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Wanted: Directions for the Decade
An industry catches its breath following
ten years of tumult and turmoil
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Business New Haven
11/15/1999
By: Ken Warren
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After a decade that has often been described as the "go-go '90s," an entire industry seems to have paused. It has been a dizzying run for health care over the last decade, but the trends that fueled the decade's dynamism appear on the wane. Will they resurge, or be replaced? And by what?
Managed care reshaped the health care playing field with its promise of discipline and savings. While now firmly entrenched in the American lexicon, the survival of the industry as we know it can't be taken for granted
In 1998, for the second year in a row, the industry lost money, this time outspending income by $490 million. Weiss Ratings of Palm Springs notes that 100 out of 600 HMOs failed to meet the minimum risk-based capital guidelines recently adopted by the National Association of Insurance Commissioners, guidelines expected to become law in most states. Questions about long-term survivability have to be asked.In Connecticut we've seen the exodus of Kaiser, the last of the staff model HMOs. We've also watched the not-for-profits leap over to the for-profit World, including Blue Cross & Blue Shield and ConnectiCare. Provider-sponsored plans are bleeding heavily and boardroom discussions revolve around the relative merits of additional capital transfusions - or euthanasia.
With the difficulties that exist in making money in managed care, look for increasing consolidation. And if the red ink gets too deep, some managed-care companies may have no choice but to liquidate.
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The provider side of health care is a sprawling $1.14 trillion industry, and the biggest single piece of the action - nearly $450 billion - belongs to hospitals. Actually, they have largely evolved into health systems, another '90s trend that has given added leverage to big players, without proving fatal to those outside the tent. Milford, New London, Danbury, Waterbury and Griffin hospitals are a few of the unmarried who continue to meet the needs of their local markets. Are they the long-term answer? At the moment there is no unifying theory for systems propelling CEOs to action.We must also wait to see what kind of relief is in store for hospitals for a painful affliction visited upon them by Congress and the White House, benignly known as the Balanced Budget Act (BBA) of 1997. According to the Connecticut-based Lewin Group, BBA will peel away an estimated $71 billion from hospital Medicare reimbursements over a five-year period.If spread evenly, quick math tells us the 5,000 U.S. hospitals would stand to lose $14 million each. The exposure for some is much less; for others incredibly more.
CFOs are struggling with the numbers because there are few places to look to try and make up these numbers, short of staff cuts. Near-term, hospitals are bombarding Congress with calls for help that are likely to be answered, but the remedy is sure to restore only a portion of the funding.This situation gives hospital leadership reason to pause. Infrastructure needs continue to require attention. Funding losses in the millions of dollars are bound to trickle down to the timing of facilities construction and maintenance, as well as the acquisition of technology.
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Physicians continue to simmer. Having also lived with HMOs, they better understand how the game is played. MDs are well-positioned in the marketplace. They lobbied effectively in Congress and were spared the harshest cuts of BBA. Many have consolidated practices, realizing there are advantages today in being part of a medical team. The migration of a growing number of procedures to outpatient settings gives them the potential for valuable new revenue streams at the expense of hospitals.
While legislators try to build fences around managed-care plans, and hospitals try to reverse the Balanced Budget Act, physicians have a little more time to map out their agenda and move on it.Gliding profitably among HMOs, physicians and hospitals is the pharmaceutical industry. The combination of drugs coming to market, and aggressive marketing techniques for getting them out the door, has helped generate enormous revenues.
As the debate resumes on what can be done about rising costs of health insurance, the Hay Group reports that prescription drug costs accounted for most of the five-percent hike in health premiums from 1998-99. Drug costs rose an average of 15 percent last year; prescription drug purchases account for ten percent of the total medical-expense pie. Fueling the increase is the fact that the hottest-selling new drugs don't have generic alternatives (yet).Pharmaceutical profits haven't gone unnoticed, but in the present climate legislators will tackle hospitals, home care and managed care much sooner
than they will lace up the gloves to go after the drug companies. Of course, the drug companies realize the importance of staying off the political radar screen. For the near term they will be successful - and will be certain to keep up their PAC payments.
Other trends have the potential to shape components of the industry. Home-care agencies have been hit hard by decisions in Washington to reduce reimbursement. Slashed revenues have prodded the closing of many home-care agencies in Connecticut.In the past 18 months, 32 agencies in this state have relinquished their state licenses. Half consolidated and half closed. Nationwide, 2,700 closed in the same time period.
Data suggests that a sufficient number of providers are still available so that patients can get home care when they need it, but with the trend toward more closures, how long will supply be able to meet demand?
The health-care industry is in an unsettled period. If managed care rebounds, what will it mean for hospitals? If hospitals fail to get relief, what will it mean to employment and modernization of physical plants? If physicians successfully move more procedures into their offices, what will it mean for hospitals?
Much is at stake, so it is understandable why the industry has paused. After a few deep breaths, it will be interesting to see the direction all the players run.
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