Although the healthcare industry’s rate of growth has leveled, the industry is behaving like a much faster-growing and much more volatile industry. The haves and have-nots are beginning to separate and go their own ways.

 

A recent report estimates that national healthcare spending increased by 3.7 percent during 2012 (Gnadinger, T., “National Health Spending Growth Remains Low For Fourth Consecutive Year,” Health Affairs, Jan, 6, 2014). This rate of increase is similar to the 3.6 to 3.8 percent experienced between 2009 and 2011. That doesn’t sound like a growth industry. It is common to bemoan annual GDP growth in the 2 to 3 percent range; health care isn’t growing much faster than that. 

We would argue, however, that health care has many of the characteristics of a growth industry. With all the pressures on revenues, it may not feel that way at the local hospital or health system level. However, here are three factors to consider:

  • Because of its huge size—$2.8 trillion in 2012—a 3.7 percent increase represents about $100 billion in new spending each year. 
  • Although the U.S. healthcare industry is the largest single industry in the world, it is restructuring and improving at a fast pace. It is far from stagnant. 
  • If the Affordable Care Act (ACA) unfolds as planned, the number of new “paying” customers will increase by 3 million to 5 million a year. 

The mathematics of growth of any economy or industry show that as its size expands, the annual growth rate is more difficult to sustain. Going back a few years when annual healthcare spending was $1.8 trillion, a 6.0 percent growth rate would have represented about $100 billion in new spending. Public policy experts would have been much more upset with the 6.0 percent rate of increase than with the 3.7 percent in the past year. But the added new dollars, with some adjustment for inflation, would have been roughly the same.

Growth in a New Direction

A New York cab driver said it well to one of us: “You need health care to do two things at once, right? You need it to grow and make a profit, and you need it to reduce sickness and need. Isn’t that unusual?”

It seems paradoxical to think that an industry would need simultaneously to grow and to shrink demand. To be successful, healthcare providers must reduce many aspects of care. The external message—and a significant part of the reality—is that the industry is making care more accessible at a lower cost. Most providers have a wide range of initiatives under way to reduce costs (and increasingly for payers and patients as well); examples include reducing readmissions, moving cases from inpatient to outpatient settings, using physician extenders, beginning to use more electronic communications with patients, leveraging other IT solutions, developing population health management strategies, and finding scale economies though mergers or other consolidations. Most of us expect these trends to increase dramatically if and when providers have further financial incentives to reduce costs.

Many healthcare provider organizations have only begun to place “population served” and “costs per member per month” on their management dashboards. If the industry is to be successful in the public eye, the dialogue should shift from costs per unit of service to costs for a given population. Demographics and increasing payments for formerly uninsured patients continue to cause demand to rise. Technology, new care and communications approaches, and other changes are cutting both ways—sometimes increasing costs per unit of care and sometimes decreasing costs per unit. But the onus is on providers to manage care in a way that consistently reduces costs per member per month. 

Growing, Declining; Dying, Soaring

Health care has been thought of as a stable growth industry (“Everybody needs it, right?”). Also, a substantial portion of the industry’s payments come from government. And in many parts of the country, there is little competition among insurers, physicians, hospitals, and others. Many have viewed their careers as a “straight trajectory.”

We see this changing. We see health care beginning to look more like other growing-but-also-volatile industries, such as the telecommunications industry, with its smartphones, and the entertainment industry, with home TV. Underneath the top growth line for many other industries is a constantly changing picture—firms growing, others declining, others merging, others going away entirely, and some soaring to unanticipated heights. We see signs of this in health care as the industry transforms itself.

We also see still more differentiation between markets. We have always seen large differences among regions based on health status, utilization of services, and rates. Now we are beginning to see large differences by state—for example, the presence and absence of Medicaid expansion and the different approaches to health insurance exchanges. 

We also are seeing major differences in strategy. In our research in conjunction with HFMA’s Value Project, we have seen similarities in issues and approaches within “cohorts” of provider organizations (the five identified cohorts being academic medical centers, multihospital systems, integrated systems, standalone hospitals, and rural hospitals). However, we are also finding huge differences in approaches within each of these cohorts. Some organizations are quietly developing large leads over others in their cohort as they anticipate industry changes.

It seems clear that the differences between the growing and declining organizations—the haves and have-nots—will soon be more pronounced. These differences are readily apparent if one looks at traditional measures, such as market share,
revenues, and bottom lines. Even before these differences become apparent, however, the separation of the haves from the have-nots can be seen in measures such as:

  • Numbers of organizations modifying physician incentive structures
  • Dollars per patient spent on patient-centered medical homes
  • The numbers of revisits to physician offices for the same patient issue or incident
  • Numbers of management teams restructuring annual management incentives
  • Numbers of joint ventures and other approaches to achieving scale economies
  • Numbers of organizations analyzing their patient/retail demand
  • Numbers of patients receiving office care that were sources of admissions five years ago
  • Numbers of real-time uses of data warehouses
  • Numbers of partners and new ventures

A Market and Career Opportunity

Health care is growing—in some ways more like a new industry than like a long-standing one. Perhaps the recent trends, and the differences between the haves and the have-nots, are encapsulated in recent comments of two healthcare CEOs: The older one said, “I’m glad it’s time to go,” while the younger one said, “What a marvelous time to be in this business.”  


Keith D. Moore is CEO, McManis Consulting, Denver, and a member of HFMA’s Colorado Chapter.

Katherine M. Eyestone is a senior consultant, McManis Consulting, Denver, and a member of HFMA’s Colorado Chapter.

Dean C. Coddington is a senior consultant, McManis Consulting, Denver.

Publication Date: Tuesday, April 01, 2014

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