Healthcare Uncertainties to Intensify in 2014

Many providers who've been on the forefront of the movement away from fee-for-service may find themselves at a disadvantage with payers as healthcare transitions into value-based payment models such as bundled payments and gain sharing, says one analyst.

Uncertainty and rapid change were hallmarks of the healthcare landscape in 2013, and there is no indication that things will be much different in 2014. In all probability, many analysts believe this historic transitional period could accelerate and get even rockier as the healthcare sector continues to undergo profound changes in how healthcare is delivered and paid for.

Curt Whelan, managing director at Huron Healthcare consultants, says that many providers who've been on the forefront of the movement away from fee-for-service may find themselves at a disadvantage with payers as the healthcare sector transitions into value-based payment models such as bundled payments and gain sharing.

"It is going to be more of the same in '14 than it was in '13," Whelan says. "The key questions are how much traction are the exchanges going to get and how much more robust and aggressive are the payers going to get on not allowing even the bigger market share leaders to get markedly more fees? If they can't at least get enough, because they are still cost-shifting, expenses are going to still outpace revenues and that is going to pinch margins. Success in this market is so much more difficult because you have to find the pockets of growth in a non-growth revenue market and go after them."

Whelan says many health systems are at an inflection point where they have compressed their costs and in some cases compressed utilization, but the financing system is not there to support what they've done. "The commercial payers are saying they aren't ready and the only thing they are telling providers is 'you aren't going to cost shift and you aren't going to get an increase on your commercial contract,'" he says.

"If the incentives and the payment system were aligning at the same time, the markets would be moving smoothly in that direction. But some hospital systems are finding themselves out in front and they're doing the right things but damaging themselves financially. It's all about appropriate care and utilization and taking waste out of the system, but when it is still dominantly a fee-for-service arrangement and it's all about transactions, they are taking transactions off the table."

Whelan believes that 2014 will "test the mettle" of healthcare providers who've made a commitment to value-based care and a serious investment in their accountable care organizational competencies.

"This is going to be a big year for them and whether the market is going to start moving with them," he says. "Otherwise, it's hard for them to back off at this point. They've got their physicians on board. It's either going to create more financial distress or some of them may starting looking to unravel what they are doing and going back to where they were before or stopping the momentum."

"We aren't suggesting that they unravel, but they have some core economic issues that they are going to have to deal with. So, they are going to have to understand that they are going to have to finance the transition because the commercial markets are not moving aggressively with them as they would like them too."

Bad Debt Rising
Exacerbating the problem, Whelan says, will be an expected rise in bad debt from growing numbers of patients with high-deductible health plans. "People are going to walk in the door where typically they may have had a $1,000 or $2,000 deductible now they have a $5,000 deductible and that is going to stress the system in '14. The bad debt is going to soar. Providers are going to do what they can to mitigate it, but in reality for that patient who used to walk in and have a reasonable deductible, now it's four or five times larger."

Tighter margins will prompt providers to rationalize the care they deliver.

"Health systems try to do everything for everybody but in reality they are going to have to choose those things that ultimately drive the most value for population health," Whelan says. "They are going to have to let niche providers or technology companies fill the gaps on some of these more invasive issues. Hospitals don't rationalize their business portfolios like a regular company does in a consistent manner."

Pacing the shift toward value-based care models leads the Huron Healthcare's list of the top five healthcare challenges that providers will face in 2014. Other challenges include:

• Responding to the Economic Dynamics of Local Markets : As healthcare organizations continue to operationalize value-based care delivery models, they are grappling with what can be achieved given the economic dynamics of their local markets. Gordon Mountford, Huron's executive vice president, says that high quality care at a lot cost is a national goal for healthcare providers "but there's not a national solution for how to get there. Local market dynamics create unique challenges and opportunities that drive the need for different strategies for success."
• Securing and Growing Market Share: Regardless of the pace of payment model change, securing market share remains a primary concern. "Volume still pays. Even under value-based payment systems, volume through the system will remain an important driver of revenue," Whelan says.
• Developing Alternative Revenue Streams: Healthcare organizations with cash reserves and strong margins are better-positioned to make investments that are related to, but not directly in support of, their core business of patient care. Jeff Jones, managing director at Huron, says that direct patient care will always be the largest percentage of revenue for most hospitals and health systems, "however, executives are looking at options that supplement declining revenue from third party payers through alternate revenue streams."
• Containing Core Operating Costs: Executives continue to seek ways to contain the costs of core operations, tackle fundamentals, and reduce utilization through standardization, care variation management, and other next-generation approaches.

"Every health system on a go-forward basis likely over the next five years needs to target 6% to 10% annually in improvements, either to revenue top line or expense management," Whelan says. "That is a pretty daunting task if you look at an organization and a 6% to 10% improvement for them is tens of millions of dollars a year. The metrics in which you are going to manage yourself are really about how to drive this core strategy that is very dynamic, that is going to move quite a bit on you, but the key metric is annual improvement of 6% to 10%. That is what you are going to have to have to survive."