Category Archives: Market Uncertainty

The U.S. Anxiety Pandemic

Posted on by • Posted in 2026 Mid Term Election Issues, 2028 Election Issues, Anxiety, Executive Orders, Health Policy, Healthcare Reform, Market Uncertainty, Politics, Sign of the Times, State of the Union, Uncertainty • Tagged , , , , • Leave a comment
The U.S. Anxiety Pandemic

The U.S. bombing of Iran’s nuclear capability is unsettling: whether MAGA or not, hawk or dove, young or old, conservative or liberal, rich or poor—it matters.

Stability at home and abroad is utopian to some but desired by all. Pandemics, mass violence, natural disasters and even election results contribute to instability and lend to insecurity. Operation Midnight Hammer might contribute to the nation’s anxiety—time will tell.

The immediate aftermath of the bunker-bombings in Iran will involve two orchestrated campaigns by government officials:

  • The Campaign to Contain Middle East Tension: military, diplomatic and economic levers will be put to the test to limit escalation of the bombing and limit its consequence to the region.
  • The Campaign to Win Public Support: issues of consequence like military intervention ultimately depend on public opinion that support laws, funding and subsequent actions taken in response. History teaches and political leaders understand that ‘winning the hearts and minds’ of the public is necessary to success. Predictably, justification for Operation Midnight Hammer will be messaged loudly by supporters and challenged by critics.

For the moment, the news cycle will shift to foreign policy and away from tariffs, inflation, household prices and the “Big Beautiful Budget Bill” which the Senate Republicans hope to bring to the floor this week. News media will speculate about the after-effects of the Israeli-Iran bombing and what role the U.S. plays in an increasingly complicated geopolitical landscape marked by marked by armed conflicts Gaza, Ukraine, Myanmar, Yemen and 26 and other countries.

The attention these get in traditional media and social media channels will exacerbate public anxiety that’s already high: 19% U.S. adults and 40% of the country’s adolescents suffer from anxiety disorder: “a persistent, excessive fear or worry that interferes with daily life and functioning”. But, per the National Institute of Mental Health, fewer than a third suffering from severe anxiety receive professional treatment.

In the public health community, much is known about anxiety: it’s more prevalent among women than men, in minority populations, lower income populations and in the Southeast. It’s significant across all age groups, and at an alarming level among young working-class adults facing unique issues like affordability and job insecurity.  And it is stigmatized in certain communities (i.e. certain fundamentalist religious sects, certain ethnic communities) lending to silent suffering and unattended consequences.

My take:

Operation Midnight Hammer came at a time of widespread public anxiety about the economy, tariffs, inflation, costs of living and political division. I will let pundits debate the advisability and timing of the bunker-bombing but I know one thing for sure: mental health issues—including anxiety, mood and substance abuse disorders– deserve more support from policymakers and more attention by the healthcare community.

  • The former requires local, state and federal lawmakers to revisit and enforce mental health parity laws already on the books but rarely enforced.
  • The latter requires the healthcare community to elevate behavioral health to a national priority alongside obesity, heart disease, cancer and aging to secure the public’s health and avoid unintended consequences of neglect.

Regrettably, the issue is not new. Employers, school systems, religious organizations and local public health agencies have been mental health default safety values to date; extreme have been temporarily shuffled to in hospital emergency rooms most ill-equipped to manage them. But systematic, community-wide, evidence-based help for those in need of mental health remains beyond their reach.

The Trump administration’s healthcare leaders under HHS’ Kennedy and CMS’ Oz espouse the U.S. healthcare system should prioritize chronic disease and preventive health. They believe its proficiency in specialty care is, in part, the result of lucrative incentives that reward providers and their financial backers handsomely in these areas.

In the President’s February 13 Executive Order establishing the Make America Healthy Again Commission, its goal was laid out:

“To fully address the growing health crisis in America, we must re-direct our national focus, in the public and private sectors, toward understanding and drastically lowering chronic disease rates and ending childhood chronic disease.  This includes fresh thinking on nutrition, physical activity, healthy lifestyles, over-reliance on medication and treatments, the effects of new technological habits, environmental impacts, and food and drug quality and safety…  We must ensure our healthcare system promotes health rather than just managing disease.”

Nothing could be more timely and necessary to the Commission’s work than addressing mass anxiety and mental health as a national priority. And nothing is more urgently needed in communities than mainstreaming anxiety and mental health into the systems of health that accept full risk for whole person health.

PS: Before Operation Midnight Hammer over the weekend, I had prepared today’s report focused on two government reports about the long-term solvency of the Medicaid and Medicare programs. Given the gravity of events in Israel and Iran and other hot spots, and after discussions with my family and friends this weekend, it became clear public anxiety is high.

I am concerned about the future and worry about the health system’s response. It’s composed of good people doing worthwhile work who are worried about the future.  I recently spoke to a group on the theme (link below): ‘the future for healthcare is not a repeat of its past.’ That lends to anxiety unless accompanied by a vision for a better future. That’s what all hope for those in Iran, Gaza, Israel and beyond, and for all who serve in our industry.

The Implications of Losing Access to Tax-Exempt Financing

Posted on by • Posted in Credit Downgrade, Credit Management, Credit Quality, Credit Ratings, Credit Upgrade, Health System, Hospital, Hospital Industry, Market Consolidation, Market Trends, Market Uncertainty, Tax Exempt Debt, Tax Exempt Status, Tax-Exempt Status • Leave a comment

https://www.kaufmanhall.com/insights/thoughts-ken-kaufman/implications-losing-access-tax-exempt-financing

On January 17, 2025, a list of potential cost reductions to the federal budget was released by Republicans on the House Budget Committee. The list is long and covers the federal budget waterfront, but it spends considerable time focusing on reductions to healthcare spending. This laundry list of cost reductions is important because the highest priority of the Trump administration is a further reduction in federal taxes. A reduction in taxes would, of course, reduce federal revenue; if federal expenses are not proportionately reduced then the federal deficit will increase. When the deficit increases then the federal debt must increase and at that point the overall impact on the American economy becomes concerning and possibly damaging. There has already been much public speculation as to how the Federal Reserve might react to such a scenario.

It is not possible right now to highlight and describe all of the House budget proposals, but one proposal absolutely stands out: The suggestion to eliminate the tax-exempt status for interest payments on all municipal bonds, or potentially in a more targeted manner, for private activity bonds, including those issued by not-for-profit hospitals. Siebert Williams Shank, an investment banking firm, described the elimination of tax exemption for municipal bonds as “the most alarming of the proposed reforms impacting non-profit and municipal issuers.”[1] This is certainly true for hospitals, since over the past 60 years the growth and capability of America’s hospitals has been substantially constructed on the foundation of flexible and relatively inexpensive tax-exempt debt. Given all of this, it is not too early to begin speculating on the impact of the elimination of tax-exempt debt on hospital finances and strategy.

We should also point out that a separate topic is under discussion, related to the potential loss of not-for-profit status for hospitals and health systems. Such a maneuver could potentially expose hospitals to income taxes, property taxes, and higher funding costs. For now, that is beyond the scope of this blog but may be something we write about in future posts.

Below is a series of important questions related to the elimination of tax-exempt financing and some speculations on the overall impact:

  1. What immediately happens if 501(c)(3) hospitals lose the ability to issue tax-exempt bonds? Let’s treat fixed rate debt first. Assume for now that only newly issued debt would be affected and that all currently outstanding tax-exempt fixed rate debt would remain tax-exempt. We could see an effort to apply any changes retroactively to existing bonds, but we view that as unlikely. Therefore, our current expectation is that outstanding fixed-rate debt would not see a change in interest expense.

    However, it is possible that outstanding floating rate debt would immediately begin to trade based on the taxable equivalent. Historically the tax-exempt floating rate index trades at about 65% of the taxable index. The difference between the tax-exempt and taxable floating rate indices in the current market is 175 basis points. For every $100 million of debt, this would increase interest expense by $1.75m annually.
  2. How would new hospital debt be issued? New debt would be issued in the municipal market on a taxable basis or in the corporate taxable market. The taxable municipal market would need to adapt and expand to accommodate a significant level of new issuance. The concern in the corporate taxable market is greater. Currently, the corporate market requires issuance of significant dollar size and generally the issuer brings significant name recognition to the market. Many hospitals may have difficulty meeting the issuance size of the corporate debt market and/or the necessary market recognition. As such, smaller and less frequent issuers would expect to pay a penalty of 25-50 basis points for issuing in the corporate market.
  3. If tax-exempt debt goes away will certain hospitals be advantaged and others disadvantaged? Larger hospitals with national or regional name recognition that issue bonds with sufficiently large transaction size and frequency will likely borrow at better terms and lower rates. Smaller- to medium-sized hospitals may find borrowing much more difficult, and borrowing may come with more problematic terms and/or amortization schedules and likely higher interest rates.
  4. Will borrowing costs go up? The cost of funds for new borrowings would increase for all hospital borrowers. For a typical A-rated hospital, annual interest expense would increase by approximately 30%. For example, in the current market, on $100 million of new debt, average annual interest expense would increase by $815,000 annually.
  5. Will debt capacity go down? All other things being equal, interest rates will go up and hospital debt capacity will go down. Also, if the taxable market shortens amortization schedules, then that will decrease overall debt capacity as well.
  6. What would the impact of the elimination of tax-exempt debt be on synthetic fixed rate structures? Hospitals have long employed derivative structures to hedge interest rate risk on outstanding variable rate bonds and loans. The loss of tax-exemption for outstanding variable rate bonds and loans would precipitate an adjustment to taxable rates, but corresponding swap cash flows are not designed to adjust. Interest rate risk is hedged, but tax reform risk is not. The net effect to borrowers would be an increase in cost similar to the cost contemplated above for variable rate bonds.
  7. What are the rating implications of the elimination of the tax-exempt market? Rating implications will be varied. Hospitals with strong financial performance and liquidity are likely to absorb the increased interest expense of a taxable borrowing with little to no rating impact. In fact, over the past decade, many larger health systems in the AA rating categories have successfully issued debt in the taxable market without rating implications despite a higher borrowing rate. Even amid the pandemic chaos of 2021, numerous AA and A rated systems issued sizable, taxable debt offerings to bolster liquidity as proceeds were for general corporate purposes and not restricted by a third-party, such as a bond trustee.

    Lower-rated hospitals with modest performance and below-average liquidity will be at greater risk for a downgrade. These hospitals may not be able to absorb the increased interest expense and maintain their ratings. While interest expense is typically a small percentage of a hospital’s total expenses, it is a use of cash flow.

    We do not anticipate the rating agencies will take wholesale downgrade action on the rated portfolio as there would likely be a phase-in period before the elimination occurs. Rather, we expect the rating agencies will take a measured approach with a case-by-case evaluation of each rated organization through the normal course of surveillance, as they did during the pandemic and liquidity crisis in 2008. A dialogue on capital budgets and funding sources, typically held at the end of a rating meeting, would be moved to the top of the agenda, as it will have a direct impact on long-term viability.
  8. How would the loss of the tax-exempt market impact the pace of consolidation in the hospital industry? If a hospital cannot afford the taxable market, then large capital projects would need to be funded through cash and operations. This inevitably will limit organizational liquidity, which will lead to downward rating pressure. Some hospitals, in such a situation, will be unable to both fund capital and adequately serve their local community and, therefore, will need to find a partner who can. We anticipate that the loss of the tax-exempt bond market will lead to further consolidation in the industry.

Let’s indulge in one last bit of speculation. What is the probability that Congress will pass legislation that eliminates tax-exempt financing? Sources in Washington tell us that it is premature to wager on any of the items put forth by the Budget Committee. And it should be noted that over the years the elimination of tax-exempt financing has been proposed on several occasions and never advanced in Congress. However, one well-informed source noted that as the tax and related legislation moves forward, there is likely to be significant horse-trading (especially in the House) to secure the necessary votes to pass the entire package. What happens during that horse-trading process is anybody’s guess. So the best advice to our hospital readership right now is to not take anything for granted. But be absolutely assured that the maintenance of tax-exempt financing is an essential strategic component for the successful future of America’s hospitals.

Pace of Downgrades Slowed in 2024: Five Key Takeaways

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https://www.kaufmanhall.com/insights/blog/pace-downgrades-slowed-2024-five-key-takeaways

Downgrades continued to outpace upgrades in 2024 although at a lower rate than in 2023. When combining the rating actions of the three rating agencies, the number of downgrades (95) declined while the number of upgrades (37) increased, compared to 116 and 33, respectively, in 2023. Many of the downgrades reflected ongoing expense pressure that exceeded revenue growth, even as volumes headed back to pre-pandemic levels and the use of contract labor declined. Other downgrades reflected outsized increases in debt to fund pivotal growth strategies. Most of the upgrades reflected mergers of lower-rated hospitals into higher-rated systems. Rating affirmations remained the majority rating action in 2024, as in prior years.

Key takeaways include:

  1. The ratio of downgrades to upgrades narrowed at Moody’s (2.0-to-1 in 2024 from 3.2-to-1 in 2023) and Fitch (1.5-to-1 from 3.5-to-1). S&P saw a wider spread in the ratio: 4.5-to-1 in 2024 from 3.8-to-1 in 2023.
  2. Downgrades reflected a wide swath of hospitals, from small independent providers to large regional systems. Large academic medical centers and children’s hospitals saw downgrades, even with exclusive tertiary services that provided differentiation with payers. Shared, recurring downgrade factors included weaker financial performance, payer mix shifts to more governmental and less commercial, and thinner reserves. Many of the downgrades were concentrated along the two coasts: California and the Pacific Northwest and New York and Pennsylvania. Many of the ratings were already in low or below investment grade categories.
  3. Multi-notch downgrades continued in 2024, ranging from two to four notch movements in one rating action. One of the hospitals that experienced a four-notch downgrade subsequently defaulted on an interest payment (Jackson Hospital & Clinics, AL). Multi-notch upgrades reflected mergers into higher-rated systems, the largest being a seven-notch upgrade of a small, single-site hospital into a 19-hospital system in the Midwest.
  4. Five hospitals experienced multiple rating actions in 2024, with rating committees convening not once but two and three times during the year. These were distressed credits whose financial performance and reserve levels dropped materially from quarter to quarter, a characteristic of high-yield or speculative rated borrowers.
  5. While some of the upgrades followed mergers, other upgrades reflected improved financial performance and stable or growing liquidity. Likewise, some of the upgraded hospitals began receiving new supplemental funds known as Direct Payment Programs (DPPs). Unlike other supplemental funds, DPPs are subject to annual federal and state approval, making their long-term reliability uncertain. Numerous types of providers saw upgrades—including academic medical centers, independent hospitals and regional health systems—and were located across the U.S. Most of the upgraded hospitals (excluding those involved in mergers) were already investment grade.

As in past years, rating affirmations represented the overwhelming majority of rating actions in 2024. This is welcome news for the industry as many hospitals and health systems will turn to the bond market to borrow for their capital projects. Investors’ view of the industry should be bolstered by the change in industry outlooks. S&P moved to Stable from Negative and Fitch moved to Neutral from Deteriorating in December 2024, joining Moody’s revision to Stable from Negative in 2023.

We expect rating affirmations will again be the majority rating action in 2025. However, even with the stability viewed by the agencies, we expect downgrades to outpace upgrades given a growing reliance on government payers, labor challenges and a competitive environment. Policy and funding changes will also cast uncertainty into the mix in 2025 and may cause credit deterioration in future years.

Inflation cools, reassuring Fed after unexpectedly hot gains in Q1

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https://www.cfodive.com/news/inflation-cools-reassuring-fed-unexpectedly-hot-gains-q1-retail-sales-powell-federal-reserve/716255/?utm_source=Sailthru&utm_medium=email&utm_campaign=Issue:%202024-05-16%20CFO%20Dive%20%5Bissue:62114%5D&utm_term=CFO%20Dive

The yield on the benchmark 10-year Treasury note fell on investor speculation that slower inflation will prompt the Fed to sooner cut borrowing costs.

Dive Brief:

  • The consumer price index excluding volatile food and energy prices rose last month at the slowest pace this year, giving Federal Reserve policymakers some relief from a barrage of first-quarter data that shook confidence inflation will steadily slow to their 2% goal.
  • So-called core CPI gained 0.3% in April compared with 0.4% during the prior month, and eased to 3.6% on an annual basis from 3.8% in March, the Bureau of Labor Statistics said Wednesday. Shelter costs rose 0.4% last month, pushing up core CPI more than any other category. Prices for transportation, apparel and medical care also increased.
  • “Inflation should show some signs of more material disinflation over the coming months as upside surprises in Q1 reverse and shelter inflation continues to soften, particularly” during the second half of this year, David Page, head of macroeconomic research at AXA IM, said in a report.

Dive Insight:

Fed Chair Jerome Powell has repeatedly said this month that unexpectedly high first-quarter inflation eroded his confidence that price pressures are falling steadily enough to warrant a reduction in the highest federal funds rate in 23 years.

“I would say my confidence in that is not as high as it was, having seen these readings in the first three months of the year,” Powell said Tuesday.

Investor speculation that cooling inflation will prompt the Fed to sooner trim borrowing costs pushed down the yield on the benchmark Treasury note on Wednesday by about 0.1 percentage point to 3.86%. Equity prices rose.

“Today’s data may be a relief relative to past months, and that should reduce any fears that the Fed might have to raise rates,” Eric Winograd, developed market research director at AllianceBernstein, said in an email.

Still, “today’s data are not good enough to move the policy needle,” Winograd said, forecasting that the central bank will not cut the main interest rate until the fourth quarter.

“Unless the labor market weakens appreciably, it will take several months of inflation steadily decelerating before the Fed will be comfortable cutting rates,” he said.

Traders in interest rate futures put 69% odds that the Fed will trim the main interest rate by at least 0.5 percentage point by the end of this year, compared with 57% odds on Tuesday, according to the CME FedWatch Tool.

“The Fed is making progress, but taming inflation is taking time,” Scott Helfstein, head of investment strategy at Global X, said in an email response to questions.

“The Fed will probably be patient,” Helfstein said, forecasting either no change to the federal funds rate this year or at most a quarter-point cut in December. “A stable rate and inflation environment, most importantly, is good for companies.”

Powell predicted that inflation will eventually slow to a more moderate pace. “I expect that inflation will move back down on a monthly level, on a monthly basis, to levels that were more like the lower readings we were having last year,” Powell said Tuesday.

A separate report Wednesday showed consumers may be pocketing their wallets in response to higher borrowing costs and the waning of savings built during the pandemic.

Retail sales in April were unchanged from March, the Census Bureau said, releasing data that was lower than expected by economists. Growth in retail sales in March was marked down to 0.6% from 0.7%.

Still, “the consumer is okay,” Helfstein said, predicting that “economic growth will likely be driven by corporate investment through the back part of the year.”

Healthcare 2024: The 10 Themes that will Dominate Discussion

Posted on by • Posted in Accountable Care Organization (ACO), Antitrust, Board, Board Effectiveness, C-Suite, Distrust, Health Policy, Health System, Hospital, Hospital Industry, Market Consolidation, Market Trends, Market Uncertainty, Non-Profit Healthcare Industry, Physician Independence, Public Health, Workforce Issues, Workforce Strategy • Leave a comment
Healthcare 2024: The 10 Themes that will Dominate Discussion

The U.S. health system has experienced three major shifts since the pandemic that set the stage for its future:

  • From trust to distrust: Every poll has chronicled the decline in trust and confidence in government: Congress, the Presidency, the FDA and CDC and even the Supreme Court are at all-time lows. Thus, lawmaking about healthcare is met with unusual hostility.
  • From big to bigger: The market has consistently rewarded large cap operators, giving advantage to national and global operators in health insurance, information technology and retail health. In response, horizontal consolidation via mergers and acquisitions has enabled hospitals, medical practices, law firms and consultancies to get bigger, attracting increased attention from regulators. Access to private capital and investor confidence is a major differentiator for major players in each sector.
  • From regulatory tailwinds to headwinds: in the last 3 years, regulators have forced insurers, hospitals and drug companies to disclose prices and change business practices deemed harmful to fair competition and consumer choice. Incumbent-unfriendly scrutiny has increased at both the state and federal levels including notable bipartisan support for industry-opposed legislation. It will continue as healthcare favor appears to have run its course.

Some consider these adverse; others opportunistic; all consider them profound. All concede the long-term destination of the U.S. health system is unknown. Against this backdrop, 2024 is about safe bets.

These 10 themes will be on the agenda for every organization operating in the $4.5 trillion U.S. healthcare market:

  1. Not for profit health: “Not-for-profit” designation is significant in healthcare and increasingly a magnet for unwelcome attention. Not-for-profit hospitals, especially large, diversified multi-hospital systems, will face increased requirements to justify their tax exemptions. Special attention will be directed at non-operating income activities involving partnerships with private equity and incentives used in compensating leaders. Justification for profits will take center stage in 2024 with growing antipathy toward organizations deemed to put profit above all else.
  2. Insurer coverage and business practices: State and federal regulators will impose regulatory constraints on insurer business practices that lend to consumer and small-business affordability issues.
  3. Workforce wellbeing: The pandemic hangover, sustained impact of inflation on consumer prices, increased visibility of executive compensation and heightened public support for the rank-and-file workers and means wellbeing issues must be significant in 2024.
  4. Board effectiveness: The composition, preparedness, compensation and independent judgement of Boards will attract media scrutiny; not-for-profit boards will get special attention in light of 2023 revelations in higher education.
  5. Employer-sponsored health benefits: The cost-effectiveness of employee health benefits coverage will prompt some industries and large, self-insured companies to pursue alternative strategies for attracting and maintaining a productive workforce. Direct contracting, on-site and virtual care will be key elements.
  6. Physician independence: With 20% of physicians in private equity-backed groups, and 50% in hospital employed settings, ‘corporatization’ will encounter stiff resistance from physicians increasingly motivated to activism believing their voices are unheard.
  7. Data driven healthcare: The health industry’s drive toward interoperability and transparency will will force policy changes around data (codes) and platform ownership, intellectual property boundaries, liability et al. Experience-based healthcare will be forcibly constrained by data-driven changes to processes and insights.
  8. Consolidation: The DOJ and FTC will expand their activism against vertical and horizontal consolidation that result in higher costs for consumers. Retrospective analyses of prior deals to square promises and actual results will be necessary.
  9. Public health: State and federal funding for public health programs that integrate with community-based health providers will be prioritized. The inadequacy of public health funding versus the relative adequacy of healthcare’s more lucrative services will be the centerpiece for health reforms.
  10. ACO 2.0: In Campaign 2024, abortion and the Affordable Care Act will be vote-getters for candidates favoring/opposing current policies. Calls to “Fix and Repair” the Affordable Care Act will take center stage as voters’ seek affordability and access remedies.

Every Board and C suite in U.S. healthcare will face these issues in 2024.

The UAW Strike: What Healthcare Provider Organizations Should Watch

Posted on by • Posted in Consumerism, Financial Stewardship, Financial Strength, Financial Viability, Financially Distressed, Future, Future State, Health System, Hospital, Hospital Industry, Job Security, Labor Relations, Labor Shortages, Labor Spend Management, Labor Strike, Market Trends, Market Uncertainty, Scrutiny, Systemness, Uncertainty, Vulnerable • Leave a comment
The Keckley Report

Politicians, economists, auto industry analysts and main street business owners are closely watching the UAW strike that began at midnight last Thursday. Healthcare should also pay attention, especially hospitals. medical groups and facility operators where workforce issues are mounting.

Auto manufacturing accounts for 3% of America’s GDP and employs 2.2 million including 923,000 in frontline production. It’s high-profile sector industry in the U.S. with its most prominent operators aka “the Big Three” operating globally. Some stats:

  • The US automakers sold an estimated 13.75 million new and 36.2 million used vehicles in 2022.
  • The total value of the US car and automobile manufacturing market is $104.1 billion in 2023:
  • 9.2 million US vehicles were produced in 2021–a 4.5% increase from 2020 and 11.8% of the global total ranking only behind China in total vehicle production.
  • As of 2020, 91.5% of households report having access to at least one vehicle.
  • There were 290.8 million registered vehicles in the United States in 2022—21% of the global market.
  • Americans spend $698 billion annually on the combination of automobile loans and insurance.

By comparison, the healthcare services industry in the U.S.—those that operate facilities and services serving patients—employs 9 times more workers, is 29 times bigger ($104 Billion vs. $2.99 trillion/65% of total spend) and 6 times more integral in the overall economy (3% vs. 18.3% of GDP).  

Surprisingly, average hourly wages are similar ($31.07 in auto manufacturing vs. $33.12 in healthcare per BLS) though the range is wider in healthcare since it encompasses licensed professionals to unskilled support roles. There are other similarities:

  • Each industry enjoys ubiquitous presence in American household’ discretionary. spending.
  • Each faces workforce issues focused on pay parity and job security.
  • Each is threatened by unwelcome competitors, disruptive technologies and shifting demand complicating growth strategies.
  • Each is dependent on capital to remain competitive.
  • And each faces heightened media scrutiny and vulnerability to misinformation/disinformation as special interests seek redress or non-traditional competitors seek advantage.

Ironically, the genesis of the UAW dispute is not about wages; it is about job security as electric-powered vehicles that require fewer parts and fewer laborers become the mainstay of the sector. CEO compensation and the corporate profits of the Big Three are talking points used by union leaders to galvanize sympathizer antipathy of “corporate greed” and unfair treatment of frontline workers.

But the real issue is uncertainty about the future: will auto workers have jobs and health benefits in their new normal?

In healthcare services sectors—hospitals, medical groups, post-acute care facilities, home-care et al—the scenario is similar: workers face an uncertain future but significantly more complicated. Corporate greed, CEO compensation and workforce discontent are popular targets in healthcare services media coverage but the prominence of not-for-profit organizations in healthcare services obfuscates direct comparisons to for-profit organizations which represents less than a third of the services economy. For example, CEO compensation in NFPs—a prominent target of worker attention—is accounted differently for CEOs in investor-owned operations in which stock ownership is not treated as income until in options are exercised or shares sold. Annual 990 filings by NFPs tell an incomplete story nonetheless fodder for misinformation.

The competitive landscape and regulatory scrutiny for healthcare services are also more complicated for healthcare services. Unlike auto manufacturing where electric vehicles are forcing incumbents to change, there’s no consensus about what the new normal in U.S. healthcare services will be nor a meaningful industry-wide effort to define it. Each sector is defining its own “future state” based on questionable assumptions about competitors, demand, affordability, workforce requirements and more. Imagine an environmental scan in automakers strategy that’s mute on Tesla, or mass transit, Zoom, pandemic lock-downs or energy costs?

While the outlook for U.S. automakers is guardedly favorable, per Moody’s and Fitch, for not-for-profit health services operators it’s “unsustainable” and “deteriorating.”

Nonetheless, the parallels between the current state of worker sentiment in the U.S. auto manufacturing and healthcare services sectors are instructive. Auto and healthcare workers want job security and higher pay, believing their company executives and boards but corporate profit above their interests and all else. And polls suggest the public’s increasingly sympathetic to worker issues and strikes like the UAW more frequent.

Ultimately, the UAW dispute with the Big Three will be settled. Ultimately, both sides will make concessions. Ultimately, the automakers will pass on their concession costs to their customers while continuing their transitions to electric vehicles.

In health services, operators are unable to pass thru concession costs due to reimbursement constraints that, along with supply chain cost inflation, wipe out earnings and heighten labor tension.  

So, the immediate imperatives for healthcare services organizations seem clear as labor issues mount and economics erode:

  • Educate workers—all workers—is a priority. That includes industry trends and issues in sectors outside the organization’s current focus.
  • Define the future. In healthcare services, innovators will leverage technology and data to re-define including how health is defined, where it’s delivered and by whom. Investments in future-state scenario planning is urgently needed.
  • Address issues head-on: Forthrightness about issues like access, prices, executive compensation, affordability and more is essential to trustworthiness.  

Stay tuned to the UAW strike and consider fresh approaches to labor issues. It’s not a matter of if, but when.

PS: I drive an electric car—my step into the auto industry future state. It took me 9 hours last Thursday to drive 275 miles to my son’s wedding because the infrastructure to support timely battery charges in route was non-existent. Ironically, after one of three self-charges for which I paid more than equivalent gas, I was prompted to “add a tip”. So, the transition to electric vehicles seems certain, but it will be bumpy and workers will be impacted.

The future state for healthcare is equally frought with inadequate charging stations aka “systemness” but it’s inevitable those issues will be settled. And worker job security and labor costs will be significantly impacted in the process.

Thinking Long-Term: Changes in Five Domains will Impact the Future of the U.S. System but Most are Not Prepared

Posted on by • Posted in Change, Change Mindset, Health System, Hospital, Hospital Industry, Market Consolidation, Market Power, Market Trends, Market Uncertainty, Private Equity, Regulation, Regulatory Pressures, Strategic Change, Strategic Imperative, Strategic Leadership, Strategy Sustainable Long Term • Leave a comment
Thinking Long-Term: Changes in Five Domains will Impact the Future of the U.S. System but Most are Not Prepared

The U.S. health system is big and getting bigger. It is labor intense, capital intense, and highly regulated. Each sector operates semi-independently protected by local, state and federal constraints that give incumbents advantages and dissuade insurgents.

Competition has been intramural:

Growth by horizontal consolidation within sectors has been the status quo for most to meet revenue and influence targets. In tandem, diversification aka vertical consolidation and, for some, globalization in each sector has distanced bigger players from smaller:

  • insurers + medical groups + outpatient facilities + drug benefit managers
  • hospitals + employed physicians + insurance plans + venture/private equity investing in start-ups
  • biotech + pharma + clinical data warehousing,
  • retail pharmacies + primary & preventive care + health & wellbeing services + OTC products/devices
  • regulated medical devices + OTC products for clinics, hospitals, homes, workplaces and schools.

The landscape is no man’s land for the faint of heart but it’s golden for savvy private investors seeking gain at the expense of the system’s dysfunction and addictions—lack of price transparency, lack of interoperability and lack of definitive value propositions.

What’s ahead? 

Everyone in the U.S. health system is aware that funding is becoming more scarce and regulatory scrutiny more intense, but few have invested in planning beyond tomorrow and the day after. Unlike drug and device manufacturers with global markets and long-term development cycles, insurers and providers are handicapped. Insurers respond by adjusting coverage, premiums and co-pays annually. Providers—hospitals, physicians, long-term care providers and public health programs– have fewer options. For most, long-range planning is a luxury, and even when attempted, it’s prone to self-protection and lack of objectivity.

Changes to the future state of U.S. healthcare are the result of shifts in these domains:

They apply to every sector in healthcare and define the context for the future of each organization, sector and industry as a whole:

  • The Clinical Domain: How health, diseases and treatments are defined and managed where and by whom; how caregivers and individuals interact; how clinical data is accessed, structured and translated through AI enabled algorithms; how medication management and OTC are integrated; how social determinants are recognized and addressed by caregivers and communities: and so on. The clinical domain is about more than doctors, nurses, facilities and pills.
  • The Technology Domain: How information technologies enable customization in diagnostics and treatments; how devices enable self-care; how digital platforms enable access; how systemness facilitates integration of clinical, claims and user experience data; how operating environments shift to automation lower unit costs; how sites of care emerge; how caregivers are trained and much more. Proficiency in the integration of technologies is the distinguishing feature of organizations that survive and those that don’t. It is the glue that facilitates systemness and key to the system’s transformation.
  • The Regulatory Domain: How affordability, value, competition, choice, healthcare markets, not-for-profit and effectiveness are defined; how local, state and federal laws, administrative orders by government agencies and executive actions define and change compliance risks; how elected officials assess and mitigate perceived deficiencies in a sector’s public accountability or social responsibility; how courts adjudicate challenges to the status quo and barriers to entry by outsiders/under-served populations; how shareholder ownership in healthcare is regulated to balance profit and the public good; et al. Advocacy on behalf of incumbents geared to current regulatory issues (especially in states) is compulsory table stakes requiring more attention; evaluating potential regulatory environment shifts that might fundamentally change the way a system is structured, roles played, funded and overseen is a luxury few enjoy.
  • The Capital Domain: how needed funding for major government programs (Medicare, Medicaid, Children’s, Military, Veterans, HIS, Dual Eligibles et al) is accessed and structured; how private investment in healthcare is encouraged or dissuaded; how monetary policies impact access to debt; how personal and corporate taxes impact capitalization of U.S. healthcare; how value-based programs reduce unnecessary costs and improve system effectiveness; how the employer tax exemption fares long-term as employee benefits shrink; how U.S. system innovations are monetized in global markets; how insurers structure premiums and out of pocket payments: et al. The capital domain thinks forward to the costs of capital it deploys and anticipated returns. But inputs in the models are wildly variable and inconsistent across sectors: hospitals/health systems vs. global private equity healthcare investors vs. national insurers’ capital strategies vary widely and each is prone to over-simplification about the others.
  • The Consumer Domain: how individuals, households and populations perceive and use the system; how they assess the value of their healthcare spending; how they vote on healthcare issues; how and where they get information; how they assess alternatives to the status quo; how household circumstances limit access and compromise outcomes; et al. The original sin of the U.S, health system is its presumption that it serves patients who are incapable/unwilling to participate effectively and actively in their care. Might the system’s effectiveness and value proposition be better and spending less if consumerization became core to its future state?

For organizations operating in the U.S. system, staying abreast of trends in these domains is tough. Lag indicators used to monitor trends in each domain are decreasingly predictive of the future. Most Boards stay focused on their own sector/subsector following the lead of their management and thought leadership from their trade associations. Most are unaware of broader trends and activities outside their sector because they’re busy fixing problems that impact their current year performance. Environmental assessments are too narrow and short-sighted. Planning processes are not designed to prompt outside the box thinking or disciplined scenario planning. Too little effort is invested though so much is at risk.

It’s understandable. U.S. healthcare is a victim of its success; maintaining the status quo is easier than forging a new path, however obvious or morally clear.  Blaming others and playing the victim card is easier than corrective actions and forward-thinking planning.

In 10 years, the health system will constitute 20% of the entire U.S. economy and play an outsized role in social stability. It’s path to that future and the greater good it pursues needs charting with open minds, facts and creativity. Society deserves no less.

What Hospital Systems Can Take Away From Ford’s Strategic Overhaul

Posted on by • Posted in Board, Capital, Caution, Clinical Treatment Process, Competition, Cost Management, Cost Reduction, Cost Structure, Death by a Thousand Cuts, Downsized, Downsizing, Duty of Care, Financial Distress, Financial Performance, Financial Viability, Financially Distressed, Health System, Hospital, Hospital Industry, Hospital Portfolio, Labor Spend Management, Leadership, Leadership Crisis, Leadership Vision, Macro Economic Developments, Market Outlook, Market Trends, Market Uncertainty, Mission, Mission Critical, Operating Income, Operating Margin, Operating Metrics, Outpatient Care, Private Equity, Reduction in Force, Reluctance, Right Size, Strategy • Leave a comment
What Hospital Systems Can Take Away From Ford’s Strategic Overhaul

On today’s episode of Gist Healthcare Daily, Kaufman Hall co-founder and Chair Ken Kaufman joins the podcast to discuss his recent blog that examines Ford Motor Company’s decision to stop producing internal-combustion sedans, and talk about whether there are parallels for health system leaders to ponder about whether their traditional strategies are beginning to age out.

What to know about the latest inflation report

Posted on by • Posted in Federal Reserve, Federal Reserve Board, Inflation, Interest Rates, Labor Market, Labor Spend Management, Market Outlook, Market Trends, Market Uncertainty • Leave a comment

Inflation moderated notably in March as a decline in gas prices helped to pave the way for the slowest pickup in prices in nearly two years, providing relief for many American consumers and a positive talking point for President Biden.

The Consumer Price Index climbed 5 percent in the year through March, down from 6 percent in February. That marked the slowest pace since May 2021.

Still, the details of the report underlined that inflation retains concerning staying power under the surface: A so-called core index that aims to get a clearer sense of price trends by stripping out food and fuel costs, both of which can be volatile, picked up by 5.6 percent from a year earlier. That was up slightly from February’s 5.5 percent increase, and it marked the first acceleration in the yearly number since September.

The mixed signals in the fresh inflation data — which, taken as a whole, suggested that price increases are meaningfully moderating but the progress remains gradual — come at a challenging economic moment for the Federal Reserve. The central bank is the government’s main inflation fighter, and it has been trying to wrestle price increases back under control for slightly more than a year, raising interest rates to nearly 5 percent from near zero as recently as March 2022 to slow the economy and weigh down costs.

Officials are now assessing how their policy changes are working, and they are trying to gauge how much more they need to do to ensure that price increases come fully under control. Inflation has been slowing after peaking at about 9 percent last summer, but the process has been a slow one. It remains a long way back to the 2 percent inflation that was normal before the onset of the pandemic in 2020.

Uncertainty over how quickly and completely price increases will cool is being compounded by recent developments. A series of high-profile bank blowups last month could slow the economy, but it is unclear by how much. Some Fed officials are urging caution in light of the turmoil, even as others warn that the central bank should keep its foot on the economic brake and remain focused on its fight against rising prices.

The new data “solidifies the case for the Fed to do another hike in May, and to proceed cautiously from here,” said Blerina Uruci, chief U.S. economist at T. Rowe Price, later adding that “it will take time to bring inflation down.”

Fed officials target 2 percent inflation, which they define using a different index: the Personal Consumption Expenditures measure, which uses some data from the consumer price measure but is calculated differently and released a few weeks later. That measure has also been sharply elevated.

While Wednesday’s report showed an uptick in core inflation on an annual basis — one that economists had largely expected — Ms. Uruci said that it also offered some encouraging signs. The core inflation measure slowed slightly on a monthly basis, when the March figures were compared to those in February.

And a few important services prices, which the Fed is watching closely for a sense of whether price increases are poised to fade, cooled notably. Rent of primary residences picked up 0.5 percent compared to the prior month, down from 0.8 percent in the previous reading, for instance. Housing inflation broadly is expected to slow in 2023, and that appears to be starting to take hold.

“There are signs in the details to suggest we’re making some progress toward slowing inflation,” Ms. Uruci said. “It’s not where it needs to be, but it’s progress.”

But those hopeful signs do not mean that inflation will fade smoothly and rapidly. The slowdown in the overall index, for instance, may not last: A big chunk of the decline is owed to a drop in gas prices that may not be sustained.

And a few other indexes continued to show quick price increases, including new vehicles and hotel rooms.

As they try to bring inflation to heel, some central bankers have suggested that they may need to further raise interest rates.

The Fed’s latest estimates, released shortly after the collapse of Silicon Valley Bank and Signature Bank in March, suggested that officials could lift rates another quarter-point this year, to just above 5 percent. The central bank will announce its next policy decision on May 3.

On Tuesday, John C. Williams, the president of the Federal Reserve Bank of New York, said that the Fed had more work to do in bringing down price increases and suggested that the central bank’s March forecast for one more quarter-point rate move was still a “reasonable starting place.”

But Austan D. Goolsbee, the president of the Federal Reserve Bank of Chicago, suggested that recent bank failures could make it tougher for businesses and consumers to access credit, slowing the economy, stoking uncertainty and creating a “need to be cautious.”

“We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation,” Mr. Goolsbee said.

Higher interest rates have made it much more expensive to borrow money to buy a house or expand a business. That is slowing economic activity. As demand cools and the labor market softens, wage growth is also moderating.

That could help to pave the way for cooler inflation. When wages are climbing quickly, companies might charge more to try to cover their labor bills, and their customers are likely to be able to afford the steeper prices. But as households become more strapped for cash, it could become harder for businesses to raise prices without scaring away shoppers.

Affordable Care Act 2.0: New Trends and Issues, New Urgency

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Affordable Care Act 2.0: New Trends and Issues, New Urgency

Thursday marks the 13th anniversary of the signing of the Affordable Care Act– perhaps the most consequential healthcare legislation since LBJ’s passage of the Medicare Act in 1965. Except in healthcare circles, it will probably go unnoticed.

World events in the Ukraine and China President Xi Jinping’s visit to Russia will grab more media attention. At home, the ripple effects of Silicon Valley Bank’s bankruptcy and the stability of the banking system will get coverage and former President Trump’s arrest tomorrow will produce juicy soundbites from partisans and commentators. Thus, the birthday of Affordable Care Act, will get scant attention.

That’s regrettable: it offers an important context for navigating the future of the U.S. health system. Having served as an independent facilitator between the White House and private sector interests in 2009-2010, I recall vividly the events leading to its passage and the Supreme Court challenge that affirmed it:

  • The costs and affordability of healthcare and growing concern about the swelling ranks of uninsured were the issues driving its origin. Both political parties and every major trade group agreed on the issues; solving them not so easy.
  • Effective messaging from special interests about the ACA increased awareness of the law and calcified attitudes for or against. Misinformation/disinformation about the “Patient Protection and Affordable Care Act” morphed to a national referendum on insurance coverage and the cost-effectiveness of the ACA’s solution (Medicaid expansion, subsidies and insurance marketplaces). ‘Death panels. government run healthcare and Obamacare’ labels became targets for critics: spending by special interests opposed to the law dwarfed support by 7 to 1. Differences intensified: Emotions ran high. I experienced it firsthand. While maintaining independence and concerns about the law, I received death threats nonetheless. Like religion, the ACA was off-limits to meaningful discussion (especially among the majority who hadn’t read it).
  • And after Scott Brown’s election to the vacant Massachusetts seat held by Ted Kennedy in January, 2010, the administration shifted its support to a more-moderate Senate Finance Committee version of the law that did not include a public option or malpractice reforms in the House version. Late-night lobbying by White House operatives resulted in a House vote in favor of the Senate version with promises ‘it’s only the start’. Through amendments, executive orders, administrative actions and appropriations, it would evolve with the support of the Obama team. It passed along party lines with the CBO offering an optimistic view it would slow health cost escalation by reducing administrative waste, implementation of comparative effectiveness research to align evidence with care, increased insurance coverage, changing incentives for hospitals and physicians and more.

The Affordable Care Act dominated media coverage from August 2009 to March 2010. In the 2010 mid-term election, it was the issue that catapulted Republicans to net gains of 7 in the Senate, 63 in the House and 6 in Governor’s offices. And since, Republicans in Congress have introduced “Repeal and Replace” legislation more than 60 times, failing each time.

Today, public opinion about the ACA has shifted modestly: from 46% FOR and 40% against in 2010 to 55% FOR and 42% against now (KFF). The national uninsured rate has dropped from 15.5% to 8.6% and Medicaid has been expanded in 39 states and DC. Lower costs, increased affordability and quality improvements owing to the ACA have had limited success.

Key elements of the ACA have not lived up to expectations i.e. the Patient Centered Outcome Research Institute, the National Quality Strategy, Title V National Healthcare Workforce Task Force, CMMI’s alternative payment models and achievement of Level 3 interoperability goals vis a vis ONCHIT, CHIME et al. So, as the 2024 political season starts, the ACA will get modest attention by aspirants for federal office because it addressed big problems with blunt instruments. Most recognize it needs to be modernized based on trends and issues relevant to healthcare in 2030 and beyond.

Trends like…

  • Self-diagnostics and treatment by consumers (enabled by ChatGPT et al).
  • Data-driven clinical decision-making.
  • Integration of non-allopathic methodologies.
  • The science of wellbeing.
  • Complete price, cost and error transparency.
  • Employer and individual insurance coverage optimization.
  • And others.

Issues like….

  • The role and social responsibility of private equity in ownership and operation of services in healthcare delivery and financing.
  • The regulatory framework for local hospitals vs. Regional/nation health systems, and between investor-owned and not-for-profit sponsorship.
  • The role and resources for guided self-care management and virtual-care.
  • Innovations in care delivery services to vulnerable populations using technologies and enhanced workforce models.
  • Modernization of regulatory environments and rules of competition for fully integrated health systems, prescription drug manufacturers, health insurers, over-the counter therapies, food as medicine, physician ownership of hospitals, data ownership, tech infomediaries that facilitate clinical decision-making, self-care, professional liability and licensing and many others.
  • Integration of public health and local health systems.
  • The allocation of capital to the highest and best uses in the health system.
  • The sustainability of Medicare and role of Medicare Advantage.
  • The regulatory framework for disruptors”.
  • And many others.

These trends are not-easily monitored nor are the issues clear and actionable. Most are inadequately addressed or completely missed in the ACA.

Complicating matters, the political environment today is more complicated than in 2010 when the ACA became law. The economic environment is more challenging: the pandemic, inflation and economic downturn have taken their toll. Intramural tensions in key sectors have spiked as each fights for control and autonomy i.e. primary care vs. specialty medicine, investor-owned vs. not-for-profit hospitals, retail medicine & virtual vs. office-based services, carve-outs, direct contracting et al . Consolidation has widened capabilities and resources distancing big organizations from others. Today’s media attention to healthcare is more sophisticated. Employers are more frustrated. And the public’s confidence in the health system is at an all-time low.

“ACA 2.0” is necessary to the system’s future but unlikely unless spearheaded by community and business leaders left out of the 1.0 design process. The trends and issues are new and complicated, requiring urgent forward thinking.