From IT projects to quality initiatives to improved transparency, in '07 it's all about making the healthcare experience better, safer
What is the business outlook for healthcare in 2007? Three words: consumerism, consumerism, consumerism.
After years of turmoil emanating out of Washington for hospitals, the situation has become eerily quiet, relatively speaking. Although health issues were high on the priority list for Democrats during their successful campaign last year, no one is expecting any seismic changes for healthcare out of the nation's capital.
As a result, 2007 may be a good year for hospitals to look inward and prepare for the consumer revolution going on around them.
Commonwealth Fund President Karen Davis says she expects Democrats will make efforts to modify several prominent healthcare programs such as the Medicare prescription drug plan. Democrats might start off the year trying to change the law to allow the government to negotiate prescription drug prices, but "getting the president's signature is a big question," she says. There also could be efforts to expand the State Children's Health Insurance Program, which comes up for reauthorization this year, and to fund information technology.
Short of legislation though, the rise of consumerism, including the push for pricing transparency, quality measures and pay-for-performance programs are only going to intensify. "This interest in information has a lot of broad-based public support, but a lot of people believe it will help to improve care, so I think that will continue," Davis says. Ultimately, she predicts, payment reform will move to an even more global plane, with hospitals receiving reimbursement for "episodes of care" rather than mere hospital stays. Payers will be scrutinizing re-admission rates and post-acute services, requiring hospitals to align with other providers.
"I think the election in general was good for healthcare," Davis says. The newfound attention to consumers also means more attention to the people who provide healthcare, she says.
Still, that doesn't necessarily translate to a glowingly optimistic business outlook for hospitals. While the federal government might have its attention focused elsewhere, state and local governments are putting healthcare at the top of their agendas, grappling with ways to provide universal healthcare even as resources diminish.
"We actually think it is going to be a very difficult year ahead because there are a number of financial impacts that we're expecting," says Gail Donovan, executive vice president and chief operating officer at four-hospital Continuum Health Partners in New York. Although the situation is perhaps more intensified in New York than in the rest of the country, Continuum is anticipating a very tight state budget year with targeted cuts in Medicaid. At the same time, New York hospitals are anxiously anticipating the implementation of a sweeping series of recommendations that carry the weight of law for restructuring the state's outmoded hospital system. Next door in New Jersey, an advisory commission was formed at year-end to analyze the condition of the state's hospital system, a precursor, perhaps, to New York's reform-minded Commission on Health Care Facilities in the 21st Century.
Preparing for the onslaught of consumerism under the watchful eye of state and local government officials could be a predominant theme for 2007. The following is a look by Modern Healthcare's editorial staff at some of the significant trends to watch as we enter the new year.
Finance: Stability and pricing
Hospitals can look forward to another year of financial stability, giving them breathing room to concentrate on internal financial operations to prepare for the rising tide of consumerism.
For the first time in compiling its business outlook, the Healthcare Financial Management Association this year surveyed nearly 2,000 members to see what was on their minds, and the top themes were consumerism and the rapidly changing competitive landscape, while revenue-cycle improvement was a top priority for healthcare finance leaders in the coming year.
"One thing (members) do feel is that the transparency issue will continue to grow, especially at the state level, and we from HFMA are encouraging them to work with (policymakers) to meet the transparency challenge," says Richard Clarke, president and chief executive officer of the HFMA.
Pricing transparency has taken on a life of its own even though the rationale for it-high-deductible, consumer-driven health plans-is still getting the cold shoulder from patients. A Commonwealth Fund survey released last year found enrollment in consumer plans remains low, and satisfaction lags behind traditional comprehensive health insurance (See chart).
Nevertheless, the drive for transparency will take off without them, Clarke says. "Our position is that providing information that helps patients make effective decisions is what consumerism is all about," he says. Along those lines, HFMA is encouraging hospital finance chiefs to develop systems based on both quality and price that allow patients to do that. "It's all about building community trust, and double talk doesn't facilitate trust," Clarke says.
Last September, as a result of a billing lawsuit quietly settled in Seattle, 390-bed University of Washington Medical Center agreed to take some specified steps over a 12-month period to calculate and inform patients about what their out-of-pocket expenses will be based on their insurance coverage. Clarke says he expects to see more hospitals making similar efforts to not only publish meaningful pricing information, but also to estimate patients' out-of-pocket costs.
Pay-for-performance programs certainly will increase, and hospitals will be grappling with ways to both monitor performance measures and develop systems that fulfill quality requirements, Clarke says. More hospitals will also be standardizing their community-benefit accounting and reporting systems in response to a push by the Internal Revenue Service and Congress for the not-for-profit sector to justify its tax-exempt status.
"I think it will probably be a year of transition not too dissimilar from the previous year," Clarke says.
As was the case last year, Fitch Ratings is giving not-for-profit hospitals a stable outlook and expects slight improvement in operating performance at its roughly 265 rated hospitals, says John Wells, senior director at Fitch. The outlook is driven by the expectation that managed care and Medicare rates will offset the usual pressures such as rising capital needs, inconsistent volume trends and increased competition from physicians and specialty hospitals, he says. "We continue to see very solid management practices being implemented throughout related to revenue enhancement, physician alignment, and supply-chain management," Wells says.
Worrisome issues such as a slowing in the revenue growth rate, scrutiny of providers' tax-exempt status and growing numbers of uninsured and underinsured could start putting pressure on hospitals as soon as 2008, although it might be more of an issue in the short term at state and local levels, Wells says.
Physicians: Looking for a permanent fix
For the nation's doctors, Medicare reimbursement rates, which have been stagnant for the past year or so, continue to top the list of concerns in 2007. Even though Congress froze rates at the eleventh hour last month, averting a scheduled 5% cutback, the medical community continues to express anxiety about future payment rates and the formula used by the federal government to pay doctors who serve Medicare patients. Under the last-minute deal to freeze rates at 2005 levels, the government also will provide a 1.5% bonus-incentive to physicians who report on quality measures in 2007.
The legislation "provides an important but temporary reprieve for seniors and the physicians who care for them," says Cecil Wilson, chairman of the American Medical Association's board of trustees.
The Medical Group Management Association says it also will continue to work to persuade lawmakers to calculate payments on a formula tied more closely to physicians' costs. William Jessee, the MGMA's president and CEO, says physicians continue to face a "major imbalance between reimbursement rates and costs they incur to care for Medicare beneficiaries."
The legislation represents a major step in efforts by Congress to tie payment to the kinds of pay-for-performance programs favored by the CMS. In late November, the Chicago-based AMA announced that its Physician Consortium for Performance Improvement had developed 151 quality measures for use in the incentive programs as part of a deal struck with key lawmakers last February.
"The physician community has not shied away from developing new quality measures per our agreement with congressional leaders," Michael Maves, the AMA's executive vice president and CEO wrote in a November letter to Charles Rangel of New York, ranking Democrat on the House Ways and Means Committee. "And we hope Congress does not miss the opportunity to address the cuts facing physicians and their patients."
Rick Kellerman, president of the American Academy of Family Physicians, says his organization will focus this year on reimbursement rates along with several other key issues, including an expansion of the State Children's Health Insurance Program and strategies to reduce the ranks of the uninsured-a number that now stands at almost 47 million. He says he doesn't anticipate a national health insurance program anytime soon, but expects several states to follow the lead of Massachusetts in crafting innovative ways to provide basic health coverage to more individuals.
The AMA's interest in pay-for-performance programs underscores the growing importance of these plans, which provide financial incentives for doctors who demonstrate quality improvement in clinical care. As recently as 2003, only about 35 of these incentive programs were in effect. That number has jumped to at least 160 in 2006, according to Med-Vantage, a San Francisco-based health informatics company. That number should continue to increase, experts suggest, even though some in the medical community worry about the pace and scope of change.
Construction: Still booming
Meanwhile, the healthcare construction boom that has swept the country over the past four years or so is expected to continue its torrid pace this year. Total healthcare construction-including hospitals, medical buildings and nursing homes-will jump 11% to an estimated $45.5 billion in 2007, according to Heather Jones, an economist with FMI Corp., Raleigh, N.C., a management consulting firm. The figure is projected to grow another 10% in 2008, rising to $50.1 billion in total healthcare construction, she says (See chart).
"It's really strong growth projected (for the healthcare industry) through 2010," Jones says. "It's going to be one of the strong segments for a couple of reasons, including population increases and the aging of the baby boomers. Also, infrastructure is aging, and it needs to be replaced."
For-profits: Bad debt rising
Publicly traded for-profit hospital companies disappointed investors during 2006 because bad debts and weak patient volume both squeezed profits, says Darren Lehrich, healthcare stock analyst for Deutsche Bank. Volume is showing signs of recovery, but bad debt is still a question mark for 2007, he says.
Lehrich expects volume to grow about 1% to 1.5% on a same-facility basis for the chains as a group in 2007. The year-over-year comparisons will look good given 2006's weakness, he says.
Hospital companies have already done what they can to mitigate bad debt, Lehrich says. "There's really no silver lining to this problem that I think stems primarily from the growth in uninsured" patients, he says. "That continues to be a national healthcare issue." Deutsche Bank conducts a national volume survey of hospitals, and Lehrich is waiting for the survey to indicate that the self-pay portion of the payer mix is stabilizing before he can be comfortable about bad debt. Fitch Ratings, in a recent report, noted that much of the bad-debt expense in 2006 represented one-time charges that companies took as they changed their accounting methods. Those methods changed because the companies are collecting a lower percentage on self-pay accounts. Lehrich agrees that the companies are unlikely to have to take similar charges in 2007 unless that percentage declines further.
Tenet Healthcare Corp., Dallas, continues to be a company in flux, Lehrich says. Tenet's volume has been wracked by the turmoil of the past four years, although the company got some closure on that turmoil in 2006. Tenet negotiated a $900 million fraud settlement with the federal government and, separately, another settlement with the government to end the criminal kickback case of its 291-bed Alvarado Hospital Medical Center, San Diego. As part of the latter settlement, Tenet agreed to sell Alvarado and has a deal pending to shed it. Even with the settlements, Lehrich says, "They have a lot of legacy issues to overcome in the market, a lot of negative things that overhang them." Tenet is trying to change physician behavior and recultivate those relationships to produce referrals, but that's a difficult thing to do, he says.
Triad Hospitals, Plano, Texas, bears watching in 2007 because of the heavy pressure the company faces from shareholders. A group of funds controlled by TPG-Axon Capital Management has criticized the company for spending too much on acquisitions and capital projects and not enough on increasing returns for shareholders. Triad is in good enough financial shape that it could take on as much as $1 billion in debt to fund a share-repurchase program in order to placate shareholders, Lehrich says.
Specialty hospitals: Honeymoon over?
As a new year begins and Democrats prepare to take control of Congress, proponents of physician-owned specialty hospitals are uncertain if the honeymoon they've enjoyed since the August end of a federal moratorium on such facilities is now over. The new political leadership could present a challenge for physician-owned hospital advocates, who traditionally have had support from Republicans on Capitol Hill.
"We rank No. 2 on Pete Stark's list of healthcare priorities," says Molly Gutierrez, executive director of Physician Hospitals of America-formerly the American Surgical Hospital Association-about the ranking Democrat on the House Ways and Means health subcommittee and longtime opponent of physician-owned facilities. "That is something we haven't faced in awhile. It is apparent to us that the AHA is certainly not going to give up its fight on physician-owned hospitals." In a recent written statement, Stark (D-Calif.) says he has been concerned for years that physician-owned hospitals are pulling profit centers out of community hospitals, and in the next Congress, he hopes to "work with colleagues on both sides of the aisle to stop their proliferation."
To prepare its members for potential battles with opponents in the coming year, the PHA plans to strengthen its support among Democrats and also establish state coalitions of physician-owned hospitals to help promote the group's message. Gutierrez says these coalitions exist in Kansas, Louisiana and South Dakota. She is currently working on one in Texas; California, Ohio and Oklahoma are likely possibilities in the future. There are about 133 physician-owned hospitals nationwide, and Gutierrez says she estimates there will be 12 to 15 new physician-owned facilities in 2007.
GPOs: The heat's turned down
Things started looking brighter for group purchasing organizations in 2006. Last year, the Senate Judiciary Committee's antitrust subcommittee held its fourth hearing investigating the business practices of GPOs, but legislation regulating the industry was never introduced.
A subcommittee spokesman says more will be known about the pursuit of legislation when the members organize later this month. However, a statement from the subcommittee's Democratic chief counsel, Jeffrey Miller, hints that the probe could be winding down.
"Our investigation uncovered many serious obstacles to competition operating to the detriment of patients and hospitals, and the industry responded by implementing substantial voluntary reforms and by pledging to end the most harmful of these practices," Miller says. "While we are pleased with this progress, we will continue to monitor this industry to ensure that competition prevails and that these voluntary reforms are permanent and lasting."
Curtis Rooney, president of the GPO trade group Health Industry Group Purchasing Association, says he is unsure what the subcommittee might do, but he is happy the chief counsel used the word "monitoring" and not "investigating." Rooney also says he expects Congress to be looking for ways to reduce healthcare spending, and thinks GPOs can play an "education role" in helping the government cut costs.
"Negotiations are what we do best," he says.
Labor: The return of ratios
Healthcare's unions ended 2006 with mixed results that are likely to mean turmoil and increased labor activity for hospitals in the year ahead.
In a blow to labor, a federal agency set new ground rules in October for organizing some of healthcare's most sought-after workers: registered nurses. The long-awaited decision-which ousts certain midlevel RN managers, called charge nurses, from the rank-and-file-is expected to become a flashpoint in campaigns as unions jockey to organize healthcare workers. And nursing ratios, which failed to gain a foothold outside California in 2006, will likely re-emerge with momentum in 2007.
Hospital trade groups in Illinois and Massachusetts, specifically, expect to see an aggressive push from unions for a bill that mimics California's precedent-setting law to mandate hospital nurse-to-patient ratios. A victory in either state would be seen as a significant win for unions actively seeking to woo the nation's largely nonunion registered nurse workforce.
The California Nurses Association, which scored its first victory outside its home state in Chicago nearly two years ago, is expected to again push Illinois ratio legislation into the limelight. "Ratios are clearly part of the picture," says the California union's spokesman, Chuck Idelson, though he declined to give specifics on the union's Illinois legislative agenda.
In Massachusetts, hospitals are preparing for an intense battle after a nurse-ratio bill grabbed headlines and cleared one chamber in 2006. "The nurses union in this state is a potent political force," says Paul Wingle, a Massachusetts Hospital Association spokesman. "This is the sole and all-consuming legislative agenda item. We are girding for it," he says.
Legal: Awaiting FTC ruling
Hospital executives and healthcare antitrust attorneys await the Federal Trade Commission's decision in the Evanston Northwestern Healthcare merger. A decision favoring the FTC staff and upholding an earlier administrative law judge's ruling compelling ENH to divest Highland Park (Ill.) Hospital would automatically be challenged by ENH to the 7th U.S. Circuit Court of Appeals in Chicago. But if the full commission overrules its staff, the case is over, says healthcare antitrust attorney Toby Singer of the law firm Jones Day in Washington.
In its 2004 merger challenge lawsuit, the FTC alleged that three-hospital ENH illegally exploited its market power to raise prices.
"I predict that hospital merger enforcement will increase after several years of being dormant," Singer says, noting that if the FTC rules against ENH, it will be at least one year before the case is heard by the 7th U.S. Circuit. "In the meantime, the FTC staff will look to whatever guidance that comes from the commission in its ruling and will look for more cases."
Singer says a series of nurse wage price-fixing lawsuits filed in 2005 and 2006 against more than 30 hospitals and health systems should move to the front burner as attorneys seek class certification for them. In those lawsuits nurses allege that hospitals and health systems illegally shared wage and salary data and conspired to underpay nurses.
Scott Becker, a healthcare attorney with McGuireWoods in Chicago, expects to see more antitrust scrutiny as hospitals and health systems continue to acquire stand-alone hospitals. He foresees less legislative scrutiny over tax-exempt hospitals, as House Ways and Means Chairman Rep. Bill Thomas (R-Calif.) and Senate Finance Chairman Chuck Grassley (R-Iowa) surrender their titles to Democrats. "But I think we'll continue to see more specific reviews by the IRS of individual hospitals and how they meet their exempt purposes."
Quality: O'Leary era ends
The biggest news this year on the quality improvement and patient safety fronts could involve either 5 million people or just one individual.
Last month, the Institute for Healthcare Improvement launched its 5 Million Lives Campaign which seeks to prevent 5 million hospital injuries over the next two years and, in the months ahead, the Joint Commission on Accreditation of Healthcare Organizations is expected to name a new president to replace Dennis O'Leary, who's retiring at the end of the year and has led the organization since taking the helm in 1986 at age 48.
"Obviously, it will be a transition year," O'Leary says. "We expect to have a busy year, which will include having my successor onboard with an overlap of three months-if not six months-and have a seamless transfer of authority. … Keep your eyes peeled for a puff of white smoke."
O'Leary says transitions in Congress may have more effect on the JCAHO than changes in its own leadership. JCAHO critic Grassley, as stated, is out as chairman of the Senate Finance Committee, and JCAHO supporter Nancy Johnson (R-Conn.), who was defeated for re-election, is being replaced as chair of the House Ways and Means health subcommittee by JCAHO critic Stark, who, O'Leary says "doesn't have anything nice to say about the Joint Commission."
As a result, O'Leary says he expects that Stark will summon him to testify sooner rather than later.
Other JCAHO developments will include expanding its Quality Check Web site (qualitycheck.org) to include nonaccredited organizations, holding a second summit on preventing wrong-site surgeries, and resolving standards on credentialing, privileging and leadership for governance bodies and management. On the last issue, O'Leary says there may be some "fire and brimstone," but substantial issues have been settled. He says the JCAHO will be launching initiatives to make care safer by improving efficiency and reducing waste, to look at how healthcare IT can be used to improve patient safety, to improve emergency preparedness and to promote cultures of quality and safety.
One of the interventions of the IHI's new campaign is the reduction of methicillin-resistant Staphylococcus aureus infections. Marty Arizumi, spokeswoman with the Colorado Health and Hospital Association, says her state is gearing up for public reporting of orthopedic and cardiac surgical-site infections and central-line infections, and that a number of other states are preparing to do the same.
Kala Ladenheim, program director at the National Conference of State Legislatures' Forum for State Health Policy Leadership, agrees with Arizumi and credits the Consumers Union advocacy group with pushing infection-reporting legislation through the states with its Stop Hospital Infections campaign. The organization's Web site states that infection-reporting legislation has been passed in California, Colorado, Connecticut, Florida, Illinois, Maryland, Missouri, New Hampshire, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont and Virginia.
"People understand it, and it's obviously something that shouldn't be happening," Ladenheim says. "It's really easy to tell the story while some of the other healthcare quality stories are more complex. It's also a money-saver and a good political issue."
IT: Consumerism, again
If there is a next big thing in healthcare IT in 2007, it will be the role of-you guessed it-consumers in this sector of the industry, according to a consensus of experts.
While at year-end in 2006, coalitions of major employers and payers both unveiled ambitious plans to try to empower their employees and plan members with personal health records, continued development of data-dependent quality improvement programs, private and public sector pay-for-performance schemes, all will have an impact on the healthcare industry, IT experts say. "I don't know that there is going to be one thing, and that may even be the story, because we've got a bunch of things going on," says Stephen Lieber, president and CEO of the Healthcare Information and Management Systems Society in Chicago.
"I think you're going to see more and more development around tools for the consumers, especially from employers, trying to use the consumer to be the vehicle to bring about change in healthcare. I'm just not sure it will develop fast enough to be the big story for 2007 because it's still too early."
But Steven Waldren, the physician director of the Center for Health Information Technology at the AAFP disagrees.
"I think it will happen in the consumer space," Waldren says. "I think we'll see some big players not typically in healthcare IT start trying to provide services to consumers. The Dossia project is just the first of many," he says, referring to the PHR joint-development effort launched in early December by corporate giants Applied Materials, BP America, Intel Corp., Pitney Bowes and Wal-Mart. The following week, the Blue Cross and Blue Shield Association and America's Health Insurance Plans uncorked their own PHR project.
Laura Adams, president and CEO of the Rhode Island Quality Institute, a statewide health information exchange, says regional and state health information organization members will be pressuring vendors for products to do the kind of quality improvement that will be in greater demand in 2007.
"I think increasingly health information exchanges and IT proponents are going to have to articulate IT's role in quality improvement a lot better than we have," Adams says. "Everybody is going to be under enormous pressure for transparency and accountability, and that technology is just going to have to produce," she adds.
Insurers: At the tipping point?
The managed-care industry is likely to eke out at least one more year of solid profitability before the long-favorable underwriting cycle slowly tops out. Buoyed by moderating medical-cost trends, plush cash reserves and a surge in Medicare members, analysts expect health insurers to enjoy average earnings gains of about 15% in 2007-comparable with 2006, though down markedly from the 30% increases averaged from 1999 to 2004.
But analysts warn that as competition for commercial members continues to heat up, insurers may be compelled to offer discounted rates, effectively sacrificing their profit margins. Health plans also face tougher contract negotiations with providers, and there's concern the new Democrat-controlled Congress-which has vowed to make controlling healthcare costs a top priority-will institute changes that could dampen growth.
"Managed care is essentially at the tail end of a very profitable cycle," says Standard & Poor's credit analyst Shellie Stoddard.
Both disease management and consumer-driven healthcare will gain considerable traction this year as insurers work to keep a lid on medical spending, and employers test out new ways to control fast-rising benefit costs. According to a recent survey by Mercer Human Resource Consulting, 14% of employers said they intend to offer their workers a consumer-driven plan in 2007, up from 6% last year and 2% in 2005.
Industry consolidation should also continue at a steady clip, as smaller insurers merge to remain competitive and larger insurers look to fill gaps in their product lines. But expect providers, lawmakers and consumer advocates to challenge more of these transactions on antitrust grounds.
Meanwhile, competition should remain fierce in the Medicare market as private insurers vie for the billions of dollars in federal incentives earmarked for them over the next decade under the revamped Medicare Advantage program. According to the CMS, a record 426 Medicare managed-care contracts have been signed for 2007, up from 364 last year and 204 in 2002.
Also, to pre-empt greater government regulation, the health insurance industry will be pushing its own package of proposals to expand access to affordable healthcare-primarily through the private sector. "Insurers are conscious of changing political tides and a renewed populism," Stoddard says. "They are proactively engaged in healthcare policy development, hoping to avoid greater government interventions."
PLAN VS. PLAN
Percentage of privately insured adults age 21-64 extremely/very satisfied with their coverage
2005 2006
Comprehensive(1) 70% 76%
Consumer-driven(2) 63% 63%
(1) Comprehensive health plan with no deductible or less than
$1,000 (individual), $2,000 (family)
(2) Consumer-driven health plan with deductible of at least
$1,000+ (individual), $2,000+ (family), with savings account
Source: EBRI/Commonwealth Fund Consumerism in Health Care
Survey, 2006
THE BOOM GOES ON
Projections for total U.S. health construction spending
2006 $41 billion
2007 $45.5 billion
2008 $50.1 billion
2009 $55.1 billion
2010 $60.1 billion
Source: FMI Corp.
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By Cinda Becker
