- The struggles of smaller providers amid the COVID-19 pandemic are likely to give way to increased merger-and-acquisition activity during the remainder of the year.
- It’s unclear whether the current levels of nursing turnover are structural, but hospitals are under pressure to respond regardless.
- The impact of inflation on healthcare prices is expected to grow.
Some smaller healthcare providers soon might find themselves with no other option but to combine with a bigger entity, according to an industry financial analyst.
In contrast, “The large insurers and large provider groups have weathered the storm” of the pandemic, said Ricky Goldwasser, managing director with Morgan Stanley.
The divergence in outlook was highlighted during a wide-ranging webinar that was hosted in April by the Brookings Institution and featured Goldwasser and two other Wall Street-based healthcare analysts. From a provider perspective, here are four big takeaways from the discussion.
1. There’s significant variation in providers’ short-term prospects
From a financial standpoint, Goldwasser sees 2022 being “easier" for larger providers compared with 2021.
Meanwhile, smaller organizations likely have experienced a greater impact on profits and cash flow. They’re also dealing with a tight capital market and a skewed labor market.
“The cost of business is increasing, and that’s more of a burden for the smaller guys,” Goldwasser said. “Being well-funded at scale is even more important than pre-pandemic.
“I think we have to ask the question: Does this mean that longer-term there’s actually less competition? Does this mean that we’re going to see more M&A in the future?”
Over the remainder of 2022, that question likely will be answered in the affirmative.
“The need for capital is going to force them into making strategic decisions,” said George Hill, managing director with Deutsche Bank, “either around raising capital at unattractive terms, or will they be pushed into the loving arms of consolidators as opposed to looking for that next round of capital?”
2. Clinical workforce issues still need to be clarified
A key question will be whether the pandemic has structurally impacted the nursing workforce, said Ann Hynes, senior healthcare services equity research analyst with Mizuho Americas.
“It’s too early to tell because we still have these COVID waves and dips,” she said. “Once that settles out, we’ll really figure out if it’s structural or not.”
“It’s probably not as bad as people think, but it will be an elevated pressure point going forward,” she added.
She doesn’t expect 20% of nurses to retire in the next year but says the numbers leaving the profession are significant enough to pose concerns. For hospitals, likely responses will include pay boosts, tuition coverage and accommodations to address burnout, such as with reduced hours and more vacation time.
"Even though it was always competitive to find a nurse, [now] it will be more competitive," Hynes said.
Hospitals generally can afford to compete on salary, she added. The bigger impact potentially will be on providers in other sectors, which could end up losing nurses to hospitals.
“For a hospital, it’s a margin impact, but for home health and behavioral [healthcare], it's actually a revenue impact and a margin impact,” she said. “If you don’t have the nurses, you can’t admit patients.”
3. Inflation will be more of an issue on healthcare prices going forward
Inflation’s impact on prices hasn’t been as substantial in healthcare as in other industries, partly because many prices get locked in via contracts that are based on projections.
Said Hill: “Have all the managed care companies appropriately priced for medical cost inflation for calendar [year] 22? And what are the numbers going to look like for calendar 23? Historically, you have seen healthcare costs appreciate faster than inflation as opposed to slower than inflation. At some point, do we have a healthcare cost catch-up that we need to be concerned about?”
Goldwasser said the surprisingly robust 8.5% payment rate increase for Medicare Advantage (MA) in 2023 is an indication of the projected rise in medical spend. (On the other hand, hospitals were disappointed when the FY23 proposed rule for inpatient payments in traditional Medicare included only a 3.2% general increase and decreases to key supplementary payments.)
A downside of large payment increases in a segment like MA is that they subsidize marginal competition, Hill said.
“The rapid growth of capital towards an industry creates excess competition, which forces companies to not be lean and disciplined and kind of forces an irrational competitive environment to some degree, which then needs to shake out later,” he said. “I wonder if we’re doing that in the Medicare Advantage space.”
4. Value-based payment implementation still faces obstacles
The shift to value-based payment (VBP) models is ongoing but likely will be “slower than some people think,” Hynes said, especially in the commercial insurance market.
“I think it’s very difficult to change the traditional fee-for-schedule hospital companies,” she said. “They’ll say [they] have some value-based contracts, but it’s really still like 5%.”
There just hasn’t been enough of a financial incentive to drive the type of systemic change that would allow for widespread VBP.
MA is an exception as far as short-term market opportunities, Goldwasser noted. In that program, health plans tend to focus on stratifying, identifying and managing the 20% of members who account for 80% of medical costs.
“On the commercial side, you just have less of that,” she said. “The dollar opportunity is smaller, and that’s why on the totem pole, we’re still early in penetration. There are just markets that present a bigger opportunity.”
For some stakeholders, shifting to a true VBP system can seem like a great idea until actual payment considerations emerge.
“Simplistically speaking, when you ask someone to take risk, you are asking them to commit some type of capital, which they then charge you a premium for — which nobody seems to want to buy or pay for,” Hill said.
“Everybody feels like they’re doing great right now without taking a bunch of risk and without paying for a bunch of risk, but everybody wants somebody else to put more risk in the game without paying for it. Everybody’s got to kick in their share for value-based care to take off in the commercial space.”
Inhibiting factors extend beyond the lure of the status quo to include a lack of infrastructure that can sustain VBP-oriented operations.
“We need to make sure that there are tools that can help providers and health systems take risk, and [that] there is connectivity between all of them before we really get to that massive shift,” Goldwasser said.
Another issue is the tight labor market across industries, Hynes said. That’s because VBP arrangements are associated with narrow networks, which employers may be reluctant to implement as they seek to recruit and retain employees in a competitive hiring environment.