Health systems face tighter margins and more pressure to work closely with physicians as coverage expands and payers grapple to contain costs under health reform, said healthcare executives in New York last week at a healthcare finance conference.
Have debt will travel
Not-for-profits meet in N.Y., talk about changes
Executives gathered at the Waldorf Astoria for the Non-Profit Health Care Investor Conference said expected changes to healthcare delivery in the coming decade under this year’s health reform laws have spurred investment in technology, quality and cost-control efforts while leaving executives more cautious about capital spending. The two-day, yearly event lets borrowers showcase their operations and strategy for investors and credit analysts.
Sponsored by the American Hospital Association, the Healthcare Financial Management Association and underwriter Citigroup, the event has mushroomed beyond its origins as healthcare borrowers’ chance to pitch their strengths to municipal bond investors. The conference drew roughly 600 people, a record, including executives from 27 borrowers who pitched their organizations’ operations before investors. Those organizations had about $37.8 billion in outstanding debt last year. But among the attendees were also health system executives eager to hear how presenters—including some of the largest health systems with the strongest finances—are readying for reform.
“We’ve all been very careful about raising new money,” said Todd LaPorte, chief financial officer and senior vice president of Scottsdale (Ariz.) Healthcare. The system, which owns three Arizona hospitals, closed its books last September with $10.5 million in income on revenue of
$808.1 million, and was among the lower-rated borrowers to go before investors last week. Standard & Poor’s rates Scottsdale BBB+ while Moody’s Investors Services and Fitch Ratings list the system A3 and A-, respectively.
LaPorte said health reform has accelerated capital investment in clinical integration and information technology. Hospital executives, faced with the prospect that reform laws replace incentives for high-volume hospital care with those that reward efficiency and care in the outpatient setting, are less certain about capital projects to expand hospital bed capacity, he said.
The sector also anticipates declining margins as federally subsidized insurance squeezes hospital reimbursement by $155 billion in the coming decade, said LaPorte and other executives at the conference. Scottsdale executives’ project the system will see $40 million less in revenue during the next 10 years, despite expanded insurance coverage, as health reform provisions take effect.
Scottsdale used Medicare rates to calculate estimated revenue from patients expected to gain private insurance, a move LaPorte said was designed to yield a conservative figure. Commercial plans generally pay more than Medicare.
The system’s projected financial impact from the laws was an exception, but executives and attendees said new federal incentives have focused attention on efforts to improve quality and get hospitals and doctors working closer together.
Michael Tarwater, president and CEO of Carolinas HealthCare System, said executives lack enough information to estimate how insurance expansion and other reform provisions will affect hospitals’ revenue and capacity to borrow. “What we don’t know dwarfs what we do know,” he said.
Hospitals cannot yet calculate payment rates for new privately insured patients under reform, he said.
Meanwhile, Tarwater added, it is unclear how state and federal budgets will finance Medicaid expansion. “The honest answer is: ‘I don’t have a clue,’ ” he said. That uncertainty has left executives to bolster efforts already under way to make gains in quality and efficiency, he said.
Carolinas, which owns 12 hospitals and manages another nine, was not among the borrowers presenting to investors. Tarwater said the system, which already has efforts under way to improve quality, efficiency and closer coordination with physicians, said the conference is an opportunity to hear how other large systems have grappled with similar initiatives.
Ralph Lawson, executive vice president and CFO for Baptist Health South Florida, said IT is projected to be the system’s largest capital expense in the next five years. The Coral Gables, Fla., system owns five Florida hospitals and also did not go before investors. Lawson said the system has also begun to employ physicians, with roughly 50 on the payroll up from none five years ago. “I’m sure that will grow dramatically,” he said.
Health systems under reform will be pushed to do more with less, Lawson said. “We have to be extremely cautious about how we spend our money.” He estimates Baptist Health South Florida’s margins will drop to 3% to 4% from 5.5% to 6% in coming years.
Leah Binder, CEO of the employer-sponsored healthcare quality organization the Leapfrog Group, who addressed attendees, cautioned hospitals will also face increased pressure for more efficient care from employers, who expect to see their own healthcare costs climb as well. Employers are likely to resist efforts by hospitals to offset pressure on margins by raising private insurers’ rates. “It could get cranky fast,” she said.
Meanwhile, Richard Clarke, president of the Healthcare Financial Management Association, announced the professional group has launched an initiative with the CFOs and chief medical officers from 15 health systems to study accounting methods for the financial impact of quality efforts.
Clarke said, as it stands, health systems rely on various measures and many such calculations include the sticker price for services, which are widely acknowledged as inaccurate.
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