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Opportunities and threats facing hospitals and health systems

Leveraging VMG Health’s expertise as a leading provider of transaction health care valuation services, this article examines seven key issues facing Hospitals and Health Systems in 2017 and into 2018.

Shift to Outpatient Sites of Care

A higher percentage of low-acuity care is being provided in lower-cost, outpatient settings (i.e., ASCs, Urgent Care, Primary Care, etc.) This trend is primarily driven by an increase in consumer cost-sharing and improving patient navigation to relevant access points within the healthcare system.

CMS is further leading the push to outpatient facilities in an effort to reduce national healthcare expenditures and improve the overall efficiency of the U.S. healthcare environment. Additionally, many ASC and urgent care platforms are owned/operated by large corporate entities and private equity groups with better access to capital to aid in marketing efforts to steer patients to these outpatient settings, and out of the higher cost hospital setting.

Hospitals and health systems that acquire, form joint ventures with, partner with, or develop, their own outpatient infrastructure will be well suited to take advantage of this trend.

The Rise of Consumerism

Patients are increasingly taking an active role in the decision making behind their health care needs. The cost of care, quality of care, and ease of care, are crucial factors in the patient-driven decision making process.

Brand awareness is an important catalyst in driving patient volume. Larger marketing budgets result in the ability to take advantage of the consumerism trend by educating patients on portfolio of service offerings, price concerns, and quality of care offered by a hospital operator or other healthcare provider. Additionally, competition in the outpatient site of service (for example, urgent care chains), increases the need for a higher focus on marketing, and brand awareness, for hospitals and health systems.

Hospitals and health systems that allow consumers to choose among a variety of inpatient and outpatient settings and compare costs, quality, and access to physicians of different healthcare organizations will enhance the consumer experience and engage the consumer base.

Uncertain Outlook of the Affordable Care Act “ACA”

Recent declining growth numbers as a result of the ACA losing its momentum has led to uncertainty in the future over enrollment numbers. While Congress has apparently moved on from the “Repeal-and-Replace” debate over the ACA, the administration has continued to take steps to limit the scope, enforcement, and implementation of the ACA’s core principles. Health Exchange enrollment decreased for the first time in 2017 by 4%.

Decreasing Emergency Room “ER” Utilization

Hospital operators experienced a surge of ER utilization following passage of the ACA due to newly insured individuals’ inexperience navigating the healthcare delivery system. The impact was most acute among individuals newly insured under Medicaid due to the lack of financial disincentives (as compared to commercial plans) to avoid emergency rooms and less access to primary care (i.e. urgent care and primary care are less likely to accept Medicaid). In addition, lower acuity commercial ER volume are shifting to more cost-effective settings. However, beginning in 2016 overall ER volume growth has begun to slow and even decline.

For hospitals who primarily rely on their ER / admissions conversion, the trend can result in lower admissions. For hospitals whose ER departments are inundated with low acuity, low reimbursement volume, this trend can result in shedding unprofitable patient engagement.

Changing Reimbursement Landscape

As compared to typical Fee-for-Service “FFS” payment models, the shift to value-based reimbursement programs by CMS, such as the Merit-based Incentive Payment System (“MIPS”) and Alternative Payment Models (“APMs”), is increasing risk involved in receiving reimbursement, and increasing expenses related to data requirements for quality reporting necessary to receive favorable reimbursement.

Increase of High Deductible Plans

The increase of high deductible plans leads to greater seasonal volatility as patients opt out of treatment towards the beginning of the year when deductibles have not been met. At the end of the year, patients who haven’t met their deductibles may opt out of care altogether. Additionally, patients are incentivized to have low-acuity care treated in lower-cost setting, as patients share in the cost savings through their deductible payments (resulting in a further push to the outpatient setting as discussed above).

Ultimately, higher deductibles lead to greater financial burden on the patient, leading to larger medical debt, and resulting in higher levels of A/R, and A/R collection difficulties for hospitals and health systems.

Bankruptcies

In 2017, VMG observed an increase in hospital bankruptcies, primarily in the rural setting. Rural residents are less likely to have health insurance coverage through a job, have lower incomes on average, have fewer healthcare options, and have higher death rates from heart disease and stroke, leading to an overall less profitable patient demographic. Additionally, smaller rural hospitals, especially those not affiliated with a larger health system, face challenges such as low leverage in payor and supplier contracts, challenges in recruiting physicians, and heavy difficulty keeping up with costs associated with technology, staffing, and marketing in the face of data reporting requirements (value-based reimbursement models), competition, and consumerism.

We have examined seven key trends facing Hospitals and Health Systems in 2017 and into 2018. The trends outlined above are driving health care M&A and other transaction activity (joint ventures, partnerships, joint operating companies, etc.) as hospitals and health systems seek to take advantage of the economies of scale needed to compete in the changing health care landscape.

VMG Health is the leading provider of fair market value consulting, transaction advisory, and valuation services to the healthcare industry. In any decision to acquire, divest, or engage in any other transaction activity, securing an experienced health care financial advisor can be a critical first step.

For more information, please contact:
Don Barbo, CPA / ABV, Managing Director, VMG Health, don.barbo@vmghealth.com
John Meindl, CFA, Director, VMG Health, john.meindl@vmghealth.com
Winston Smart, Manager, VMG Health, winston.smart@vmghealth.com
 
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