The healthcare industry remains volatile, with various sub-industries
expanding and contracting for a variety of reasons, including the economy,
changing reimbursement and spending, and market consolidation. This article
provides an overview of the current status of certain sub-industries, and
discusses some of the specific factors that are contributing to these trends.
This article also provides specific considerations regarding the status of the
economy and how it is impacting healthcare providers; discusses the trend of
large health system mergers and questions whether these “mega-mergers” are
positive or negative; and presents observations related to independent physician
practices that are staying independent.
1. Observations on 17 Niches. Healthcare reform, the economic
landscape and the continual regulatory changes that characterize the healthcare
industry have created certain shifts in the prospects of various healthcare
niches. While the success of a specific company or provider within a
sub-industry depends a great deal on its individual strengths, the proficiency
of its management team and its available resources, specific trends emerge
across the broader sector. Below is a brief overview of the current status of 17
|Hospitals and Health Systems
||Slow erosion to stable: political power in part offsets substantial
reimbursement risk; reduced inpatient cases; increased risk on patient
receivables and increased deductibles; serious pricing pressure if
movement of patients to exchanges; continued consolidation across
industry. Certain hospitals and health systems that have the best
quality, that develop leadership in taking on risk, that have market
dominance, or that treat a specialized niche and are very lean in their
operations will thrive.
|Ambulatory Surgery Centers
||Slow erosion: reduced number of available physicians; core
specialties remaining fairly independent; pressure on case numbers;
reimbursement risk; some access to payor issues. Despite the slow
erosion in the overall ASC industry, ASC business remains a very good
industry and business in the greater context. It remains remarkable how
different the revenue equation can be for ASCs from geographic market to
||Stable to growth: continued increasing patient demand offsets some
reimbursement risk; continued consolidation; reduced number of
||Slow to moderate erosion; reimbursement risk depending upon
specialty (see below); pressure on referral base and payor access.
||Slow erosion to stable: political power in part offsets some pricing
pressure (e.g., relationship with Senator Orrin Hatch); better
international opportunities; patient demand continues to increase;
substantial mid- and long-term pressure on domestic pricing.
|Health Information Technology
||Stable to slow growth: customer budget constraints (increased risk
to customer-available capital) offset by need to expand and improve
systems in hospital and health systems.
||Growth: strong alignment with consumers and payors; slim margins.
|Dental Practice Management
||Stable to growth: growth dependent on payor mix — pressure on
Medicaid-dependent companies; increased state regulatory pressure.
||Stable: little political power; fragmented industry undergoing
consolidation; some reimbursement risk.
||Stable: some political power; reimbursement risk; utilization risk
constraints; consistent consumer demand.
||Slow erosion to stable: reimbursement risks for Medicaid-dependent
providers and timing of payment from states impact cash flow.
||Growth: high patient demand for services; alignment with payors and
|Anesthesia Practice Management
||Stable to growth: alignment with payors and hospital sector.
||Stable: influx of physicians; increased reimbursement and
||Slow erosion to stable: reimbursement risk; mature orthopedic
practices seem to be very resilient in terms of their referral base and
remain critical to the overall delivery of healthcare (i.e., as to the
percentage of total dollars spent in orthopedics and the reliance of all
facilities on orthopedics).
||Slow erosion to stable: reimbursement risk; increased payor controls
||Stable: while some pressure on pricing at all levels,
gastroenterologists in many spots remain in very high demand and remain
2. Healthcare Spending. Following are seven observations on the
current economic climate surrounding healthcare providers.
A. Government Debt and the Need to Reduce Spending. No matter how
you slice it —and the sequester seems to be the most simple and obvious
example of it — there is an increased recognition that the federal
government must rein in its spending. Even those on the tax-and-spend side
seem to view it as such. Through Medicare and Medicaid, the government is
responsible for around 30 to 50 percent of the payments healthcare providers
receive and, as a result, even small reductions in federal spending could
amount to a lot of money coming out of healthcare.
B. Increased Taxes. Increased taxes on high-earning individuals
will only further compound the impact of sequestration by taking more money
out of the economy that would be otherwise spent on goods and services,
including healthcare. These increased taxes being paid by the largest tax
payor blocs will take serious dollars out of the economy that won’t cleanly
recycle back in and may just go to service government debt. Where a larger
and larger portion of the healthcare bill is paid by consumers, whether via
deductibles or other means, this has a significant impact on the economy.
C. Tepid Economic Growth. Even before accounting for the sequester
and increased taxes on income and the payroll, the economic growth rate was
at 1 to 2 percent. When you then take another 3 to 5 percent out of the
economy through taxes and cost reductions, it is hard to see where the
country will have any economic growth. In March, the unemployment rate was
steady at 7.6 percent. Real job creation was below zero when job growth (a
88,000 increase in nonfarm payroll employment) is balanced with those
exiting the workforce. Overall, the civilian labor force declined by 496,000
during the month.
D. Shifts to Healthcare Exchanges. As insurance companies raise
rates to meet the requirements of healthcare reform, it is increasingly
projected that more of the population will move to healthcare exchanges.
This shift to exchange-based health plans is concerning for healthcare
providers, because the payment rates for these plans are uncertain. A small
movement of well-paying commercial insurance patients to lower-paying
exchanges bodes very poorly for providers.
E. Tightened Spending on Healthcare. Economic problems will
provide more pressure on employers and employees to cut costs, including
what is paid for healthcare. Employees selecting health plans — either
offered through their employer or exchanges — may move toward lower-premium
or high-deductible health plans with less comprehensive coverage. These
plans shift more healthcare cost responsibility on patients, which can
create collections difficulties for providers. Similarly, employers looking
to cut costs will reevaluate healthcare spending and and may elect to
cost-shift to employees.
F. Provider Profitability Under Pressure. Health systems are
reporting lower profits in 2012 than in 2011, and the decrease in
reimbursement and inpatient cases coupled with the percentage of healthcare
costs patients are responsible for out-of-pocket will exacerbate these
changes. The loss in some types of cases by systems leads to increased
competition for other types of cases; this puts more pressure on the
providers who survive based on such cases and patients.
G. Mergers and Acquisitions. Earlier this month, the New York
Times reported that the first quarter of 2013 saw the lowest M&A deal volume
since Q1, 2010 (See “Mergers Slowed to a Snail’s Pace in the First Quarter,
the Fewest Since 2003,” New York Times, April 2, 2013). However, we are still seeing a
steady flow of deals in the healthcare sector.
3. Mega Hospital and Health System Mergers. During recent months, the
concept of “Big Medicine” has been increasingly discussed. Brigham and Women’s
surgeon and writer Atul Gawande, M.D., propelled the phrase in his New Yorker
op-ed last summer, in which he drew analogies between American healthcare and
The Cheesecake Factory restaurant chain. “Big chains thrive because they provide
goods and services of greater variety, better quality and lower cost than would
otherwise be available,” Dr. Gawande wrote in the piece. The reality is that the
U.S. healthcare sector is rapidly consolidating. Data by Irving Levin Associates
shows that 2011, the latest year available, brought 86 hospital merger or
acquisition deals — the highest number in the past decade.
Recently, more large health systems, e.g., systems with $3 billion dollars or
more in revenue, are looking at merging with each other. Last fall,
Detroit-based Henry Ford Health System and Beaumont Health System in Royal Oak,
MI, announced their signing of a letter of intent to begin merger discussions.
If they do consolidate, the systems would form the largest health network in
southeast Michigan, with more than 42,000 employees and roughly $6.4 billion in
annual revenue. In Texas, Temple-based Scott & White Healthcare and Dallas-based
Baylor Health Care System announced plans in December 2012 to merge into a
42-hospital, $7.7 billion organization with approximately 34,000 employees. The
deal would drive the newly created organization to one of the top 10 largest
nonprofit systems in the country. There’s also the pending merger between
Livonia, MI-based Trinity Health and Newtown Square, PA-based Catholic Health
East, which will create an 82-hospital system across 21 states — potentially the
fifth-largest hospital system in the country.
When already significant systems propose to merge, many questions arise with
respect to whether the combination really makes sense from a cost-savings or
strategy perspective. For example, will the combined system achieve a truly
dominant position where payors and employers must have the system in their
health plans or will the merger leave the system so burdened with costs and
employees that it will ultimately need to engage in layoffs or other efforts to
drastically cut costs? Will it allow for more strategic management or simply
lead to a large system without clear priorities? Will the merger allow the
health system to better serve managed care payors, deliver quality care and
manage costs? Will the depth in revenues allow for better investments in
management, outpatient services, information systems and other capital projects?
Time will tell whether these mega-mergers succeed or create inefficient,
4. Specialty Physician Practices. Despite the trend of migration of
independent physicians to hospital and health system employment, many specialty
physician practices are looking to remain independent. The decision to stay
independent is largely driven by concern regarding future income. This concern
mainly stems from a lack of control over referral patterns and decreasing
professional and ancillary reimbursement. Small changes in income lead to an
explosion in physician/hospital transactions. For example, when the average
cardiologist’s reimbursement fell by about 15 percent, a significant number of
cardiologists migrated from private practice to hospital employment. With most
other specialties, once reimbursement falls by more than 10 percent, the
interest in joining a hospital or health system tends to become significantly
more acute. Until that point, practices seem more eager to remain autonomous,
particularly if it’s a group that has enjoyed long-term independence. Practices
that elect to remain independent are also evaluating strategies for affiliating
with other practices, either through ownership or collaborations designed to
achieve increased bargaining power with payors.