Although hospitals with employed physicians gain revenue, expenses rise simultaneously. Hiring doctors is "a strategic move by hospitals for a variety of reasons, but it does come with a financial penalty," says one analyst.
Hospitals with very high physician employment generate stronger revenue growth but are less profitable than peer institutions with fewer employed physicians, Moody's Investors Service says.
"It's pretty simple. Physicians are very expensive to employ," says Daniel Steingart, vice president and senior analyst at the rating agency.
"Typically when doctors come from being in private practice or a small group practice and they come under the hospital's employ it's not even just a straight transfer of their revenues and expenses. Oftentimes the expense base actually grows. Hospitals typically have a more generous benefits package and there is additional overhead associated, oftentimes with new IT systems, etc."
"So, although the hospital gains the revenues that the practice had been generating, the expenses of the hospital go up, and physicians earn quite a bit of money," Steingart says. "It's a strategic move by the hospitals for a variety of reasons, but it does come with a financial penalty."
For the study, Moody's divided hospitals into four categories based on employed physicians as a percentage of total medical staff. Low physician employment was defined as 1% to 15% of total medical staff and high physician employment was defined as 65% to 100% of total medical staff. The physician employment medians data was taken from 226 rated hospitals in Moody's portfolio from 2012 to 2014 and compared with the rating agency's not-for-profit and public healthcare medians data for fiscal 2014.
Moody's found that the median operating cash flow margin is 10.7% for hospitals with low physician employment, compared to 8.5% for hospitals with very high physician employment.
However, hospitals with very high physician employment saw a 6.8% three-year revenue compound annual growth rate, compared to 4.9% for hospitals with low physician employment.
Hospitals with very high physician employment have a median operating revenue of $950 million, compared with $431 million for hospitals with low employment, and $673 million as the national medial.
Hospitals with very high physician employment also report that outpatient revenues (54%) exceed inpatient revenues (46%), Moody's says.
Steingart says there are some indications that expenses related to physician employment level off in time, or at least don't grow as quickly, as hospitals find more efficient ways to operate practices.
No Goldilocks Formula
"It's an iterative process. It takes a little bit before it levels out," he says. "We have some systems that began employing docs in the mid-1990s and never stopped and have very mature practices. So for them, you don't see it in the financials anymore, but you still have plenty of others still in the growth phase."
There also appears to be no institutionalized Goldilocks formula for the perfect percentage of employed physicians.
"It's case-by-case and what makes sense for your market and your strategy," Steingart says. "We aren't in the business of giving advice. That being said, if your primary competitors are going all out and employing every last doc they can, you're forced to either adopt an aggressive employment strategy yourself or you're positioning yourself in the market as somebody that is open to any sort of arrangement. The point being that you would have to react to what your competitors are doing. Every market is different."
Steingart says this trend is expected to continue because hospitals are employing greater numbers of physicians to gain market share and the transition to risk-based contracts, and because younger physicians generally prefer to be employed.
"There is a large generational divide in how doctors want to practice," he says. "Physicians 40 and under generally are more interested in work/life balance and not running a practice and not dealing with the business aspect. There is both a demand from the hospitals for this, but there is also a very willing supply from physicians."
Steingart says anyone paying attention to this issue wouldn't be surprised by the study's findings.
"If you're following the industry everybody pretty knows this already, but it's one thing to 'know something' and another to show it with the data," he says. "We've been collecting the data for several years and, sure enough, it tracked out the way we expected it to. We thought that was worth commenting on."
The Federal Trade Commission's administrative complaint says the merger would create a dominant provider of general acute care inpatient services sold to commercial health plans in a four-county region of south-central Pennsylvania.
For the second time in about a month, the Federal Trade Commission has rejected the proposed merger of two healthcare systems.
This week, the FTC and the Pennsylvania Office of the Attorney General jointly moved to block Penn State Hershey Medical Center's proposed merger with PinnacleHealth System after stating that the combined providers would "substantially reduce competition in the area surrounding Harrisburg, PA, and lead to reduced quality and higher healthcare costs for the area's employers and residents."
The FTC and the Pennsylvania Attorney General said they would file a complaint in federal district court this week for a preliminary injunction to stop the deal, pending an administrative trial.
"The proposed merger would eliminate the significant competition between these hospitals, resulting in higher prices and diminished quality," Debbie Feinstein, director of the FTC's Bureau of Competition, said in prepared remarks.
Penn State Hershey and PinnacleHealth issued a joint statement saying they were "extremely disappointed" by the FTC's actions, and that the boards of both systems will "examine our options" over the next several days to determine if they will fight the ruling.
"We firmly believe that the integration of PinnacleHealth and Penn State Hershey serves the best interests of patients and the entire central Pennsylvania community," the two systems said. "The joining of our two health systems is completely consistent with the goals of the Affordable Care Act. It creates the depth of services and scale that is required to manage the health of distinct populations of patients and better positions us to provide the most appropriate care, in the most appropriate setting at the lowest possible cost."
The FTC's administrative complaint said the merger would create a dominant provider of general acute care inpatient services sold to commercial health plans in a four-county region of south-central Pennsylvania. The merged health system would control 64% of this market, which the FTC said would lead to increased healthcare costs and reduced quality of care for more than 500,000 regional residents.
Hershey is a 551-bed, not-for-profit healthcare system in Dauphin County. It also owns the Penn State Hershey Cancer Institute and the Penn State Hershey Children's Hospital. Hershey's total revenues in FY2014 were $1.39 billion.
Pinnacle is a not-for-profit three hospital system also in Dauphin County, which operates three acute care hospitals: Harrisburg Hospital, Community General Osteopathic and West Shore Hospital with a combined total of 610 beds. Pinnacle had total revenues in fiscal year 2015 of $1.07 billion.
The Commission vote to issue the administrative complaint and the vote on the temporary restraining order and preliminary injunction were both 4-0. The complaint was filed in the U.S. District Court for the Middle District of Pennsylvania, and the administrative trial is scheduled for May 2016.
More FTC Scrutiny of Healthcare M&As?
In early November, the FTC said it would block Cabell Huntington (WVA) Hospital's proposed acquisition of St. Mary's Medical Center.
"The combination would create a dominant firm with a near monopoly over general acute care inpatient hospital services and outpatient surgical services in the adjacent counties of Cabell, Wayne, and Lincoln, West Virginia and Lawrence County, Ohio likely leading to higher prices and lower quality of care than would be the case without the acquisition," the FTC said in an administrative complaint.
Jay Levine, an antitrust attorney with Porter Wright's Washington, DC, office, says it's not clear if the FTC and the Department of Justice are targeting health system mergers.
"Is this part of a trend? The trend is that there are more of these combinations happening," he says. "There is a perception that we may be seeing more of these [FTC actions], but that is partly because more of these [mergers] may be happening."
Levine says healthcare mergers have been on regulators' radar screens for years now as market pressures and economies of scale push providers toward consolidation.
"To the extent that this is causing providers to merge, then there are more mergers being put in front of the FTC and DOJ, and there are probably more strategic mergers put before them because the thought process is that these types of strategic combinations will cause the types of efficiencies and cost reductions the parties are trying to achieve. At the same time they also can produce the kind of anticompetitive effects that the enforcement agencies are worried about."
Levine says it's hard to generalize or identify trends with state and federal regulators because each healthcare M&A is unique and "fact-specific."
"Any two systems, especially if they are large systems and they are close geographically, they are going to be somewhat of a red flag," he says. "Look for big hospitals getting together and touting the big efficiencies that they are going to get. If that is the rationale they're hyping, then it could well be that they're looking to get together because they think they can essentially pressure the managed care companies. Beyond that, it's the same old, same old. All of these deals are going to be scrutinized. It's not going to go away."
The nation's population is growing while the number of its hospitals is declining. Rural areas are most affected. "If you don't need as many… trying to maintain hospitals for reasons other than for what they're designed doesn't make a lot of sense," says an industry expert.
The past 12 months have been rough for rural and non-urban hospitals, many of whom are seeing their very existence under threat. Unfortunately, there are no indications that life is going to get easier in 2016.
Jamie Orlikoff
So says Jamie Orlikoff, a Chicago-based healthcare management consultant and veteran observer of rural healthcare for the past three decades. He has long called for critical access and community hospitals to wake up and ask the tough questions about margin and mission. Orlikoff spoke with me this week about some of the challenges that 2016 will bring. The following is an edited transcript.
HLM: What's your outlook for rural and nonurban hospitals in 2016?
Orlikoff: The pressures are going to build and accelerate and you are going to see the departures of the weaker players expanding into the middle range of the market. These pressures are going to be exacerbated by several things hitting simultaneously.
First of all, the sugar rush of Medicaid expansion is over.
Secondly, the impact of retail healthcare and high deductibles and premium shares and copays is going to put tremendous pressure on rural hospitals to provide a meaningful retail consumer-facing alternative to both new and emerging disruptive competitors, as well as larger hospitals in different markets that can draw people with money in their pockets.
Another issue is more pressure on critical access hospitals' reimbursements. There is a potential—and now we're guessing—that CAHs may be put on the prospective payment model as opposed to the cost-plus model.
Most CAHs that have done the analysis conclude that they couldn't stay in business if they were on the prospective payment model. Many have not done the analysis because they're in denial. I've had people tell me 'Oh, CMS would never do that!' and then they did do that. If you go back a few years, the reimbursement used to be 105% of cost and now it's 101%. We've already seen a lot of downward pressure.
Because of this, a lot of these rural facilities, especially the CAHs, are thinking long and hard about whether or not they can remain independent or whether they need to take part in the affiliation and merger craze, [and] whether they [have to] become part of a larger system to still be able to provide services to their communities.
HLM: It sounds like you don't see the M&A market cooling in 2016.
Orlikoff: We are going to see a lot more absorption of the independents. Small rural and CAHs [will be absorbed] into larger systems and that will move from the affiliation model to the more formal acquisition model. The organizations that will be under the most pressure will be the public, district, or county authority hospitals. They are the ones that are publicly owned with publicly appointed boards that are required to have board meetings in public.
The paradox is that they have all the restrictions of public ownership, but the vast majority of them receive no benefits of tax financing.
Many small rural communities are going to be confronted with a very stark choice: Lose the facility or raise taxes and fund the facilities with tax dollars. The smart organizations are thinking about privatizing to become a 501 (c)(3). Number one, so it can be more flexible with dealing with the issues of the market and maybe they can survive. Number two, so they have a greater ability to seek out merger or affiliation partners.
HLM: Will the increased numbers of insured patients help rural providers?
Orlikoff: Most of the plans purchased on the exchanges are low-premium high-deductible plans. That shifts the whole issue of migration of bad debt away from bad debt for uncompensated care to bad debt for individuals with insurance who cannot pay their deductibles or copays.
That's what I meant when I said the sugar rush is over. Bad debt migration will be particularly impactful on small rural facilities. Then, you are going to start seeing disruptive competition. Telemedicine or clinics in Walgreens or CVS will tend to draw because of the low cost and defined prices and because of the convenience for people who have some money in their pockets to get services that they otherwise might have gotten from smaller rural providers.
The people who have 'good insurance' increasingly are going to compare the services and quality they get from small rural facilities to larger hospitals that might be an hour or two away. The risk is that you'll lose the people with money in their pockets who can pay their deductibles, which then generates the revenues to cross-subsidize the-mission based patients who generate a loss.
HLM: Will CMS eliminate the CAH program?
Orlikoff: No. They want to curb the abuses and increase the degree of accountability so that if you are a CAH five years from now you're in a place where they need one and you're working hard to provide quality care at low cost.
It's no longer a pass. It no longer will be a perfunctory demonstration of need and therefore pay on a formula that is going to guarantee that a hospital continues to exist regardless of how they perform. That is going away.
There is an underlying notion that all hospitals are going to have to operate on the same level and if you're not providing quality care, or controlling your costs, and that care can be obtained within a reasonable distance elsewhere, why should we finance you?
HLM: Does CMS understand the negative economic consequences of these rural hospital closings for the communities they serve?
Orlikoff: First of all, it's not the mission of a hospital to be an economic driver of a community. The problem is that many board members take that as their implicit mission. That leads to a notion that it is better to maintain a hospital even if it's not a good quality hospital, even if the costs are high and the quality is low, because it's good economically for the community.
That kind of thinking has put us exactly where we are today, at overcapacity. Patients in the community will say 'I'm not going to go to a hospital where the quality isn't good and it's not safe and the costs are high when I can go somewhere else.'
Second, CMS is under no obligation to think of the best economic interests of a community. It's not their purposes. CMS is looking at this tsunami of aging that is going to completely destroy the pyramid of financing model for Medicare. They are doing everything they can to maintain the solvency of Medicare for as long as they can.
HLM: What other challenges do you see?
Orlikoff: There's a trend we are seeing that doesn't bode well for hospitals. Since 1980 there has been an increase in the population of about 30 million and there has been a reduction of 15% to 20% in the number of hospitals in that same period.
Something strange is going on.
If you increase demand, which presumably an increase in population would do, you would expect the supply to remain at least constant or go up. This means the traditional supply-and-demand co-efficient doesn't apply anymore. There used to be a formula that you needed four inpatient beds per 1,000 population. The average was something like 2.9 beds per 1,000 in 2013.
The interesting question is, how many beds per 1,000 are needed? And the answer is no one knows.
So, if CMS or local board members or policy makers operate a hospital based on the economic impact that it has on a community all it does is create the dam effect that delays the re-equilibration, but doesn't prevent it. Then when it happens, it is much more aggressive.
Unfortunately, we are facing tremendous market forces with length-of-stay declines and need-for-hospitalization declines. In 1980 the average daily census in the U.S. was about 747,000 people. In 2013 that was down to 500,000.
If you don't need as many hospitals, trying to maintain hospitals for reasons other than for what they're designed doesn't make a lot of sense. It is very painful for these small rural communities. There is a notion that if you're community doesn't have a hospital it's a red flag that your community is not vibrant and may be on the decline.
(Look for part two of my interview with Jamie Orlikoff, and his recommended action plan for rural providers in next Wednesday's column.)
Cash flow growth in the healthcare sector jumped in 2014 and remained strong through June 2015, prompting Moody's to upgrade the sector's outlook from "negative" to "stable." But key drivers are not performing as strongly now, signaling a potential slowdown.
The nation's not-for-profit healthcare sector will likely see diminished cash flow and patient volumes in 2016, although the overall outlook in the sector for the next 12 to 18 months is "stable," Moody's Investors Service says.
"We expect the current strong growth in patient volumes and cash flow will return to normal levels (3% to 4%) over the outlook horizon because some of the factors driving recent strong performance, such as gains in insurance coverage and strong patient volume growth, will not be repeated in 2016," Moody's says.
Cash flow growth in the sector had been relatively flat for several years but jumped to 12.3% in 2014, and growth through June 2015remained strong at 10.5%. That prompted Moody's in August to upgrade the sector's outlook from "negative" to "stable." Moody's says key drivers of cash flow growth in previous quarters are not performing as strongly, signaling a potential slowdown.
"For example, inpatient volume growth has been boosted by gains in insurance coverage and recent growthcomes after years of declines, likely reflecting some pent up demand," Moody's says. "Although patient demand remains strong compared to thelast five years, patient volume growth began to slow by June 2015, and many hospitals are projecting flat growth in 2016.
Moreover,hospitals continue to see more patients in the outpatient setting, due in part to regulatory changes from payers and advances inpatient care that require fewer hospitalizations. Reimbursement for outpatient services is significantly lower than for inpatient care."
On other fronts, not-for-profit providers continue to see bad debt falling, although at a slowing rate. The reductions in bad debt are credited to the increased health insurance coverage under the Patient Protection and Affordable Care Act. Nearly all of the reductions in bad debt are occurring in states that expanded Medicaid, while bad debt reduction in non-expansion states "has slowed considerably."
Moody's says Medicare and Medicaid enrollment is expected to expand over the next two years as the population ages, and more states expand their Medicaid rolls.
"However, government payers reimburse at rates below commercial insurance, pressuring margins; reimbursement from the government is not typically subject to negotiation," Moody's said. "The question of if, and when, additional states expand Medicaid eligibility will affect future financial performance as costs increase; two of the most populous states (Texas and Florida) remain opposed to Medicaid expansion, but will face continued pressure from the hospital industry and others to change course."
Another potential source of pressure on margins will be the expansion of population health programs designed to reduce inpatient services and lower costs. Moody's says the sector could lose money on population health "unless hospitals successfully enter into risk sharing contracts or make investments to capture volume in lower cost settings."
Effects of Payer Consolidation
"Strategic investments, like physician practice acquisitions and insurance company start-ups, are low margin businesses and can lead to large operating losses during the initial phase," Moody's says. "Additionally, necessary investments in information technology and electronic health records are a significant and growing expense."
Not-for-profit providers could also see more pressure coming from a consolidated commercial health insurance sector, especially the mega-mergers of Anthem Inc. and Cigna Corp., and Aetna Inc.'s acquisition of Humana.
The sector will also have to weather the growing pains of the health exchanges created by the ACA, many of which are under financial stress.
"Most major health insurers reported losses on their exchange business and many insurance co-ops (not for profit insurance companies founded under the ACA) have failed in recent months under mounting losses," Moody's says. "Additionally, the risk corridor program, established to stabilize premiums by having insurers share gains and losses on qualified ACA plans, will pay only 12.6% of the amount owed to insurance companies."
Moody's notes that some larger not-for-profit health systems that are building their own insurance platforms will face the same challenges as traditional insurers in these low-margin business lines.
The not-for-profit sector could also see significant competitive challenges from non-traditional providers in the urgent care arena, such as Walgreens Health Clinics and CVS MinuteClinics. In addition, Moody's says political and regulatory challenges in the coming years, including the imposition of the "Cadillac Tax" in 2018 could reduce benefits for people with commercial plans.
Moody's says the sector's status could upgrade to "positive" in the coming months "if the operating environment continues to improve, allowing for above average growth inoperating cash flow. We would consider changing the outlook to positive if we expect sustained operating cash flow growth above 4%over a 12 to 18 month period, after accounting for healthcare inflation."
On the other hand, the outlook could downgrade to negative if cash flows are flat or negative.
"Some factors that would contribute to a negative outlook include: states significantly reducing Medicaid reimbursement, a significant increase in the uninsured rate, or legislative or regulatory changes that significantly alter the healthcare market," Moody's says.
Market consolidation remains active as the year winds to a close. Recent deals span from acquisitions announced by Kaiser Permanente in the northwest and WellStar in Atlanta, to a sale by Tennessee-based Community Health Systems.
Kaiser Permanente has announced that it will acquire Seattle-based Group Health Cooperative, a member-governed, nonprofit health system, in a deal worth $1.8 billion.
Bernard J. Tyson
In a joint press release, KP and Group Health Coop said the acquisition would expand KP's reach to an additional 590,000 people in Washington and northern Idaho and advance the growth of an integrated care model. When the deal is finalized, Group Health will become the eighth KP region.
Because Group Health is governed by individual corporate members, and "owned" by the communities it serves, the funds from the $1.8 billion transaction will go toward the creation of a not-for-profit community foundation dedicated to improving community health, the two systems said.
"This agreement is a natural extension of our long, successful working relationship with Group Health and it provides us with the opportunity to expand access to high-quality, affordable care and coverage," Bernard J. Tyson, chairman and CEO of Kaiser Foundation Health Plan and Hospitals said in prepared remarks.
"Kaiser Permanente and Group Health Cooperative are a natural fit. The opportunity to unite will allow us to best serve the current and future needs of our members, customers and employees. We look forward to welcoming the people of Group Health Cooperative into the Kaiser Permanente family."
Susan Byington
Susan Byington, chair of the Group Health board, said the cooperative entered the acquisition as "a highly sought after, financially strong, and nationally recognized healthcare organization.
"I believe this opportunity to join with Kaiser Permanente creates even greater assurance that the committed teams and care delivery system that has kept me and my family healthy will be serving families for decades to come," she said.
KP and Group Health have a relationship that precedes the acquisition through shared best clinical practices and the development of non-profit innovations. They also have allowed each health plan's members to receive care in the other's service areas.
Scott Armstrong, president and CEO of Group Health, said the deal provides "a unique opportunity to accelerate our growth and potential through a vastly deepened relationship with Kaiser Permanente by tapping into their exceptional resources, skills, track records, and reach. Through this acquisition, we'll better be able to tackle rising healthcare costs and implement even more powerful technologies to serve our members."
WellStar Buys Tenet's 5 Atlanta Hospitals
Tenet Healthcare Corporation is selling its five Atlanta-area hospital to WellStar Health System in a deal valued at up to $500 million.
The hospitals in the sale are Atlanta Medical Center and its South Campus, North Fulton Hospital, Spalding Regional Hospital, Sylvan Grove Hospital and 26 physician clinics. The companies began exclusive negotiations for the sale last summer, and the deal is expected to be finalized in early 2016.
Candice Saunders
"We are pleased that our hospitals will join a leading regional healthcare network like WellStar," said Keith Pitts, vice chairman of Tenet. "This agreement will better position these facilities for long-term success, benefiting all stakeholders."
WellStar president and CEO Candice Saunders said that "with addition of Tenet's metro Atlanta hospitals, we will be better able to provide world-class healthcare to our patients for years to come."
When the deal is finalized, Tenet will no longer operate hospitals in Georgia. The Dallas-based for-profit hospital chain pulled up roots in North Carolina earlier this year.
In a May 5 conference call with analysts, Tenet CEO Trevor Fetter explained the exodus.
"There are markets where we don't see a path either by acquisition or partnership to develop the scale we believe will be necessary as healthcare delivery continues to evolve. In those markets, we believe our hospitals would be better positioned under another operator," he said. "For example, we continue to pursue strategic alternatives for our hospitals in Georgia and North Carolina and expect this process will likely result in sales of these facilities."
Providence Health, St. Joseph Health to Merge
Catholic health systems Providence Health & Services and St. Joseph Health have signed definitive agreement to merge. The new parent organization will be called Providence St. Joseph Health.
Deborah Proctor
"Together, we can invest more in the needs of everyone we serve, especially the most vulnerable," Rod Hochman, MD, president and CEO of Providence Health said in prepared remarks. "Our commitment is to improve affordability, enhance clinical care, and improve access to much-needed services."
Deborah Proctor, president and CEO of St. Joseph Health, said the two health systems share common mission and similar histories. "We are two mission-focused organizations that have the potential of being better together, delivering outstanding clinical care and providing a compassionate presence in all the communities we serve," she said.
Providence St. Joseph Health will focus on a shared mission and vision, and the strategic, financial, and operational direction for the system overall.
Hochman will serve as the CEO of the parent organization, which will be based in Renton, WA. There will be two system offices – in Renton and in Irvine, CA. The board of directors of the parent organization will include seven members appointed by Providence and seven members appointed by St. Joseph Health.
Rod Hochman, MD
Providence and St. Joseph Health serve different communities, but together they form a contiguous geography. Providence operates 34 hospitals, 475 physician clinics, senior services, supportive housing and other health and educational services. The health system and its affiliates employ more than 76,000 people in Alaska, California, Montana, Oregon and Washington.
St. Joseph includes 16 hospitals, physician organizations, home health agencies operating in California, Texas and New Mexico.
CHS Sells NJ Hospital to Prime Healthcare
Franklin, TN-based Community Health Systems, Inc. will sell the 126-bed The Memorial Hospital of Salem County (NJ) and related outpatient services to Prime Healthcare Foundation in a deal that is expected to be completed by June, 2016.
Financial terms were not disclosed.
"Prime Healthcare looks forward to continuing The Memorial Hospital's history of quality and success because we believe exceptional healthcare should be part of every community," said Prem Reddy, MD, chairman, president, and CEO of Prime Healthcare. "The experienced team of physicians, nurses, and staff at The Memorial Hospital of Salem County are recognized for their exceptional care and will be a welcome addition to the Prime Healthcare family of hospitals."
Prem Reddy, MD
Ontario, CA-based Prime Healthcare Foundation is a 501(c) (3) public charity and an affiliate of for-profit Prime Healthcare Services, which operates 38 hospitals in 11 states.
CHS is one of the largest for-profit hospital companies in the nation and owns, leases, or operates 198 affiliated hospitals in 29 states.
The proposed partnership is not yet final. Both health systems are working with the California Attorney General's office on next steps and hope to complete the review and approval process in 2016.
Providence Health & Services is a not-for-profit Catholic health system. It operates 34 hospitals, 475 physician clinics, and employ more than 76,000 people across five states – Alaska, California, Montana, Oregon and Washington. St. Joseph Health is a not-for-profit, integrated health care delivery system that includes 16 hospitals, physician organizations, home health agencies, hospice care, outpatient services and community outreach services.
After five years of historic low growth that averaged about 3.7% per year, spending growth accelerated to 5.3% in 2014, largely in part to the addition of 8.7 million people to government and private health insurance rolls under the Patient Protection and Affordable Care Act.
Healthcare spending in the United States crossed the $3 trillion threshold in 2014 and now represents 17.5% of the nation's gross domestic product, the Centers for Medicare & Medicaid Services said Wednesday.
A further breakdown by CMS's Office of the Actuary shows that after five years of historic low growth that averaged about 3.7% per year, spending growth accelerated to 5.3% in 2014, largely in part to the addition of 8.7 million people to government and private health insurance rolls under the Patient Protection and Affordable Care Act.
Spending on healthcare breaks down to $9,523 per person, according to the study, which was published in Health Affairs.
"Some of the primary drivers of the growth include acceleration in private health insurance and Medicaid expenditures due to the expansion of health insurance coverage under the Affordable Care Act," Anne B. Martin, an economist in the Office of the Actuary at CMS and lead author of the Health Affairs article, said in conference call with media.
The expansion added 8.7 million people to the insurance rolls, and lifted the share of the insured population from 86% in 2013 to 88.8% in 2014, the highest share since 1987.
Martin says another factor was the "rapid growth in prescription drug expenditures, fueled in part by the introduction of new specialty drugs, particularly those used to treat Hepatitis C. Overall, spending on prescription drugs grew by 12.2% in 2014, compared to 2.4% growth in 2013.
On a per-enrollee basis, overall spending increased 3.2% in private health insurance, 2.4% for Medicare and decreased 2% in Medicaid.
Despite the accelerated growth, CMS said consumer out-of-pocket spending grew by 1.3% in 2014 compared to 2.4% in 2013. Overall, healthcare spending grew 1.2 percentage points faster than the overall economy in 2014, resulting in a 0.2 percentage-point increase in the health spending share of gross domestic product – from 17.3% to 17.5%. From 2000 to 2009, before the PPACA, healthcare spending grew by an average of 6.9% annually, 2.8 percentage points faster than GDP.
The report showed that:
Total private health insurance expenditures (33% of total health care spending) reached $991.0 billion in 2014, and increased 4.4%, faster than the 1.6% growth in 2013 (the slowest rate since 1967). The faster rate of growth reflected the impacts of expanding coverage through Marketplace plans, health insurance premium tax credits, new industry fees, and changes to benefit designs. Per-enrollee spending increased by 3.2% in 2014. Average growth in per-enrollee spending was 7.4% from 2000-2009.
Medicare spending, which represented 20% of national health spending in 2014, grew 5.5% to $618.7 billion, a faster increase than the 3% growth in 2013. The 2014 rate of growth was driven by increased spending growth for retail prescription drugs and in Medicare Advantage. Per-enrollee spending increased by 2.4%. Average growth in per-enrollee spending was 7% between 2000 and 2009.
Medicaid spending accounted for 16% of total spending on health and grew 11% in 2014 to $495.8 billion, a faster increase than the 5.9% growth in 2013. Medicaid growth in 2014 was driven by coverage expansion under the Affordable Care Act, as 26 states plus the District of Columbia provided coverage for individuals with incomes of up to 138% of the federal poverty level. An estimated 6.3 million newly eligible enrollees were added to Medicaid in 2014. Per-enrollee spending decreased by 2%.
Out-of-pocket spending (which includes direct consumer payments such as copayments, deductibles, and spending not covered by insurance, excluding premiums) grew 1.3% in 2014 to $329.8 billion, slower than annual growth of 2.1% in 2013. The slowdown in 2014 was influenced by the expansion of insurance coverage and the corresponding drop in the number of individuals without insurance.
Retail prescription drug spending accelerated in 2014, growing 12.2% to $297.7 billion, compared to 2.4% growth in 2013. Rapid growth in 2014 was due to increased spending for new medicines (particularly for specialty drugs such as those used to treat hepatitis C), a smaller impact from patent expirations, and price increases for brand-name drugs. Private health insurance, Medicare, and Medicaid spending growth for prescription drugs all accelerated in 2014.
The COO of a small Mississippi hospital says he was frustrated—and surprised—to read of its endangered status in a non-profit organization's report after all the money and energy that the hospital's parent company has committed to improvements.
The Center for Mississippi Health Policy noted that 31 rural hospitals in the state were at risk of closing. Nine hospitals were placed at greatest risk of closing. (Pioneer Community Hospital was not on the Center's endangered list, even though the critical-access hospital closed three weeks after the report was released.)
To find out more, I called on one of the nine hospitals that made the most-endangered list: Highland Community Hospital, a 60-bed hospital in Picayune, MS. I wanted their perspective on what they're doing to turn things around. Doug Jones, COO of publicly-owned ForrestHealth, the Hattiesburg-based five-hospital parent system that owns Highland, says the Health Policy study is accurate based on the narrow methodology they used, but he says that the methodology doesn't tell the entire story.
"They based their report on 2012 data and they didn't look at any of the outliers that were going on in 2012," Jones says. "We were building a $58 million hospital, which we moved into on July 28, 2012. We had a lot of costs associated with staffing, training, and activating the new hospital that you are not able to capitalize. There were some high expenses associated with that."
"The other thing you may remember is we were going through this little thing called meaningful use at that time. So, we were implementing electronic health records. A lot of expenses hit that year and they made our financials look worse."
To be blunt, the financials still don't look that good at Highland. In 2014 the hospital generated nearly $104 million in gross patient revenues, but accrued net losses of $16.9 million, although Jones says the hospital has made incremental improvements on its financials and will have a positive cash flow in 2015.
To appreciate Highland, Jones says you have to look back to about 2006, when ForrestHealth assumed hospital operations after Hurricane Katrina.
Slow Progress, But Encouraging Signs
"The hospital was damaged and there was a lot of population shift," Jones says. "People were moving out of New Orleans, Slidell, getting away from the coast, Gulf Port and other places and moving into the community, which created a lot of issues with the high charity load at that time."
Local doctors in Picayune had purchased the bankrupt hospital in 1998. "After Katrina, the damage to the hospital became a great financial burden to the doctors and we took over," Jones says. "The intent at that time was to replace the facility, but the [economic] downturn of 2007 happened shortly after that and remember that nobody could issue bonds at that time."
In 2009 Jones went to Highland as interim administrator and made a community needs assessment. Ultimately, the ForrestHealth board in 2009 authorized the construction of the new hospital that opened on July 2012.
"The board decided that in order to serve the community we needed to build a new hospital and replace the hospital that had been there since 1952 and we needed to recruit new medical staff. Investment in recruiting medical staff is expensive also," Jones says. "On average to recruit and move in a doctor and get them up and running and subsidize them for the first two years of practice can run you $500,000 to $700,000. This is a health professional shortage area, even though we've been fairly successful recruiting doctors into the community, and we still have more to recruit."
Jones says the board at ForrestHealth determined that Highland's patient migration to out-of-county providers was a key issue that could only be addressed with significant facility and staffing upgrades, starting with a new hospital.
"Could we make gains and maintain the people in the community at the old facility? The answer was no," Jones says. "On top of that the old facility had structural, mechanical, electrical issues that would have to be addressed from a codes standpoint. We could easily see investing $14 million to $15 million into a 60-year-old building, not to make it function or look any better, but just to deal with the structural/mechanical issues associated with it."
"The question was could we make it work financially," Jones says. "We went about an analysis, looking at the patient population, looking at the financial projections, being very conservative on what we thought we could gain from revenues, our ability to recruit physicians, the ability for those physicians to build practices, and a lot of factors. It was a big risk, but the board at that time felt they needed to do something."
While the financials are still wobbly, Jones sees encouraging signs that the hospital has turned things around.
"Every year we pick up a little more volume," Jones says. "If you go back to 2009, we saw about 15,000 ER visits. This year we are right at 24,000. In 2009 we didn't have specialists coming to the hospital. We have cardiologists now five days a week, and ENT, neurosurgery, [and] orthopedics two days a week. We have general surgery, ICU, [and] the physical therapy is there on site. There are a lot of changes in the way we operate."
Frustration and Surprise
When the Mississippi Center on Health Policy report was issued in early November, most media outlets in the state didn't look at it as an economic impact analysis. The Associated Press lead read: "At least nine rural Mississippi hospitals are at risk of closing down, according to a new study." The nine hospitals were identified in the second paragraph.
Jones says he was frustrated—and surprised—to read of Highland's imminent demise, especially after all the money and energy that ForrestHealth has committed to improve the hospital.
"We have done a lot of work to increase community confidence in that hospital and the services that are being offered and anytime something like this comes out it can be damaging," he says.
"All it takes is for someone to think 'Oh the hospital is closing. I don't want to be a patient of this or that doctor because they won't be here long because the hospital is closing.' We've responded. The local paper did an article about it. The hospital has seen steady improvement since 2012, continues to grow, and that was the intent when we made the decision to build a new hospital. We were going to grow that hospital and the services it provides for the community."
Data collected by the Agency for Healthcare Research and Quality shows that hospital-acquired conditions such as adverse drug events, pressure ulcers, and catheter-associated urinary tract infections declined sharply between 2010 and 2014.
Federal officials say safety and quality measures linked to the Patient Protection and Affordable Care Act resulted in 2.1 million fewer hospital-acquired conditions, saved 87,000 lives, and reduced healthcare costs by nearly $20 billion between 2010 and 2014.
"In 2014 alone we had 800,000 fewer patient harms, preventing nearly 37,000 deaths at hospitals and saved $6.8 billion for patients, families and the system," Patrick Conway, MD, principal deputy administrator/CMO at the Centers for Medicare & Medicaid Services, said during a conference call Tuesday.
"This is welcome news for patients and their families. These results represent real people who did not die or suffer infections or harm in the hospital."
Data collected by the Agency for Healthcare Research and Quality shows that HACs fell from 145 per 1,000 discharges in 2010 to 121 per 1,000 discharges in 2014, a 17% decline.
Hospital-acquired conditions include adverse drug events, catheter-associated urinary tract infections, central line associated bloodstream infections, pressure ulcers, and surgical site infections, among others. The Agency for Healthcare Research and Qualityanalyzed the numbers of avoidable HACs compared to 2010 rates using baseline estimates of deaths and excess healthcare costs developed by Partnership for Patients.
AHRQ Director Richard Kronick says the 37,000 lives saved from reduced HACs in 2014 were "approximately equivalent to a one-year hiatus from all deaths from breast cancer in the United States."
The biggest reductions seen in the four-year span were among three of the most common HACs or adverse events, Kronick says. Adverse drugs events fell by 16% and contributed 40% of the overall reduction; pressure ulcers dropped 23% and represented 28% in the overall reduction; and catheter-associated urinary tract infections (CAUTIs) dropped 38% and accounted for 16% of the overall reductions.
"Overall, other important hospital-acquired infections showed reductions in addition to the CAUTIs. Most notably there were very large reductions in central line-associated bloodstream infections, (CLASBIs)" Kronick says. "These infections are relatively rare, but quite deadly. In 2010, the rate of CLABSIs was 0.55 per 1,000 hospitalizations. By 2014 this rate was reduced by over 70% down to 0.15 per 1,000 hospitalizations. We are clearly not yet at zero but we are getting close."
Of the four most frequent HACs measured, falls was the only adverse event that did not improve over the four-year span.
"Falls are a double-edged sword," Kronick says. "Part of what's important for many patients is getting them up and about and having them move more, which increases their exposure to falls. A reasonable hypothesis might be that there are more patients moving more, which is a good thing, but also increasing exposures to falls, and that may be part of what is going on here."
6 Ways to Combat HACs
The report noted that after making considerable gains between 2010 and 2013, the improvements "held steady" between 2013 and 2014. Why that is so is not known. "We don't have a full answer to that question," Kronick says. "Part of the answer is that the dramatic improvements we saw in the earlier years were the relatively lower-hanging fruit and hospitals are now working on more difficult problems."
"Some of this is a timing issue," he says. "We adopted in 2014 the national action plan for adverse drug events modeled on the 2009 action plan to reduce healthcare-associated infections. That plan was just adopted in 2014 and it will be taking some time before we see the results of that and similarly a recent adoption of the national action plan for combatting antibiotic resistant bacteria. We need better evidence for reducing some kinds of harm as well as the continued effort from folks in hospitals around the country to try to figure this out."
While specific tactics are needed to combat specific HACs and adverse events, Conway says the safety and quality movement shares at least six common themes.
"One, it's important to have the evidence on how to improve patient safety," he says. "Two, we are seeing it is important to have a culture and a focus on patient harm across the board. You are not just working in one area. You are working in the whole culture and the whole system. Three, high-reliability methods that are really focusing on every single time delivering the right care. Four, data and transparency at a macro level for hospitals but also down to the unit level so they are able to drive improvement on that unit. Five, the right technical assistance and quality improvement support. Six is the right incentives. We are increasingly tying incentives to quality and safety results, and we're seeing when we do that combined with the previous items you move a national needle in patient harm in a way we have never seen before in this country's history."
Pioneer Community Hospital is the third to close this year in Mississippi, a Medicaid non-expansion state. It's upsetting to learn about these closings because they don't just provide necessary care, but also vital jobs, and a sense of community in the rural areas they serve.
I hadn't planned on writing back-to-back columns on rural hospital closings, but these events are becoming far too common. Last week it was Bowie, TX. This week, it's Mississippi. The situations aren't quite the same, but the endings are all too familiar.
Mark Norman
Pioneer Community Hospital of Newton, MS, said it has lost its critical access status and will close on Dec. 1. The Centers for Medicare & Medicaid Services last year rescinded Pioneer's critical-access status, effective Dec. 1, 2015, after determining that the hospital did not meet the 35-mile distance requirement from other hospitals.
Pioneer CEO Mark Norman did not return calls for comment, but he issued a statement explaining that the hospital could not survive without the cost-plus-1% enhanced payments that come with critical access status.
"[In] September of 2010, USDA allowed Pioneer Community Hospital of Newton to purchase the hospital from the previous owner, with the CAH designation being an essential requirement for the transfer to occur," Norman said. "The loss of the CAH designation makes the operation of the hospital no longer financially feasible. This revised interpretation of the mileage regulation, 1820(c)(2)(B)(i)(I) and (II), is a complete reversal of CMS's original interpretation that allowed the facility to remain financially operational for the past five years."
Pioneer's emergency department will close on Dec. 1, and the hospital will accept no more admissions after Dec. 1. "Patients already admitted to the facility will be discharged upon the completion of their care and treatment," Norman said.
Pioneer plans to maintain a clinic in Newton with extended operating hours, but Norman said "residents of Newton County in need of future emergency medical care will need to seek the attention at another hospital in Forest, Meridian or Union."
Red Ink
Even with critical access status, Pioneer was running in the red. American Hospital Directory data for 2014 shows that the hospital generated $32 million in total revenues, but lost $580,000.
It's upsetting to read about these rural hospital closings because most of us understand what critical roles they play, not just in providing care, but also for fostering a sense of community and generating and facilitating local economic development.
A study out this month by the Center for Mississippi Health Policy identified nine hospitals in the state that were in danger of closing and estimated that those hospitals represented more than 2,600 jobs, generated more than $8.6 million in state and local taxes, and close to $290 million in economic activity. Ironically, Pioneer was not on that endangered hospitals list because the Center used 2012 data for its analysis.
Pioneer's closure means the money generated by scores of relatively well-paying healthcare jobs will no longer circulate throughout the tiny community, located 64 miles due east of Jackson.
"We really don't know how this is going to play out, but there were about 130 jobs that were full-time and part-time," Newton Mayor David Carr told me. "We're a small town, about 3,400… most of [the 130 of] them full time and a lot of them paying pretty good for small town Mississippi."
"Also, it was a part of the community as far as events and things like that," Carr says. "They sponsored health fairs, a lot of stuff like that that you usually don't think about. They had a nice cafeteria. I'm a member of the Lions Club and the Rotary Club. We had our meetings there every week. That's a minor thing, but it's all part of it when you add it all up."
Pioneer is the third hospital to close this year in Mississippi, a Medicaid non-expansion state. Kilmichael Hospital shuttered converted to a health clinic. Natchez Community Hospital closed this month as part of a consolidation with Merit Health Natchez.
In the Crosshairs
Whenever I hear about these rural hospitals closing I am reminded of a conversation I had in 2012 with James E. Orlikoff, then a senior consultant at the Center for Healthcare Governance. He warned that critical access hospitals were in the crosshairs as federal regulators looked to trim costs.
"Anytime you face an economic crunch when you have carve-out artificial protections, they can't last," Orlikoff told me three years ago. "Is it evitable? Yes. 'When' and 'how' are the questions… I tell my critical access hospitals to strategically plan on three years to be off the cost-plus model."
Orlikoff said then that the critical access funding cuts will come sequentially, rather than all at once. "Many critical access hospitals don't fit within the rules, so first they will be the first to lose their protected reimbursements. Then the cuts will migrate to all critical access hospitals, especially as other markets can show the efficiencies that can be taken."
Orlikoff warned in 2012 that many critical access hospital leaders were in denial.
"Many of the leaders here are so embedded in that protective philosophy, that they don't know what their finances are. They don't know how much inefficiency they have in the system. So when the time comes, they are going to be paralyzed," Orlikoff explains. "If they start thinking about it now, maybe they can get ahead of the curve."
I tried to contact Orlikoff this Thanksgiving Week to update his prescient comments. He didn't return my call. Then I thought why bother? It's clear that what he told me in 2012 applies now.
The not-for-profit healthcare sector is not immune to cyber security threats, particularly as they relate to patient records and the disruption of medical technology, Moody's Investors Service says. And larger healthcare systems are more vulnerable than stand-alone hospitals.
The dramatic rise in IT system security breaches across all sectors of the economy – from banking to government and including healthcare, has prompted Moody's Investors Service to include "cyber risk" as a "stress-testing scenario" when assessing credit scores.
"A cyber threat's severity and duration determine how we reflect the risk in our analysis and ratings," the bond rating agency said in a report this week. "To be clear, we do not explicitly incorporate the risk of cyber attacks into our credit analysis as a principal ratings driver. But across all sectors, our fundamental credit analysis incorporates numerous stress-testing scenarios, and a cyber event—like other event risks—could be the trigger for those stress scenarios. A successful cyber event's severity and duration will be key to determining any credit impact."
The not-for-profit healthcare sector is not immune to the threat or its consequences, particularly as it relates to patient records and the disruption of medical technology, Moody's says.
"An information breach would likely not materially disrupt services and the financial impact would be limited," Moody's says. "A breach in medical technology security would present more immediate risk and impair the hospital's reputation, volumes, and financial performance. Whether or not such a cyber-event would be covered by a hospital's medical malpractice insurance is untested."
Lisa Goldstein, associate managing director, public finance group at Moody's, compares preparing for cyber risks to preparing for Medicare or Medicaid cuts. "We look at it through the lens of any hospital's next year's operating and capital budget; what the expenditures are going to be; what the pressures on operations may be," Goldstein says.
"When it comes specifically to cyber security, what component of your annual expense budget does that represent? Are you even talking about it? Are you pretty far down the road in trying to contain this risk, or just starting?"
While any hospital could be the target of a cyber attack, Moody's says larger healthcare systems are more exposed than stand-alone hospitals. "This is largely due to the highly centralized IT function at many of these regional and national systems that have domain over more patient records and medical technology than a stand-alone hospital. As a mitigant, however, many of the large systems have access to external liquidity, such as lines of credit, in addition to their own cash reserves."
Goldstein says the response to cyber risk has varied greatly from hospital to hospital. "We are not hearing from all of our rated hospitals and health systems that this is a key concern to them. Some are talking about it. Right now most are not," she says.
"That speaks to where they are on their IT cycle spectrum. There are hospitals and health systems that 10 years ago went through their major IT conversion and are in a better position now to focus on cyber security. Then there are others on the side of the fence who are just gearing up in 2016 for their IT electronic medical records. Cyber security is way out there."
Overall, Moody's said the not-for-profit healthcare sector maintains a higher risk awareness of cyber security than other sectors of the economy, which is a credit positive.
"Most hospitals have completed or are in the process of installing new patient information systems which likely have better safeguarding features than prior technology," Moody's said. "We estimate that one-quarter to one-third of a hospital's annual capital budget is for information technology needs. In step with the capital budget, a growing portion of the operating budget is related to IT upgrades, warranties, security, and training."
Goldstein says hospitals also are aware of the increased need for strong internal protocols as more information is increasingly shared with external parties, such as vendors, patients, payers, and physicians.
"You have a lot more fingers in the pot with exchanges accessing data, traditional insurers, and the government systems are now linked electronically," Goldstein says. "Now the patient can access their own data so they have their fingers in the pot as well."
Goldstein says it appears that hospitals and health systems that make cyber security a standing agenda item at board meetings generally have a stronger grasp of the problem and are often farther along the road toward protecting data.
