Among the many looming threats hospitals will face in 2021 is the rise of so-called payviders—insurers that have bought or partnered with medical groups and other providers.
“The line between providers and payers is getting blurrier and blurrier over the course of time with major payers taking significant positions in the provider space,” said David Morlock, a managing director in Cain Brothers’ Health Systems M&A group.
Such deals exploded in 2020, a trend that will likely continue this year. That doesn’t bode well for hospitals, as these deals usually entail managing patients’ cost using global budgets. That means keeping them out of the most expensive settings—namely, anything involving a hospital.
The 2021 financial outlook for healthcare providers is more difficult to predict than ever, as so much of it depends on the trajectory of an out-of-control pandemic.
While many had expected the crisis that began in earnest in March 2020 to be contained by year’s end, it’s clearly far from over.
“It’ll be more of a two-year event,” said Megan Neuburger, a managing director with Fitch Ratings. Neuburger studies investor-owned hospitals, and she’s not forecasting a complete earnings recovery for them until 2022.
COVID-19 vaccines carry promise, but the rollout will take months and it remains unclear how many Americans will get vaccinated. In the meantime, cases and deaths continue to climb, underscoring the urgency of the undertaking.
Still, experts who follow the industry say they foresee some intriguing trends playing out this year, one involving a specific area of outsourcing. But the hard truths of lower patient revenue and higher expenses aren’t going anywhere in the near term.
“It’s impossible to predict an exact date when we get back to the new normal,” said John Langenderfer, senior vice president and director with Huntington Bank. “Clearly I believe it’s going to take most of the year.”
The coming year probably won’t see the kind of abrupt, catastrophic revenue fallouts from the government-mandated shutdowns of spring 2020. But the pandemic will certainly temper volumes.
“The volume recovery is key and obviously COVID will have a lot to say about that,” said Richard Miller, chief business strategy officer for Northwell Health in New York, a market that was slammed in the spring and is now seeing cases rise again to a lesser degree.
Not-for-profit health systems lost 30% to 40% of their revenue in spring 2020 because of elective service suspensions, but were able to recover a “material” amount of that by the third quarter, according to a report from Moody’s Investors Service. That said, Moody’s predicts those systems’ median operating cash flow will decline 10% to 15% in 2021.
In a fee-for-service marketplace—which much of the country largely still is—patients like those being treated for COVID are much less profitable than those coming in for surgeries such as hip replacements or cardiac stents. “When you crowd out surgical business because of medical patients, it’s going to strain margins for sure,” Morlock said.
Health systems could increasingly encounter burnout among their caregivers this year—if they haven’t already—and should consider ways to give them stretches of paid time off, said David Burik, a partner with Guidehouse and leader of its payer/provider division. Maybe someone who worked 1,800 hours on a COVID unit gets two weeks of paid time off, he said.
“We’re stressing the people in the system, and one way or another, that will have financial consequences,” he said.
That’s one thing Peter Markell, chief financial officer of Mass General Brigham, is worried about. Spring 2021 could be a tricky time as staffers who’ve worked tirelessly over the past year request vacation time.
Markell said the Boston-based health system will have to figure out how to backfill for that. (They’ll have to do it without Markell, as he’s retiring at the end of March 2021.)
Mass General Brigham, formerly Partners HealthCare, posted a steep operating loss in its fiscal 2020, which ended Sept. 30: $351 million on $14.1 billion in revenue, a -2.5% margin. That was largely because the health system couldn’t perform non-essential procedures between March and May in order to preserve capacity for COVID patients. So far in fiscal 2021, the system has been performing better, Markell said.
“We’re much better prepared for going through this second surge now,” he said. “We know how to balance caring for COVID patients and staying open for the non-COVID patients.”
Not-for-profit Northwell was inundated with COVID patients early on and had to ramp up staff and supply spending as a result. That combined with lower procedure volumes prompted the 23-hospital system to lose almost $247 million on operations in the first nine months of 2020 on $9.6 billion in revenue, a -2.6% margin. That’s despite having recognized almost $900 million in federal stimulus grants.
Michele Cusack, Northwell’s CFO, said COVID affected every line on the system’s profit and loss statement.
“Baselines changed,” she said. “The new normal is not yet set.”
Aside from the temporary setbacks of 2020, the long-term trends affecting provider finances are the same, Neuburger said. Nothing about the pandemic is going to change for-profit hospitals’ profitability and cash outlooks in the long run. That said, it’s a mature sector, so look for constant, slow growth rather than dramatic revenue and earnings spikes, Neuburger cautioned.
The same trends will exist post-pandemic regardless of who controls the chambers of Congress, Morlock said.
“Accessibility and affordability of healthcare are critical issues going forward and will continue to be critical and will need to be addressed by providers,” he said.
The rise of ‘payviders’
Meanwhile, the payvider trend isn’t showing any signs of slowing.
By Guidehouse’s count, more payer-provider partnerships were announced in 2020 than in the past five years combined. By far the biggest example is UnitedHealth Group’s Optum Care subsidiary, which has more than 53,000 doctors and 1,450 clinics nationwide.
The arrangement can take a lot of forms, but usually has insurers buying or partnering with medical groups, who then manage patients’ health using global budgets.
Several factors are driving the trend. One is the increased importance of Medicare and Medicaid in the health insurance business. Insurers are also increasingly pushing risk onto providers. And while a decade ago providers were more apt to start health plans on their own, nowadays they find risk more palatable in partnerships, Guidehouse’s Burik said.
A big area where this is happening is the Medicare Advantage market. A number of primary-care operators have sprouted up in recent years specifically to treat Advantage patients, with the goal of reducing costs and keeping the savings. They get paid a fixed monthly rate to treat those patients, and take on financial risk if they need more care.
Staffing costs will stay elevated
Hospitals’ staffing costs—accounting for roughly half of their expenses—will likely stay elevated this year as the demands of COVID continue to necessitate traveling nurses and overtime and premium pay.
That will continue to be the case until COVID vaccination ramps up. In the meantime, many health systems will continue to rely on contract staffing. A recent KPMG analysis found that travel nurses’ pre-COVID to COVID bill rate went up by 10 percentage points more than that of permanent nurses.
“Whoever touted that the demise of the nurse staffing company was near was not correct,” said Dr. Ross Nelson, principal and national healthcare strategy leader with KPMG.
Markell, of Mass General Brigham, expects elevated staffing costs to continue for at least a couple of months. “We’re all scrambling to get them,” he said.
The pandemic has heightened competition among payers and providers with respect to their never-ending dance of claims and denials.
With more payers using automation and artificial intelligence to quickly comb through and reject medical claims, providers are increasingly investing in the same technology to prevent as many denials as possible. That’s meant a lot more providers turning to outsourcing in lieu of doing the work in-house.
“There is a lot more interest in outsourcing than there has been in a while, frankly,” Guidehouse’s Burik said.
That’s been a boon to revenue-cycle vendors, and the trend could be even stronger in 2021.
Revenue-cycle vendors are also positioned to become a hot area of private equity investment, said Amber McGraw Walsh, a partner with McGuireWoods. The stronger candidates are those that offer more of a “soup to nuts” revenue-cycle management and technology solution, combining features like claims processing, data analytics and supply management, she said.
“All these things that can come together in one big solution, I absolutely think that’s going to be an area that private equity continues to look at pretty hard,” McGraw Walsh said.
One such deal was Golden Gate Capital’s investment in Ensemble Health Partners, a Cincinnati-based firm that offers revenue-cycle outsourcing and a suite of other services aimed at improving providers’ operations.
Northwell has a hybrid model in which certain revenue-cycle functions are outsourced to UnitedHealth Group’s Optum360 and others are done by Northwell’s own team. Miller said he was initially skeptical when everyone started working remotely, but accounts receivable collection has remained strong during the pandemic.
Remote work will probably become permanent for many staff members, said Northwell’s Cusack. Before the pandemic, up to 30% of the system’s revenue-cycle team worked remotely. Once it’s over, only about 20% will return to the office, she said.
“Pre-COVID, people looked at revenue cycle as a fixed, physical cost,” said Guidehouse’s Burik. “Coming out of this, more folks are saying, ‘Well, maybe it’s a virtual, variable cost. And by the way, is it really something I want to invest in as a core competency?’ ”
A big year for investment?
Some analysts predict systems will see strong investment returns in 2021 driven by stock market gains.
Stronger operating leverage across the companies that constitute the S&P 500 will be part of what drives those equity gains, said Sameer Samana, senior global market strategist with the Wells Fargo Investment Institute. Those companies’ projected earnings for this year are roughly 10% higher than pre-COVID, partly because they’ve trimmed expenses during the pandemic, he said.
“Corporate earnings this year will hit all-time highs that will be enough to drive equity markets also to all-time highs,” he predicted.
But some of the broader economic growth that’s projected for this year—especially with COVID vaccines rolling out and the potential for additional congressional stimulus legislation—appears to already be priced into the stock market, which could dampen its performance this year, said Ross Mayfield, an investment strategy analyst with Baird.
“I think it might be a good year, but not as great a year as we think it should be, particularly in the back half of the year,” he said.
Stable debt costs
On the borrowing front, health systems aren’t likely to notice significant swings in interest rates this year compared with 2020. The Federal Reserve recently indicated it plans to keep rates on federal funds at or near 0% until the labor market improves. “At the short end of the curve there’s a pretty big anchor there,” Mayfield said.
Refinancing to get ahead of rising interest rates was a bigger conversation a few years ago, and isn’t likely to happen as much now, Fitch’s Neuburger said.
“The macro economic effects of the pandemic and associated monetary policy response have put that dynamic on the back burner for now,” she said.