Declining credit ratings and high-deductible health plans are just two of the chief strategic concerns voiced by hospital and health system financial executives.
When hospital and health system leaders look ahead to next year, they see a number of serious financial challenges on the horizon. New payment realities are converging with more efficient, effective clinical protocols to create what many chief financial officers see as the most difficult time in healthcare.
A year ago, they named health insurance exchanges and managed care delivery design among their top strategic challenges. High on the list of their concerns this year:
1. Declining Utilization
Martin Arrick |
Improving quality and producing better patient outcomes are essential for success in a value-based payment system. Yet, as provider organizations find better ways of delivering care, they are also negatively impacting a critical revenue stream, says Martin Arrick, managing director, U.S. Public Finance, at Standard & Poor's Rating Services in New York.
"In a lot of parts of the country, volume has really declined, partially because the quality of care is improving," he says. "Best practices are going to reduce complications and reduce admissions and readmissions, so improving these [quality measures] is going to impact finances."
While Arrick notes that Medicaid expansion is increasing utilization in some states among a low-income population that was previously uninsured, he does not think this will create long-term relief for hospitals.
"It's just a one- or two-year blip as the healthcare system absorbs these people. But the bigger forces will continue to drive down utilization and to drive change within the sector," he says.
David Ertel, chief financial officer at Philadelphia-based Einstein Health Network, says that as providers work to deliver "appropriate care in lower cost settings," patient volume is being driven down, particularly on the inpatient side.
"One challenge people are facing in most health systems is [that] patient activity levels are changing in some very real respects. Medical care is changing and that is changing everything financially, too," he says.
"Inpatient volume levels are challenging. Hospitals really need to become critical care units with a very high acuity of very sick patients. Revenues are therefore challenged."
2. High-Deductible Health Plans
As more patients gain insurance coverage through health plans that have a significant cost-sharing obligation, hospitals will face a greater collections challenge in 2015—something that is causing many CFOs to rethink internal processes in order to protect revenue.
"Improving patient collections goes back to patient outreach," says Craig Richmond, senior vice president and chief financial officer at Cleveland-based The MetroHealth System. "I would say one key is to communicate with patients early and often."
MetroHealth launched its pre-service center about two years ago to move much of the revenue cycle process upfront, including making outbound calls to educate patients about their financial responsibility and to try to collect payment before a procedure is performed.
"During the discussion, options are provided to the patient regarding financial assistance, and we offer them the opportunity to pay at this time," Richmond says, adding that from the fourth quarter of 2012 to the fourth quarter of 2013, up-front collections increased by approximately 300%.
Arrick says high-deductible health plans are a budding problem for providers as more employers move their workforce into defined contribution health benefit plans and patients become increasingly responsible for footing the bill for their care.
"People don't want to spend their own dollars and are becoming a lot more cost-conscious. Price consciousness among the insured is really at the beginning state, and as it grows, it will only be harder for folks in hospitals," he says.
3. Downgraded Credit Ratings
Standard & Poor's adjusts credit ratings for not-for-profit hospitals as necessary to reflect market realities. The situation hasn't looked good in 2014, which, in turn, doesn't bode well for next year.
"As of August 31, we had 29 upgrades and 36 downgrades… and about a quarter of the downgrades were multi-notch downgrades, which is not good because it suggests things are dropping faster than in the past," Arrick says.
"With the upgrades, 11 of the 29 were related to M&A activity where a community hospital merged with a system or maybe two decent size hospitals merged together. It feels like those 11 might have been downgrades, but now they are upgrades because of some organizational structure change."
Margins are tightening for most providers, which means the industry's credit outlook could continue to suffer, Arrick adds.
"There is a growing dependency on investment income, which in and of itself is a risk because you have good years, and you have bad years. It is very destabilizing if the market goes into a tailspin."
Mark Hepler, chief financial officer at Munson Healthcare, an eight-hospital system based in Traverse City, MI, says one reason for the dip in ratings is that health systems are having to invest significant dollars in preparing for value-based purchasing.
"As we move away from fee-for-service reimbursements, the investments we have to make are not capital investments. They are operating investments that cannot be capitalized or amortized," Hepler says.
"In the past, we spent most of our dollars investing in capital equipment and facilities. Now we are investing in integrating our physicians and becoming a clinically integrated network. Those costs don't lend themselves to being capitalized over time, and they have an impact on cash flow and margins, which are important to the rating agencies."
4. Medicaid Expansion Woes
Many health systems in states that are not expanding Medicaid are facing real financial peril due to significant cuts to the Disproportionate Share Hospital program, which makes federal payments to qualifying hospitals that serve a large number of Medicaid and uninsured individuals.
"For our institution, without questions, the biggest challenge we'll have next year is the [Patient Protection and] Affordable Care Act and whether Medicaid expansion is going to happen," says Allen Johnson, chief financial officer at Truman Medical Centers, a two-hospital system based in Kansas City, MO.
As a safety-net provider in an urban area, TMC has a challenging payer mix. About 70% of the health system's patient population is either covered by Medicaid or Medicaid Advantage or is uninsured.
"Missouri has the third lowest adult eligibility for Medicaid. Right now it is 18% of the federal poverty guideline. With Medicaid expansion, it would be 138%. If expansion happens, a lot of the uncompensated care we currently provide would be converted to Medicaid, which would be very helpful for our finances," Johnson says.
"There are two roads that the state can take with Medicaid expansion, and if Missouri doesn't expand Medicaid, it will be a disaster for Truman because we are going to see huge cuts in DSH payments starting in 2017."
Arrick says even hospitals in states that have expanded Medicaid have cause for concern because having Medicaid coverage will encourage people to access services, which puts collections in jeopardy if a state has to make budget cuts.
"As we all know, when the economy takes a downturn, one of the first places states look to cut is Medicaid so having more Medicaid beneficiaries means having more risk."
5. Making EHRs Pay Off With Actionable Data
Most hospitals and health systems are spending big bucks on their electronic health records and data analytics capabilities, but the return on those investments can be elusive and not all IT installs go well.
Once an EHR is up and running, the key to maximizing it from the financial perspective is to extract and analyze the data in a way that leads to standardization of care and a reduction in the use and duplication of expensive clinical resources, says Money Atwal, chief financial officer and chief information officer for the East Hawaii Region of the Honolulu-based Hawaii Health Systems Corporation.
"If the CFO gets the data at that micro level, they can sit down with the docs and look at how to streamline the process… It takes all the emotion out of it, and that is one thing I am trying to bring to our C-suite is the idea that our decisions should be data-driven. We don't want to forget about the patient, but let's use some good data to help clinicians achieve good clinical outcomes while minimizing variation and lowering costs."