drive consolidation in the hospital industry. Increasing payment issues and “ongoing wage and supply cost inflation will pressure margins for hospitals that are not able to gain operating efficiencies,” Moody’s analysts’ wrote in an April 10 report.

 

Revenue pressures include rising bad debt, as patients face higher out-of-pocket payments, and payers increasingly encourage patients to seek care in lower-cost settings instead of hospitals. Additionally, state Medicaid programs are expected to seek ways to limit eligibility or reduce payments to providers. (“Hospital Deals Accelerate in 2018,” HFMA Weekly, April 20, 2018)

 

“Many smaller hospitals lack the capital to invest in new facilities to drive growth or make necessary investments in information technology and clinical systems that are required in order to operate efficiently and effectively in the current environment,” Moody’s wrote.

 

Smaller hospitals necessarily will look to larger organizations as capital partners, or they may choose to align with other hospitals. “They will need to do this in order to leverage purchasing and pricing power in negotiating with commercial payers in local markets,” Moody’s noted.

 

Experts Weigh In

 

A former director of the Medicare Payment Advisory Commission said recently at a conference that hospital and physician prices are related to increasing market concentration. He noted that while well-functioning markets can control costs and potentially improve quality, many U.S. markets don’t have that level of functioning even after many years of hospital concentration and increasing levels of vertical integration.

 

Hospital advocates have countered that a high level of consolidation is needed to provide the type of coordinated care that is increasingly sought by public and private payers. One healthcare executive noted that health care is consolidating to provide the scale that allows for improving care at a lower cost.

 

Congress has discussed possible federal responses to hospital merger and acquisition trends, including a reduction in Medicare payments to practices acquired by hospitals.

 

The merger trend also is affecting hospitals’ credit standing, according to a March 5 report by Moody’s. “Consolidation strategies may result in immediate improvement—or immediate decline—in credit quality, depending on the terms and materiality of the consolidation,” Moody’s wrote.

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

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Due Diligence: A Strategic Opportunity

When hospitals merge or enter into transactions, or a larger health system acquires a hospital, due diligence becomes a step to the process. During due diligence, an organization can “look under the hood,” if you will, and take a very deep dive into the operations of a hospital to identify any significant red flags that would cause the acquirer perhaps to walk away from the deal, said Dan Grauman, President and CEO of Veralon, during a recent interview with iProtean.

 

“The due diligence process should focus on the multiple dimensions of what defines a hospital organization.”

 

As a preview to iProtean’s upcoming course on due diligence, we’re presenting a recent article, “Don’t Lose Sight of the Strategic Value of Due Diligence,” Veralon Experience & Insights, from the Veralon team.

 

Performing due diligence can seem like a “check the boxes” exercise as organizations verify material facts, gain a clear view of the risks involved, and more. But there is strategic value in due diligence, especially in identifying the impact of the transaction on existing partnerships and relationships. Such insight empowers post-transaction planning and sets the stage for successful integration.

 

A “strategic” approach to due diligence seeks to develop a strong understanding of the relationships, market dynamics, competitive forces, and other factors that could affect the success and viability of the transaction. For example, organizations that elevate due diligence from a required exercise to a strategic opportunity:

 

  • Evaluate the “What if?” scenarios of competitors’ response to the transaction
  • Assess the potential impact of the transaction on physician alignment
  • Consider whether and how the transaction will affect partnerships with competitors

 

There are three standard areas of due diligence that, when strategically leveraged, play a critical role in preparing for integration.

 

Affiliations and Ventures

 

Standard due diligence includes review of an organization’s existing affiliations and business relationships (e.g., joint ventures, clinical affiliations, contracted services). Strategic due diligence goes beyond understanding the terms and legal considerations associated with these arrangements and seeks to understand the following:

 

Competitive and marketplace implications: Take the time to assess the potential impact of a competitor’s response to the transaction on the organization’s existing relationships. For example, one health system sought to acquire a community hospital whose primary competitor was a health system that was similar in size to the organization that wished to purchase the hospital. All of the hospital’s gastrointestinal and orthopedic physicians were employed by the competitor. Additionally, the hospital had entered into a joint venture with the competitor to operate a cancer center.

 

During strategic due diligence, health system leaders:

 

  • Considered how to respond if the hospital’s physician competitors chose not to provide care at the hospital
  • Established plans to align independent orthopedic practices in the area
  • Assessed the potential to pull out of existing joint venture relationships and partnerships
  • Evaluated the near-term integration priorities for the hospital and health system

 

Potential sources of future redundancy: For example, if a potential partner has a strong cancer program or a cancer center, the acquiring organization should consider how this program will fit within its existing service line.

 

Implications for accountable care organizations (ACOs) and clinically integrated networks (CINs). This is especially important in transactions that involve hospitals or health systems with multisystem physician networks.

 

Physician Services and Alignment

 

Standard due diligence will include a review of medical staff, physician/clinical relationships, medical staff composition (e.g., employed vs. independent, affiliations with competitors, age) and coverage arrangements. Strategic due diligence goes a step further, taking into consideration:

 

Gaps in medical staff/physician coverage: In addition to identifying current gaps in physician services, consider potential gaps in service that could arise in response to the transaction, such as changes in patient flow between facilities. Early identification of areas where stop-gap coverage may be needed ensures continued service delivery.

 

Impact on referral patterns: Consider the competitive dynamics that could influence post-transaction operations, including clinical referral patterns.

 

Implications for executive leadership. When reviewing contracts, keep an eye out for change-of-control provisions in place for the organization’s executive leaders. For example, if an executive leader has a change-of-control clause that states the leader may leave voluntarily after the transaction is complete and receive severance and full benefits for a specified period of time, this could present relevant financial risk.

 

Management and Administrative Services

 

Standard due diligence includes a review of management contracts with third parties and contracts for outsourced services, such as IT, billing, coding, and food services. Strategic due diligence seeks to strike a balance between the desire to eliminate expensive outsourced contracts and the need to retain on-the-ground insight and organizational knowledge that will be critical during integration . . .

 

 

(Special thank you to Veralon for permission to print significant parts of this article. For the full article, please email clockee@iprotean.com)

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

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Corporate Interest in the Delivery of Care

Now that the iProtean Symposium has concluded and we have a rich source of new material from our experts for the upcoming courses, we will from time to time feature select abstracts from our experts’ interviews. Subscribers will see new courses such as Health Care: We Have a Problem; Doing More with Less; Due Diligence on Deals; Alternative Sources of Revenue; Physicians and Value/Risk-Based Reimbursement; Involving Finance in Strategic Planning; Physician Burnout. Our experts include Dan Grauman, Marian Jennings, Nate Kaufman, Anne McGeorge and Brian Wong, M.D.

 

Today’s feature is from Dan Grauman and his thoughts on the recent interest by corporations in taking on healthcare.

 

Interviewer: Why is corporate America seemingly interested in taking on healthcare? Whether it be Amazon, Wall Street or Berkshire Hathaway or CVS/AETNA?

 

Health care continues get a lot of attention on a national scale by corporate America. Primarily this is because how significant a percentage of our economy goes to healthcare—nearly 20 percent. This includes hospitals, physicians, health insurers, pharmaceutical companies, medical device manufacturers, etc.

 

So when you have an industry that big and there’s disruption and change, all of which characterize our industry, there’s also opportunity. At the same time, large employers for years have been concerned about the cost of healthcare, the cost of the premiums that they have to bear for their work forces. So these large employers are paying attention as purchasers of healthcare services; they want to influence the delivery system and make sure it’s providing care in the most efficient way possible. They want to pressure the insurers and the pharmaceutical companies that are in the middle, if you will, and at the same time corporate American thinks it can do it better if it gets involved in a more meaningful way.

 

The new disruptive technology-driven companies are very sophisticated in terms of supply chain and other business processes and they look at their core competency and expertise and ask, “What if we translate and deliver this and apply it to healthcare delivery? Perhaps we can help this industry do better and at the same time help ourselves.

 

Interviewer: Will they better manage care and cost than the traditional players: hospitals, physicians and insurers?

 

There has been a long-term debate and discussion about whether anyone could help hospitals and physicians practice medicine in a better and more efficient way. Are the physicians, who have so much control about what care is rendered and how it’s delivered, the only ones who could really change the delivery of care?

 

The traditional model has been for health insurers, by threatening to deny payment for certain types of care, to try to influence care. It hasn’t worked very well and one of the well-known facts is that there are significant variations across the country in how medicine is practiced. There may be some valid reasons for some of those differences, but some of the differences are so stark that it doesn’t really make sense.

 

But the fact is that if you look at the way a particular disease or healthcare problem is handled in one market versus another across the country, you see significant variations. And the argument goes that if corporate America—the Amazons and Berkshire Hathaways and Googles—could reduce those variations and get more consistency about how medicine is practiced, then care and cost would be more favorable.

 

 

 

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HHS Head Plans to Get Aggressive with Value-Based Payments

The head of the U.S. Health and Human Services (HHS) said recently that the department will aggressively push to implement value-based payment, extending beyond ACOs and bundled payment initiatives.

 

“ . . . we want to look at bold measures that will fundamentally reorient how Medicare and Medicaid pay for care and create a true competitive playing field where value is rewarded handsomely,” said HHS Secretary Alex Azar II at a recent meeting of hospital executives. (“Azar: Time to Move Value-Based Payment Beyond ACOs, Bundles,” HFMA Weekly, March 7, 2018)

 

He said he plans to use the Center for Medicare and Medicaid Innovation and MACRA to experiment with new payment models.

 

Keys to Transformation

 

Azar outlined four “engines of transformation.” The first, as noted above, involves revamping federal value-based payment programs.

 

The second engine of transformation involves reducing government rules and regulations that inhibit integration and collaboration. Examples of regulations include:

  • Medicare and Medicaid price-reporting rules
  • FDA communication policies that hinder innovative pharmaceutical company and payer collaboration
  • Anti-fraud protections that impede useful coordination and integration of services

 

Another engine of transformation involves giving consumers greater control over health information through interoperable and accessible health IT, giving patients control of their records in a useful format and giving them the means to bring their records to a new provider.

 

Finally, he wants to encourage transparency from providers and payers. Azar said he would begin by encouraging the healthcare industry to find solutions and would “lay out more powerful incentives if it doesn’t.”

 

Consumer Focus

 

The key theme uniting the Secretary’s four priorities was that value will be determined by “a marketplace of many players” and not by “arbitrary authorities or central planners.” (“Azar: Time to Move Value-Based Payment Beyond ACOs, Bundles,” HFMA Weekly, March 7, 2018)

 

He wants a consumer-centric approach and argues that this will make transformation easier, but not painless. The reorientation toward consumers will potentially require “uncomfortable” federal intervention because facilitating a competitive, value-based marketplace “is going to be disruptive to existing actors, he said.” (“Azar: Time to Move Value-Based Payment Beyond ACOs, Bundles,” HFMA Weekly, March 7, 2018)

 

 

 

The Board’s Role in Leading Through Transition, iProtean’s latest advanced Governance course, now appears in your library. It features Karma Bass and Marian Jennings on issues such as dealing with uncertainty, new elements for evaluating the CEO, prudent risk-taking, critical questions, recommended practices, destination metrics and changing over time.

 

 

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Hospitals Threatened by Insurers’ Growth Strategies

“Hospitals will face greater competition, risk of volume declines and margin erosion as the nation’s largest commercial health insurers aggressively pursue growth strategies that are aimed at lowering healthcare spending,” according to Moody’s Investors Service.

 

Insurers’ strategies include:

 

  • Acquisition of physician groups
  • Acquisition of non-acute care services
  • Tougher contract negotiations
  • Greater restrictions on member benefits

 

Moody’s analysts note that to some degree, insurers have engaged in these strategies in the past. But as the pace and magnitude increase, these initiatives will be increasingly disruptive to not-for-profit hospitals’ credit quality.

 

Moody’s provided the following detail:

 

  • Hospitals will be vulnerable to direct competition as insurers purchase providers. Over the last several months, health insurers have announced three significant deals that seek to purchase healthcare service providers. These transactions will result in shifting more care away from higher cost hospital settings. Two examples:
    • In the largest of the three deals, CVS Health plans to merge with Aetna Inc. Hospitals will face the risk that Aetna members will get their primary care services from CVS’s retail health clinics instead of hospital outpatient settings.
    • Optum, a division of UnitedHealth Group Incorporated and an active acquirer of physician groups, announced that it plans to buy DaVita Inc.’s medical group division. Optum’s moves will raise uncertainty for hospitals in markets where it owns physicians.

 

  • As Optum and health insurers attempt to move to value-based payment models that emphasize quality over quantity of care, hospitals will see even less volume. By owning physicians, Optum—working with its health insurance affiliate, UnitedHealthcare (UHC) and a number of other health plans—will be able to take greater control of premiums and expenses, including those related to hospital care. Hospitals would lose more business if Optum’s medical groups and its contracted health plans accelerate the shifting of patients out of the more expensive hospital setting. As a result, hospitals’ revenue and income would also be at further risk as insurers seek to add value by reducing healthcare spending.

 

  • Hospital revenues and margins will come under additional pressure as insurers are increasingly able to better flex negotiating power. When negotiating contracts, insurers will benefit from increased scale. At the same time, hospitals are becoming increasingly reliant on commercial payments to cover operating costs as governmental payers reduce rates. As insurers impose more restrictions on the types of care for which they will provide coverage, hospitals will be vulnerable to rising bad debt levels and fewer emergency room visits.

 

(From: “Not-for-profit and public healthcare – US: Hospitals face new threat from health insurers’ disruptive growth strategies,” Moody’s US Public Finance Weekly Credit Outlook, February 22, 2018)

 

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