Dashboard Observations on 17 Niches and Specialties

Dashboard Observations on 17 Niches and Specialties; 7 Reasons to Worry About the Healthcare Economy; Is a Large Combined System Better?

1. Prospects for markets within the healthcare industry

The dashboard below highlights where we see expansion or slow down in different niches with healthcare. Of course, the success of a specific company or provider within an industry depends a great deal on its individual strengths, and the proficiency of its management team and its available resources.

Industry Status/Prospects
Hospitals and health systems 
Slow erosion to stable. Political power in part offsets substantial reimbursement risk; reduced inpatient cases; increased risk on patient receivables and increased deductibles; serious pricing pressure if movement of patients to exchanges; continued consolidation across industry. Certain hospitals and health systems that have the best quality, that develop leadership in taking on risk, that have market dominance, or that treat a specialized niche and are very lean in their operations will thrive. 
Ambulatory surgery centersSlow erosion. Reduced number of available physicians, core specialties remaining fairly independent, pressure on case numbers; reimbursement risk; some access to payor issues. Despite the slow erosion in the overall ASC industry, ASC business remains in the greater context a very good industry and business. It remains remarkable how different the revenue equation can be for ASCs from geographic market to market. 
Dialysis facilities 
Stable to growth. Continued increasing patient demand offsets some reimbursement risk; continued consolidation; reduced number of physician owned facilities.
Physician practices 
Slow to moderate erosion. Reimbursement risk depending upon specialty (see below); pressure on referral base and payor access.
Medical deviceSlow erosion to stable. Political power in part offsets some pricing pressure (e.g., industry relationship with Sen. Orrin Hatch); better international opportunities; patient demand continues to increase; substantial mid- and long-term pressure on domestic pricing.
Health information technology 

Urgent care
Stable to slow growth. Customer budget constraints (increased risk to customer available capital) offset by need to expand and improve systems in hospital and health systems.

Growth. Strong alignment with consumers and payors; slim margins.

Dental practice managementStable to growth. Growth dependent on payor mix, with pressure on Medicaid-dependent companies; increased state regulatory pressure.
Home health 
Stable. Little political power; fragmented industry undergoing consolidation; some reimbursement risk.
HospiceStable. Some political power; reimbursement risk; utilization risk constraints; consistent consumer demand.
Nursing homes 
Slow erosion to stable. Reimbursement risks for Medicaid-dependent providers and timing of payment from states impacts cash flow.
Behavioral health 
Growth. High patient demand for services; alignment with payors and consumers.
Anesthesia practice management
Stable to growth. Alignment with payors and hospital sector.
Pain management
Stable. Influx of physicians; increased reimbursement and utilization controls.

Slow erosion to stable. Reimbursement risk; Mature orthopedic practices seem to be very resilient in terms of their referral base and remain critical to the overall delivery of healthcare (i.e., as to the percentage of total dollars spent in orthopedics and the reliance on all facilities on orthopedics.
Spine care   Slow erosion to stable. Reimbursement risk; increased payor controls on surgery.
Stable. While some pressure on pricing at all levels, gastroenterologists in many areas remain in very high demand and remain very busy. 


2. Hospital and health system mergers

This remains a fascinating time in healthcare. We are continuing to see small to midsize facilities enter into affiliations and sales transactions. In contrast, we are also seeing some large systems (e.g., systems with $3 billion dollars or more in revenue) looking at merging with each other. Here, many questions arise with respect to whether the merger really makes sense from a cost savings or strategy perspective. Specifically, will the combined system achieve a truly dominant position where payors and employers must have the system in their health plans, or will the merger leave the system so burdened with costs and employees that it will ultimately need to engage in layoffs or other efforts to drastically cut costs? Will it allow for more strategic management or simply lead to a large system without clear priorities? Will the merger allow the health system to better serve managed care payors, deliver quality care and manage costs?  Will the depth in revenues allow for better investments in management, outpatient services, information systems and other capital projects?

For more discussion on this issue of whether hospital and health system mergers perform, please see "Is Bigger Always Better? Exploring the Risks of Health System Mega-Mergers" (Becker’s Hospital Review, March 18, 2013) and "Point-Counterpoint: Is the Rush to Hospital Consolidation Rash?" (Becker’s Hospital Review, March 26, 2013).

3. Healthcare spending

Here are seven observations on the current climate surrounding healthcare providers.

  • Government debt and the need to reduce spending. No matter how you slice it —and the sequester seems to be the most simple and obvious example of it — there is an increased recognition that the federal government must rein in its spending. Even those on the tax and spend side seem to view it as such. Through Medicare and Medicaid, the government is responsible for around 30-50 percent of the payments healthcare providers receive, and as a result, even small reductions in federal spending could amount to a lot of money coming out of healthcare.
  • Increased taxes. Increased taxes on high-earning individuals will only further compound the impact of sequestration by taking more money out of the economy that would be otherwise spent on goods and services, including healthcare. These increased taxes being paid by the largest tax payor blocs will take serious dollars out of the economy that won't cleanly recycle back in and may just go to service government debt. Where a larger and larger portion of the healthcare bill is paid by consumers, whether via deductibles or other means, this has a significant impact on the economy.
  • Tepid economic growth. Even before accounting for the sequester and increased taxes on income and the payroll, the economic growth rate was at 1 to 2 percent. When you then take another 3-5 percent out of the economy through taxes and costs reductions, it is hard to see where the country will have any economic growth. In March, the unemployment rate was steady at 7.6 percent. Real job creation was below zero when job growth (a 88,000 increase in non-farm payroll employment) is balanced with those exiting the workforce. Overall, the civilian labor force declined by 496,000 during the month.
  • Shifts to health exchanges. As insurance companies raise rates to meet the requirements of healthcare reform, it is increasingly projected that more of the population will move to healthcare exchanges. This shift to exchange-based health plans is concerning for healthcare providers, because the payment rates for these plans are uncertain. Small movements of well-paying commercial insurance patients to lower paying exchanges bodes very poorly for providers.
  • Tightened spending on healthcare. Economic problems will provide more pressure on employees and employees to cut costs, including what is paid for healthcare. Employees selecting health plans — either offered through their employer or exchanges — may lean toward lower-premium or high deductible health plans with less comprehensive coverage. These plans shift more healthcare cost responsibility on patients, which can create collections difficulties for providers. Similarly, employers looking to cut costs will reevaluate healthcare spend may elect to cost-shift to employees.
  • Provider profitability under pressure. Health systems are starting to report much lower profits in 2012 than in 2011, and the decrease in reimbursement and inpatient cases coupled with the percentage of healthcare costs patients are responsible for out-of-pocket will exacerbate these changes. The loss in some types of cases by systems leads to increased competition for other types of case by these systems and more pressure on the providers who survive based on such cases and patients.
  • Mergers and acquisitions. A few days ago, the New York Times reported that the first quarter of 2013 saw the lowest M&A deal volume since Q1 2010 ("Mergers Slowed to a Snail's Pace in the First Quarter, the Fewest Since 2003," April 2, 2013). We are still seeing a steady flow of deals in the healthcare sector.

4. Specialty physician practices

We are still seeing many specialty physician practices looking to remain independent. The decision to stay independent is largely driven by concern regarding future income. This concern largely stems from a lack of control over referral patterns and decreasing professional and ancillary reimbursement. Small changes in income lead to an explosion in physician/hospital transactions. For example, we saw a massive migration from private practice to hospital employment when the average cardiologist’'s reimbursement fell by about 15 percent. With most other specialties, once reimbursement falls by more than 10 percent, the interest of joining a hospital or health system tends to become significantly more acute. Until that point, practices seem more eager to remain autonomous, particularly if it's a group that has enjoyed long-term independence. We are also seeing more independent practices evaluate strategies for affiliating with other practices, either through ownership or collaborations designed to achieve increased bargaining power with payors. 

5. Playing to Win

I just completed reading a fascinating book, "Playing to Win: How Strategy Really Works" authored by A.G. Lafley, the former long-term CEO of Proctor and Gamble. He is mostly a disciple of the Michael E. Porter School of strategy. Lafley outlines a process for strategy assessment based on five concepts. 

  • What are the winning aspirations/goals?  
  • What field or market will you play in?  
  • What is the best approach to win?
  • What capabilities must be in place to win?
  • What management systems are required to support the effort? 

In exploring various businesses and opportunities with clients, I found the tools and concepts very useful and enjoyed it immensely.

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