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15 Key Factors Affecting Hospitals' Longer-Term Outlook

Written by Leigh Page | February 16, 2010

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Tags:Allan Baumgarten |Dick Clarke | hospitals | long-term trends

1. Promise fades for more paying patients. The health reform bill was going to vastly expand the

number of paying patients, but hospitals still would have had to wait three or four years to see a big

spurt in paying patients, says Allan Baumgarten, a Minneapolis-based research consultant whose

work focuses on healthcare policy, finance and local market strategies. Now hospitals will need to use

that time to plan for a future with a weak trickle of paying patients, he says.

2. Reimbursements lag further behind inflation. Long-term federal and state budget deficits will

keep reimbursements behind inflation, says Dick Clarke, president of the Healthcare Financial

Management Association in Westchester, Ill. That, coupled with the failure to expand the pool of

paying patients through reform, will mean hospitals will really have to work on expense reductions. In

the first year of the recession, Mr. Clark says, "hospitals already picked the low-hanging fruit, reducing

per-unit supply costs and the cost of personnel," so it will be more difficult this time around.

3. Number of paying patients in long-term decline. Higher unemployment results in fewer covered

patients, which means more bad debt and charity care, Mr. Baumgarten says. It's worse than you

might think, he adds, because for every one person who loses a job, you can figure two will lose

coverage, accounting for the worker's family. "This is a long-term problem because it won't be easy for

the economy to regain lost jobs," he says. "The risks for hospitals are significant."

4. Overcapacity of beds in some areas. Mr. Baumgarten says many hospitals have been extending

their geographic reach, especially into affluent suburbs, to increase their pool of paying patients. But

when everyone is doing this, it can lead to overbuilding and overcapacity. For example, he says three

new hospitals recently went up in Williamson County, Texas, north of Austin, which already had three

small hospitals. He wonders whether the area can sustain so much new construction.

5. Negotiating strength moves to insurers. Hospitals used to have the advantage over insurers in

price negotiations because beds were scarce and insurers needed to have them, Mr. Baumgarten

says. Hospital systems with highly regarded brand names and robust geographic presence haveenjoyed strong leverage. But as utilization declines and hospitals create overcapacity, he thinks

insurers might be able to skip over a stubborn hospital that demands a large pay increase.

6. Insurers may not need to be tough negotiators. Health plans are passing on much of their

insurance risks to employers, patients and providers, Mr. Baumgarten observes. Large employers are

increasingly self-funded, an arrangement where the insurer simply manages the account and is not on

the hook if costs rise. And in high-deductible plans, the plans pass on part of the risk to patients and

providers. Patients have to pay large amounts before they meet their deductible and hospitals and

doctors have to collect it.

7. Patients continue shifting to high-deductible plans. Dodging rising premiums in traditional

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plans, many people have been switching to high-deductible health plans with comparatively low

premiums. Mr. Baumgarten says high-deductibles lower the demand for services. "When you have to

pay everything out-of-pocket until the deductible is met, you're less likely to seek care," he says. He

believes it's unlikely people will switch back from high deductibles even if healthcare inflation

subsides.

8. Hospitals forced to become more efficient. Hospitals have long complained about insufficient

Medicare payment levels, but as rate hikes cool off, Mr. Baumgarten thinks hospitals may decide

Medicare rates aren't so bad after all and that these rates could be enough if hospitals learned to be

more efficient. One way this can be done, he says, is to collaborate very closely with physicians and

other providers to reduce the total cost of a particular episode of care both inside and outside of the

hospital.

9. Payors move to bundled reimbursements. Mr. Clarke says CMS has launched several pilot

projects that explore paying providers for the whole episode of care, such as the Acute Care Episode

(ACE) demonstration. Instead of reimbursing for volume, he predicts payors will move toward

reimbursements for outcomes, or "payment for value." Expect more pilots, soon followed by some

permanent changes in reimbursements from both public and private payors, he says.

10. Providers coalesce into integrated systems. Facing declining income and changing payment

methodologies, hospitals will need to fundamentally restructure the way they deliver care, Mr. Clarke

says. "Organizations will need to pull together in a different way," he says. "The old incentive to admit

more patients will be replaced by the new incentive to improve outcomes." He thinks hospitals will

have to approach healthcare from a new perspective: keeping patients out of the hospital.

11. Physicians fall in with hospitals. Despite bad experiences with acquiring physician practices in

the 1990s, hospitals are back at it, Mr. Baumgarten says. He sees this as a win-win situation in many

cases. Hospitals need physicians to increase admissions and to coordinate care, and group practices

need hospitals to access capital for projects like EMR. Some analysts believe a group practice of less

than 350 doctors cannot amass the necessary capital and cannot be sustained.

12. Small hospitals seek shelter with larger ones. "The number of small, freestanding hospitals will

decline fairly significantly in the next five years," Mr. Clarke says. "In many cases smaller institutions

will not be large enough to address upcoming challenges, such as taking a bundled payment." He

thinks they will join larger institutions that have the means to organize hospitals and doctors intointegrated systems.

13. Capital needed for IT introductions. Mr. Clarke says hospitals will need to buy more equipment

and redesign facilities to change patient flow, but the biggest investment will be in healthcare IT, a very

expensive proposition.

14. Non-profits' debts stay comparatively small. While many nonprofit hospitals face debts, they

tend to have much lower debt loads than those of privately held organizations, Mr. Clarke says.

Because nonprofit hospitals can't go into private equity markets, their ability to develop capital is more

constrained and they can't amass huge debts, he says.

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15. Discounts for construction become available. With overall demand for construction in the

basement, Mr. Baumgarten sees outstanding discounts for hospitals that want to build and have the

money to does so. The cost of materials is down and contractors will negotiate price just to get the

business. However, hospitals face the risk of overbuilding caused by the downward trend in patient

volume. Already some new projects are being scaled back, with unfinished space set aside for future

expansion.

Contact Leigh Page atleigh@beckersasc.com.

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