12 Key Issues Hospitals Will Face in 2013

By Molly Gamble for Becker’s Hospital Review

In an Oct. 17 webinar presented by Becker’s Hospital Review, Scott Becker, JD, CPA, a partner at McGuireWoods in Chicago and publisher of Becker’s Hospital Review, commented on a dozen of the most pressing issues facing hospitals and health systems today.

1. Hospital-hospital consolidation. As hospitals continue to merge and affiliate, it presents a real concern whether independent hospitals can sustain their model and survive. Hospitals are merging or being bought and sold at a rate that continues to grow, driven by declining reimbursement, tight credit and the pursuit for more leverage with payors.

2. Hospital-physician alignment. The rate at which hospitals and physicians align is very market-specific. Mr. Becker referenced some studies that found roughly 50 percent of all physicians are employed by hospitals, while 80 percent of physicians have some type of financial relationship with a hospital.

“This is often driven by market competition,” said Mr. Becker. “In many small markets, once one hospital starts to acquire physician practices, the other hospitals believe they have to, to stay sustainable or retain volume.” The bottom line is that no hospital wants to be left in a position where they have no referrals from independent physicians.

3. Payor-payor consolidation. Mergers between payors were looming five to 10 years ago, well before healthcare reform. Now, payors’ dominance in certain markets has changed significantly. “Markets often had several payors, none too critical to that market, but now there are markets with a handful of very large payors,” said Mr. Becker.

The ideal market for a provider might be one in which a payor doesn’t have more than 25 percent of market power. But there are some areas today where payors have 45 percent of the market, leaving providers with less leverage.

4. Payor-provider consolidation. In some markets, payors may strike new relationships with providers to avoid dependence on any one hospital or health system. That was the case in Pittsburgh, where Highmark struck a deal to acquire West Penn Allegheny Health System. Highmark didn’t want to be in a position where University of Pittsburgh Medical Center had too much leverage, according to Mr. Becker. That deal recently fell apart, although Highmark is still urging West Penn to return to the negotiating table.

There is also another incitement for payor-provider relationships. “Payors that have lots of cash are investing in other provider businesses, partially to reduce healthcare costs, but also as private equity to make their companies more diversified in terms of where their money is coming from,” said Mr. Becker.

5. Sustainability of physician employment. The physician-employment model is generally the approach hospitals will take if they can afford it. “Employment works in a fee-for-service environment, and for no other reason, is a way to ensure [a hospital’s] referral base isn’t torn off by some other competing facility,” said Mr. Becker.

The expense associated with the employment model is the downside. For some large systems, the cost of maintaining large physician practices is beginning to grow. For some small hospitals, the inability to recruit physicians will make the employment model unsustainable. Also, as many hospitals grow more aggressive in their employment strategy to remain competitive, they lose discipline in hiring only the most productive physicians. As a result, hospitals may end up with a “full population of physicians employed, some productive and some not, leading to some financial problems,” said Mr. Becker.

6. Validity of alternative hospital-physician financial relationships. Aside from employment, hospitals are striking other engagements with physicians, such as joint ventures, medical directorships and service line co-management arrangements. The question following these types of deals is whether a financial relationship is the real imperative.

Today, many hospital executives are concerned when a significant portion of patient volume is tied to physicians who have no financial relationship with the hospital. “In an extremely competitive world, [those physicians] are viewed as unsigned free agents who could end up with someone else,” said Mr. Becker. As a result, some hospitals may try to strike a financial relationship with a physician regardless of whether they want the physician’s leadership — and that’s where the legality of the agreement comes into question. The hospital may want to cement the physicians’ referrals. “Why would a hospital need five different medical directorships in an area when they haven’t needed them previously?”

7. Hospitals with pro-physician cultures. One of the most critical factors in how well a hospital manages a physician practice is whether it has a culture that is relatively physician positive. “This doesn’t mean they need to tolerate prima donnas, but treat physicians as professionals,” said Mr. Becker.

Hospitals should also be hyper-competent in managing physician practices, especially “blocking and tackling” functions like the practice’s health information technology needs, while offering a solid compensation package.

“You don’t have to be the best paid system to retain the best physician group, but you have to be solid. … You have to be totally respectable in terms of compensation and paying well. Most people don’t leave for a few more dollars. They leave for other factors, but you want to take money off the table as a factor,” said Mr. Becker.

8. Physician shortage and leakage. Each day seems to bring a new forecast on the severity of the nation’s physician shortage, and Mr. Becker said the jury is out for the most part on how hard this will hit hospitals. Some experts and policymakers have predicted a 5,000 physician shortage in 10 years, while others have forecasted a 150,000 shortage in 15 years, and others have dismissed the shortage all together as political rhetoric.

Physician leakage is another concern correlated with employment. “When hospitals employ physicians, they expect those physicians will become quite loyal to their system,” said Mr. Becker. “When they don’t, we see boards and CFOs and CEOs concerned about why they aren’t getting all the cases from their employed physicians. As financial pressures loom, I think you’ll see more rigidity in trying to ensure employed physicians use hospitals 100 percent.”

9. Hospitals facing bankruptcy. Hospital bankruptcies generally stem from three causes: mismanagement, heightened competition or reimbursement issues. Sometimes, hospitals are simply in unfavorable geographic positions, and there isn’t much that can be done. Other times it is a matter of poor management: “We’ve seen hospitals that were overbuilt compared to their physician populations,” said Mr. Becker. He also mentioned another hospital that struggled when three of its top 10 admitters were picked up by another system, even though it was relatively profitable and large to begin with.

10. The likelihood of remaining independent. Mr. Becker cited a Kurt Salmon study that listed six key factors to assess whether a hospital can stay independent.

• Geography. Are there barriers to the hospital? Is it located in a remote or competitive area?
• Payor mix. “If you’re stuck in a market where a payor has too much clout, or you have a horrible Medicaid environment, it’s hard to stay profitable as other costs rise,” said Mr. Becker.
• Physician alignment. Does the hospital have a key physician alignment strategy? Is it around employment? What is the risk of another system scooping up key physicians? What is the risk of physicians retiring, and will those retirees be replenished with productive physicians?
• Asset base. How healthy are the hospital’s assets? Are there any key areas the hospital can invest in more? Does the facility need substantial renovation, relocation or other expenditures?
• Cost structure. Does the hospital have a high- or low-cost structure, and is this adjustable or not? What are its monthly costs? How many days cash on hand does it have? How wide are the margins, what is the hospital’s borrowing capacity and what is the pension situation?
• Quality of care. Hospitals must determine whether their quality can stand the test of increasingly sophisticated physicians and consumers. “If you’re sitting in a board meeting, and none of the board members would use the hospital, that’s a litmus test that the hospital may not have long-term opportunities,” said Mr. Becker.

11. Accountable care organizations. Hospital systems have led ACO development and there have been a larger number of physician groups involved in ACOs than initially expected, according to Mr. Becker. ACOs have been a large driver in hospital-physician alignment strategies. “In terms of trying to manage a shared savings network, you’re looking for stability,” said Mr. Becker. “That’s much easier to control through a tightly-tied network, where you’re responsible for physicians’ income.” As they take on more risk, hospitals want to control what they can through a protocol and knowledge of costs per service.

12. Physician burnout. In his experiences with physician organizations, Mr. Becker has heard leaders comment on how difficult it is to recruit physicians to leadership roles. That wasn’t the case 10 years ago, when physicians volunteered for governance roles and wanted to be involved. That enthusiasm is not as robust — or even existent — for some hospitals and physician groups today. “It seems to me that we’re overly estimating the extent of energy our nation’s physicians have at the moment,” said Mr. Becker. “Concerns about burnout are very real.”