As trustees and senior management create their budgets, develop strategic plans and consider how to allocate precious resources, several factors make planning for the future unsettling and difficult. Health care reform is in the hands of the Supreme Court, which is tasked with the challenge of deciding the legality of mandating insurance coverage. The difficult economy, stubborn high unemployment and challenges to reimbursement continue.
As hospital leaders look forward, they also need to reflect on major events in 2011 — the struggling economy, the decline in elective procedures and general softening of volume, and the introduction of value-based Medicare payment models — that will shape 2012. Here are the 10 health care trends that will make the biggest impact on hospitals and systems, plus the factors of which trustees should be mindful.
The economy and high unemployment rate will drive more people to purchase high deductible health plans. These patients will use less health care, while adverse selection will occur with commercial HMOs (that is, sicker patients — typically those with chronic diseases — will stay with their HMOs to minimize out-of-pocket expenses). Elective procedure volume will decline, and patients may select less expensive diagnostic procedures or modalities. Additionally, bad debt will increase for medical groups and hospitals.
Trustees should keep an eye on: payer mix, specifically the HMO and high-deductible percentage mix as well as Medicaid and bad debt amounts. Monthly tracking of volume, especially by payer, would be a good indicator of trends. Further, talking to physicians and tracking their office visits, which have been off by about 4 percent for the past two years, and their procedure volume would provide an early look at utilization trends. Lastly, track the volumes of outreach labs. It's a useful gauge of physician office visit volume.
Costs will continue to grow faster than the revenue per unit. Medicare costs will rise faster than projected because the scheduled physician payment reductions (the sustainable growth rate) will not occur. Meanwhile, an aging population consumes more resources, and the number of patients with chronic diseases continues to increase. Their complexity of disease also will increase. With most states holding Medicaid payments at the current rate or decreasing them, Medicare increasing less than 2 percent, and many health plans limiting increases to less than 5 percent, pressure will build on medical groups and hospitals who already are struggling to control costs in other areas. For example, wage rates are increasing 3 percent or more, benefit costs are going up 8 to 10 percent, and utility, supply and drug costs will be up at least 10 percent.
Trustees should keep an eye on: rate increases from the various payers — Medicare, Medicaid and commercial health plans. Some plans may tie increases to improvement in quality outcomes. Labor negotiations, benefit renewal expenses and vendor agreements all will drive costs up higher than revenue. Management will have to focus on cost-saving strategies to maintain margins. Lastly, trustees should monitor the acuity and case mix of their patients.
Hospital-physician alignment will continue to be critically important to hospital CEOs. Physicians will continue to seek alignment with hospitals to mitigate the unknown future of reimbursement, soft volume and the development of ACOs, bundled payment and care models such as patient-centered medical homes. Most physicians lack the financial resources to implement the necessary IT and care management tools required to succeed in this new payment model. Now that health plans are jumping into medical group acquisitions, other groups and hospitals will become nervous regarding the potential change in ownership and disruption of referral patterns.
Trustees should keep an eye on: medical staff or medical group leadership approaching hospital management regarding employment or other stronger economic ties or support. Management should be focused on the IT investment needed to offer an ambulatory electronic health record, computerized provider order entry, a picture archiving and communication system or health information exchange, not to mention compliance with the impending — and expensive — ICD-10 implementation. These investments will be needed to attract young and middle-aged physicians to their organization.
Care model changes are coming and will accelerate. Watch for continued development and maturing of patient-centered medical homes, bundled payments for joint replacement and cardiovascular service lines and, in the near future, for oncology, spine and other service lines. The growth of accountable care organizations will continue at a slow pace; clinical integration will outpace ACO development. Innovators will begin to consolidate case management, hospitalists and intensivists into a centralized, coordinated function. Case management services will be embedded in medical groups and extend to post-acute care. Many organizations will pursue the Center for Medicare & Medicaid Innovation's Health Care Innovation Challenge to attract grant money to develop and implement new care models for vulnerable populations.
Trustees should keep an eye on: their medical staff or medical staff leadership, who should drive the need to change with the market and take new approaches to the delivery of care. Physicians may approach the hospital with the idea of trying some of these new models. This will require hospital leaders to develop new economic incentives to collaborate with the physicians through comanagement agreements, shared risk pools between physicians and the hospital, medical homes designed around chronic disease groupings, stepping into the ownership of post-acute services, and possibly entering into joint ventures.
Cost cutting will continue to be top of mind for all CEOs. With concern over when inflation will rear its ugly head and payment pressures from Medicaid, Medicare and commercial health plans, CEOs will be intent on cutting costs. They will be evaluating outsourcing functions to less costly vendors and using metrics to measure vendor performance. Leaders also will explore selling underperforming assets, programs or services and reducing the number of nonclinical personnel.
Trustees should keep an eye on: CEOs who are restructuring or reorganizing their organizations, reducing nonclinical personnel, outsourcing certain departments, programs or services, disposing of underperforming assets and discontinuing money-losing or underperforming programs.
IT will consume the attention of many hospitals and medical groups. The focus will be on meaningful use standards, ICD-10 conversion and investments into quality improvement tools. IT investments including HIEs, ambulatory EMRs, CPOE, an enterprise data warehouse and results reporting may delay spending on new construction or facility modernization.
Trustees should keep an eye on: careful prioritization of capital projects. Identify possible outsourcing options for complex IT initiatives (such as an enterprise data warehouse or HIE). Trustees also should review the organization's IT plan to ensure that it has been updated given the needs for clinical integration and obtaining meaningful use incentives. The plan should have a vision, goals, timeline and budget that reflect the organization's priorities as well as federal deadlines.
Access to capital will remain tough for nonprofits, while for-profits will see their access to funding increase. Nonprofits will double down on their fundraising efforts, betting on an improving economy. Private equity and publicly traded companies will use their strength and access to capital to expand their reach into health care. The health plans, with their huge cash reserves, will make investments to develop experienced managed care capabilities and acquire physician provider groups. They will continue to move away from the premium business and offer managed care expertise, data and analytics, and critical mass to organizations to better manage costs.
Trustees should keep an eye on: increased activity by the hospital's foundation, coupled with a focus on generating income from operations. The debt rating agencies are concerned with Medicare and Medicaid cuts and the slowdown in health plan premium increases. For-profits will be more active in acquiring hospitals and using their management systems and access to capital to improve performance. It will be important for executives and boards to stay close to the medical staff and listen to their needs and concerns, so that if they get interested in selling their practices, they consider the hospital a potential buyer.
Expect consolidation, mergers and acquisitions to continue in 2012. Struggling hospitals and medical groups will continue to see markets consolidate and volume concentrate to stronger facilities, experience difficulty accessing capital and be unable to make an adequate investment in IT and clinical care. Declines in Medicare and Medicaid reimbursement will hurt income and the ability to borrow. And as inpatient volume declines (and hospitals feel greater pressure due to value-based payment models), excess capacity in the market will encourage further consolidation.
Trustees should keep an eye on: the financial performance of their competitors, declines in utilization of inpatient facilities, an aging medical staff and physicians' reluctance to adapt to these new care delivery models. On the medical group side, watch for lack of capital investment by the group in IT initiatives, care protocols and care management infrastructure. Further, if the group lacks a critical mass or a market presence to warrant the attention of the health plans, the medical group will be looking for a partner. Lastly, as hospitals and medical groups underperform and they fall behind their competitors, there will be a decline in facility and equipment investment. The physicians in the community will be a good source of information about a hospital's performance and, therefore, an early warning of trouble ahead, such as a sale and increased consolidation.
Expect higher turnover, redirections in positions and early retirements in the C-suite. The C-suite will become more demanding, with more conflict from competing interests among physicians and greater demand for fewer resources. There has never been a time with such an unsettled future; it is difficult to know where health care will be in another year. With all the change due to reform, delivery models, inadequate payment given the increasing cost of providing care, labor strife and declining inpatient volume, the increasing churn in hospital C-suites will continue. Many CEOs recognize that they will have to reduce their own C-suite staff and restructure the organization, and many are worn out from the stress of the past three years.
Trustees should keep an eye on: burnout in the C-suite, reduced productivity due to sustained stress and a lack of focus on the organization's strategic direction. Close communication with C-suite members will be necessary going forward and attention to succession planning is more important than ever.
Driving volume to your physicians and facilities is key. That means capturing greater market share while per capita use rates continue to slide. Everyone will chase the same high-paying payer mix; the key is improving throughput and changing the care delivery model to squeeze out waste, duplication and layers of oversight by demanding more from a smaller management team. As physicians are offered more incentives to reduce inpatient care and move volume to outpatient and post-acute care providers, the inpatient censuses will decline and cause more economic stress. Many experts believe the impact of ACOs, bundled payments, the medical home, post-acute services, palliative care, and others all will result in the lower use of hospitals. Further, the weak economy also will reduce the use of health care services, especially those of hospitals.
Trustees should keep an eye on: the development of new care models in their market and incentive models used by health plans or ACOs that will reduce the use of their hospital. Even a change in the ownership of a medical group or competing hospital can be a game changer in the market and reduce volume.
One final thought: It is an election year so the rhetoric, facts, misinformation and experts will be in high gear, causing many leaders to hesitate and watch what happens in the presidential, House and Senate races. Trustees shouldn't let this uncertainty slow down or paralyze their management teams as they ponder the implications and the impact on the organization's future.
Steven T. Valentine, M.P.A. (svalentine@the camdengroup.com), is president of The Camden Group, Los Angeles.