The doom and gloomers turned out to be wrong.
After a decade or more of dire predictions about the fate of the healthcare industry made by consultants, studies and surveys, the outlook is positively bullish.
Draconian Medicare cuts, ruthless managed-care companies, spiraling medical inflation and a host of other economic ills were supposed to produce an Armageddon for the whole industry, especially hospitals.
But so far, the sky hasn't come crashing down. In fact, much of the industry seems to be doing just fine, despite some well-publicized tumbles by Columbia/HCA Healthcare Corp., Oxford Health Plans, Kaiser Permanente and PacifiCare Health Systems.
"There's plenty of money for everyone," says Uwe Reinhardt, a professor of healthcare economics at Princeton University. "I think the health of the healthcare industry is terrific."
New year-end economic indicators are emerging that give credence to Reinhardt's optimism. For example: Hospitals saw their aggregate profits jump nearly 25% in 1996 -- according to the American Hospital Association's own figures -- while national healthcare spending rose just 4.4%, the lowest increase since 1960.
Overall, healthcare spending in 1996 accounted for 13.6% of the gross domestic product, a number that has been unchanged since 1993.
The industry's good health has hospitals focusing on investment opportunities. "The biggest problem in the hospital industry is cash management," Reinhardt says. "The big job used to be allocating personnel to beds. Now it's, `Do I put (money) in stocks or bonds or real estate?' "
Cloudy crystal balls. Even the feds can be guilty of crying wolf.
A 1993 report from the U.S. Commerce Department predicted healthcare spending would top $1 trillion by 1994, but that milestone wasn't reached until 1996, according to a recent annual report put together by a team from HCFA's actuarial office. The report appeared in the January/February issue of Health Affairs (Jan. 12, p. 3).
With healthcare spending growing at record low rates, it also appears unlikely that bleak predictions the Washington-based Barents Group made three years ago will come true (June 5, 1995, p. 6). The study, done for the Henry J. Kaiser Family Foundation, projected per-capita health spending would grow 36% nationally between 1996 and 2000.
Per-capita health spending actually has grown at a progressively slower rate since 1993. In 1993 it increased 7.5%, but in 1996 it rose just 3.5%, the report in Health Affairs says.
And some of the news just seems to be getting better.
Last year's overall inflation rate was 1.7%, the lowest the country had seen in more than a decade. Consumer prices for medical goods and services rose 2.8% in 1997, down slightly from the 3% medical inflation rate in 1996.
The jump in hospital aggregate profits to more than $21 billion in 1996 translates to a 6.7% profit margin, another industry record.
Medicare bounty. Five years ago, Fairfax, Va.-based Lewin-VHI, a healthcare consulting firm, predicted the 1993 budget law would drive down average Medicare profit margins for hospitals to -11.8% by 1997.
Well, the Medicare spending restraints in that budget came to pass, but the whopping dip in Medicare margins didn't. The latest projections by the Medicare Payment Advisory Commission pegged 1997 prospective payment system profit margins at a strong 14.2% (Sept. 29, 1997, p. 2).
Now called the Lewin Group, the company says its studies serve as a wake-up call to the industry.
"It's really a prescription to get hospitals to change," says Robert Rubin, M.D., the company's president. "It's not something we would want to inscribe on a tablet and say that this is the way we want the world to be."
Rubin says the difference in PPS margins occurred because hospitals consolidated, decreased beds and reduced costs.
It's not unusual that some projections don't come true, says Hal Luft, a professor of health economics at the University of California at San Francisco. Healthcare, Luft says, is not like physics, which allows events to be forecast with much more certainty.
"We're not dealing in the context of physics, where billiard balls bounce off each other, and if you know where it's gone in the past, you know where it's going in the future," Luft says. "What we have here are organizations with people in them who learn. . . . It makes it much harder to make predictions, because people can see how they failed and try to correct that."
Healthcare companies responded to the dire predictions by becoming more efficient. Those efficiencies are bound to increase as healthcare companies harness the power of information technology to further streamline their business.
Cautionary note. But some of the news so far this year isn't as rosy.
Wholesale prices for acute-care hospital services jumped 0.5% in January, the highest monthly increase in more than two years, according to the U.S. Labor Department's Producer Price Index released in February. The PPI measures changes in net revenues collected by the producers of goods and services.
For all of 1997, wholesale prices for hospital services rose 0.4%, down from 1.4% in 1996.
A spokesman for the American Hospital Association says the price "blip" doesn't forecast a long-term hike in hospital prices (Feb. 23, p. 3).
But Milliman & Robertson, a national actuarial and consulting firm, released a report in February saying that hospital inflation is on the rise, a trend it says started in the fourth quarter of 1996 (Feb. 23, p. 3).
Who's sorry now? Even managed care doesn't seem to be having the negative effect on hospitals' profitability people expected it would. In fact, just the opposite seems to be happening.
"It's not the hospitals that are unprofitable; it's the HMOs," says John Erb, a principal at the William M. Mercer consulting firm and chief author of a study about health benefit costs. "Hospitals have done a good job reacting to managed care . . . by getting a lot of inefficiency out of the system, reducing expenses and negotiating decent contracts."
According to the most recent Mercer study of 1997 benefit costs, 85% of all U.S. employees are enrolled in some form of managed care: 35% in PPOs, 30% in HMOs and 20% in point-of-service plans.
But some HMOs are struggling, and positive forecasts about their financial performance last year didn't materialize.
Analysts had predicted that HMOs were digging out of the financial hole created by price wars.
A story published in MODERN HEALTHCARE June 30, 1997, (p. 64) trumpeted Norwalk, Conn.-based Oxford Health Plans' performance, reporting first-quarter net earnings of $34.4 million, an increase of 85.7% over the year-ago quarter. It also highlighted Santa Ana, Calif.-based PacifiCare Health Systems, which reported a 36.5% jump in net income to $43.5 million.
Oh, how times have changed.
Both Oxford and PacifiCare faced tough financial times last year. PacifiCare reported a loss of $22 million for 1997, compared with earnings of $76 million in 1996.
Oxford lost $291.3 million in 1997 on revenues of $4.2 billion. It earned $99.6 million in 1996 on revenues of $3.1 billion (March 2, p. 6).
Even Kaiser Permanente, for the first time in its history, posted a $270 million loss for 1997 on its hospital and health plan operations (Feb. 16, p. 4).
Squeezed. William Falk, a principal at the Towers Perrin consulting firm, says HMOs are "caught in the middle."
"It's the push back between the employers wanting lower premiums, HMOs wanting market share and providers saying there's a minimum price we can't go below," Falk says. "The HMOs, in their need and desire for increased market share, got caught in the middle."
In the past three years, Perrin says, employers have been extremely successful in negotiating favorable rates with the HMOs, and the HMOs have been willing to oblige to gain market share.
But that effort to gain market share is beginning to take its toll.
That's why Falk and others predict HMO prices will increase in coming years.
Part of that increase, Falk says, will be money spent by managed-care plans to improve their internal administrative procedures to address employers' concerns, such as timely payment of claims and data collection.
According to a new national study by Mercer, 1997 was a good year for employers.
Total health plan costs rose only 0.2% thanks in part to an unexpected spike in managed-care enrollment. The 12th annual Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans found total benefits averaged $3,924 per employee in 1997, compared with $3,915 in 1996, when employers saw a cost increase of 2.5%.
Benefits picture. Partly responsible for last year's slight increase were low inflation in the cost of medical goods and services and fierce competition among managed-care plans.
The slight cost increase for benefits should keep money in the pockets of employees.
"If costs remain flat, employees don't see any increase in their contributions either," Erb says.
But that good news comes at the expense of some workers.
According to the study, health benefit costs are down because fewer employers are offering medical benefits to future retirees. And those retirees who have coverage are moving rapidly into managed care from traditional indemnity plans.
The Mercer national survey polled nearly 4,000 employers and looked at benefit costs for active and retired workers.
The lower-than-expected costs to employers have allowed them to do other things with their money, such as hiring and training new employees, rather than budgeting for double-digit increases in healthcare benefit costs as they did in the late 1980s and early 1990s.
But while 1997 was a good year, employers don't expect the same this year.
More than 67% of those surveyed by Mercer expect benefit costs to rise in 1998. They are budgeting for an average increase of about 7%.
The increase likely will occur because managed-care companies will have to boost prices to recoup losses from their recent price wars, Erb says.
The Towers Perrin Health Care Cost Survey predicts the cost of large employers' health benefit plans will increase about 4% in 1998, up from a 3% increase in 1997.
The Towers Perrin survey included 150 Fortune 1000 companies. Collectively, the companies provide benefits to more than 2 million employees and more than 500,000 retirees and their dependents.
Those surveyed said in 1999 they expect an average increase of about 7% for managed-care plans and a more than 9% increase for indemnity coverage.
Bonding. Last year was a booming year for healthcare bond volume, too.
The year saw a total of $22.3 billion issued in tax-exempt healthcare bonds, compared with $16.6 billion in 1996, according to Richard Peterson, an analyst with Securities Data Co., a Newark, N.J.-based bond tracking firm. The all-time high for healthcare bonds was in 1985, when $29.6 billion was issued.
"This is primarily being driven by the consolidation we're seeing in the healthcare industry," says David Cyganowski, managing director and co-head of the healthcare group at Salomon Smith Barney. "Right now, nonprofit hospital systems, like their for-profit competitors, are working very hard to develop integrated delivery systems. . . . Critical to the success of an integrated delivery system is scale."
Organizational consolidation is driving the bond issues as companies restructure their balance sheets and take advantage of merger/acquisition financing, a move that can save companies millions.
For example, in mergers or acquisitions, not-for-profit hospitals can refinance bond debt they might not otherwise have been able to, Cyganowski says.
He says he expects these consolidations to continue for another two to four years, which means the bond volume will continue to rise or at least remain steady.
Prosperous docs. Another component of the industry's recent overall financial health is still missing.
The American Medical Association hasn't yet released its 1996 annual figures on physician incomes.
However, physician incomes have dipped only once since the AMA began tracking them in 1982. That decline happened in 1994, when the average income slipped 3.6% to $182,400, a drop blamed on an increase in managed care.
But average incomes rebounded the next year and climbed to $195,500, an increase of a little more than 7%. When that increase was announced, the AMA backed off its earlier claims that managed care was responsible for the 1994 decline. No wonder, since the AMA also reported that more doctors had managed-care contracts in 1995 than the year before (Jan. 6, 1997, p. 2).