November 14, 2007
Healthcare is a highly scrutinized endeavor, with inadequate payment, rising costs, and intense competition. Coping with today's healthcare environment is more than enough to keep any leader fully occupied. However, to be truly effective, leaders must have a vision for the future and a plan for realizing that vision. HFMA's Healthcare Finance Outlook 2008-2013 combines forward-looking research and analysis with the knowledge from some of the best and brightest in the industry.
HFMA surveyed and interviewed more than 100 of the leading financial executives and industry advisors to identify key issues and to forecast major industry movement over the next three to five years in the four areas that drive healthcare business success, volume, cost, pricing/payment and capital. The report also recommends actions financial leaders can take to meet the anticipated challenges resulting from these trends.
Volume Outlook
Of four possible factors affecting hospital volume, the most significant one over the next three to five years is physician integration, according to survey respondents. Eighty percent of respondents ranked that issue as an extremely significant or significant future action to grow hospital volume, as evidenced by ratings of 5 or 4. A related issue—the movement toward nonhospital treatment facilities, such as retail settings— ranked as the second highest rated factor that will influence hospital volume. The two other possible factors affecting volume (or affected by volume shifts)—financial stress on safety-net hospitals and health system integration—were seen as extremely significant or significant by 63 percent of respondents.
Cost Outlook
The most significant components of cost are well known to hospital financial executives: labor and supplies. Labor costs are being driven by factors such as nurse and other shortages, as well as rapidly rising benefit costs. Supply costs are driven largely by the use of high-cost physician-preference items. Among five possible issues that could influence hospital costs over the next three to five years, accelerating regulatory requirements ranked the highest, with about 70 percent of respondents labeling this factor as extremely significant or significant, with ratings of 5 or 4. The factor next highest rated was increases in cost of supplies and pharmaceuticals. Respondents appeared to lack optimism about the possibility of productivity tools or pay-for-performance initiatives to reduce costs, with total highest ratings coming in third and fourth out of the five possible factors that will influence cost.
Pricing/Payment Outlook
The healthcare payment and pricing systems are broken. Both are fraught with illogic and unfairness, creating problems for all healthcare stakeholders. Nearly half of hospital payment derives from Medicare, Medicaid, and other government health programs. Due to federal and state budget constraints, government payment is falling increasingly short of covering hospitals' costs. Although hospitals continue to institute cost-control measures, they cannot make up the payment shortfall. As such, the cost of this shortfall is generally passed through to commercial payers and consumers. Among the possible issues that could influence pricing/payment over the next three to five years, stagnant or declining Medicare and Medicaid payment rates rated highest, with 96 percent of respondents rating it as extremely significant or significant, with scores of 5 or 4.
A second tier of factors with similar ratings of significance were:
- State mandates for coverage of uninsured patients
- The 2008 presidential election Health plans' bargaining power
- In addition, 49 percent of respondents believed that package pricing (in which hospital and ancillary services are combined into a single bill and payment) would be extremely significant or signficant.
Capital Outlook
Continued aging of facilities, rapid development of new technology, increased consumerism, a national focus on patient safety—all the drivers of the spending boom are still barreling down the road. "There's no doubt about it," says Catherine A. Jacobson, FHFMA, CPA, senior vice president of strategic planning and finance, CFO, and treasurer, Rush University Medical Center, Chicago. "We've been enjoying some phenomenal debt markets, with extremely low rates and cost of issuance and virtually no spread on quality at all: A triple B could be priced within spitting distance of a double A rating." As of mid-2007, she says, that's starting to spread. "We're starting to see certain types of vehicles just shutting down, such as derivative and swap-type arrangements—people just aren't willing to go there to get that lower cost. Covenants are tightening up. These are all the typical things you would expect to see with a flight to quality." Overall, she says, debt is still available. "It might cost you a little bit more but it's still not prohibitive."
Of four factors that could influence hospitals' access to capital over the next three to five years, the factor rated most significant was increasing cost of capital, cited as extremely significant or significant by 82 percent of respondents, with scores of 5 or 4. The next factor with greatest ratings of significance was the increasing threat to healthcare providers' tax-exempt status resulting from scrutiny over charity care and community benefit, with 76 percent citing this factor as extremely significant or significant. Other factors were increased private equity investments in health care and surplus in bed capacity in some markets.
Keeping an Eye on the Future
"It's daunting to anticipate the future. Yet maintaining future-focused perspective is vital to ensure resources are available to fulfill the critical mission of health care for the long term," Richard L. Clarke, DHA, FHFMA, president and CEO of HFMA.
SOURCE: HFMA's Healthcare Finance Outlook 2008–2013
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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 VI, Issue 23. Copyright 2007, Healthcare Financial Management Association. All rights reserved.