ERDMAN E-News – The Implications of the Senate’s Better Care Reconciliation Act for Hospitals and Health Systems

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The Implications of the Senate’s Better Care Reconciliation Act

for Hospitals and Health Systems

The Bottom Line

For hospitals and health systems, the combination of utilization increases, higher costs of capital, and declining reimbursement means margins are shrinking and investments in acute program optimization, physician alignment, and retail health expansion are necessary. Market strategy must be revisited around clinical, operational and capital plans while lawmakers struggle with health reform and lenders and investors tighten their reins on capital.

 

The Context

On June 22nd, the much-awaited Senate health reform bill was made public: The Better Care Reconciliation Act (BCRA). A score by the Congressional Budget Office (CBO) concluded it would reduce the deficit by $321 billion and increase the ranks of the uninsured by 22 million over 10 years. The bill’s deficit reduction is achieved by a 25% cut to Medicaid funding and elimination of subsidies for 11 million people who purchase insurance through the healthcare marketplaces.
The BCRA’s deficit impact is higher than the House-passed American Health Care Act ($321B vs. $119B) and coverage impact similar ($22M vs. $23M). The major distinction between the two is in timing: The Senate proposes to phase out Medicaid funds more slowly and extend cost sharing subsidies for marketplace enrollees for two years before they’re phased out. Otherwise, the two are similar (See Table One).

Reaction by GOP Senators has been mixed: at least 4 think the BCRA doesn’t go far enough in repealing the Affordable Care Act. At least 5 think it’s cuts to Medicaid too harsh. That leaves the fate of the BCRA in limbo. So, while there’s optimism among hospitals that DSH payment cuts might be restored in FY18 and the Senate might not pass a Repeal law, the reality is the GOP led Congress will use its budgetary leverage to reduce federal funding for Medicaid and Medicare. That’s the reality for hospitals.

And It is also clear key elements of the Affordable Care Act will remain intact for 12-24 months, so for hospital strategists and planners, the window of opportunity to access capital and re-design care delivery strategies is narrow.

 

How has the market reacted?

The financial markets have had mixed reactions to the Washington DC drama: investor-owned systems saw their stocks increase as investors think the impasse may result in cuts being delayed. Moody’s, Fitch and S&P, whose assessment is especially important to not-for-profit hospitals, remain cautionary about the acute sector and predict the bill would have negative credit implications for hospitals. Their forecast is especially tepid for hospitals in states with slow economic growth that primarily depend on Medicaid and Medicare reimbursement.

 

The Implication for Hospitals and Health systems

Given the uncertainty of Repeal and Replace legislation and certainty that cuts to Medicare and Medicaid are inevitable, four assumptions should be considered by hospital strategists and planners:

1. Access to and costs of capital will increase: Lenders will raise rates in tandem with the Federal Reserve’s announced plan to raise rates three times this year. For some organizations, taking advantage of credit markets today with rates at relatively low rates is prudent, even if accompanied by slightly downgraded debt.

2. Demand for inpatient care is moderating and outpatient services is increasing: Moody’s projects outpatient growth will continue as hospital operators invest in additional points of access, i.e. primary care offices, urgent care centers, freestanding emergency departments, ambulatory surgery centers, imaging centers and retail operations. Not surprisingly, according to Modern Healthcare’s 38th Annual Construction & Design Survey, more than 83% of survey participants reported their biggest business opportunities are in designing and building outpatient facilities including medical offices, urgent care and retail clinics and stand-alone emergency clinics.

3. Hospital operating margins are shrinking: Through 2025, labor costs are forecasted to increase 4-6% annually, drug costs are up an average of 6.7% annually and uncompensated care to $1.1 trillion including $296.1 billion in hospital care. The Urban Institute predicts that balance sheet write-offs will quadruple in the next decade, as the ranks of the uninsured people and under-insured people swell.

4. Physician-employment will necessitate Investments in their clinical, operational and strategic positioning: One in three physicians is now employed by hospitals. Hospitals must carefully but deliberately aggregate their physicians with ancillary and alternative health services into clinically integrated, operationally efficient, readily accessible, strategically located facilities: they’re the hospitals front door. And these investments must be made coincident with the implementation of MACRA; the new payment system for physicians that ties their compensation to performance, increased competition from alternative site providers, (urgent care centers, retail clinics) who are gaining third party coverage, and Medicare’s new site-neutral payment policy.

 

What does it mean for hospital planners and strategists?

1. The efficiency, scale and scope of operations should be evaluated and enhanced. Bigger is better. Alignment trumps independence. Multi-disciplinary care management close to homes and workplaces coupled with digital capabilities is the new hub of health system activity, replacing inpatient services as the backbone of the organization’s competitive strategy.

2. A comprehensive retail strategy is vital. Strategic investments that enhance accessibility to the hospital/health system’s clinical portfolio should be accelerated. As consumers and employers play a more direct role as purchasers, virtualized services and access points close to workplaces and communities are paramount to gaining a greater share of the market. Three strategies at the top of the list are:

  • Clinical program rationalization: Centralization and standardization of key inpatient clinical programs to achieve optimal quality, concentrated volume and favorable positioning around total cost of care. Doing higher volume procedures in few sites should get strong consideration.
  • Primary Care: Development of high-volume, comprehensive primary care centers in strategic locations to accept capitated payments, manage population health and attract targeted populations. Co-locating internists, dentists, optometrists/ophthalmologists, mental health professionals, nutritionists, pharmacists and health coaches in accessible sites, augmented by digital health technologies that connect patients and care teams is foundational to hospital/health system positioning.
  • Urgent care centers (UCCs): payers, employers and consumers are increasing their use of UCCs as a cost-effective alternative to emergency care and patient capture core strategy. Designed, built, staffed and equipped appropriately in the right locations, urgent care centers serve as the front door for patient relationships and contracting advantages with payers.

3. Secure capital now. Lenders are ready to invest in organizations with plans for market optimization. Strategic partners are interested in joint ventures that expand the scale and scope of the hospital’s capabilities. The window of opportunity is open as capital costs are relatively low.

ERDMAN’s Perspective:

Inaction is risky. Timely action toward prioritizing capital investments, centralizing efforts in inpatient programs, expanding and connecting providers and patients, and increasing the efficiency, scale and scope of the system’s programs and services is necessary.

ERDMAN’s Health System of the Future offers a customized blueprint for optimizing your strategic footprint to optimize return on capital, competitive positioning with payers and quality, access, and branding differentiation with consumers.

For smart planners, it’s not about bricks and sticks; it’s about strategic design and efficient building of the health system of the future.

Further the discussion at info@erdman.com

At ERDMAN, we believe that the questions of new service offerings, population health, patient experience, new care models, and facilities are not separate, isolated challenges. We believe that by looking at these challenges through multiple perspectives simultaneously, we come up with more effective and efficient solutions. Through our Integrative Thinking, we take on the complex challenges of healthcare to help our clients build healthier communities.

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