Bending of cost curve becoming apparent

BOSTON—The bending of the cost curve in healthcare is starting to become apparent, said Martin Arrick, MBA, managing director of U.S. public finance for Standard & Poor’s Rating Services, speaking at the 2014 Connected Health Symposium.

Being from a bond rating agency, Arrick said he spends a lot of time talking with everyone from hospital leadership teams about their strategies for the future. “The profitability pressure will continue to grow. We believe value-based pricing and price transparency will emerge as key factors but they are slow to emerge. New, risk-based payment models are not yet broadly applicable or measurable and are slowly emerging.”

Providers are preparing for national health reform, he said, by cutting costs, strengthening their balance sheets, enhancing their infrastructure and aligning with strategic partners. “High-cost procedures and providers are at risk.”

It’s a complicated environment we’re in, Arrick acknowledged.

Since the Affordable Care Act became law in 2010, the credit impact has been less pronounced than the headlines suggest, he said. There is a political component but the market will probably keep reform going at this point. Healthcare reform is evolving slowly and balance sheets remain strong although operating margins are softer.

There’s early evidence that the expansion of Medicaid is helping hospitals, Arrick said. “The amount of money going to hospitals and systems is declining over time. Exchanges are part of that. They’re probably going to reimburse hospitals and systems at a slightly lower rate than the best payers. That’s a concern over time.”

Hospitals are seeing the need to get to more population health management but they tend to be conservative organizations, he said. “They don’t want to hurt their overall financial performance while getting from here to there even though they see the need to get from here to there. It’s all about baby steps. You can’t blow up an organization while doing a better job.”

Meanwhile, employer-sponsored insurance is declining and high-deductible plan membership is growing. “The next step after high-deductible plans is probably private exchanges. That’s going to put a lot more on the average person who will pay more and be more responsible for their healthcare.”

Ongoing incremental pressures continue, he said, and the outlook on the sector right now is negative. Over the past few years, hospitals have “cut costs with a vengeance and maintained some profitability. They tend to be very resilient organizations” but they are finding it difficult to keep up with all the changes, he said.

Hospitals the past few years have cut costs with a vengeance but they’re seeing more sources of competition. Hospitals should probably figure out ways to work with some of these businesses.

Much of hospital consolidation is due to financial concerns, he said. In a repeat of activity in the 1990s, these new, larger organizations benefit from scale, negotiating power and geographic reach. “People are trying to go for the next generation of cost cutting.” One way to do that is have just one department across an organization for activities such as human resources and legal. Service line consolidations are starting but are still rare, he said. Mergers and acquisitions will continue but for broader reasons than in the past.

Looking ahead, Arrick said his agency believes downgrades will exceed upgrades. Margins are getting squeezed. There’s a declining utilization trend, growth of risk-sharing arrangements, continued pressure on employer cost increases and “rising out-of-pocket expenses equals discriminating against consumers which equals volume and revenue decline which equals weaker financial profiles.”

There are positives as well, he said, such as time and energy spent on new business models, developing population health management and expanding system size and scale. That could translate to “lots of money for IT.”

There also are lots of uncertainties so providers need to really look at the role of new technologies and consumerism. “Think about how what you do impacts hospitals and health system. Who hospitals are competing with is changing. These are big questions we all need to be thinking of. It’s clear hospitals have to get into the risk business but getting in and succeeding are two different things.”