News | Healthcare Business Trends

Dec. 3-7: Hospitals Expected to Face Growing Margin Pressure

News | Healthcare Business Trends

Dec. 3-7: Hospitals Expected to Face Growing Margin Pressure

Nov. 29—Policymakers in Washington, D.C., next week will focus on hospitals' Medicare margins, as one rating agency warns government- and consumer-driven margin pressure will increase.

 

Government policy that moves closer to price setting could be a key margin challenge for the healthcare sector in 2019.

Nov. 29—Policymakers in Washington, D.C., next week will focus on hospitals’ Medicare margins, as one rating agency warns government- and consumer-driven margin pressure will increase. 

The Medicare Payment Advisory Commission (MedPAC) is expected to review Medicare hospital margins as part of its regularly scheduled two-day December meeting.

In its previous margin assessment, in December 2017, MedPAC projected hospitals’ overall Medicare margin would decline from negative 9.6 percent in 2016 to about negative 11 percent in 2018.

The upcoming meeting will follow a new 2019 projection by Fitch Ratings, which concluded that growing demand for healthcare services will challenge financially struggling governments and consumers. As a result, pricing and profit margin pressure could increase in 2019.

Fitch noted that the many disruptive threats to healthcare business models boil down to an attack on the industry’s pricing power.

Those threats fall into the broad categories of outside industry-competitive upstarts; government policy that is moving close to price setting; and efforts by consumers and large employers to force the industry to accept lower prices by managing the demand side through products like high-deductible health plans.

“Of all of these categories, Fitch thinks the government policy aspect poses the greatest threat since it is the farthest reaching,” the analysts wrote.

Forecasted Trends

The healthcare sector’s aggregate gross leverage was expected to remain steady, with no catalyst for companies to manage balance sheets differently in 2019.

Fitch expected most healthcare companies that have benefited from tax reform to increase shareholder payments and other capital deployment rather than repay debt.

The agency forecasted 4 percent growth in aggregate cash flow from operations for Fitch-rated healthcare issuers, a projection that reflects solid underlying macroeconomic conditions.

Fitch described the healthcare sector’s liquidity as generally good, although the agency had some concern about traditional threats to liquidity, including rising rates, refinancing risk, and covenant violations. The agency was less optimistic about issuers that face longstanding headwinds and execution risk in operational turnaround plans. This group included hospital companies Community Health Systems and Quorum Health Corp.

Fitch forecasted 3 percent aggregate revenue growth for the sector in 2019.

“This dynamic creates challenges to pricing power and profitability for U.S.-focused companies, as healthcare consumers and health insurers struggle to meet the increasing financial burden,” the report stated.

The recent midterm election results signaled stasis on major federal regulation that would influence the profitability of the healthcare industry, Fitch concluded. Financially, that’s good news for the sector.

“With Democrats gaining control of the House of Representatives, threats to the Affordable Care Act are unlikely to resurface, although there are lawsuits against key provisions of the legislation that could prove to be wild cards,” Fitch wrote. “While some consensus may develop on drug pricing, Fitch does not think any radical changes to the current system are likely in the near term.”

Another disruptor to the healthcare sector is the growing push among individuals and large employers to rein in spending growth. Although the federal government wields great influence through Medicare, Fitch noted, far more Americans have employer-provided health insurance.

“As employers and consumers continue their revolt against rising costs, we expect to see more state governments respond with policies that could negatively affect the industry’s profits, like rules limiting balance billing and narrow networks,” Fitch wrote.

The consumerism dynamic and its threat to pricing power drove 2018’s strategic merger-and-acquisition activity (M&A), with providers seeking to create vertically integrated entities that blur the traditional lines among health insurers, pharmacy benefit managers, and providers.

”Whether M&A can produce the cost and revenue synergies promised by management will help determine whether vertical consolidation continues to reshape the industry,” Fitch wrote.” “Early results will become apparent in late 2019.

Monday, Dec. 3

Webinar by the Agency for Healthcare Research and Quality on its Consumer Assessment of Healthcare Providers and Systems (CAHPS) surveys. Learn more.

11th Annual Conference on the Science of Dissemination and Implementation in Health, Washington, D.C. (through Dec. 5). Learn more.

Tuesday, Dec. 4

Briefing by Health Affairs on telehealth, Washington, D.C. Learn more.

Webinar by America’s Health Insurance Plans (AHIP) titled “Optimize Risk Adjustment Performance with AI & Analytics.” Learn more.

Wednesday, Dec. 5

Webinar by HFMA titled “Moving to Value-Based Reimbursements (VBR): Successful Best Practices in Quality Reporting.” Learn more.

Hearing by the House Energy and Commerce Committee’s Oversight and Investigations Subcommittee titled “Examining the Availability of SAFE Kits at Hospitals in the United States.” Learn more.

Webinar by AHIP titled “HEDIS—Reaching for the Stars.” Learn more.

Webinar by CMS on 2019 and 2020 changes to the Medicare Promoting Interoperability Program (formerly known as the Electronic Health Record Incentive Program). Learn more.

Webinar by CMS titled “Palliative Care for Dually Eligible Older Adults.” Learn more.

Webinar by the American Hospital Association titled “Equity of Care Award: Strategies and Best Practices for an Award Winning Application.” Learn more.

Webinar (free) by athenahealth titled “Countdown to 2019: Congress, CMS, and you.” Learn more.

Webinar by the Harvard T.H. Chan School of Public Health titled “Being Seriously Ill in the U.S.: Financial and Health Care Impacts.” Learn more.

Annual conference of the National Center for Complex Health and Social Needs, Chicago (through Dec. 7). Learn more.

Thursday, Dec. 6

HFMA Winter Seminars, Chicago (through Dec. 7). Learn more.

Webinar by MGMA titled “2019 Coding Updates.” Learn more.

Friday, Dec. 7

Briefing by the Alliance for Health Policy titled “2018 Signature Series Congressional Briefing: Aging in America,” Washington D.C. Learn more.

Deadline to submit nominations to the CMS Health Equity Awards. Learn more.

About the Authors

Rich Daly

is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

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