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Winter 2012
Bigger & Brighter Solutions
Contents
Winter 2012 Letter from Dave and Alex
Finding a big platform solution for the 'new normal' market
Piecemeal reactions will not be sufficient to respond to three major trends reshaping national healthcare into a pay-for-performance world.
Forging a strategic alignment to face hospitals' challenges
Piedmont Healthcare is charting a path for success as they navigate the transition to a new value-based foundation.
Bringing breadth to the table in capital transactions
As consolidation becomes a critical consideration for health systems, Navigant Capital Advisors offers experts in assessing options, completing transactions and realizing benefits.
Navigant News
Navigant Advisors Offer their Expertise
Upcoming Events
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Finding a Big Platform Solution for the ‘New Normal’ Market
By David Burik
Health system executives and Boards never have been confronted with so much volatility, complexity and uncertainty. Medicare, usually the largest payer for hospitals, is no longer following its traditional path of raising reimbursement rates enough for hospitals to maintain their traditional cost and operating structure. Medicaid programs are under severe pressure as states scramble to balance their budgets. The volume of commercial insured patients is dropping at the same time that the quality of commercial insurance is declining, with higher deductibles and bigger self-pay exposure. Meanwhile, past management solutions – another performance improvement initiative, another strategic plan – are no longer adequate in an era of changing and more complex physician relationships, relentless financial pressure and recapitalization transactions that would have been unheard-of only two years ago.
Yet many hospital executive teams and Board members are reluctant to fully respond to these conditions. They’ve heard these Chicken Little warnings before, only to discover that marginal changes in the status quo were sufficient. They remember all the anxiety surrounding the last time the federal government attempted healthcare reform in the 1990s, before the economy took off, filled government tax coffers, and eased a corporate sense of urgency to overhaul company benefit plans. The need to tackle tough issues suddenly evaporated. And now, more than 18 months after passage of the Patient Protection and Affordable Care Act, some health systems are again skeptical of pundits’ predictions of a transformation in healthcare. They doubt, for example, that Accountable Care Organizations (ACOs) called for in the legislation will get off the ground when an ACO demonstration project flounders (though the final ACO rules published recently by the U.S. Department of Health and Human Services may make ACOs more palatable to physicians and hospital financial executives). Some skeptics also presume the entire reform movement will die with a shift in the Washington political winds.
But that skepticism, while perhaps understandable, misses the point. The only certainty in healthcare today is that the challenges facing health systems will not go away this time. They are not political in nature. They are not about healthcare reform legislation. They are about economics and market forces, which will accelerate, not recede. There are no signs an improving economy is going to mitigate the need for change. The triple threat of lagging reimbursements from Medicare, Medicaid and commercial payers is not a passing phase. The pressure to recapitalize and consolidate is not going to ease.
Collectively, these challenges represent the “new normal” in healthcare. Piecemeal reactions will not be sufficient to respond to a fundamental shift from the traditional fee-for-service model to the new pay-for-performance world that rewards health systems delivering cost-effective, high-quality care. Instead, health systems need “big platform solutions” that require new behaviors and a new mindset. More specifically, big platform solutions must address the needs and performance of both physicians and hospitals – addressing not just the traditional areas of opportunity such as labor cost, revenue cycle and supply chain, but identifying opportunities for improved care management and major reconfiguration.
We have one advantage in devising these big platform solutions: we can learn from Massachusetts, the nation’s laboratory of healthcare reform since it passed its healthcare insurance reform law in 2006. At Navigant, after completing more than 150 post-reform engagements with a wide range of health systems, physicians, payers and suppliers in Massachusetts, we believe three major trends will reshape the national healthcare landscape:
I. Recapitalizations are coming:
Thinly capitalized and distressed hospitals increasingly will seek partnerships, resulting in some transactions that could not have been predicted two years ago.
II. ACO tools are finding their way into standard contracts:
Managed care contracts offering incentives to use accountable care tools such as more generics, less high-end imaging and emergency department avoidance are being embraced by primary care physicians, triggering acceptance by specialists and hospitals.
III. Fiscal pressures are demanding cost reductions:
We’ve already seen performance improvement initiatives ranging from clinical documentation improvement to supply chain maximization. Structural expense reductions impacting care management, reconfiguration and economies of scale now are on the docket.
I. Recapitalizations
The number of hospitals and staffed beds were determined in a different era, when the population was growing, inpatient utilization rates were higher and reimbursements were increasing. Today, in many markets those trends are often reversed, ushering in a new era of consolidation and recapitalization. (See Table 1-1) Already 40 percent of 240 metro areas in a recent study had fewer health systems in 2010 than in 1990. The gap between high-performing and low-performing health systems will grow more pronounced. The high performers will be characterized less by favorable locations and market demographics, and more by their ability to document and deliver value, or higher quality at a lower cost. Capital strength to cope with the changes ahead will be a key differentiator. For example, as physicians are forced to select a health system partner, many will quickly identify and prefer a well-capitalized one.
How does a health system become better capitalized? For many thinly capitalized hospitals, the traditional methods of borrowing money, seeking a philanthropic donor or generating cash from operations are not readily available. A recapitalization transaction often is the only option. Recapitalizations have come in several variations in recent years, including capital partnerships, system mergers, insurer purchases and joint ventures. Some once-unimaginable transactions are being struck. Who would have predicted, for example, that the Archdiocese of Boston would agree to sell its health system to a private-equity firm? But that sale to an affiliate of Cerberus Capital Management last year provided Boston’s Caritas Christi Health Care system with approximately $830 million of capital support to complete a turnaround and position it for the future, while still retaining its current management, employment level, residency and teaching programs, and Catholic identity and charitable policies.
For health systems today, the first step is awareness of your capital position in your marketplace. Hospitals that carefully track their market share, number of physicians and clinical accomplishments sometimes are not as aware of their competitive capital position. And if that position is lagging, do not presume that waiting for just the right market condition is a good idea. For example, private-equity firms’ and other investors’ appetite for health systems may be limited, particularly if federal budget battles result in further cuts to Medicare. Timing is important.
Table 1-1
Merger Activity is on the Rise
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2010 Deal Highlights
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Two-thirds of activity occurring in 2010 occurred
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in the second half of year
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Consensus that volume will continue to increase, driven in large part by stand-alone hospitals looking for support
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48% increase in deal volume and six-fold +
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increase in deal value from 2009
Sources: Healthcare Finance News 2/7/11, 2/22/11; Irving Levine Associates
II. ACO Tools
ACOs are set to start in 2012 under the federal healthcare reform law. And although some of the energy behind Medicare ACOs has died, the goals underlying accountable care are alive and well. Momentum is shifting away from the Centers
for Medicare & Medicaid Services’ ACO platform solutions toward market-based alternatives. Tools wrapped up in the ACO concept can be taken out and put to work immediately under today’s reimbursement scenarios. You don’t have to be an ACO to say you are not paying for 30-day readmissions, or demand that more of your patients are getting comprehensive “medical home” care, or impose quality performance metrics. Tools that lie within the ACO concept can be implemented quicker, faster and better. For example, starting with Medicaid, the nation’s fastest growing payer, many states are prototyping medical homes, chronic care and managed care initiatives, and bundled payments. WellPoint has made a major investment in Care More, a Medicare Advantage provider. UnitedHealthcare is making large investments in its infrastructure to support accountable care tools. Aetna is pursuing joint ventures with partners. And Medicare has raised a national focus on readmissions, announced expansion of bundled payments, required ICD-10 coding – and generally is pursuing an aggressive payment-reform agenda regardless of the political and constitutional fate of health insurance reform.
III. Fiscal pressures
Under the “new normal,” health systems are feeling huge fiscal pressure on the cost side. (See Table 1-2)
• Volumes are lower, especially on higher-margin services such as surgery and imaging.
• Winning price increases is difficult.
• The payer mix is deteriorating; even with a brand-name insurance card, the deductible often is higher and net revenue is lower.
• Physician services, the fastest-growing part of many health systems, often is accounted for as requiring a “subsidy.”
Realizing they no longer have a positive margin in Medicare business, health systems are taking aggressive steps to address the fiscal pressures. They are recognizing, for example, that physician employment is not synonymous with effective clinical integration. Health systems also are recognizing they must capture both economies of scale and “economies of skills.” Despite the notion that small equals nimble and big equals bureaucratic, large health systems with economies of skills can move faster than smaller organizations. For example, to develop a stroke center, a large system could commit the people and time to develop a model and prototype program, smooth out the wrinkles, roll it out throughout the system and support it with advertising. Large health systems simply can bring the managerial bandwidth to respond to today’s volatile and complex world more effectively than smaller organizations. That said, that competitive edge lasts only if large health systems also put in place robust and ongoing training programs at the same time they install best-in-class infrastructure.
With all the new pressures facing health systems, managers and Board members are finding that old answers and approaches are not up to the task. In the past, when health systems went to the capital markets to secure financings, they turned to financial advisers to develop pro forma statements for support. But pro forma projections are only as good as the assumptions that underlie them, and today there are myriad other factors to consider in addition to the projected interest rate. Will you eliminate or consolidate services? Will you improve through-put? Major new operating assumptions must be constructed.
Table 1-2
Hospital Operating Margins by Year
Observations
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In 1997, the average hospital was making money on Medicare and had a Commercial margin just over 10%
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By 2006, the average hospital was losing nearly 10% on its Medicare business but was making over 20% on Commercial volumes
Source: Hospital and Physician Cost Shift; Payment Level Comparison of Medicare, Medicaid and Commercial Payers; Milliman, December 2008
The big platform solutions needed for the “new normal” world often require new business models, which in turn require fresh financial testing and model development – and more complex assumptions that reflect the best thinking of both strategic and performance improvement teams.
In the post-reform world, health systems must thoroughly re-evaluate their core strategies for achieving their mission goals. Meeting the challenges of value-based care is complex and comes with obstacles, but when done right can provide significant community, strategic, financial and clinical benefits
About the Author
David Burik is a Managing Director with Navigant Healthcare. He has more than 30 years of consulting experience within all segments of the healthcare industry. His expertise includes the definition and communication of key strategic issues, as well as the successful execution of platform solutions for those issues. He has a bachelor’s degree and master’s degree in finance and hospital health service management from the Kellogg School of Management at Northwestern University. For more information, contact David at dburik@navigant.com or 312 583-4148.
One Hospital’s Perspective on the Need for a Big Platform Solution
 Larry R. Kaiser, M.D., F.A.C.S.
President and CEO, Temple University Health System
Dean, Temple University School of Medicine
Sr. Executive Vice President for Health Sciences, Temple University
David Burik has provided an insightful look into the complexities faced by those of us charged with running healthcare organizations in the current, but ever-changing, social, political and economic environment. The ability to be nimble in managing change is critical and all options should be “on the table” depending on the location and the characteristics of a particular market specifically the degree, or lack thereof, of concentration on the provider as well as the payer side. At Temple University Hospital we face, among other challenges, the unique situation in being the de facto public hospital (Medicaid accounts for over 50% of discharges) in the largest city in the country without a public hospital or hospital district. We have taken significant costs out of our system but still find ourselves with a market share in the single digits similar to most of the other institutions in the unconcentrated healthcare market that defines Philadelphia with the difference being in the payer mix enjoyed by the others. We engaged Navigant to work with us to define strategies that will allow us to continue to survive in this very competitive marketplace since simply cutting costs will not be sufficient. The challenges for all of us really are just beginning, underscoring the importance of the expertise provided by Burik and his colleagues.
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