Healthcare as a zero-sum game: 7 key points

https://www.beckershospitalreview.com/hospital-management-administration/healthcare-as-a-zero-sum-game-7-key-points.html?origin=cfoe&utm_source=cfoe

This article sets out seven thoughts on healthcare systems.

The article discusses:

  1. Types of Healthcare Systems
  2. Mergers and Key Questions to Assess Mergers
  3. Headwinds Facing Systems
  4. The Great Fear of Systems
  5. What has Worked the Last 10 Years
  6. What is Likely to Work the Next 10 Years
  7. A Few Other Issues

Before starting the core of the article, we note two thoughts. First, we view a core strategy of systems to spend a great percentage of their time on those things that currently work and bring in profits and revenues. As a general rule, we advise systems to spend 70 to 80 percent of their time doubling down on what works (i.e., their core strengths) and 20 to 30 percent of their time on new efforts.

Second, when we talk about healthcare as a zero-sum game, we mean the total increases in healthcare spend are slowing down and there are greater threats to the hospital portion of that spend. I.e., the pie is growing at a slower pace and profits in the hospital sector are decreasing.

I. Types of Healthcare Systems

We generally see six to eight types of healthcare systems. There is some overlap, with some organizations falling into several types.

1. Elite Systems. These systems generally make U.S. News & World Report’s annual “Best Hospitals” ranking. These are systems like Mayo Clinic, Cleveland Clinic, Johns Hopkins Hospital, NewYork-Presbyterian, Massachusetts General, UPMC and a number of others. These systems are often academic medical centers or teaching hospitals.

2. Regionally Dominant Systems. These systems are very strong in their geographic area. The core concept behind these systems has been to make them so good and so important that payers and patients can’t easily go around them. Generally, this market position allows systems to generate slightly higher prices, which are important to their longevity and profitability.

3. Kaiser Permanente. A third type of system is Oakland-based Kaiser Permanente itself. We view Kaiser as a type in and of itself since it is both so large and completely vertically integrated with Kaiser Foundation Health Plan, Kaiser Foundation Hospitals and Permanente Medical Groups. Kaiser was established as a company looking to control healthcare costs for construction, shipyard and steel mill workers for the Kaiser industrial companies in the late 1930s and 1940s. As companies like Amazon, Berkshire Hathaway and JPMorgan Chase try to reduce costs, it is worth noting that they are copying Kaiser’s purpose but not building hospitals. However, they are after the same goal that Kaiser originally sought. Making Kaiser even more interesting is its ability to take advantage of remote and virtual care as a mechanism to lower costs and expand access to care.

4. Community Hospitals. Community hospitals is an umbrella term for smaller hospital systems or hospitals. They can be suburban, rural or urban. Community hospitals are often associated with rural or suburban markets, but large cities can contain community hospitals if they serve a market segment distinct from a major tertiary care center. Community hospitals are typically one- to three-hospital systems often characterized by relatively limited resources. For purposes of this article, community hospitals are not classified as teaching hospitals — meaning they have minimal intern- and resident-per-bed ratios and involvement in GME programs.

5. Safety-Net Hospitals. When we think of safety-net hospitals, we typically recall hospitals that truly function as safety nets in their communities by treating the most medically vulnerable populations, including Medicaid enrollees and the uninsured. These organizations receive a great percentage of revenue from Medicaid, supplemental government payments and self-paying patients. Overall, they have very little commercial business. Safety-net hospitals exist in different areas, urban or rural. Many of the other types of systems noted in this article may also be considered safety-net systems.

6. National Chains. We divide national chains largely based on how their market position has developed. National chains that have developed markets and are dominant in them tend to be more successful. Chains tend to be less successful when they are largely developed out of disparate health systems and don’t possess a lot of market clout in certain areas.

7. Specialty Hospitals. These are typically orthopedic hospitals, psychiatric hospitals, women’s hospitals, children’s hospital or other types of hospitals that specialize in a field of medicine or have a very specific purpose.

II. Mergers and Acquisitions

There have seen several large mergers over the last few years, including those of Aurora-Advocate, Baylor Scott & White-Memorial Hermann, CHI-Dignity and Mercy-Bon Secours, among others.

In evaluating a merger, the No. 1 question we ask is, “Is there a clear and compelling reason or purpose for the merger?” This is the quintessential discussion piece around a merger. The types of compelling reasons often come in one of several varieties. First: Is the merger intended to double down and create greater market strength? In other words, will the merger make a system regionally dominant or more dominant?

Second: Does the merger make the system better capitalized and able to make more investments that it otherwise could not make? For example, a large number of community hospitals don’t have the finances to invest in the health IT they need, the business and practices they need, the labor they need or other initiatives.

Third: Does the merger allow the amortization of central costs? Due to a variety of political reasons, many systems have a hard time taking advantage of the amortization of costs that would otherwise come from either reducing numbers of locations or reducing some of the administrative leadership.

Finally, fourth: Does the merger make the system less fragile?

Each of these four questions tie back to the core query: Does the merger have a compelling reason or not?

III. Headwinds

Hospitals face many different headwinds. This goes into the concept of healthcare as a zero-sum game. There is only so much pie to be shared, and the hospital slice of pie is being attacked or threatened in various areas. Certain headwinds include:

1. Pharma Costs. The increasing cost of pharmaceuticals and the inability to control this cost particularly in the non-generic area. Here, increasingly the one cost area that payers are trying to merge with relates to pharma/PBM the one cost that hospitals can’t seem to control is pharma costs. There is little wonder there is so much attention paid to pharma costs in D.C.

2. Labor Costs. Notwithstanding all the discussions of technology and saving healthcare through technology, healthcare is often a labor-intensive business. Human care, especially as the population ages, requires lots of people — and people are expensive.

3. Bricks and Mortar. Most systems have extensive real estate costs. Hospitals that have tried to win the competitive game by owning more sites on the map find it is very expensive to maintain lots of sites.

4. Slowing Rises in Reimbursement – Federal and Commercial. Increasingly, due to federal and state financial issues, governments (and interest by employers) have less ability to keep raising healthcare prices. Instead, there is greater movement toward softer increases or reduced reimbursement.

5. Lower Commercial Mix. Most hospitals and health systems do better when their payer mix contains a higher percentage of commercial business versus Medicare or Medicaid. In essence, the greater percentage of commercial business, the better a health system does. Hospital executives have traditionally talked about their commercial business subsidizing the Medicare/Medicaid business. As the population ages and as companies get more aggressive about managing their own healthcare costs, you see a shift — even if just a few percentage points — to a higher percentage of Medicare/Medicaid business. There is serious potential for this to impact the long-term profitability of hospitals and health systems. Big companies like JPMorgan, Amazon, Berkshire Hathaway and some other giants like Google and Apple are first and foremost seeking to control their own healthcare costs. This often means steering certain types of business toward narrow networks, which can translate to less commercial business for hospitals.

6. Cybersecurity and Health IT Costs. Most systems could spend their entire budgets on cybersecurity if they wanted to. That’s impossible, of course, but the potential costs of a security breach or incident loom large and there are only so many dollars to cover these costs.

7. The Loss of Ancillary Income. Health systems traditionally relied on a handful of key specialties —cardiology, orthopedics, spine and oncology, for example — and ancillaries like imaging, labs, radiation therapy and others to make a good deal of their profits. Now ancillaries are increasingly shifted away from systems toward for-profits and other providers. For example, Quest Diagnostics and Laboratory Corporation of America have aggressively expanded their market share in the diagnostic lab industry by acquiring labs from health systems or striking management partnerships for diagnostic services.

8. Payers Less Reliant on Systems. Payers have signaled less reliance on hospitals and health systems. This headwind is indicated in a couple of trends. One is payers increasingly buying outpatient providers and investing in many other types of providers. Another is payers looking to merge with pharmaceutical providers or pharmacy and benefit managers.

9. Supergroups. Increasingly in certain specialties and multispecialty groups, especially orthopedics and a couple other specialties, there is an effort to develop strong “super groups.” The idea of some of these super groups is to work toward managing the top line of costs, then dole out and subcontract the other costs. Again, this could potentially move hospitals further and further downstream as cost centers instead of leaders.

IV. The Great Fear

The great fear of health systems is really twofold. First: that more and more systems end up in bankruptcy because they just can’t make the margins they need. We usually see this unfold with smaller hospitals, but over the last 20 years, we have seen bankruptcies periodically affect big hospital systems as well. (Here are 14 hospitals that have filed for bankruptcy in 2018 to date. According to data compiled by Bloomberg, at least 26 nonprofit hospitals across the nation are already in default or distress.)

Second, and more likely, is that hospitals in general become more like mid-level safety net systems for certain types of care — with the best business moving away. I.e., as margins slide, hospitals will handle more and more of the essential types of care. This is problematic, in that many hospitals and health systems have infrastructures that were built to provide care for a wide range of patient needs. The counterpoint to these two great fears is that there is a massive need for healthcare and healthcare is expensive. In essence, there are 325,700,000 people in the United States, and it’s not easy to provide care for an aging population.

V. The Last 10 Years – What Worked

What has worked over the last five to 10 years is some mix of the following:

  1. Being an elite system has remained a recipe for financial success.
  1. Being regionally dominant has been a recipe for success.
  1. Being very special at something or being very great at something has been a recipe for success.
  1. Being great in high paying specialties like orthopedics, oncology, and spine has been a recipe for success.
  1. Systems have benefited where they provide extensive ancillaries to make great profits.

VI. The Next 10 Years

Over the next 10 years, we advise systems to consider the following.

  1. Double down on what works.
  1. Do not give up dominance where they have it. Although it may be politically unpopular and expensive to maintain, dominance remains important.
  1. Systems will need a new level of cost control. For years hospitals focused on expanding patient volume, expanding revenue and enlarging their footprint. Now cost control has surpassed revenue growth as the top priority for hospital and health system CEOs in 2018.
  1. Systems will have to be great at remote and virtual care. More and more patients want care where and when they want it.
  1. Because there will be so much change, systems must continue to have great leadership and great teams to adjust and remain successful.
  1. As systems become more consumer-centric, hospitals will have to lead with great patient experience and great patient navigation. These two competencies have to become systemwide strengths for organizations to excel over the next decade.

VII. Other Issues

Other issues we find fascinating today are as follows.

1. First, payers are more likely to look at pharma and pharma benefit companies as merger partners than health systems. We think this is a fascinating change that reflects a few things, including the role and costs of pharmaceuticals in our country, the slowly lessening importance of health systems, and payers’ disinterest in carrying the costs of hospitals.

2. Second, for many years everyone wanted to be Kaiser. What’s fascinating today is how Kaiser now worries about Amazon, Apple and other companies that are doing what Kaiser did 50 to 100 years ago. In essence, large companies’ strategies to design their own health systems, networks or clinics to reduce healthcare costs and provide better care is a force that once created legacy systems like Kaiser and now threatens those same systems.

3. Third, we find politicians are largely tone deaf. On one side of the table is a call for a national single payer system, which at least in other countries of large size has not been a great answer and is very expensive. On the other hand, you still have politicians on the right saying just “let the free market work.” This reminds me of people who held up posters saying, “Get the government out of my Medicare.” We seem to be past a true and pure free market in healthcare. There is some place between these two extremes that probably works, and there is probably a need for some sort of public option.

4. Fourth, care navigation in many elite systems is still a debacle. There is still a lot of room for improvement in this area, but unfortunately, it is not an area that payers directly tend to pay for.

5. Fifth, we periodically hear speakers say “this app is the answer” to every problem. I contrast that by watching care given to elderly patients, and I think the app is unlikely to solve that much. It is not that there is not room for lots of apps and changes in healthcare — because there is. However, healthcare remains as a great mix of technology and a labor- and care-intensive business.

 

Arizona hospital rebrands after bankruptcy

https://www.beckershospitalreview.com/finance/arizona-hospital-rebrands-after-bankruptcy.html?origin=cfoe&utm_source=cfoe

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Green Valley (Ariz.) Hospital has emerged from the bankruptcy process with a new owner and a new name, according to the Arizona Daily Star.

Green Valley Hospital entered Chapter 11 bankruptcy in early 2017 and received permission from the bankruptcy court to sell its assets. In January, Lateral GV, part of equity firm Lateral Investment Management, submitted the winning bid for the facility.

In February, the bankruptcy court approved the sale to Lateral GV, and the hospital emerged from bankruptcy in July with a new name: Santa Cruz Valley Regional Hospital.

Although the hospital exited the bankruptcy process, its financial challenges continued. Santa Cruz Valley Regional Hospital laid off 60 employees in July.

The hospital’s financial footing has stabilized over the past few months, and it is now looking to grow its workforce.

“We’re staffed and ready (for the influx in winter population) and look forward to adding more employees back in,” Santa Cruz Valley Regional Hospital CEO Kelly Adams told the Arizona Daily Star.

The hospital may also add more services in the future.

“I talk with patients every day, and they say they’re tired of going to Tucson for their healthcare,” Ms. Adams said. “This encourages us to bring more physicians in and more services.”

 

 

California health system’s bankruptcy challenged by employee union

https://www.beckershospitalreview.com/finance/california-health-system-s-bankruptcy-challenged-by-employee-union.html

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El Segundo, Calif.-based Verity Health System, the nonprofit operator of six hospitals, filed for bankruptcy protection Aug. 31. The bankruptcy proceedings are being challenged by SEIU-UHW, a union representing 2,000 workers at Verity Health hospitals.

The hospitals were originally owned by Los Altos, Calif.-based Daughters of Charity Health System. The financially troubled system began seeking a buyer for the hospitals in 2014, and Integrity Healthcare, a company created by BlueMountain Capital Managementtook over the facilities in 2015 and renamed them Verity Health System. Billionaire Patrick Soon-Shiong, MD, bought Integrity in July 2017, according to the Los Angeles Times.

Dave Regan, president of SEIU-UHW, expressed concern about Verity entering bankruptcy.

“When Verity bought these hospitals from Daughters of Charity four years ago, they made promises to these communities that they would not lose access to the care they needed,” he said in a press release. “Now it looks like Verity’s billionaire owner wants to go back on those commitments.”

In the bankruptcy filing, Verity seeks court permission to sell the hospitals from any liens and encumbrances. SEIU-UHW contends this shows Verity’s “intent to nullify their obligations both to their union collective bargaining agreements and the conditions of sale imposed by former Attorney General Kamala Harris when Verity purchased the hospitals.”

By challenging the bankruptcy filing, SEIU-UHW intends to ensure the hospitals are kept open and continue to meet pension obligations and maintain current services and levels of employment.

 

 

6-hospital Verity Health files for bankruptcy

https://www.beckershospitalreview.com/finance/6-hospital-verity-health-files-for-bankruptcy.html

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El Segundo, Calif.-based Verity Health, which operates six hospitals in Northern and Southern California and maintains ties to billionaire former surgeon Patrick Soon-Shiong, MD, filed for bankruptcy Aug. 31, Reuters reports.

Verity Health CEO Richard Adcock told Reuters he expects the system to remain in bankruptcy protection for at least a few years as it restructures and continues working with potential buyers.

The bankruptcy announcement comes on the heels of several deals that left the system with more than $1 billion in pension liabilities and bond debt. Verity Health reportedly secured a $185 million loan to remain operational.

Mr. Adcock added the system has been losing nearly $175 million per year on a cash flow basis.

In July, Verity Health revealed it is examining all strategic options, including a sale, of some or all of its hospitals. Mr. Adcock told Reuters the system has received a number of offers, including from several large national hospital operators.

Dr. Soon-Shiong, who has founded and sold several biotech companies and recently purchased the Los Angeles Times and other newspapers for $500 million, acquired Verity Health’s management company in 2017. At the time, he said his goal was to revitalize the health system, which has come to employ 6,000-plus people as of 2017.

Mr. Adcock said the health system is re-examining all of its contracts, including the management deal with Dr. Soon-Shiong, Reuters reports.

 

Operator of 22 freestanding ERs files for bankruptcy

https://www.beckershospitalreview.com/finance/operator-of-22-freestanding-ers-files-for-bankruptcy.html

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Houston-based Neighbors Emergency Center, which operates 22 freestanding emergency rooms, has filed for Chapter 11 bankruptcy, according to the Texarkana Gazette.

Neighbors’ freestanding ERs are operating as normal throughout the debt restructuring process, a company spokesperson told the Texarkana Gazette.

“All of our 22 centers are remaining open,” the spokesperson said. “The bankruptcy was filed to prepare for sale.”

The spokesperson did not give details on the sale of the freestanding ERs, according to the report.