What Does the Future Hold for Hospitals and Healthcare Providers? 6 Observations & Concerns

Hospitals and health systems today are confronted by a number of challenges that could ultimately impact how they deliver care. From reduced reimbursement to increased government scrutiny and anticipated provider shortages, we anticipate the future forecast for these providers will be a cloudy one. Here are six observations on the current climate surrounding hospitals and health systems.  

1. Government debt and the need to reduce spending.
No matter how you slice it — and the sequester seems to be the most simple and obvious example of it — there is an increased recognition that the federal government must rein in its spending. Even those on the tax and spend side seem to view it as such. Through Medicare and Medicaid, the government is responsible for around 30-50 percent of the payments healthcare providers receive, and as a result, even small reductions in federal spending could amount to a lot of money coming out of healthcare.

As of April 1 when sequester cuts kicked in, healthcare providers began experiencing an across-the-board 2 percent reduction in Medicare payments, including graduate medical education funding. For this fiscal year, these cuts are estimated to total $9.9 billion.

President Obama and lawmakers are expected to work on a budget when Congress resumes to replace the $1.2 trillion in automatic spending cuts. However, providers should not expect the replacement legislation to be much more favorable to their bottom lines.

2. Increased taxes. Increased taxes on high-earning individuals will only further compound the impact of sequestration by taking more money out of the economy that would be otherwise spent on goods and services, including healthcare.

The Tax Policy Center, a nonpartisan think tank, estimates roughly 77 percent of Americans households will face higher federal taxes in 2013 due to increased payroll taxes that went into effect earlier this year. The wealthiest face even heftier increases in income taxes, as well as an additional 3.8 percent tax on investment income in a new tax created by the Patient Protection and Affordable Care Act.

These increased taxes being paid by the largest tax payor blocs will take serious dollars out of the economy that won't cleanly recycle back in and may just go to service government debt. Where a larger and larger portion of the healthcare bill is paid by consumers, whether via deductibles or other means, this has a significant impact on the economy.

3. Tepid economic growth.
Even before accounting for the sequester and increased taxes on income and the payroll, the economic growth rate was at 1 to 2 percent. When you then take another 3-5 percent out of the economy through taxes and costs reductions, it is hard to see where the country will have any economic growth. In March, the unemployment rate was steady at 7.6 percent. Real job creation was below zero when job growth (a 88,000 increase in non-farm payroll employment) is balanced with those exiting the workforce. Overall, the civilian labor force declined by 496,000 during the month.

4. Shifts to healthcare exchanges. As insurance companies raise rates to meet the requirements of healthcare reform, it is increasingly projected that more of the population will move to healthcare exchanges. Aetna CEO Mark Bertolini has said he expects premium increases could grow by as much as 100 percent in some group markets, and employers will reconsider their healthcare benefit packages as a result. A February report by the Congressional Budget Office estimated that roughly 7 million will lose or drop their employment-based coverage by 2022.

This shift to exchange-based health plans is concerning for healthcare providers, because the payment rates for these plans are uncertain. Small movements of well-paying commercial insurance patients to lower paying exchanges bodes very poorly for providers.

5. Tightened personal spending.
Economic growth problems will provide more pressure on employees to cut costs, including what is paid for healthcare. Employees selecting health plans — either offered through their employer or exchanges — may lean toward lower-premium or high deductible health plans with less comprehensive coverage. These plans shift more healthcare cost responsibility on patients, which can create collections difficulties for providers.

6. Healthcare provider profitability under pressure. Health systems are starting to report much lower profits in 2012 than in 2011, and the decrease in reimbursement and inpatient cases coupled with the percentage of healthcare costs patients are responsible for out-of-pocket will exacerbate these changes. The loss in some types of cases by systems leads to increased competition for other types of case by these systems and more pressure on the providers who survive based on such cases and patients.

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6 Key Observations on Sequestration and Hospitals

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