Even in the face of an uncertain economy, the challenges and pitfalls of healthcare reform, and the recent deceleration in job growth, hospital workers and executives have done relatively well this year with pay raises.
Hay Group's 2012 Healthcare Compensation Study shows that hospitals increased base salaries by an average of 2.9% in 2012, compared with 2.5% in 2011, and 2.4% in 2010.
A further breakdown shows that employees at larger integrated systems received median base salary raises of 2.9%, down from 3% in 2011, and hospital employees received 2.4% base increases, slightly up from 2.3% in 2011.
These figures will not inspire cartwheels. They're about in line with other estimates on compensation increases in other parts of the economy. However, it's worth remembering that these raises come with inflation at 1.7% as measured by the Consumer Price Index, and with an unemployment rate of 8.3% in the larger economy. Relatively speaking, healthcare workers and executives are doing all right.
Not surprisingly, the rate of growth for healthcare executive compensation is outstripping that of the general employee ranks, but not by much and that margin appears to be shrinking.
CEOs at not-for-profit integrated health systems received a median 3.2% increase in base salary for 2012, compared to a 4% increase in 2011, while hospital CEOs received a 3% increase in 2012, compared to a 5% increase in 2011, Hays Group found.
"I have seen over the last several years a much closer parallel, if not an exact parallel, between base salary increases provided to the general employee population and what is being provided to executives," Jim Otto, a senior principal in Hay Group's Healthcare Practice, told HealthLeaders Media.
"Compensation committees are asking specifically ‘what is the range of base salary increase for the rest of the employees?' They're taking that into account and unless there are particular circumstances for a position that general employee population range is the range that the committee works within to determine base salary increases."
Another trend Otto notes is the continuing shift away from base pay raises for healthcare CEOs as compensation packages continue to move toward incentive pay and long-term benefits.
"Base salary adjustments are going north compared to prior years but not tremendously. What has really influenced pay at the executive level, especially the cash compensation over the last 10 years, is the increasing level of comfort with using incentive plans," Otto says.
"I don't see that changing in the near future given our work with boards and compensation committees at the executive level dealing with compensation arrangements. They aren't looking to give the kinds of base salary increases that you used to see 10, 15, 20 years ago and they are much more inclined to putting more pay at risk to make sure they get the outcomes they are willing the additional dollars for."
Healthcare executives are also seeing an uptick in benefits and perquisites incentives that are slightly higher than in the general market. At health systems, for example, 74% of the compensation packages offered executive long-term disability benefits, compared to only 33% of the general market.
Otto estimates that incentive compensation represents between 25%-40% of base salary. "That is at a decent-sized healthcare system doing between $500 million and $1.5 billion of net revenues. That gives you a sense that cash compensation is the pie and base salary is going to be anywhere between 65%-70% of the pie," he says.
Boards at tax-exempt hospitals are particularly sensitive to public scrutiny about high executive salaries and recognize that compensation can be more easily justified when it is linked to specific goals.
"That is attractive to a lot of boards and committees. ‘I am willing to pay these dollars but we need to see outcomes that are commensurate with what we are willing to pay,'" Otto says. "At tax-exempt healthcare providers a lot of board members are coming from the for-profit world. They are used to these kinds of incentives. It is not a foreign concept for them to think of a base salary and annual incentives and even a base, annual and long-term incentives as major components of an executive's pay package."
It shouldn't be surprising that we see this shift in compensation packages because everything else in healthcare is in a state of flux.
"Because you are going to change how you operate you are probably going to change how you are structured organizationally, which means that jobs are going to change," Otto says. "We are seeing that with certain clients where they have changed operating models, how they are organized, what the jobs are going to look like both now and what they see them turning into in the future and if people are successful at doing that they are going to be in demand."
Otto says healthcare leaders understand that these new demands have changed the way they will be compensated.
"The CEOs who I talk and work with view this as the world they have been living in for a while and we aren't going to go back to the way it was where the heavy lifting of cash compensation increases was coming year over year out of base salary and not out of incentives," he says. "Those days are gone."
The nation's four largest hospital associations and their allies at medical schools urged Congress in a letter this week to oppose a cap on payments for outpatient services in hospitals.
The cap proposal was floated earlier this year by the Medicare Payment Advisory Commission, which estimates that it could save the federal government about $1 billion.
Under the proposal, for non-emergency examinations in a hospital outpatient setting the physician would get the standard amount for the service in a hospital setting. The hospital would get the difference between the physician office payment minus the physician payment in the hospital.
The hospital associations say the proposal would reduce payments by at least 71% for 10 of the most common outpatient hospital services.
"Simply put, it is significantly damaging to beneficiaries and the providers on which they rely to enact legislation that will result in such large cuts. We urge you to oppose inclusion of these cuts in any legislation, and appreciate your continued support of our hospital and its patients," the letter stated.
The letter was co-signed by the American Hospital Association, the Association of American Medical Colleges, the Catholic Health Association of the United States, Federation of American Hospitals, and the National Association of Public Hospitals and Health Systems, and sent to every member of Congress.
Congress is already contending with $1.2 trillion in mandated cuts that take effect on Jan. 1under the Budget Control Act of 2011, which includes a 2% sequester of Medicare funding. In addition, a separate 27% cut in physician Medicare reimbursements is schedule to go into effect on Jan. 1 under the sustainable growth rate funding formula.
The MedPAC cap proposal does not appear to be on any committee agendas at least until after the November general election and the hospital associations made clear in their letter to lawmakers that they want to keep it that way.
"Knowing there is going to be tremendous pressures on policy makers to achieve more savings as we go into the next round of discussions, whether it is the physician fee fix or the bigger issues around the 'fiscal cliff,' we would just anticipate that this idea may come up again as one that is debated by policy makers," Beth Feldpush, vice president of policy and advocacy at NAPH, told HealthLeaders Media.
Feldpush says approximately 200 safety net hospitals represent about 2% of all hospitals in the United States. However, they would absorb 15% of the cap reductions—a $150 million hit—owing to their patient mix, high facilities and operations costs, and a care delivery structure that relies heavily on outpatient clinics.
"That's 15% of $1 billion: 200 hospitals; 2% of hospitals; 15% of the cuts. That is a lot," Feldpush says. "You could pretty much say that it would be incredibly challenging to stake an institution to cuts of that magnitude without seeing negative consequences in terms of the services we could offer and the people we could serve."
Much of that disproportionate hit comes because large safety net hospitals in urban settings rely on extensive ambulatory care networks. "Among NAPH member hospitals, they have on average 20 outpatient clinics. This is intentional. We manage those hard-to-reach patient populations with very complex multiple co-morbidities," Feldpush says.
"We often think of ambulatory care and the clinics providing primary care. That is certainly true, but in addition, our members have specialty clinics that often act as a medical home for those complex patient populations. For example, most of our members will have a cardiovascular clinic, a diabetic clinic, a pain clinic, cancer clinics, and the patients that we serve really don't have any other source of care to manage those really complex medical conditions."
Feldpush says capping outpatient reimbursements doesn't meld with the integrated care model that the federal government is advocating.
"As we think of moving to integrated care, providing better care in the ambulatory setting to keep people out of the hospital, reaching out to folks who don't have good access now, this proposal seems to fly in the face of that," she says.
"This proposal contradicts the agreed upon goals we are all working for, integrated care and providing care in the least-resources-intensive setting for the benefit of patients."
As many as 766,000 healthcare and related jobs could be lost by 2021 with the 2% sequester of Medicare spending that goes into effect Jan. 1, the nation's leading healthcare professional associations said in a joint warning on Wednesday.
The American Medical Association, the American Hospital Association, and the American Nurses Association issued a report Wednesday morning detailing the state-by-state impact of the sequestration as part of their coordinated effort to urge Congress to fix the problem.
"The 2% cut would have such a profound impact on jobs in the healthcare sector," AMA President Jeremy A. Lazarus, MD, told HealthLeaders Media. "It has a tremendous economic impact and a tremendous patient care impact. The AMA, the AHA and the ANA coming together to express our deep concern indicates that this is a high priority for us."
Lazarus says the AMA and scores of professional medical associations and societies are already battling with Congress to stave off the looming 27% Medicare physician payment cut, which also takes effect on Jan. 1 under the sustainable growth rate funding formula.
"We are coupling our concern with the yearly issue of the potential 27% cut in the sustainable growth rate," he says. "This adds another level of uncertainty for physicians so we want them to know about it and what we are doing on it."
Caroline Steinberg, vice president for trends analysis with the American Hospital Association, says the jobs report demonstrates the importance of the healthcare sector to the economic well-being of the nation. The report estimates that nearly 500,000 jobs will be lost in the first year of the sequester.
"Few people really recognize the impact of healthcare on the economy," Steinberg says. "Healthcare is really an economic mainstay and healthcare job growth has remained strong throughout the economic downturn. It's a message that people need to hear what is often missed in the larger debate."
"With healthcare services the spending often stays in the community," Steinberg says. "When you spend a dollar on healthcare, 60% of that dollar is going to go to creating jobs at that hospital in the community. If you spend a dollar a Wal-mart a lot of that money is going to go to China because a lot of the products are made in other countries. That is why healthcare has a pretty high multiplier relative to other industries."
She says that multiplier effect could also work in reverse for thousands of hospitals and the communities they serve across the nation if the cuts go through.
"When you cut Medicare funding Medicare hospitals will have less reimbursements coming in. They will have to lower their expenses and some of that will be through staff reductions. That is the direct effect," Steinberg says. "And part of that direct effect is that hospitals will reduce spending on other supplies and services."
"The indirect effect would be when the hospitals reduce their spending on other supplies and services and other businesses are affected," she says. "If a hospital reduces spending on laundry or food service or medical devices or drugs those companies will in turn have to reduce their expenditures, which could result in staff layoffs."
Finally, Steinberg says, there is the "induced effect" of the loss of revenue for people who've lost their jobs either at a hospital, or supplier. "They are then going to reduce their purchases in their community, which will cause additional business, restaurants, clothing stores, car dealerships, to have less revenue coming in, which will lead to more job losses," she says.
The cuts were mandated by the Budget Control Act of 2011 as part of an agreement to raise the debt ceiling after a bipartisan "Super Committee" failed to negotiate a balanced budget deal. If a new deal can't be hammered out by Jan. 1, cuts totaling $1.2 trillion will kick in automatically against military and domestic programs.
Congress will take up the issue again after the November general election. Several Congressional leaders from both parties said this week that they anticipate a successful resolution, but House Speaker John Boehner, (R-OH) told reporters that he is "not confident at all" that a deal would be finalized.
The healthcare sector has been one of the few bright spots for job growth over the last decade and through the Great Recession. In August, healthcare created 16,700 new jobs, 17.3% of the 96,000 new jobs in the overall economy for the month.
So far this year, healthcare has created 197,300 jobs, nearly 18% of the 1.1 million jobs created by the overall economy. Since January 2008 healthcare has created 1.2 million jobs in an economy that has otherwise seen a net loss of 4.7 million jobs over the same period.
Nearly half of Tennesseans living in rural areas who seek healthcare drive past the hospitals closest to their homes to look for care in more urban settings, even when their local hospitals offer the same services, a study shows.
The study, Patterns of Care in Tennessee: Use of rural vs. non-rural facilities, from the BlueCross BlueShield of Tennessee Health Institute, explains in great detail the sourcing and methodology used to cull the 2009 data and how it was parsed to get "apples-to-apples" comparisons. For expediency's sake read the original report.
Steven L. Coulter, MD, president of the Health Institute told me the data clearly shows that rural patients are migrating to more urban settings for their healthcare. Coulter also readily concedes that the data can't say why.
"That actually is the question of the hour," says Coulter, an internist. "My speculation is that they perceive, whether true or not, that the services are better elsewhere. We really can't make a policy-level judgment based on the data we have found. All we can say is people are mobile and they are moving. What we can't say is whether that is a good thing or a bad thing, because we haven't looked at clinical outcomes or the economic impact on the communities that these small hospitals serve."
These findings suggest that profound changes are underway for rural hospitals in Tennessee. If nearly half of the potential patient base is driving past the door to get the same services farther from home—for whatever reason—that challenges financial viability. Hospitals that don't attempt to understand that migration and that don't adapt to that migration will shutter.
"These hospitals are going to find themselves forced to either go it alone or sell to a for-profit or somebody like that who knows how to do it, because the reality is a lot of these places are not financially viable," Coulter says.
Maybe it's time for rural hospitals to wave the white flag for elective procedures and instead focus on services that take advantage of their proximity to patients: Trauma and chronic care.
"Trauma is 'every minute counts,' but there are diseases like myocardial infarction and pneumonia where minutes really do count as well," Coulter says.
"It has also been shown that the most appropriate and best intervention for myocardial infarction is on-the-spot angioplasty and not the clot busters that for so long we thought were the equivalent. In other words, if you don't have a cardiac cath lab, you aren't serving the people in your community. If anything, you may be just slowing them down from getting where they need to go."
Coulter suggests that many rural hospitals could convert into emergency stabilization centers. "Instead of having inpatient beds, put in a cath unit in, put in a trauma unit. Have a trauma surgeon and a cardiologist in the house or on call 24 hours a day," he says.
"My bias is that many of these facilities could be converted to much more effective facilities for not really a whole heck of a lot of money."
The Affordable Care Act will place a renewed emphasis, and money, on chronic care treatment. Coulter believes that rural hospitals are a perfect source point. Instead of traveling longer distances for their more-frequent chronic care consultations, patients could drive to the hospital down the street.
"The emphasis is going to come particularly through the (Accountable Care Organization) concept. It's going to come from the perspective of case management," Coulter says. "There is finally some literature coming out showing that intensive case management really does prolong life. It is not necessarily cheaper in the aggregate, but it does improve quality of life."
This change in care models and emphases for rural hospitals will likely accelerate the consolidations that the sector has seen over the past five or six years. "We are going to see a lot of CHS and HCA and Tenet-type organizations are going to take over these small hospitals and they are going to figure out what the most profitable means to make the viable," Coulter says. "Then you have to ask is the most profitable the right thing to do?"
There is no way to determine if the patient migration patterns identified in Tennessee apply in the same measure to other states. Geographically, Tennessee is long and narrow and surrounded by eight states with lots of potential for patient migration. And while Tennessee is mostly rural, the state's highway system is among the best in the nation. As a result, access to quality care in more-urban settings, both instate and across state lines, is readily available.
Still, it would not be unreasonable to suggest that the findings in Tennessee are somewhat applicable to rural hospitals in other states. After all, these migratory patterns are a function of consumer behavior and consumer behavior is not restricted to state lines.
In other words, if consumers have a choice and can go elsewhere, a certain percentage of them will exercise that choice.
Rural hospitals across the country would be wise to understand why patients in their service areas drive past the doors. Once the reasons for patient migration are understood, rural hospitals can determine which services best play to their home-field advantage.
When cost-effective point-of-service options are identified, a rural hospital can turn its remote location into a distinct competitive advantage.
In the February 2012 Impact Analysis Report, Value-Based Purchasing: Facing the HCAHPS Hurdle, HealthLeaders Media Council members were evenly divided on whether VBP, as designed, will succeed in improving quality of care while also reducing costs. We asked four leaders: What is the outlook for your organization, and what are the reasons it will succeed or fail?
Scott Trott, MHA
Vice president of payer management and faculty services
UNC Healthcare System
Chapel Hill, N.C.
On the outlook for VBP:
Our outlook is good from the perspective that the patient experience component is already very high. The clinical components need improvement and we have active programs in place around all of those measures. It will succeed in the near-term based on the organizational approach of looking at this across the board for our health system.
On synergies:
We have a couple of our major commercial contracts that have many of these measures in them as well, so we have some synergy between the governmental and commercial payers. One thing that might lead to its failing is if we get focused on multiple other measures or other payer-specific measures that aren't in sync with value-based purchasing core metrics.
On incentivizing physicians:
The other part of this is keeping our physicians engaged. Another year or so of having incentives built in to help keep physicians engaged in helping to drive these changes and improve these measures and is absolutely critical. Some incentives have to be built in, maybe it's an internal thing that we need to do, where our physicians have the chance to benefit as these scores improve.
On reducing cost of care:
I am not sure if cost will actually be reduced. So many of these clinical measures are based and predicated on folks who are in the hospital or have had an encounter, and costs are really mostly reduced when you avoid having folks come in from the beginning. This kind of value-based purchasing is focused on inpatient or acute events.
Judy Schwartz, MD
CMO
Knox Community Hospital
Mount Vernon, Ohio
I don't think it will have an impact on quality because I don't think what they are monitoring is quality. It's more about monitoring processes than things that have been shown to improve quality.
For example, all the VTE [venous thromboembolism] prophylaxis that we are near 100% on, I am not sure that it really prevents anything of significance from a clinical perspective. Or whether or not you think to document after you tell patients they should take aspirin. Patients are already doing it so I don't think it is markedly changing what is going on. It's just improving the documentation, which of itself may be some benefit but I don't think it is much of a quality benefit as stated.
I do think it will help with service delivery. It will make everybody pay attention to that but when you look at it, those scores are already very high. On the other hand, it depends upon what area you are looking at. ED scores, for example, tend to be lower than ambulatory services scores. Inpatient is heavily impacted by what happens in the ED. So, if your ED isn't doing well, your inpatient scores can suffer from that. We are fairly comfortable here in that we don't have the huge volumes they have in large-city EDs, where they have hours upon hours of waiting times.
Marlene Weatherwax
CFO and vice president
Columbus (Ind.) Regional Health
We are an independent single-hospital health system and I believe we have a good outlook for the organization. We have strong financial statements, good results, high quality, and improving patient experience. We used to be at the top of the game before HCAHPS came into play and we are working on getting back on top.
Why would it fail? I don't know how to answer that one. We are pretty close to the Indianapolis market and there is a lot of posturing going on by the large health systems. I would contend that Indianapolis is a little overbuilt with specialty hospitals, so everybody is fighting for market share. When they have a difficult time in their own market, they start looking outward. Our pockets are only so deep, where some of their pockets are a little deeper.
I don't know that in and of itself value-based purchasing is doing anything to improve quality while reducing costs, but it is getting people to focus on these things. By using very process-oriented metrics, it is forcing hospitals to look at better types of process improvement methodologies, such as Lean and Six Sigma. I think that by going through that, they will improve their quality and costs, but I don't think that value-based purchasing as it is designed will really cause that to happen on its own.
Gary Tiller
CEO
Ninnescah Valley Health System Inc.
Kingman (Kan.) Community Hospital
Don't call it value-based purchasing. Call it "We are going to throw you under the bus and take your money." Do I have any faith in these things? Not much. It's a ruse. First of all let's separate quality from cost. There are a thousand different interventions, séances, Kumbaya moments in quality that HHS is pushing and they are plunking down money and some of these things they have studied for years and they have not proven to be of any benefit.
The push for quality is not going to save money and it's not going to improve quality either. But they tie money to all these things.
The two things that have a chance to actually save money are the medical home concept and the evidence-based medicine, and we will never see much of those. For one thing, on the medical home, the family practice docs don't want to lose the camaraderie with the specialists, and the specialists don't want to see any of that happen. They want to see the patient get into that vortex where the specialists keep handing them off. While you may impact the rate of increase with this sort of stuff, you are not going to ever have a decrease.
For years now Bureau of Labor Statistics' monthly employment reports have been showing that the healthcare sector is the biggest job creation machine in the U.S. economy.
BLS has estimated that by 2020 the healthcare sector will create 5.6 million new jobs, thanks in large part to the aging Baby Boomer population and the expansion of health insurance under the Patient Protection and Affordable Care Act.
Healthcare is labor-intensive. The American Hospital Association says that labor accounts for nearly 60% of spending for hospital care. With healthcare costs rising at roughly three times the rate of inflation, it's not clear how long the rest of the economy can continue to support this job growth.
It is not completely farcical to say that the nation is on a trajectory that may eventually have everyone working in healthcare and spending all of their money on healthcare, which already gobbles nearly 20% of the gross domestic product.
The talk about "bending the healthcare cost curve" centers around reducing waste and fraud and improving quality. We don't hear much about slowing healthcare job growth even though wages and benefits are the single largest expense in healthcare.
In most sectors of the economy new technology reduces job growth and lowers costs. For better or worse, robots on the assembly line means fewer jobs for humans and labor cost savings. That logic doesn't necessarily apply to healthcare.
The advent of electronic medical records, for example, has led to a huge demand for thousands of technicians who can design, install, and operate these highly complex computer systems. The newest imaging equipment also requires highly skilled operators with clinical and technological expertise.
Technology will probably save money by reducing waste, fraud, misdiagnoses, and abuse. But it will not come cheap, and the savings may not be readily apparent for years.
This steady hiring in healthcare continues even as there is near universal agreement that very soon the healthcare sector will be required to provide more care for less money. Medicare and Medicaid are cutting reimbursements and increasingly linking the value of payments to quality outcomes. Commercial plans are following the government's leads and are taking a hard line against cost shifting.
There are signs that the healthcare job growth may already be slowing.
Relatively speaking, it's been a slow summer. BLS notes that from June through August, job growth in healthcare averaged 15,000 per month, compared with an average monthly gain of 28,000 in the prior 12 months. Every day in the media we see local stories across the nation about hospital layoffs brought on by financial strains or consolidations.
However painful, these are anecdotal and generally isolated events.
Even with the slow summer, on a macro level in the first eight months of 2012 healthcare created 72,000 more jobs than it did for the same period in 2011. So, it's hard to say if this is the start of a slump in healthcare job growth or merely a blip.
Generally speaking it's not a good idea to hold much stock in one, two, or even three months of job data when making longer term predictions. After all, BLS considers its two most recent months of job data to be "preliminary" and subject to considerable revision.
In August, healthcare created 16,700 new jobs, 17.3% of the 96,000 new jobs in the overall economy for the month. So far this year healthcare has created 197,300 jobs, nearly 18% of the 1.1 million jobs created by the overall economy. Since January 2008 healthcare has created 1.2 million jobs in an economy that has otherwise seen a net loss of 4.7 million jobs over the same period.
A further breakdown of BLS data for August shows that ambulatory services, which include physicians' offices, grew 14,200 jobs, while hospitals grew 5,700 jobs. The volatile nursing homes subsector with its larger cohort of semi-skilled workers actually shed 3,200 jobs for the month, which happens occasionally.
More than 14.3 million people worked in the healthcare sector in August, with more than 4.8 million of those jobs at hospitals and more than 6.3 million jobs in ambulatory services, which includes more than 2.4 million jobs in physicians' offices.
In the larger economy, BLS reported that the 96,000 jobs created in August were led by 28,000 new jobs in food services, and 27,000 new jobs in professional and technical services. The unemployment rate dropped slightly in August to 8.1%, but economists said it was mostly because "discouraged workers" have stopped looking.
BLS says 12.5 million people were unemployed in August, which was essentially unchanged throughout 2012. The number of long-term unemployed, defined as those who have been jobless for 27 weeks or longer, remained at 5 million people in July, representing 40% of the unemployed. So far this year job growth has averaged 139,000 per month compared with an average monthly gain of 153,000 in 2011.
If we are seeing the start of a slowing job growth trend in healthcare, it may be mirroring the slowing job growth in the overall economy.
Nonprofit healthcare organizations are gradually shifting traditional investment strategies away from bonds and other fixed income securities toward more highly diverse portfolios that could make them less vulnerable to market swings, multiyear analyses from Commonfund show.
William F. Jarvis, managing director and health of research with the Wilton, CT-based financial advisors, says nonprofit healthcare organizations are taking cues from colleges and universities that have seen generally strong investment returns over the last 20 years using a more diversified "endowment model."
"Healthcare organizations have historically had portfolios that were much more heavily allocated to bonds and fixed income securities than other types of nonprofits, certainly much more allocated to bonds than the typical college or university would have," Jarvis told HealthLeaders Media.
That strategy appears to be changing.
In FY2009, for example, bonds and other fixed income investments averaged 41% of the portfolios of the 86 nonprofit healthcare organizations tracked by the Commonfund Benchmarks Study of Healthcare Organizations. That allocation dropped to 36% in FY2011.
"So we are beginning to see these shifts," Jarvis says. "They don't all occur at once, but it looks as if healthcare organizations are reconsidering whether this endowment model works for them."
Endowment models have been around since at least the early 1990s and Jarvis says they generally have a "higher tolerance for less-liquid assets like real estate, hedge funds, private equity, and venture capital." Higher education institutions, for example allocate about 10% of their investments to bonds.
"Colleges and universities were the leaders in diversifying portfolios into different asset classes that would provide uncorrelated sources of return that don't go up and down together at the same time," Jarvis says.
The endowment model eventually caught on with charitable foundations, then operating charities such as museums and symphonies, and now it is piquing interest with nonprofit healthcare organizations.
Jarvis says that nonprofit healthcare organizations' historical attachment to fixed income investments stems from a reliance on bonds to fund capital projects. "So the rating organizations like to see a large chunk of bonds and cash to maintain the bond rating," he says. "It has been something of a drag on returns and hasn't really protected them in the downturn."
In FY2008, for example, Commonfund reported investment losses averaging 21.2% for the nonprofit healthcare organizations that it tracks. . So that the big shift that we saw this year was healthcare organizations beginning to maybe take a closer look at adopting more closely this endowment model," he says.
With the shift away from fixed-income securities, investments in private capital and real estate have grown from 15% of the average healthcare portfolio in FY2009 to 21% in FY2011, Commonfund analyses show.
"Normally you don't see moves that big," Jarvis says. "That was funded by taking domestic equities down from 24% to 20% of the overall pool. So that is part of the big news here. Historically we have not seen these kinds of big moves in healthcare organization portfolios. Now we are beginning to see more strategic moves. They don't all occur at once but it looks as if healthcare organizations are reconsidering whether this endowment model works for them."
A Commonfund review of FY2011 also found that:
After two years of double-digit gains, the 86 nonprofit healthcare organizations it tracks reported investment returns of zero in FY2011. The flat returns followed net gains of 10.9% in FY2010 and 18.8% in FY2009.
From FY2009-2011 the average annual net return on investable assets was 9.6%, while for the trailing five years annual net returns averaged 1.8 percent – thanks to the -21.2% loss recorded in FY2008 in the midst of the recession.
A further breakdown for FY2011 shows that net returns on nonprofit healthcare organizations' defined benefit plan assets averaged 1.3% compared with FY2010 net averaged return of 12.3%. Three-year defined benefits plan returns averaged 11% and five-year returns averaged 2.2%.
By asset class fixed income provided the highest return in FY2011 with an average of 5.4%, followed by a 3.9% return for alternative strategies, 0.2% for short-term securities/cash, -0.2% for domestic equities and -10.9% for international equities.
Within alternative strategies the highest returns came from private equity real estate at 14.1%; venture capital at 11.1%; and private equity at 10.7%. Marketable alternatives, which include hedge funds, were the largest single alternative allocation for many healthcare organizations and lost -1.8%.
For FY2011, investment returns were correlated to size; the larger the organization, the better the return. Organizations with investable assets over $1 billion realized an average return of 0.6% while the smaller organizations at the opposite end of the size spectrum lagged with a return of -1.9%.
It's getting to the point where hospital mergers and acquisitions aren't really news anymore beyond the healthcare trade publications and the local service areas that are affected by the deals.
According to Irving Levin Associates Inc. there has been a fairly steady increase in the number of hospital mergers and acquisitions over the past several years: up from 38 M&A deals involving 56 hospitals in 2003 to 90 involving 156 hospitals in 2011. That's almost two deals a week.
We've seen this cycle before. Hospital M&A accelerated in the late 1990s along with the advent of managed care. Levin notes that M&A fever peaked in 1998 with 139 deals involving 287 hospitals and steadily declined until 2003.
While it is entirely possibly that we could be at the top of an M&A cycle once more, this time it feels different. We are seeing the broad consolidation of the hospital industry in all parts of the nation and it's difficult to see any market forces out there that will reverse this trend.
Lower payment rates from all payers will invite consolidation as hospitals look to reduce costs and improve economies of scale and market leverage with payers and vendors.
Physician-employees, technology, and regulatory compliance are driving up the cost of doing business.
Accountable care organizations reward integrated healthcare delivery that improves quality at reduced cost.
In the face of these headwinds, scores of otherwise stable and well-managed not-for-profit hospitals have joined with larger health systems in any number of partnership models. The strategy for many of them is to negotiate now from a position of strength rather than waiting for market pressures to force a move.
Last week, for example, Marquette General Health System in Michigan's Upper Peninsula finalized a $483 million deal that will make it the fourth hospital, and the first in Michigan, for investor-owned Duke LifePoint Healthcare, which itself was created two years ago in anticipation of the consolidation trend.
Marquette General CEO/President Gary Muller told me that the Duke LifePoint was one of 16 entities that showed an interest in acquiring the 315-bed specialty care hospital.
"The 16 proposals are pretty unusual because we were in a strong position," Muller said.
"Financially bottom line operating income was building up. All of our quality marks were good," he explained. "We didn't need to do anything but our board was looking ahead and saw that storm clouds are coming in healthcare and they acted preemptively. The analogy is selling your house when the roof is fine and the foundation is good and everything is painted and that is the way Marquette is."
Muller told me that Duke LifePoint was not the highest bidder, but that the Marquette General board picked it because of its mix of business and clinical expertise. Duke LifePoint will invest $300 million in capital improvement projects that will include an outpatient surgery center, cancer center, private patient rooms, new technology and new IT infrastructure. Duke LifePoint will also invest $50 million for physician recruiting over the next 10 years.
In addition, the deal allows Marquette General to retire about $100 million in long-term debts and unfunded pension liabilities, and provides another $23 million for the hospital foundation.
For Duke LifePoint the toehold in northern Michigan provides an opportunity to compete with blue chip providers that include Cleveland Clinic, Mayo Clinic, University of Michigan Health System, and Henry Ford Health System. Muller says Duke LifePoint also sees an opportunity to expand its orthopedic sports medicine program in Marquette, which is the home of a U.S. Olympic Education Center.
The biggest knock on hospital M&As is the loss of local autonomy. Hospitals are often the biggest employers and economic engines in the regions they serve and a source of local pride. No matter what guarantees are put in place the boards at most acquired hospitals are usually reduced to advisory status and their control is greatly diminished.
Muller says the Marquette board will still have a role in strategic planning and credentialing. It is satisfied that any concerns it has will be heard by the new owners. "The board is an advisory board now but it is 12 members and they are all local except for one from Duke and we wanted that," he says. "They don't feel like the community governing role is something they need to hold on to the detriment of the hospital."
And that's just it.
Marquette General and scores of other hospitals across the nation have seen which way the winds are blowing. Increasingly they are willing to forfeit a certain amount of autonomy in exchange for access to the capital and clinical and business expertise that will improve their position in a highly competitive market.
This all makes perfect sense in the nearly $3 trillion healthcare economy that is otherwise huge, bafflingly complex, and in the midst of historic change. There is no reason to think that this trend toward consolidation will reverse itself anytime soon.
Many not-for-profit hospitals have done a good job stabilizing margins after the Great Recession but still face continued challenges with flat inpatient volumes, healthcare reform mandates, and lower reimbursements linked to government budget pressures, a new report from Moody's Investors Service says.
The bond rating agency's report, U.S. Not-for-Profit Hospital Medians Show Operating Stability Despite Flat Inpatient Volumes and Shift to Government Payers, shows that balance sheet measures improved and cash and investments portfolios remained highly liquid. However, weak investment returns over the past year have stagnated balance sheets for most hospitals.
Overall, the financial outlook appears to be improving for not-for-profit hospitals, as executives look for new ways to cut expenses in the face of weaker revenue growth and further changes to federal healthcare policy and regulations over the next few years.
"There will be pressures going forward, but management teams have done a good job so far of responding to the recession and the changes in the healthcare market," Moody's analyst and report author Sarah Vennekotter tells HealthLeaders Media.
Even with flat inpatient admissions in FY2011, not-for-profit hospitals recorded a median expense growth rate of 5% against a median revenue growth rate of 5.3%. That represents a slight uptick from FY2010, which saw revenue and expense growth rates of 4.2% and 4.1%, respectively.
Vennekotter anticipates continuing challenges in FY2013, including lower payments for inpatient procedures from all payers as incentives and mandates for efficiency and quality move more patients to outpatient settings. For example, the median growth rate in observation stays has continued to improve incrementally each year, from 7.4% in FY2008 to 8.2% in FY2011.
"Growth in observation stays has been strong in the last couple of years," Vennekotter says. "That's because Medicare [Recovery Audit Contractor] audits have come in and hospitals have been forced to reevaluate how they document and code patient care when, for example, they come to the ER. We will continue to see that as Medicare continues to monitor hospitals to ensure that they are properly coding inpatient admissions and observation stays."
Other financial pressures in FY 2013 will include the ongoing federal budget woes, which will probably mean more Medicare and Medicaid reductions for hospitals on a per-patient basis. In addition, margins are likely to weaken as hospitals contend with losses on employed physician strategies.
While managers initially looked to salary and benefits cuts to reduce expenses, Vennekotter says they may soon have to go elsewhere. "You can't keep cutting expenses year over year when it comes to employee salaries and benefits," she says. "In terms of expense reductions beyond the low-hanging fruit of salaries and benefits, hospitals will look to transition to providing healthcare in lower-cost settings and being more efficient, which will be much more difficult to implement than reducing salaries and benefits. It's going to be more difficult for management teams to find places to cut expenses, but not impossible."
Lisa Martin, Moody's senior vice president for the Public Finance Group, says finding new ways to reduce costs will become increasingly difficult for hospital managers.
"That is because what we are talking about is reducing expenses by redesigning entire processes," Martin says. "So it is not just a question of reducing headcount. It's a question of reducing things like length of stay and improving back office support functions to reduce the amount of time between admission and discharge, which involves changing an entire process. That is a much more difficult strategy than just cutting the low-hanging fruit."
The Moody's report also found that:
Median growth rate of inpatient admissions remained flat in FY2011 at 0.1% growth, following a 0.4% decline in FY2010 and zero growth in FY2009.
Growth in governmental payers continues as Medicaid now represents 13% of gross revenues, up from 12.4% in FY2010. Medicare grew to 43.7%, up from 43.4%. Median revenue from managed care, Blue Cross / Blue Shield, and other commercial payers declined for the third consecutive year.
Although the median debt load at not-for-profit hospitals increased to $191.9 million in FY2011, up from $189.3 million in FY2010, the median rate of change for debt outstanding was a decline of 1.6%.
Median days cash on hand was 165 days, up from 159.8 days in FY2010, and nearly approaching the FY2007 median of 172.8 days seen prior to the economic downturn and severe market losses.
Martin cautioned that the approximately 800not-for-profit hospitals reviewed by Moody's for bond rating purposes are only a fraction of the estimated 5,000 not-for-profit hospitals in the United States, and thus may not accurately reflect the overall health of the sector. "There are many out there that are struggling, and many of them we do not have readings on," she says. "There is a wide variation in operating performance within the portfolio we do maintain. While the median is up a little on some measures, there is a big disparity between those that tend to be the larger health systems in multiple regions or markets compared with some of the smaller standalone hospitals that are struggling now, and that is even before some of the negative effects of federal budget cuts and other Medicare pressures."
For obvious reasons many of us at HealthLeaders Media avoid writing about the politics of healthcare reform.
For one thing, there exist already hundreds of media outlets dedicated to the highly divisive topic, which often attracts commentary from the tinfoil hat brigades. More importantly, however, the politics of healthcare reform are ultimately beside the point.
People in the healthcare sector and the occasionally candid politician understand that healthcare reform is driven foremost by money and not politics or ideology. That is why the issue will still be with us regardless of which party occupies the White House or runs Congress next year.
There are legitimate disagreements on how to pay for healthcare, how to "bend the cost curve" and the extent to which the government should be involved. However, it is generally accepted that the current pace of healthcare spending, which will soon represent 20% of the nation's gross domestic product, is unsustainable.
With that in mind, it was interesting to read a Washington Post article this week detailing the efforts of some Texas counties to do an end-run around Gov. Rick Perry's adamant opposition to the Medicaid expansion in the Patient Protection and Affordable Care Act. It provides a wonderful example of rhetoric crashing against reality.
The governor's rejection of Medicaid funding imperils billions of dollars for the state's healthcare infrastructure at a time of severe budget constraints for the state and local governments. By some estimates Texas would draw down $164 billion from the federal government over the first 10 years of the expansion, at a cost of $27 billion in state dollars.
Perry, an unsuccessful presidential contender, is one of at least six governors who have vowed to reject Medicaid expansion money. They are playing politics with an economic reality that goes beyond party affiliation and ideology.
In a July 9 letter to Health and Human Services Secretary Kathleen Sebelius, Perry said he stood "proudly with the growing chorus of governors who reject the PPACA power grab. Thank God and our nation's founders that we have the right to do so."
"Through its proposed expansion of Medicaid, the PPACA would simply enlarge a broken system that is already financially unsustainable," Perry told Sebelius. "Medicaid is a system of inflexible mandates, one-size fits-all requirements, and wasteful, bureaucratic inefficiencies. Expanding it as the PPACA provides would only exacerbate the failure of the current system, and would threaten even Texas with financial ruin."
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The lambasting of the Medicaid expansion comes from the governor of a state that already operates one of the nation's most restrictive Medicaid programs. As a result, the U.S. Census Bureau reports that 26.3% of Texas residents were uninsured in 2009, the highest rate in the nation.
Instead of expanding Medicaid, Perry and other governors have called for block grants of federal money so that states can decide for themselves the best way to provide coverage for the uninsured.
With the state government opposed to expanding the Medicaid rolls, the burden of providing for the uninsured in Texas, as in many states, falls upon counties and municipalities. Those local officials who are already facing tight budgets are understandably not so eager to reject the federal government's offer to pay for 100% of the Medicaid expansion in the first three years and for 90% of the expansion beyond 2020.
In addition, hospital executives, who often carry political clout in the state legislature as the largest employers in their districts, have already started to push back against Perry's pronouncement.
Texas Hospital Association Executive Director Dan Stultz said in prepared remarks that the state's hospitals "recognize there are concerns with expanding the Medicaid population, but given the state's high number of uninsured, all options for gaining insurance coverage must be closely considered. Without the Medicaid expansion, many will remain uninsured, shifting costs to the insured and increasing uncompensated care to health-care providers."
Most tellingly, on the same day that Gov. Perry issued his broadside to Secretary Sebelius, WellPoint Inc. announced that it was spending $4.9 billion to acquire Amerigroup Inc. which describes itself as "dedicated to the Medicaid, SCHIP, SSI and Medicare programs in the State of Texas" and in 12 other states.
"The acquisition of Amerigroup expands our scale and further diversifies our business mix by deepening our investment in the high growth Medicaid marketplace. It also increases our flexibility to serve customers across the economic spectrum," Wayne S. DeVeydt, executive vice president/CFO of WellPoint said at the time. "We believe the acquisition is not only strategically important, significantly enhancing our future revenue and EPS growth opportunities, but will also provide an attractive return for our shareholders."
Clearly WellPoint is anticipating an expanded Medicaid population.
Once again, the point here is not to disregard legitimate concerns and arguments about the scope and role of government in healthcare.
It is instead to make the point that responsible leaders can do so without firing election-year broadsides against programs that affect the fiscal health of their cities and counties, and the physical health of millions of their most vulnerable constituents.
How will this play out? I suspect that after the Nov. 6 election, there is a good chance that many of fiercest critics of the Medicaid expansion in Texas and other states will quietly drop their objections. After all, this isn't about politics. It's about money.
