Steward Health Care is abandoning its proposal to sell five Utah hospitals to HCA Healthcare, and New Jersey-based RWJBarnabas Health dropped its plan to purchase New Brunswick, NJ-based Saint Peter’s Healthcare System. These pivots come just weeks after the Federal Trade Commission (FTC) filed suits to block the transactions, saying they would reduce market competition. The FTC said in a statement that these deals “should never have been proposed in the first place,” and “…the FTC will not hesitate to take action in enforcing the antitrust laws to protect healthcare consumers who are faced with unlawful hospital consolidation.”
The Gist: These latest mergers follow the fate of the proposed Lifespan and Care New England merger in Rhode Island, and the New Jersey-based Hackensack Meridian Health and Englewood Health merger, which were both abandoned after FTC challenges earlier this year.
Antitrust observers find these recent challenges unsurprising, as all were horizontal, intra-market deals of the kind that commonly raise antitrust concerns. What will be more telling is whether antitrust regulators can successfully mount challenges of cross-market mergers, or vertical mergers between hospitals, physicians, and insurers.
A recent conversation with a health system CFO made us realize that a long-standing nugget of received healthcare wisdom might no longer be true. For as long as we can remember, economic observers have said that healthcare is “recession-proof”—one of those sectors of the economy that suffers least during a downturn. The idea was that people still get sick, and still need care, no matter how bad the economy gets. But this CFO shared that her system was beginning to see a slowdown in demand for non-emergent surgeries, and more sluggish outpatient volume generally.
Her hypothesis: rising inflation is putting increased pressure on household budgets, and is beginning to force consumers into tougher tradeoffs between paying for daily necessities and seeking care for health concerns. This is having a more pronounced effect than during past recessions, because we’ve shifted so much financial risk onto individuals via high deductibles and cost-sharing over the past decade.
There’s a double whammy for providers: because the current inflation problems are happening in the first half of year, most consumers are nowhere near hitting their deductibles, leading this CFO to forecast softer volumes for at least the next several months, until the usual “post-deductible spending spree” kicks in.
Combined with the tight labor market, which has increased operating costs between 15 and 20 percent, this inflation-driven drop in demand may have hospitals and health systems experiencing their own dose of recession—contrary to the old chestnut.
The prevailing opinion earlier this year was that the hospital registered nurse (RN) shortage was being driven by older nurses retiring early or leaving hospital employment for less-demanding care settings during the pandemic. However, recent data shown in the graphic below paint a different picture.
Hospital RNs with over ten years of tenure actually turned over at lower rates in 2021, compared to 2019. Meanwhile, the turnover rate for nurses with less tenure (who are typically younger) increased in 2021. While less-tenured nurses have always turned over at higher rates, we are seeing a new uptick in younger RNs leaving the profession.
The size of the total RN workforce decreased by 1.8 percent between 2019 and 2021—and the decline was twice as steep for hospital-employed RNs. Younger RNs disproportionately drove this decline: nurses under age 35 left the nursing workforce at four times the rate of those over age 50.
A recent survey suggestsyounger RNs are less likely to feel their well-being is supported by their organization, and more likely to define themselves as “emotionally unhealthy.” To keep younger nurses in the profession, hospitals must increase the support available to them. Investments might include expanding preceptorship and mentorship programs, many of which were cut during the pandemic, and increasing behavioral health support and job flexibility.
An analysis published in the Annals of Internal Medicine finds that if Medicare had purchased 77 common generic drugs from Mark Cuban’s Cost-Plus Pharmacy in 2020, it would have saved $3.6B dollars. That translates to more than a third of the $9.6B Medicare spent on generic drugs that year.
In January, Dallas Mavericks owner and billionaire Cuban launched the generic drug company as a transparency play, cutting out pharmacy benefit managers (PBMs), negotiating directly with manufacturers, and selling drugs at a flat 15 percent markup.
The Gist:This isn’t the first study to find that Medicare overpays for generic drugs, as it’s unable to negotiate drug prices under current law. Another recent analysis found that Costco can offer consumers lower prices than Medicare drug plans for half of the most common generic drugs.
The fact that both Costco’s and Cuban’s pharmacies, neither of which accepts health insurance, can offer consumers cheaper generics is another indication of how PBMs’ perverse incentives and opaque pricing and rebate models lead to consumers being steered to higher priced drugs. We’re hopeful that the FTC’s new investigation into PBMs will shed light on their pricing practices, and create a path for lawmakers to finally address unsustainably high prescription drug prices.
The company plans to leverage its expansive retail footprint of 9,000 stores, as well as its pharmacy business and other care delivery assets, to connect patients with late-stage pharmaceutical trials either at retail clinics, at home, or virtually. To match patients with trials, Walgreens is partnering with health data company Pluto Health, which aggregates information across medical records, insurance claims, and other sources.
The Gist: The decentralized clinical trial business has been growing since the pandemic spurred a rapid switch to remote trial participation. This announcement comes roughly a year after competitor CVS announced its entry into the clinical trial space.
Most clinical research is centered in academic medical centers, which are disproportionally located in large urban areas, forcing many patients to travel long distances to participate. With large amounts of patient data and footprint spanning all fifty states, retail pharmacies are well-positioned to partner with investigators to reach patients who lack access to clinical trials today, given lack of financial resources or ability to travel.
The 6-3 decision in Dobbs v. Jackson Women’s Health Organization, challenging a Mississippi law banning most abortions after 15 weeks, overturns the nearly 50-year precedent providing a constitutional right to abortion. The opinion was little changed from a draft that was leaked last month, returning most decision making on abortion to states. At least 13 states have so called ‘trigger laws’ in place that will almost immediately make abortion illegal, and another 13 states are likely to pass similar laws.
The Gist: In over half of states, existing or new laws will likely prevent pregnant people from accessing critical and evidence-based reproductive healthcare services, including medically safe abortion, miscarriage care, pregnancy termination for severe fetal anomalies, and endangerment of the childbearing parent’s life.
Patients in Texas, which passed one of the strictest abortion laws last year, have already been facing challenges obtaining prescriptions for medications for miscarriage and abortion care. Many state laws which criminalize providing the procedure put physicians and other medical providers in legal jeopardy.
And as legal experts point out, most malpractice insurance doesn’t protect physicians from damages incurred from criminal charges.
Moreover, most laws have been written by legislators with little or no medical expertise, leading to lack of clarity about which potentially life-threatening situations, in what circumstances, merit pregnancy termination—forcing physicians to delay lifesaving obstetric care. (Read this NEJM piece to understand what this looks like for doctors and patients in Texas today.) Regardless, today’s decision will lead to increased mortality for pregnant people and those unable to seek safe abortion care.
Citi, The American Hospital Association (AHA) and the Healthcare Financial Management Association (HFMA) recently hosted the 22nd annual Not-for-Profit Healthcare Investor Conference. The event was in person, after being virtual in 2021 and canceled in 2020 due to the pandemic. Leaders from over 25 diverse health systems, as well as private equity and fund managers, presented in panel discussions and traditional formats. The following summary attempts to synthesize key themes and particularly interesting work by leading health systems. The conference title was “Refining the Now, Reshaping What’s Next.”
Is Healthcare Headed for Best of Times or Worst of Times?
Clearly the pandemic showed how essential and adaptive the US healthcare industry is, and especially how incredible healthcare workers continue to be. It also exposed and accelerated many underlying dynamics, such as impact of disparities, clinical labor shortages and supply chain challenges. On balance, at this year’s conference presenters remained quite optimistic about the future, and felt that despite enormous pain, the pandemic has helped to accelerate positive transformation across healthcare.
At the same time, almost all presenters referenced future headwinds from labor and supply inflation, concerns about increasing payment pressures, and the continued need to address disparities and social justice. That being said, there was not much disclosure at the conference about just how bad things could get in the future given accelerated operational and financial risks.
As usual at such a conference, there was much passion, creativity, sharing and celebration. While each organization and market differ somewhat, the following are common themes discussed.
Key Themes
Enormous Workforce Challenges – Every speaker referenced workforce as being THE key issue they are facing, specifically retirement, recruitment, retention, well-being and cost. We have talked for years about a future caregiver shortage, but this reality was accelerated by the pandemic. The majority of health systems saw single-digit turnover rates grow to 20-30%, and the cost of temporary labor such as traveling nurses, decimate operating margins. The many strategies discussed at the conference went beyond simply paying more to attract and retain staff. A key question is whether organization-specific strategies will be enough, or whether we need a broader societal and industry-wide collaborative effort to dramatically increase training slots for nurses and other allied health professionals.
Pandemic Stressed Organizations and Accelerated Transformation – At the 2021 virtual Citi/AHA/HFMA conference, many posited that the country was past the worst of the pandemic. (In fact this author’s summary of last year’s conference was titled “Sunrise After the Storm”). That was before the Omicron wave hit hard in Q1 2022. First-quarter 2022 operating margins were negative for most but not all healthcare systems due to cumulative impact of Omicron, temporary labor and supply costs, especially since the governmental support that partially offset those costs in 2020 ended. Organizations and their teams remain resilient, but highly stressed. Risks and challenges associated with future waves continue, as well as high reliance on foreign drug and supply manufacturing. While highly distracting and painful, many organizations discussed how the pandemic actually accelerated the pace of transformation. Necessity drives required action, and at least temporarily overcomes political and cultural barriers to change.
Growing Pursuit of Scale, Including through M&A and Partnerships – All health systems continue to be highly complex with multiple competing “big-dot” priorities. Multiple systems described their current M&A and growth strategies, pursuit of scale, as well as how these strategies were impacted by the pandemic. While the provider community remains highly unconsolidated on a national basis, mergers are more frequent, including between non-contiguous markets. Systems said that larger size, coupled with disciplined management, can reduce cost structure and improve quality and patient experience. While some pursue scale through organic growth initiatives or M&A, others described success in creating scale by leveraging partnerships with “best-in-class” niche organizations and other outside expertise.
Health Equity, Diversity and ESG as Core to Mission – Consistent with last year, most speakers discussed their efforts to address health equity, social justice, diversity, and Social Determinants of Health. Many health systems have developed robust strategies quickly as the pandemic spotlighted the impact of existing disparities. There is increasing interest in Environment, Social and Governance (ESG) initiatives, including environmental stewardship to improve the health of their communities and the world by reducing their carbon footprint and medical waste.
Patient-Centric Care Transformation Continues as a Priority – The pandemic significantly accelerated the shift to telehealth and virtual care. Many health systems are increasing their efforts to design care around the patient instead of the traditional provider centric focus. While the need for inpatient care will always continue, more care is taking place in settings closer to or at home, with digital enablement. Expansion of personalized medicine, genetic testing and therapies, and drug discovery are transforming how healthcare is provided.
Affordability and Value-Based Care – US healthcare costs as a percentage of GDP increased from 18% in 2019 to almost 20% in 2020, mainly driven by the pandemic. There remains a dichotomy between reliance on fee-for-service payment and commitment to value-based care. Although only 11% of commercial payment is currently through two-sided risk arrangements, almost all presenting health systems discussed their strategies to continue moving to value-based care and to improve affordability. Some systems are leveraging their integrated health plans and/or expanding risk-based contracts. Many are trying to reduce unnecessary care through adoption of evidence-based models and to shift care to less costly settings.
Inflation and Accelerating Financial Pressures – Health systems are facing unprecedented increases in labor and supply costs, that are likely to continue into the foreseeable future. At the same time, commercial payment rate adjustments are “sticky low” as insurers and employers push back on rate increases. Governmental payment rate increases are less than cost inflation. In addition to current cuts like the re-implementation of sequestration, longer-term cuts to provider assessment programs, provider-based billing, disproportionate share and Medicaid expansion may severely impact many organizations over time. Benefits like 340b discounts are also experiencing pressure. Post-pandemic clinical-volume trends remain unclear, and additional governmental support associated with future pandemic waves is unlikely. Adding to these challenges, declines in stock and bond prices are negatively impacting currently strong balance sheets.
Conclusion: Best or Worst of Times in Healthcare?
Time will tell, in retrospect, if the next five years will be the best of times, worst of times, or both in healthcare. Optimists point to the resiliency of healthcare organizations; enormous opportunity to reduce unnecessary cost through adoption of evidence-based care and scale; pipeline of new cures and technology; and opportunities to address social and health equity. Pessimists point to likely unprecedented financial pressures and operational challenges due to endemic labor and supply shortages; high-cost inflation vs. constrained payment rates; and future uncertainty about the pandemic, the economy and investment markets.
The situation will undoubtedly vary by market and organization as reflected in conference presentations, but all systems will likely face substantial pressure. As one speaker noted “humans have a great ability to respond to pain,” so this may be the inflection point where more healthcare systems radically accelerate necessary change to improve health, make healthcare more equitable and affordable, with higher quality and better outcomes. Some health systems are clearly doing that, with pace, nimbleness and passion. Can the industry as a whole accomplish it successfully?
What role should the federal government play in addressing major healthcare issues? And does the way you vote affect your prospects for a long and healthy life? We talked about it on today’s episode of the 4sight Friday Roundup podcast.
David Johnson is CEO of 4sight Health.
Julie Vaughan Murchinson is Partner of Transformation Capital and former CEO of Health Evolution.
David Burda is News Editor and Columnist of 4sight Health.
Credit rating downgrades for several hospitals and health systems were tied to cash flow issues in recent months.
The following seven hospital and health system credit rating downgrades occurred since February:
1. Jupiter (Fla.) Medical Center — lowered in June from “BBB+” to “BBB” (Fitch Ratings) “The ‘BBB’ rating reflects JMC’s increased leverage profile with the issuance of $150 million in additional debt to fund various campus expansion and improvement projects,” Fitch said. “While favorable population growth in the service area and demonstrated demand for services in an increasingly competitive market justify the overall strategic plan and project, the additional debt weakens JMC’s financial profile metrics and increases the overall risk profile.”
2. ProMedica (Toledo, Ohio) — lowered in May from “BBB-” to “BB+” (Fitch Ratings) “The long-term ‘BB+’ rating and the assigned outlook to negative on ProMedica Health System’s debt reflects the system’s significant financial challenges as result of continued pressure of the coronavirus pandemic and escalating expenses, with ProMedica reporting a $252 million operating loss that follows several years of weak performance,” Fitch said.
3. Providence (Renton, Wash.) — lowered in April from “Aa3” to to “A1” (Moody’s Investors Service); lowered from “AA-” to “A+” (Fitch Ratings) “The downgrade to ‘A1’ is driven by the disaffiliation with Hoag Hospital, and the expectation that weaker operating, balance sheet, and debt measures will continue for the time being,” Moody’s said.
4. San Gorgonio Memorial Healthcare District (Banning, Calif.) — lowered in May from “Ba1” to “Ba2” (Moody’s Investors Service) “The downgrade to Ba2 reflects the district’s tenuous cash position and weak finances that have contributed to difficulty in securing a bridge loan financing for liquidity needs pending the delayed receipt of approximately $8 million to $9 million in intergovernmental transfers beyond the end of the fiscal year,” Moody’s said.
5. Willis-Knighton Medical Center (Shreveport, La.) — lowered in March from “A1” to “A2” (Moody’s Investors Service) “The downgrade to A2 reflects expectations that Willis-Knighton will continue to face challenges in achieving budgeted operating cash flow margins due to heightened wage pressures and volume softness,” Moody’s said.
6. OU Health (Oklahoma City) — lowered in March from “Baa3” to “Ba2” (Moody’s Investors Service) “The magnitude of the downgrade to Ba2 reflects projected cashflow in fiscal 2022 that will be materially below prior expectations, from an escalation of labor costs, and reliance on a financing to avoid a further decline in already weak liquidity and potential covenant breach,” Moody’s said. “Also, the rating action reflects execution risk given a prolonged period of management turnover with several key positions unfilled or filled with interim leaders, a governance consideration under Moody’s ESG classification.”
7. Catholic Health System (Buffalo, N.Y.) — lowered in February from “Baa2” to “B1” (Moody’s Investors Service) “The downgrade to ‘B1’ anticipates minimal cashflow and a further significant decline in liquidity this year, following material losses in fiscal 2021 from a 40-day labor strike and the disproportionately severe impact of the pandemic, both social risks under Moody’s ESG classification,” the credit rating agency said.
HENRY KOTULA 