If adversity tests our strength, healthcare could be in for a real workout in 2002.
Continued fallout from the Sept. 11 attacks will heap new challenges onto an industry already straining under rising costs, bipartisan political bickering and nationwide staffing shortages.
Hospitals will be forced to shell out more on bioterrorism preparedness. Insurers will face rising demand for costly behavioral healthcare services. Vendors will have to scramble to supply new antibiotics. And physicians' pleas for better Medicare payments may fall on deaf ears as Congress remains focused on homeland security.
Add to that the economic slowdown-which is leaving more Americans without health insurance and compelling states to squeeze their Medicaid budgets-and you have a perilous outlook for the coming year.
Still, the industry has reason to view 2002 with guarded optimism.
Healthcare stocks are performing ahead of major indices. Investor-owned hospitals are sitting pretty and appear poised to offer a financial lifesaver to struggling not-for-profit providers. HMOs' bottom lines are improving as premium increases finally outpace medical costs. And robust merger activity should continue across the board.
Perhaps it's too much to assume that healthcare will be the engine that pulls the rest of the nation out of recession, as some pundits have suggested. Yet as you read Modern Healthcare's annual outlook for the new year on the following pages, see if you don't find yourself occasionally admitting, "Well, it could be a lot worse."
A temporary reprieve
On the information technology front, healthcare administrators can breathe a collective sigh of relief heading into 2002 now that a fast-approaching deadline for standardizing reimbursement transactions has been delayed a year. But the relief is only temporary, and congressional leaders are stiffening their resolve not to budge on other equally burdensome requirements of the Health Insurance Portability and Accountability Act of 1996.
The decision by Congress to postpone the compliance deadline for using standard insurance-related formats until October 2003 will take some of the heat off payers and medical facilities, but they still must deliver a detailed plan of action to HHS by October 2002, a deadline that could cause a lot of headaches.
At the same time, pressure is building for providers to make investments in information technology that improve patient safety and enhance clinicians' ability to make informed decisions. The combination of HIPAA compliance timelines and clinical-care management imperatives will bring IT to the fore in fiscal planning.
And the same law that gave the industry some breathing room on standard formats also reaffirmed Congress' insistence that privacy and patient-confidentiality regulations be implemented by April 2003 as scheduled.
Hospitals appear to be on the recovery trail. Although some financial troubles loom, the hospital sector as a whole may have seen its financial situation hit bottom in 2001.
Not too long ago, both for-profit and not-for-profit hospitals were reeling from the Medicare cuts of the Balanced Budget Act of 1997, as well as their own strategic missteps of investing in money-losing physician practices and health plans. That's in addition to a burst of merger activity that often failed to produce promised cost savings and, in some cases, generated as much instability as an attempt to unite two ends of a magnet.
Since then, however, hospitals have been forced to refocus on their core business of providing patient care. That shift has been driven partly by the financial need to concentrate on profitable business lines and partly by a sharp increase in demand.
Rating agencies report that although downgrades have continued to outpace upgrades at not-for-profit hospitals, the rate of downgrade activity appears to be slowing. Also, more of the downgrades appear to be hitting smaller players, indicating that large healthcare systems are making successful turnarounds.
That's not to say the nation's not-for-profit hospitals still don't face a barrage of financial and administrative challenges in 2002: Bioterrorism preparedness, the rising cost of prescription drugs, declining investment income, HIPAA compliance and the delay in updating Medicare outpatient payments are likely to fuel the bulk of boardroom discussions in the upcoming year, observers say.
Hospitals in many regions also will continue to grapple with surging demand for inpatient services, a trend that can cut both ways. Although many parts of the country still have more hospital beds than they need, some providers are becoming constrained to the point where they are having to divert ambulances to neighboring facilities. Many are even building new hospitals for the first time in years.
At the same time, many not-for-profits "are pretty tapped out" when it comes to cash they can use next year to fund major projects and offset losses caused by growing numbers of uninsured patients, says Linda Miller, president of the Volunteer Trustees of Not-For-Profit Hospitals. "Those that are fortunate enough to have endowments or investment income will be affected as well," she says.
Not-for-profit hospitals can visit the bond market to finance important initiatives, but despite historically low interest rates and renewed investor confidence, 2002 may not be an easy year to do so.
Hospitals in some parts of the country need basic infrastructure resources, while others require costly upgrades to medical and information technology systems, says the Rev. Michael Place, president and chief executive officer of the St. Louis-based Catholic Health Association. Meanwhile, the threat of bioterrorism hands hospitals yet another potentially huge expense.
"The amount of dollars gets so high that your normal bond financing mechanisms get strained," Place says.
Like for-profit hospitals, the "not-for-profits will have to finance (bioterrorism) preparedness, and they will not have extra dollars to do it," Miller says.
On the flip side
The outlook is brighter for investor-owned hospitals, which should enjoy solid operating results in 2002, although their stock performance may depend more on uncertainty for 2003 and beyond, analysts say.
"It may be the year of perception over reality" for the for-profits, says Frank Morgan, a healthcare analyst with Jefferies & Co. in Nashville. Reimbursements from managed-care plans and Medicare should continue to be strong for 2002, and there are no signs of slowing volume, he says. "The question is, what will happen beyond '02-will pricing falter?"
The disappearance of the federal budget surplus since the Sept. 11 attacks and the need to reauthorize healthcare provisions in the balanced-budget law make increases in Medicare reimbursements questionable, he says.
Medicaid reimbursements also are becoming more questionable, says Rob Mains, a healthcare analyst with Advest, a Hartford, Conn.-based brokerage firm. State budgets are stretched because the sliding economy is resulting in revenue shortfalls, and Medicaid is a big-ticket item that is bearing the brunt of emergency budget cuts, Mains says.
The uncertainty could have a cooling effect on stock prices in 2002, but operating trends remain excellent for investor-owned hospitals, Mains and Morgan agree. The bigger for-profit chains, including Nashville-based HCA; Tenet Healthcare Corp., Santa Barbara, Calif.; and Triad Hospitals, Dallas; will continue to see advantages from their better access to capital and their economies of scale, particularly in dealing with costly HIPAA requirements, Mains says.
Acquisition opportunities also should continue to exist, although the profile of the hospitals being purchased likely will be a bit weaker than those acquired in previous years, Morgan says.
Other operational obstacles raise questions about future performance. Notably, there's a nagging shortage of qualified clinical staff, with some markets being hit harder than others, making it ever more difficult for hospitals to meet increasing demand.
"The current nursing shortage is not cyclical, and hospitals will have to fundamentally change the nature of nurses' jobs, retain staff and keep expenses in check in order to be successful," Fitch analyst Anil Joseph said in a written statement.
Hospitals are having to compete for nurses with home health agencies, HMOs, pharmaceutical companies and recruitment firms. Many staffers are being hired away from nursing homes, where hard work and low pay make caring for the elderly unattractive.
In post-acute care, Medicare's prospective-payment system for inpatient rehabilitation, which replaced a cost-based system as of Jan. 1, has been long-awaited by for-profit providers such as HealthSouth Corp. of Birmingham, Ala., and RehabCare Group of St. Louis. In recent guidance for investors, for instance, HealthSouth said the new payment system should add 7 cents to earnings per share for 2002.
Nursing home operators will continue to monitor the effects of tort reform in Florida, where legislators passed a law in 2001 that caps some damage awards. Still, it appears that operators will continue to avoid and even exit litigious states such as Florida and Texas, with smaller local operators buying the reduced-price facilities.
The walking wounded
Among those in for the roughest ride this year is the medical community.
Physicians face a cut of 5.4% in Medicare reimbursements during the coming year, while average practice expenses are expected to rise by more than 6%, says William Jessee, M.D., president of the Denver-based Medical Group Management Association. Those numbers represent a double dose of bad news.
"That's a net swing of 11.6%," Jessee says. "Doctors are going to be screaming bloody murder. I think you'll start hearing the physician community in February or March screaming, 'I can't do this anymore.' I think there's going to be a big blow-up, and a lot of pressure on Congress."
Although Congress is now considering two bills that would limit that reduction to no more than 0.9%, Jessee says he believes that chances are "one in a hundred" that the 5.4% figure will be modified. In the midst of a recession and a preoccupation with homeland security, Congress isn't likely to heed the pleas of a lobbying constituency led by the American Medical Association, which has angered and alienated many lawmakers with its staunch support of a patients' bill of rights, he says.
"The heat is on physicians right now," Jessee says. "And a lot of Republicans are still angry with the AMA. They're delighting in holding the AMA's feet to the fire."
Meanwhile, as physicians continue to focus on issues such as bioterrorism and patient safety, they also must deal with another developing crisis-the skyrocketing cost of malpractice insurance.
That concern was underscored by St. Paul Cos.' decision last month to pull out of the medical-liability business, a move that will affect some 42,000 physicians in all 50 states. Those doctors will be forced to scramble for alternatives-most likely at a far higher price.
Add to that the approaching reality of HIPAA, and it's a gloomy outlook for America's medical community. In fact, one lobbyist believes a "convergence" of ill winds across the industry could have a disastrous effect.
"It's the perfect storm," says Kim Ross, vice president of public policy at the Texas Medical Association, the largest state medical society in the nation with more than 37,000 members. "There's no easy answer. There simply are not enough tax dollars and not enough premium dollars to support all the medically necessary care."
Managing in managed care
The nation's health plans should continue to reap the benefits of hefty premium increases and tighter cost controls implemented in 2001, even as they contend with increased healthcare spending, greater bargaining power among providers, consumer distrust and a barrage of lawsuits targeting leading HMOs.
Health plans intend to boost rates for large employers by 14% to 20% this year, the largest price increases since the early 1990s. They blame the increases on demand for less-restrictive plans, as well as a post-Sept. 11 spike in demand for behavioral healthcare services and prescription medications for anxiety and depression. Use of such drugs, observers say, is likely to remain elevated as employees and their families cope with future uncertainties.
In addition, HMOs finally are starting to gain control of spiraling administrative and pharmacy costs, thanks to their growing use of the Internet and multitier copayment plans, which shift more of the cost for brand-name drugs to patients. As a result, the managed-care industry should continue to enjoy increased profitability overall, though the bulk of smaller plans will remain in the red.
HMOs' continued exodus from the Medicare program could fuel a heightened consumer backlash against managed care. So, too, could decisions by more not-for-profit health plans, especially Blue Cross and Blue Shield plans, to pursue for-profit conversions.
PPOs will continue to gain ground in membership as HMOs struggle with an image problem. As consumers scorn restrictions on their healthcare options, HMO enrollment growth is expected to remain sluggish during the next five years. After a long period of sharp growth, HMO enrollment actually dropped in the past couple of years (See chart, p. 29). PPO membership, meanwhile, should climb at an average annual rate of 15% over the same period.
"Another big finding is that HMO costs have moved up close to PPO costs," says Sherilyn Fahlstrom, a consultant for William M. Mercer in Kansas City, Mo. "Therefore, there's lots of employee movement out of HMOs. Employers are dropping HMOs from their plan choices, because what's the point if there's no cost advantage?"
Managed-care plans also will face intense political pressure from both Washington and state legislatures as various patients' rights bills advance. Bills in Congress would give consumers and doctors more power to make medical decisions and to sue their health plans.
Supply and demand
Suppliers, the stalwarts of healthcare's "recession-resistance" economy, also have a busy year ahead.
In addition to keeping hospitals supplied with their pharmaceutical and equipment needs, vendors have to think about complying with war-readiness contracts struck with the Defense Department in more peaceful times. Meanwhile, drug companies are racing against the clock to meet the challenges of bioterrorism by putting development of vaccines and antibiotics on the fast track.
The war effort does not discount more mundane but still crucial matters such as industry standardization of product coding. The promise is that such efforts to streamline purchasing at all levels of the supply chain will eliminate costly errors.
Pharmaceutical companies are first up to the plate on this issue. They are under marching orders from the federal government as well as the top hospital group purchasing organizations to digitally convert the national drug code numbering on their products into bar codes over the next several years.
The conversion to bar coding will not be so easy on the other side of the supply chain-medical devices and equipment. In order to put the horse before the cart, purchasers first must push for universal product numbering on supplies other than drugs before they push for bar codes. And they are pushing for it.
Still, suppliers and purchasers continue to argue that the question of product coding is a chicken-or-egg-type question. Suppliers say they don't want to take the trouble to uniformly code their products if hospitals are not invested in the technology to read it. And although the technology is relatively inexpensive, hospitals don't want to invest in it if suppliers don't give them anything to read.
But with healthcare e-commerce rapidly consolidating into an electronic marketplace where all tiers of the supply chain meet, look for a break in the impasse.