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Nonprofit Hospital Consolidation to Continue in 2019

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https://www.healthleadersmedia.com/finance/nonprofit-hospital-consolidation-continue-2019

Despite increased scrutiny from regulators, nonprofit health systems will remain active through mergers and acquisitions this year, according to a new Moody’s report.

The deluge of M&A activity among nonprofit health systems is expected to continue on in 2019, with the potential for some “unconventional relationships,” according to a Moody’s report released Friday morning.

Driven by tight financial conditions challenging the nonprofit hospital business model, as well as the entrance of nontraditional corporate players to healthcare and the potential changes to the ACA, more M&A activity is expected throughout the year.

Moody’s expects nonprofit health systems to engage in partnerships with other hospitals but also seek to align with companies specializing in data analytics or ridesharing services to continue the transition from inpatient care to outpatient care.

Nonprofit health systems are also aiming to increase their footing when negotiating with payers, which involves strategic decisions to diversity service options and increase their geographic reach.

The report cites ProMedica’s acquisition of HCR Manorcare and Tower Health’s purchase of five for-profit acute care hospitals as examples of nonprofit systems taking a short-term credit hit to gain stable long-term positioning for the organization.

Though M&A activity is expected to be widespread and a primary objective for many nonprofit systems, the Moody’s report warned that additional scrutiny from state and federal regulators is on the way.

The requirements put in place on the CHI-Dignity Health merger by California Attorney General Xavier Becerra, along with price increase restrictions imposed by Massachusetts Attorney General Maura Healey on CareGroup and Lahey Health, are cited as examples of the terms health systems should expect to meet.

For-profits will tap into capital markets

The Moody’s report also indicates that for-profit hospitals will delve further into capital markets so long as they remain receptive and buoyed by low interest rates. This approach could lead to lower interest costs and improve liquidity, which would bolster their credit standing.

Jessica Gladstone, Moody’s associate managing director and lead analyst on for-profit hospitals, told HealthLeaders that rising interest rates would a material impact on many for-profit hospitals.

“High cash interest costs relative to earnings are already consuming the majority of cash for many FP hospital companies,” Gladstone said. “For companies with floating rate debt, rising interest rates (depending on the amount of the increase) could leave some FP hospitals with very little free cash flow left to pay down debt or otherwise invest to grow operations.”

Gladstone added that while many of the same headwinds facing for-profit hospitals remain a challenge in 2019, executives can be encouraged by the opportunities ahead to refinance high-cost debt and achieve cost savings.

Several deals are listed as potential opportunities that could benefit for-profit healthcare organizations in 2019 regarding changes to capital structure, interest cost savings, as well as M&A activity:

Additional highlights from the Moody’s report:

  • Expect smaller community and regional nonprofit hospitals to join cooperatives to gain leverage at the negotiating table on supply costs among other price points.
  • Growing investment by private equity firms in physician practices and ambulatory services, will put a pinch on nonprofit systems.
  • The entrance of Amazon, Walmart, and Apple can’t be discounted as another driver of M&A activity in 2019.
  • Vertical mergers like CVS-Aetna and the continued rise of telemedicine will drive patients away from traditional areas of care delivery, like hospitals.
  • Though major changes to the ACA remain unlikely due to the split government in Congress, smaller changes could still make a significant impact.
  • The report cites potential changes to site-neutral payments, Medicare quality-factor penalties, and DSH payment reductions as examples.

 

 

 

 

Walmart implements a narrow network for diagnostic imaging

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Starting last March, retail giant Walmart now requires that its employees use a select network of 800 diagnostic imaging providers, or face additional out-of-pocket costs, according to an article this week from Kaiser Health News. Lisa Woods, Walmart’s senior director of benefits design, said high error rates in imaging studies were the driver for establishing the program, with the perspective that “a quality MRI or CT scan can improve the accuracy of diagnoses early in the care journey.”

The network was created in partnership with New York-based Covera Health, a technology company that has amassed information on thousands of imaging facilities nationwide, and uses independent radiologists to evaluate a sample of studies to determine facility and radiologist error rates. According to the article, while many employers have steered employees to lower-cost imaging networks, Walmart is the first to do so based on quality of the studies.
 
Whether this network will be effective in achieving its stated goal—reducing misdiagnoses that lead to unnecessary care and surgery—remains an open question. Poor-quality imaging undoubtedly leads to repeat studies, which carry significant costs. But many other factors (clinical judgement, incentives, patient preferences) contribute to the decision to perform surgery. Defining imaging “quality” beyond the blunt measures of repeat rates, technical adequacy and radiologist sub-specialization is highly complex, and requires correlation with pathology and clinical outcomes data—a high bar for an outsourced analytics provider.

Despite Walmart’s goals, it will be difficult for imaging providers to differentiate their services solely on quality. The high variability in imaging prices is well-documented, and choice of provider is largely made by consumers, for whom imaging is a commodity service.

Without an activist employer or payer to steer them, consumers will likely continue to choose their imaging providers based on their doctor’s recommendation and out-of-pocket costs.

 

The false promise of “no regrets” investments

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At the end of my meeting last week with a health system executive team, the system’s COO asked me a question: “Your concept of Member Health describes exactly how we want to relate to our patients, but we’re not sure about the timing. Could you give us a list of the ‘no regrets’ investments you’d recommend for health systems looking to do this?”

We frequently get asked about “no regrets” strategies: decisions or investments that will be accretive in both the current fee-for-service system as well as a future payment and operational model oriented around consumer value. The idea is understandably appealing for systems concerned about changing their delivery model too quickly in advance of payment change. And there is a long list of strategies that would make a system stronger in both fee-for-service and value: cost reduction, value-driven referral management, and online scheduling, just to name a few.

But as I pointed out, the decision to pursue only the no-regrets moves is a clear signal that the organization’s strategy is still tied to the current payment model. If the system is really ready to change, strategy development should start with identifying the most important investments for delivering consumer value.

It’s fine to acknowledge that a health system is not yet ready, but I cautioned the team that they should not rely on the external market to provide signals for when they should make real change. External signals—from payers, competitors, or disruptors—will come too slow, or perhaps never.

At some point, the health system should be prepared to lead innovation, introduce a new model of value to the market and define and promote the incentives to support it. Real change will require disruption of parts of the current business and cannot be accomplished with “no-regrets investments” alone.

 

Antipating the Impact of the Baby Boom on Medicare

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In perusing the excellent work of the Peterson-Kaiser Health System Tracker project, we recently came across an analysis (depicted on the left, below) of Medicare spending patterns broken down by age of beneficiary. Based on 2014 data, the analysis shows how much was spent per capita in traditional Medicare fee-for-service on beneficiaries of each age. (The analysis excludes Medicare Advantage data, and also doesn’t include beneficiaries aged 65, for whom a full year of spending data wasn’t available.)

What’s interesting is how spending patterns differ across age cohorts—inpatient spending peaks at age 92 and then declines, spending on physician services peaks at age 85, skilled nursing and hospice spending ramp up quickly for much older beneficiaries. To see how these patterns might play out if applied to the Baby Boom generation, we combined the Peterson-Kaiser analysis with our earlier look at generational aging. The result is the chart on the right, below, which shows how each bucket of spending will increase over the coming 25 years given aging of the population.
 
A couple of interesting observations from this (admittedly imperfect) analysis.

First, the sheer size of the baby boom generation will drive a huge increase in Medicare spending over the next 25 years. And a full third or more of the total Medicare spend on Baby Boomers isn’t even captured here—that will come via payments to Medicare Advantage plans.

Second, inpatient care drives a huge amount of the total spend. It’s clear that an urgent priority is finding ways to shift spending from the light grey bars (inpatient) to the other segments—we need to pull forward the shift from inpatient to other settings from where it was in 2014’s population. Recall that this is traditional Medicare—strategies like accountable care organizations (ACOs) and other care management/population health reforms will be critical here.

Finally, in addition to changing the trend with innovations in care delivery models, we should expect technology and pharmaceuticals to play a role in inflecting the shape of this graph. Whether that impact will produce a net savings or a net increase in spending remains to be seen.

New Tax Will Help Washington Residents Pay for Long-Term Care

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In other healthcare news from the Evergreen State, Gov. Inslee also signed a law this week that will provide a new long-term care benefit for state residents starting in 2025. In the furthest-reaching legislation of its type nationally, the new Washington law puts in place a payroll tax of 0.58 percent starting in 2022, and creates a year-long, $100/day allowance for state residents that can be used to pay for nursing home fees, at-home caregivers, and other long-term care needs.

Family members who are full-time caregivers can also receive compensation. Like other states, Washington spends a growing portion of its state budget on paying for long-term care for aging residents, putting a heavy burden on the finances of its Medicaid program that’s expected to worsen as the Baby Boom generation ages. In addition to nursing and caregiver services, the new benefit can also be used for in-home meals, housing repairs, and other services that impact health status.

As with its “public option” plan, Washington has taken the lead on another healthcare coverage issue that will eventually need to be addressed nationwide: the fact that seniors are entering retirement entirely unprepared for the amount they’ll need to spend on long-term care.

Medicaid currently pays for two-thirds of nursing home care and 60 percent of all long-term care costs, and no state is currently prepared for the amount of spending that will be required over the next 25 years. Almost no one buys long-term care insurance, which is unaffordable for most. Any serious attempt to expand coverage over the next few years must take on this critical issue.