Healthcare Reform and the Economy: Are Either Looking Up?

I was struck recently by the conflicting predictions some healthcare and financial industry experts are offering regarding healthcare reform's impact on the healthcare industry. This May, a lot of folks in the know have weighed in on what the economy and the new law will mean for healthcare's financial outlook. Some experts are saying things are looking up, while others are saying things don't look so good. It's hard to know whom to believe; moreover if you're a CFO and attempting to do any predictive modeling or risk assessment for your facility, you have to decide which information to plug in.

In Nashville, TN, at the Nashville Health Care Council's annual "Financing the Deal" panel discussion, finance industry executives expressed confidence in the healthcare sector. They noted an increased availability of capital and an uptick in mergers and acquisitions activity. In case you missed it, I recently looked at the topic of mergers and acquisitions and there's even more information on this topic in the May edition of HealthLeaders magazine.

Nashville Health Care Council members agree that health reform legislation will have a significant impact on the future of the industry and deal-making trends. They also foresee this legislation having a positive affect on the providers as there will be an influx of new patients created by reform. Although, in order for this to truly be positive, they noted, the providers need to focus on the delivery of high-quality service while reducing costs. So simple a concept; yet so hard for some to actually deliver on.

Contrast this positive outlook with another report that came out this week. On a nationwide scale, hospital CFOs don't share this positive prognosis. In Chicago, just a few days after the Health Care Council held its meeting, a national survey of CFOs and senior comptrollers conducted by Grant Thornton LLP, showed that CFOs in the healthcare industry are less optimistic about the state of the U.S economy and their own company's financial prospects over the next six months compared to their counterparts in other industries.

The survey also reports that a quarter (24%) of healthcare CFOs thought their own facilities' financial prospects would improve (versus 52% for all respondents). Only 16% thought the economy would come out of recession in 2010 (versus 28% of all respondents). The survey indicates that most CFOs and other financial leaders feel that 2011 will be the year we come out of our recession.

So, it seems many CFOs aren't so sure things are looking so bright. Interestingly, neither are two of the key ratings agencies. Consider a report by Moody's Investors Service released about three weeks ago (which I also discuss in a column) saying they are less than optimistic about the affect of healthcare reform on the industry.

In their report they note, "The passage of healthcare reform will bring large scale changes in operating and capital strategies employed by not-for-profit hospitals to deliver healthcare services. These changes will require healthcare leaders to focus even more on multi-year strategies to assure long-term financial sustainability in an era of reform and newly constrained economic reality. . . . The impact of healthcare reform, even with the benefits from reductions in uncompensated care, will ultimately be negative for the industry in the sense that existing operating practices and strategies may be insufficient to maintain credit quality."

Then just last week, Standard and Poor's released a report on healthcare in the U.S. called "Can The U.S. Economy Afford Health Care Reform?" (note, only subscribers can view this report). It looks at the cost of healthcare in the states versus in other G-7 countries. In their press release S&P notes, "The new healthcare bill will not help lower costs. Its emphasis is on increasing coverage. How much the additional coverage will cost is uncertain." I'm going to read between the lines a bit here; they don't come right out and say things look bad, but it doesn't sound like they are saying things look good either with healthcare reform.

Another report came out the same week that may be helpful to CFOs and their predictions of what healthcare reform and the economy may mean for them. The federal Bureau of Labor Statistics shows that healthcare prices overall increased 0.2% in April and were 3.1% higher than a year ago.

These are healthcare consumer prices that are on the rise, like the result of more people being asked to shoulder higher deductibles and offset the current cost of so many uninsured. BLS reports that physician office prices rose 0.4% from March to April, and were 2.4% higher than in April 2009. Also, hospital prices overall increased 0.1% in April and were 3.7% higher than a year ago.

If costs are rising, then the Nashville Health Care Council's footnote that a positive outlook was dependent on providing high quality care at reduced costs doesn't seem to be taking shape – but it's early still, these things can always change.

Keep in mind that the number of uninsured isn't declining just yet. Actually, it could still grow based on the latest unemployment stats. As of May 7 national unemployment rose to 9.9% in April, after having remained steady at 9.7% for the previous three months. The number of unemployed workers hit 15.3 million and the number of long-term unemployed, those without a job for 27 weeks or more, rose to 6.7 million.

We are all familiar with the expression about people and opinions, and when one expert says "up" another five will say "down". Still, it's important to make note of all these surveys and commentaries—the best any financial leader can do is watch them over the course of several months to see whether a direction can be discerned. Fact is, no matter what you decide to put into your forecasts in the end it's always just an educated guess.