September 20, 2006
Strategic, financial, and capital planning by hospitals begins with an assessment of the environment in which they operate. The latest Financing the Future II report, developed by HFMA in partnership with GE Healthcare Financial Services and Kaufman Hall & Associates, Inc., provides updated healthcare industry thoughts from a panel of leaders in the field about the future of healthcare spending and capital access.
Change has been and will likely continue to be ever-present in the healthcare industry. "Leaders assessing their environment must think globally about their business and about the forces that could impact the organization at multiple levels," said Martin Arrick, managing director, Not-for-Profit Healthcare, Standard & Poor's. Although the "jury was out" with our panelists on whether such current trends as consumer-directed health care and pay-for-performance will persist into the future, the opinion was unanimous that three big-picture issues warrant ongoing focus from hospital leaders: competition, payment, and technology.
Competition
The competitive landscape for not-for-profit hospitals and healthcare systems has altered dramatically in the past decade. Although the intensity of competition varies by location, many organizations are facing significant threats—particularly in relation to highly profitable services, such as orthopedics and cardiology—from physicians, regional healthcare providers, and for-profit companies. Demographic growth occurring in some local or regional markets may support new nontraditional providers, but more often than not, general hospitals are feeling intense competitive heat in key service areas.
"The most important trend for hospitals, and one that probably creates more planning uncertainty than any other factor, is hospitals' changing relationship with their physicians. An increasing portion of lucrative outpatient services offered by hospitals is subject to competition from physician-owned facilities, including physician practices. Some hospitals are much more vulnerable to competitive challenges from physicians than others," commented Paul Ginsburg, PhD, president, Center for Studying Health System Change.
Ginsburg also noted, "Research indicates that population aging is not as large a factor as many in the hospital industry have imagined, but local population trends can also be extremely important to hospital planning efforts. For example, consider how fast hospitals in the Phoenix area need to expand just to keep up with population growth."
Payment
Payment constraints are hardly news, having been a major environmental factor for hospitals and healthcare systems since the advent of Medicare's prospective payment system in 1983 and the Balanced Budget Act of 1997. The mounting federal budget deficit since 2002, however, has greatly exacerbated an already tough situation and makes government-based payment a particularly hot-button issue. "Medicare payment will be the first and foremost issue that drives hospital financial and capital planning. Medicare accounts on average for 50 percent of a hospital's revenue base. Although rates are favorable and the outlook stable for 2006, the rate of Medicare payment is likely to slow in the next couple of years," said Lisa Goldstein, senior vice president/team manager, Health Care Ratings, Moody's Investors Service.
Arrick agreed, "Key issues on the horizon and likely to emerge within a couple of years include whether the federal government can continue to fund Medicare at the current levels plus an increased percentage each year, and whether states can afford Medicaid healthcare expenditures that exceed growth in overall state revenues each year."
"Healthcare financial managers should take into account the federal budget deficit as they develop their longer-term financial plans," said Richard Clarke, DHA, FHFMA, president and CEO, Healthcare Financial Management Association. "The obvious method by which the government deals with funding shortfalls is to limit payment, so, as part of their projections, managers need to consider likely reductions in the rate of payment increases, and potentially even a rate of overall payment reduction. Operating plans must reflect the imperative to drive down costs and/or strategic plans must reflect consideration of different scenarios for diversification into new markets with new revenue and payer streams."
Clarke also noted, "Price inflexibility will present hospitals with a significant challenge. In addition to Medicare constraints on pricing, consumer price sensitivity is expected to be a key issue in the next decade. Consumers and payers will require price transparency. As consumers become more responsible for making their healthcare purchasing decisions, they will shop for prices that are 'in line' with market rates."
Technology
During the past 20 years, advances in technology related to patient diagnosis and treatment have made possible increasingly complex inpatient procedures and shifted the provision of many less complex services from acute care settings to outpatient facilities. Healthcare IT is helping hospitals improve clinical quality, patient safety, and physician recruitment.
"During the next decade, hospitals will continue to struggle in defining and selecting the 'right' portfolio of high-tech equipment. New technologies are evolving very quickly and increasingly enabling new services, and thus are generating top-line growth. These technologies can support the growth goals of hospitals and help to enhance a hospital's position in increasingly competitive markets. Hospitals should be attentive in their future planning to how they will support technology-related capital expenditures," said Randy Fuller, manager, Market Intelligence, GE Healthcare Financial Services.
"Hospitals need to be attentive to developments in technology. Electronic health records, quality/outcomes tracking, clinical decision support, revenue/cost management systems, and other IT applications will be 'the enabler' for managing hospital issues coming down the pike. IT will help decide to what degree an organization is able to address current trends, whether managing or tracking pay for performance, consumer-directed health care, or demographic changes," Goldstein observed.
SOURCE: Financing the Future II Report 6: The Outlook for Capital Access and Spending
Additional Resources
If you have questions or comments about HFMA Wants You to Know, contact editor Maxine Harrison.
HFMA Wants You to Know ISSN: 1540-0697. Volume V, Issue 20. Copyright 2006, Healthcare Financial Management Association. All rights reserved.