4 Unpleasant Predictions for 2012

HealthLeaders Media’s 2012 Industry Survey is now under way. This annual survey is the top source of healthcare industry insight, and I encourage you to take it. In looking forward, however, it helps to reflect on this year’s survey data. Here are my predictions for the top concerns facing healthcare financial leaders, based on our 2011 Industry Survey and conversations over the past year with many CFOs.

Prediction 1: Cost-cutting will intensify. In our 2011 Industry Survey, financial leaders ranked cost reductions as their number-one priority (it ranked second in 2010). And at our recent HealthLeaders Media CFO Exchange, financial leaders made it clear that with reimbursement cuts pending, cost reductions will remain the top priority.

I anticipate that cost-cutting will become even more challenging in 2012. Although finance is not traditionally thought of as a “creative field,” CFOs will need to come up with ingenious ways to save money.

Clinical spend is one area that financial leaders are going to have to dissect under a microscope. I spoke last week with a CFO who was about pitch to his clinical staff the idea of reducing the number of surgical packs being opened per procedure. The protocol calls for two packs to be opened, though the second is rarely used. With the cost of individual surgical packs running into thousands of dollars, the simple act of opening only one pack (unless the second is needed) could result in millions in savings for this facility. Of course, there is a caveat: the financial leader first needs support of the clinical staff. Prepare yourself for some tough conversations and a lot of pushback.

Prediction 2: Medicare payments will be mixed. Medicare has been ruffling feathers for decades, and 2012 won’t be any different. Overall, healthcare organizations are dealing with either flat or reduced reimbursements from Medicare and Medicaid, and financial leaders aren’t anticipating changes in the coming year.

It remains to be seen whether the Medicare sustainable growth rate formula, which calls for 30% cuts in physician payments, will be repealed, as the American Medical Association (AMA) and many other healthcare associations are lobbying. But things might go from bad to worse, as far as physicians are concerned: This month the Medicare Payment Advisory Commission recommended that Congress eliminate the existing SGR formula and replace it with a plan that includes reimbursement cuts to specialists and a pay freeze for primary care physicians. Either way, your physicians are likely to be unhappy.

Poise yourself, too, for some difficult commercial payer negotiations. However, in an interesting twist this year, these negotiations could morph and become a dialog about population management. Moreover, the use of bundled payments will gain a stronger foothold.

Prediction 3: Growth becomes an imperative. The survival of some hospitals and health systems is at stake. Cutting costs is not enough; organizations must grow to survive. Two areas CFOs should look at are service line growth and market consolidation.

Service lines have long been where financial leaders turn to enhance the bottom line. The way service lines are selected is changing, however. Gone are the days you could base a service line choice on the rate of reimbursement, because reimbursements are declining. However, you can still look at patient volume. Baby boomers virtually guarantee increasing volumes.

The CFOs I’ve recently spoken with are planning to invest in orthopedics and cardiovascular service lines. The key to making both of these profitable is, naturally, greater volume in conjunction with cost-conscious implant selection. HealthLeaders hosted a webcast just last week on strategies to make your joint service lines more profitable.

Two other service lines I feel are ripe for growth are sleep centers and behavioral/ mental health. Sleep centers can impact many chronic conditions, such as high blood pressure, that healthcare organizations are eager to see decline. Behavioral health deals with behaviors such as addiction that often play a role in chronic care problems. Mental health treats disorders of mood. The recession and slow economic recovery have created a pervasive and deep level of stress for both the employed and unemployed.

Market consolidation is the quickest way to grow. The last two years have been marked by an increasing number of mergers and acquisition, and the mantra for 2012 will continue to be, If I can’t beat ’em, I’ll join ’em. Physician practices in particular are struggling to remain financially solvent against the tide of reimbursement reductions. It’s a situation that’s causing many practices to seek a “mega-group” or join with the area hospital or health system. The consolidation trend also holds true for hospitals of all sizes. I suspect that in the next five years, if the prevailing healthcare climate holds, we will see the near-demise of the independent hospital, with the possible exception of the boutique hospital.

Prediction 4: Not-for-profits must be wary. The always vigilant Internal Revenue Service will keep tabs on 501(c)(3) qualifications. If you fail to comply with the new requirements, your not-for-profit status could come under scrutiny. I foresee the IRS not wasting much time before flexing its muscles and threatening to revoke at least one organization’s not-for-profit status. 

I also wonder if next year will see an increase in the number of for-profit hospitals and health systems purchasing not-for-profit hospitals. As reimbursement cuts weaken balance sheets, the for-profit healthcare sector is better positioned financially to make acquisitions. Also keep your eye out for another investor, the private equity firm. Interest in hospitals from these firms has grown at a swift pace in the last two years.

I realize that many of these predictions are not positive for healthcare financial leaders. There is much to be wary of as you move into 2012. For CFOs doing financial forecasts, worst-case scenario planning might prepare your organization to better handle some of these topics. That alone may make you feel better.