After months of caution, leading healthcare providers say they are getting on with business.
In the May issue of Leadership, BDC reported on the results of ongoing interviews with a dozen healthcare executives across the nation in the face of a potential repeal and replacement of the Affordable Care Act (ACA). We concluded that, despite short-term uncertainties in the market, provider responses were fundamentally the same as they had been since 2010, when the ACA become law: a continuing transformation toward value-based care and an increased focus on improving clinical and operational efficiency, albeit with a slowing of new capital expenditures.
We have continued our interviews with a broader sample of executives from 10 other nationally known provider systems, focusing primarily on market-leading organizations in the Northeast, Midwest and Pacific Coast regions. These are our latest observations.
A New Sense of Optimism
After months of legislation watching, hospitals and health systems have concluded that they have sufficient breathing room to again crank up their planning efforts. In our ongoing sampling of discussions, C-suite leaders from market-leading organizations are now expressing a renewed sense of optimism, purpose, and focus.
This outlook does not figure to be diminished by the White House’s recent decision to stop the cost-sharing subsidies that compensate insurers for providing discounts to low-income consumers. Systems with manageable capital needs in the near term, a stable liquidity position, and good operational metrics appear to be in a stronger position to move forward.
The “wait and see” caution expressed in our earlier interviews appears to have been born out in first- and second-quarter market data. The recent Health Sector Trend Report from Altarum shows that healthcare spending growth is trending further downward in 2017, from 5 percent in Q1 to 3.8 percent for Q2. Healthcare employment growth averaged 21,000 jobs per month for the first five months of the year, down from a monthly average of 32,000 for the prior two years; a more recent uptick in employment in June and July stemmed from job growth in ambulatory locations, perhaps reflecting the continuing pursuit of cost-reduction and asset-redeployment efforts that were highlighted as “no regret” strategies in our first round of interviews.
However, after months of back-and-forth debate in Washington, we have noticed a shift: uncertainty persists, but with more of a chronic undertone. After the failure of the most recent attempt at ACA repeal—the Graham-Cassidy block-grant proposal for Medicaid—even without a Democratic filibuster, there is little appetite in Congress for another ACA fight.
President Donald Trump has issued an executive order to stop payment of the ACA’s cost-sharing subsidies to insurers, but health plans in the individual-insurance market, faced with repeated threats over the past few months, generally had priced the loss of these subsidies into their premiums for next year already; the impact of this executive order is unclear, especially given a lawsuit filed by 18 states and the District of Columbia to maintain the subsidies. Meanwhile, there is a continued bipartisan effort in the Senate to address the ACA’s limitations while supporting the exchanges. Despite some risks in the individual market, Medicaid expansion appears safe for now and the overall commercial market looks solid.
Although the majority of executives in our initial rounds of interviews indicated they were confining themselves to “no regret” moves, our more recent interviews revealed a more positive outlook. Several leading national systems indicated they have decided to restart their planning process to develop the next iteration of their business strategy.
“We have looked at the market for the past six months,” says a chief strategy officer (CSO) with a leading Midwest system, “and have decided that the current trends among commercial and government payers are likely to stay in place.” There is consensus among the C-suite leaders we interviewed that the commercial market will continue to trend slowly toward value, with hospitals and health systems showing continuing interest in assuming a greater share of insurance risk—although most interviewees stopped short of considering full-risk contracts at this time. One CSO adds, “The individual markets will continue to be a wild card, but we think there is now enough stability to pursue our plan for market growth and develop plans to gain a more appropriate share of risk.”
However, any moves toward value and population health will continue to be driven by regional market conditions. For example, the CEO of an academic health system with a dominant market share in a state with malpractice reform finds no compelling financial reason to speed up the organization’s move to value, barring “a significant external shock” such as a regulatory or competitive issue.
Three Major Strategies
Based on our interviews, we have identified three major strategies that the C-suites of leading systems are likely to pursue as they begin to shift from ‘no regret’ moves to steps designed to solidify their positions.
Freeing up capital for new growth and program expansion. Providers in healthy markets appear likely to move forward on growth projects, including programmatic expansion and new construction.
In general, executives expressed confidence that there was sufficient stability in commercial and government markets for them to start investing in growth. One academic medical center in a high-growth market in the Eastern part of the country, for instance, indicated that it had not paused on moving forward with capital expenditures. “The dynamic growth in our area puts winds in our sails,” the organization’s CFO said. “Our main challenge is to get a new facility up and running to take advantage of the demand—and to manage existing (limited) capacity better, for example by reducing length of stay.”
A regional system in the Midwest reported that it was acquiring physician practices to build out its clinical networks. A public health system in the Midwest confirmed it was continuing to push capital projects toward completion, including a $1.3 billion campus transformation to replace aging facilities.
Achieving scale through acquisitions, mergers, partnerships, and alliances. When able, providers continue to expand their footprint to gain benefits of scale.
Our interviews found near unanimous belief in the need for scale to improve liquidity metrics, to address declining payments, and to create leverage against big suppliers. However, there seems to be an increasing move toward partnerships and alliances rather than outright mergers.
Alarmed by a spate of mergers in the industry recently, the Federal Trade Commission (FTC) has entered an activist phase, successfully challenging high-profile provider mergers and acquisitions such as Penn State-Hershey and Pinnacle Health, and Advocate Health Care-NorthShore University; and, in the insurance market, Anthem-Cigna and Aetna-Humana.
Provider leadership is perplexed by this antitrust resistance, feeling that, as price takers, they have limited ability to increase rates. A Midwest system, stymied by the FTC’s challenges, is looking to find growth opportunities out-of-state.
Another challenge to outright mergers is cultural: An executive from a different Midwest provider system expressed considerable frustration at “the politics and emotions of not-for-profit health care that far outstrip rational thinking,” making it extremely difficult to link up organizations that aren’t financially desperate. This provider is trying to realize the benefits of scale through partnerships and affiliations rather than acquisitions, where possible.
Partnerships are also the vehicle of choice for an academic health system that is dominant in its state. Originally created as a merger of major local players, the organization may be “topped out on our merger strategy,” according to its CEO. Instead, it is evaluating potential partnerships and taking steps to identify and make use of synergies (e.g., the sharing of electronic health records).
Developing a strategy to ensure patient access and a seamless continuum of care. In developing an actionable strategy for value-based contracting, providers are focusing on issues relating to consumer access and the care continuum.
Several providers are expanding the use of advanced practice clinicians (APCs) working at the top of their licenses. The objective is to fill primary care physician shortages and to provide support for primary care physicians and specialists. In rural Mississippi, a clinically integrated network (CIN) developed by a community health system has successfully integrated APCs—nurse practitioners and physician assistants—with primary care physicians and specialists in a commercial contract covering more than 100,000 lives. The APCs practice independently as well as in association with physicians, providing an estimated 50 to 60 percent of primary care within the CIN’s service area.
Given that most providers are now in the physician business as well as the hospital business, there is increasing focus on building high-performing employed medical groups to replace declining private-practice staffs. Systems are moving beyond straight-salary employment contracts, organizing their employed physicians as separate groups with incentive compensation based on patient engagement and satisfaction metrics as well as productivity.
Most executives who were interviewed want to create or grow high-performing CINs that are capable of managing risk for targeted populations. One Southeast-based academic system with a robust CIN is using analytics to manage extremely high demand, “moving patients within our system from busy locations to less busy locations,” and to grow the volume and improve the case mix index of their tertiary and quaternary referrals.
Provider organizations also are partnering with managed care organizations to develop value-based contracts with joint investment in the case management, predictive modeling, and network configuration needed for providers to move to the appropriate level of risk. Early investment in analytical capabilities has been key, according to several executives.
An Evolving Outlook
Our May article identified a cautious, “wait and see” outlook among provider organizations faced with an unpredictable environment. After the failure of various ACA repeal-and-replace efforts, uncertainty remains but appears to have been accepted by organizations as a chronic condition, affecting primarily the individual market, that needs to be managed as an ongoing aspect of doing business rather than as an acute crisis that demands an immediate intervention. Meanwhile, the overarching quest to increase access to high-quality and affordable care continues.
Aamer Mumtaz, MBA, MPH, is a principal with BDC Advisors, Miami.
Alan London, MD, is a director with BDC Advisors, Miami.
Elizabeth Walker, JD, MHA, is a principal with BDC Advisors, Miami.