The year ahead is not only going to be a rough year for investor-owned hospital chains, but also it just might be the beginning of the end of their profitability in the long run, predicts Jeff Villwock, a managing partner at Atlanta-based Genesis Capital and a long-time hospital stock analyst.
The sinking economy is a big factor, of course, Villwock says. Rising unemployment and consumers hoarding their cash have already led to significant declines in elective procedures, and the forecast is for unemployment to climb as high as 10%, Villwock says. If you have a choice, people are not spending money right now, he says. Thats going to impact the hospitals, the ambulatory surgery centers, I mean everybody.
The investor-owned companies, at least, face the tough economic times and tight credit markets with enough liquidity to make it through 2009, Villwock says (Nov. 3, 2008, p. 32).
In the longer term, Villwock cites two culprits that are generally seen as good for healthcare service providers: healthcare reform that brings universal coverage and the aging of the population.
As Villwock sees it, the healthcare reform that is likely to take shape will have a devastating effect on private health plans. He expects a government insurance pool to be part of a healthcare reform plan that will have broad support among Democrats. This pool, like the Medicare program, should have general and administrative costs of about 3% of total costs. It will compete with commercial managed-care plans with general, sales and administrative expenses that are about 30% of their total costs. That will drive down premiums that the managed-care plans can charge, Villwock says, which, in turn, will cut the healthy 6% to 8% annual increases in reimbursements that those plans have been paying in recent years to hospitals and other service providers.
Its my personal belief that thats brilliant if youre a Washington bureaucrat who wants to control healthcare, Villwock says. Government can undercut the private insurers.
The growth in the Medicare population is a good-news, bad-news proposition, Villwock says. The growth rate for Medicare beneficiaries has increased from 1% annually a few years ago to 2% currently, rising to 3% by 2011, Villwock says. Theres going to be a huge increase in demand for healthcare services. Thats the good news, Villwock says. The bad news is, we cant pay for it. The growth in funding cant keep up with this growth in beneficiaries, so reimbursements will have to decline, he says.
Healthcare providersI am absolutely convincedwill not be able to make money on Medicare in five years, Villwock predicts.
He acknowledges that expanding coverage will cut down on bad-debt and charity-care expenses, but he believes that other losses will offset those gains. Moreover, he adds, the exploding federal budget deficit makes it all the more likely that provider reimbursements will be cut as they were in the Balanced Budget Act of 1997.
I think this business is going to be extraordinarily painful going forward. I think were pretty much done, Villwock says. He says his healthcare investment activities are leaving the United States, because I think the opportunities to make money are gone.