On the Minds of Leading Health Care CEOs and Boards
By John Richter
At a client meeting, the CEO of a large physician group asked me, “What do you think are the biggest issues facing health care providers right now and what should we be prepared for?”
I thought for a moment and five challenges quickly came to mind: access to capital, negative inflation, the ailing economy, physician-hospital relationships, and the uncertainty of health care reform.
It will take great management, creative planning, dedication, and sacrifices, but health care providers can profitably operate their businesses in these unstable times.
Access to capital
Access to capital is limited by both the fact that interest rates on long-term, fixed-rate debt remain high, and demand for tax-exempt bonds is low. Health care organizations that want to borrow money to finance their projects are finding it to be very expensive, especially if they lack the endorsement of a rating agency.
This situation has, in turn, shifted the paradigm for funding capital projects. Until the bond market dried up, many organizations, particularly those with large funded depreciation reserves, could finance their capital projects with minimal costs. Instead of using cash set aside for capital projects, they borrowed the funds to finance the project because the interest rate on the bonds was lower than what they were earning on their cash reserves (producing positive arbitrage). This practice allowed most to repay the debt with earnings from investments, while presenting strong liquidity. Those days are over—the markets have devastated reserves and access to new debt is limited.
Negative inflation (shrinking margins)
For many years, health care providers’ costs grew at a rate that exceeded Medicare and Medicaid inflationary increases. This forced them to develop new products and services, continuously improve operational efficiency, and alter their payer mix to make up the difference. Providers are now saying they have no more “tricks up their sleeves” to make up the difference between 2 to 3 percent rate increases and 4 to 6 percent cost increases. They are beginning to feel the pain of inflation.
The ailing economy
Providers are feeling the impact of people losing their jobs, working reduced schedules, and having their health benefits eliminated. In addition, uninsured patients translate into a) an increase in bad debts, charity care, emergent care, and sicker people and b) a decrease in elective procedures.
People faced with job uncertainty, a lack of insurance, or high-deductible health plans are also choosing to delay or forgo elective surgeries and other procedures altogether. This is resulting in a decline in the number of outpatient surgeries (and the corresponding revenue) for hospitals and ambulatory surgical centers.
The housing crisis is affecting senior living providers. Because aging adults are struggling to sell their homes, the number of new residents entering continuing care retirement communities (CCRCs) and independent and assisted living facilities is decreasing.
The list goes on—health care providers have been and will continue to be affected by our ailing economy.
Physician-hospital relations
Due to the current economic environment, combined with diminishing payment rates and the likelihood of health care payment reform, physicians are evaluating their business models, other business opportunities, and relationships with referrals and hospitals.
The motivation seems to be different today than it was in the mid-1990s, the last time we saw significant consolidation activity. Back then, consolidation was a response to a common enemy: managed care. Now, it’s simple—third party payment rates are not growing at an acceptable pace, and, as a result, physician compensation and income are suffering. To counter, physicians are looking for new business opportunities, many of which compete with hospitals. In response, hospitals are forging relationships on new levels, acquiring both primary care and specialty physician practices and going into business through joint ventures and partnerships.
Health care reform
While the issue of health care reform rears its head periodically, this time a confluence of factors suggests the climate is ripe for it. President Barack Obama has proposed universal access to health care, and as a top priority for his administration, we’ve already witnessed big changes, including significant funding for
electronic health records (EHR) and more Medicaid dollars for states through a temporary increase in the federal matching percentage.
Although the country is currently focused on recovery, we fully expect Congress to pass a reform bill before the end of the summer. Based on emerging indicators, long-time tabooed subjects such as bundling are very much on the table, but, at this point, no one knows for sure what the passage of a reform bill would really mean for their organization.
How some leading providers are responding to these challenges
I feel confident that leaders taking steps to adapt to the economic conditions head on will navigate their way through the downturn.
Naturally, executives are looking at how to be more operationally efficient. Many have already developed or are developing rigorous plans to reduce expenses by examining the niceties versus the “must do” projects. There are cases where this is resulting in staffing reductions, delayed operating and capital expenditures, and, generally, making tough decisions that might be considered more unpalatable in better times.
In response to the shortage of traditional financing options for replacements, renovations, and routine improvements, providers are searching for other opportunities, including short-term loans from banks instead of tax-exempt debt, the U.S. Department of Housing and Urban Development (HUD), and the U.S. Department of Agriculture (USDA).
We’ve observed that leading providers respond early—they do not wait until a crisis draws them to action. They formulate strategies, develop capital plans, engage the right people, and operate their health care business efficiently. With the proper balance of risk management and quality, they are not only able to weather a storm, but they are positioned to thrive in challenging times by seizing the opportunities that make sense.
To find out how top aging-services organizations are responding to this economy, we talked with past Pathways to Greatness recipients. Read the interviews with:
How we can help
To meet the changing needs of our health care clients, our work has transformed at LarsonAllen. Eighteen months ago, we were focused on development projects, including building projections, forecasts, operating plans, and delivering market and feasibility studies. Today, we are helping our clients work through long-range strategic plans,
strategic capital planning, operational improvements, management consultant reports, financial performance issues, and
physician and hospital affiliations. We can assist you in assessing your unique situation and identifying opportunities to improve profitability and long-term viability.
John Richter is the principal-in-charge of health care at LarsonAllen.