Health care industry outlook
Volume 6, Winter 2021
While the announcement of a COVID-19 vaccine and its disbursement at the end of 2020 was certainly a light at the end of the tunnel for the public and the embattled health care industry, hospitals and health care systems know the journey to recovery is far from over. Communities continue to see virus surges and hospitals face capacity concerns. Health care organizations must take a realistic look toward the future and begin preparing for what could be several challenging months before the pandemic’s impact is behind us. From addressing patient care and pricing needs to understanding regulatory challenges and new investment and acquisition opportunities, 2021 could be a year of fits and starts. Those organizations that plan for change and remain nimble will lead the way.
- Resilience, persistence and agility will be key to recovery for health care providers
- The need for price transparency has taken on increased importance for organizations
- Health care technology investment and deals continue to provide opportunities
- No Surprises Act could reduce total patient responsibility for care and reduce total provider revenues
- Cybersecurity and data protection continue to be a point of concern
Is there a light at the end of the tunnel?
The health care industry’s response to COVID 19 has been one of resilience, persistence and commitment, especially by front-line caregivers. The pandemic has significantly shifted industry trends and accelerated the pace of change. As a result, leadership is being forced to reevaluate strategic plans to determine and evaluate how best to deliver care going forward.
Kaufman Hall’s December 2020 National Hospital Flash Report indicates that operationally, and financially, November was a challenging month for hospitals and health systems nationwide. Margins and volumes fell, revenues flattened, and expenses rose as states moved to retighten social distancing guidelines. Margins have been down consistently since the start of the pandemic, but have fluctuated from month to month. Even with mass vaccine distribution on the horizon, the report predicts that “October’s downturn likely will continue as COVID-19 rates rise throughout the fall and winter. Hospital and health system leaders are bracing for difficult months ahead, as the combined forces of the pandemic and seasonal flu drive many individuals, and local and state governments to recommit to stricter preventive measures, causing many to delay nonurgent procedures and outpatient care. The result will exacerbate volume declines and could further destabilize hospitals financially, with a potential return to the significant losses seen in March and April.”
To date, Department of Health and Human Services (HHS) has distributed approximately $109 billion of the $175 billion allocated to the Provider Relief Fund (CARES Act) as of mid-November, according to data released by the department. In an effort to provide additional relief, Congress voted, in December, to appropriate additional dollars to the provider relief package and changed the rules (yet again) with respect to how lost revenue is recognized.
Understanding the financial reporting and compliance requirements associated with CARES funding will continue to be important in 2021.
While it is unclear what impact and lasting influence the pandemic will have on delivery of care from a financial perspective, one thing is certain, telemedicine is not going away and has arguably had the most profound impact to the health care industry in 2020. With claims up 3,000% year-to-date over the same period the prior year, it is clear that continued investment in telemedicine and related technology will be important.
Health Catalyst reports that with the shift to telehealth, providers are entering a new business landscape as COVID-19 has broken down barriers between traditional providers and more modern telehealth and disruptive care delivery companies. In the article titled, Six Strategies to Navigate COVID-19 Financial Recovery for Health Systems, Health Catalyst reports that health care’s new competitors fall into three main buckets:
- Telehealth-only providers: Companies like MDLive and Teladoc use real physicians and offer a variety of specialties and focus a significant portion of their business on working with insurance providers and self-funded health plans to provide subscriptions.
- Direct primary care: The direct primary care companies include Go Forward, Crossover Health and One Medical. Go Forward is similar to a modern subscription concierge practice. Crossover Health partners with employers like Apple, Microsoft and Amazon to deliver care directly to employees. One Medical is a modern concierge practice that charges an annual fee and bills fee for service.
- Large corporations: Amazon, Walmart and CVS Health are entering the health care space. Amazon offers a virtual care program for their employees as well as in-home deliveries and more. They announced a partnership with Crossover Health in July to pilot employee health clinics near large centers. Walmart has opened care clinics and a virtual care system and CVS continues to build their hubs.
“Teledoc, Doctor on Demand, Go Forward and Crossover Health have business models that overlook coding, CPT codes and modifiers, and other procedures traditional organizations must follow … Amazon, Walmart and CVS Health have traditional, straightforward pricing and are redirecting care away from the traditional system into their own care delivery system,” according to the article.
As large corporations and other providers increase competition for patients, they will compete with traditional provider organizations for patients. According to a survey, 79% of primary care physicians have experienced some form of burnout and four out of five employed physicians say their health systems employers are not doing anything to combat it. With a loss of clinicians, comes loss of revenue. The disruptive care delivery companies are introducing new models of care that appeals to clinicians because they “offer less hassle,” with no coding and documenting for quality measures and the like. There’s often less stress due to lower patient volumes, and with a lot of the concierge practices and even telehealth, clinicians can somewhat choose how much volume they want, as well as more flexibility.
The pandemic is not over, and no one can anticipate what the next 12 to 24 months will bring and how it will affect health care providers. Leadership and front-line caregivers will need to continue to be resilient, persistent and quick to respond.
Price transparency: Why this, why now?
On Nov. 15, 2019, Centers for Medicare and Medicaid Services finalized rules requiring all hospitals to make publicly available and produce annually a machine-readable file of standard charges that includes gross charges, negotiated charges, a self-pay walk-in rate, and minimum and maximum negotiated charge for all services. In addition, CMS defined a list of 300 services whose discounted cash prices, payer-specific negotiated charges, and de-identified minimum and maximum negotiated charges must be made publicly available in a searchable, consumer-friendly format.
CMS will be monitoring compliance with methods that include evaluation of complaints made by individuals or entities, review of analysis of noncompliance by individuals or entities, and audits of hospitals’ websites. If a hospital is noncompliant, CMS may take steps ranging from a written warning notice to imposition of penalties up to $300 per day and publicizing it.
In an era of rising health care costs and diverse consumer buying preferences, the need for price transparency has taken on increasing importance.
There are many factors driving this demand with expenditures being one of them. U.S. health care expenditures and rates of inflation continue to lead the world and dominate federal expenditures. U.S. health care spending grew 4% to $3.8 trillion in 2019, which equates to $11,582 per person, according to an analysis by CMS' Office of the Actuary released Dec. 16, 2020. This compares to 4.7% growth in 2018 and is similar to industry averages of 4.5% annual rates. The Society for Human Resource Management (SHRM) reports that “large employers project that their health benefits costs will rise 5.3% in 2021, although COVID-19 expenses are fueling uncertainty about overall expenses. The group’s 2021 Large Employers’ Health Strategy and Plan Design Survey was conducted in May and June 2020, and it captured responses from 122 large employers offering coverage to more than 9.2 million employees and dependents. Seventy-seven percent of the respondents each has more than 10,000 employees.”
SHRM reports that premiums and employees’ out-of-pocket costs are estimated to reach $14,769 per employee, up $197 from 2019. Total costs are projected to rise to an average of just over $15,500 in 2021. The pricing transparency rules are meant to provide patients the information they need to make educated care decisions and reduce cost. President Donald Trump, whose administration proposed the rules, is quoted as saying, “We believe the American people have a right to know the price of services before they go to visit a doctor.”
The American Hospital Association, Association of American Medical Colleges, Children’s Hospital Association and Federation of American Hospitals have issued statements on behalf of hospital systems indicating that they believe these rules will increase confusion because they do not achieve the goal of providing patients with out-of-pocket cost information, accelerates anticompetitive behavior among health insurers, and stymies innovation in value-based care delivery models.
While the pricing transparency rules may be a step in the right direction, we remain skeptical that these rules alone will enable patients to know the prices of services before receiving treatment. Pricing in the health care ecosystem will likely remain opaque until we have greater data interoperability between payers, providers and patients.
According to an article published by Healthcare Financial Management Association (HFMA), written by Kevin Shears and Chris Sukenik, the new rules and general market trends have six important implications for providers:
- Increased pricing visibility will expose substantial price variations among providers. This creates a need for hospitals and health systems to focus on defining and communicating their consumer value proposition. News stories will likely present providers in a negative light across major metro markets. Health systems will need to focus on sharpening and delivering on their value propositions for consumers, including individuals and employers.
- Health systems will need to deploy strategic pricing to maintain and strengthen their market
position. Health systems will have to develop a more nuanced pricing strategy to address the issue of significant price variability among providers in their area and ensure continued success in an increasingly value-focused market.
- Providers will experience unit rate compression, and most of this rate movement will be price
declines. With the veil of negotiated rates lifted, health plans will be able to show how their payment rates compare with those of competing health plans in the market. As a result, health systems with rates above the market average, will be under pressure to accept lower prices during negotiations and will likely experience unit rate compression.
- Providers should prepare for expanded efforts to implement reference pricing. Given the impact of COVID-19 on the economy, employers will grow increasingly willing to pursue reference pricing strategies as part of business recovery plans to control health care costs.
- Highly profitable commercial volume and market share will shift, likely from higher-priced
organizations to lower-priced ones. With commercial lives shrinking as a share of population in most markets nationally, largely because of the COVID-19 crisis, the competition for commercial lives has become more intense. Market shifts in commercial volume from higher-priced to lower-priced health systems will deteriorate the financial performance of health systems on the wrong side of the volume shifts.
- Centers of excellence strategies will become an important vector for volume growth. Publicly available pricing data will accelerate the development and adoption of COE programs. The organizations that win with COE strategies will likely do so by engaging clinical leadership to quickly gain experience in developing bundled payments, developing the foundational cost and quality analytics to demonstrate and communicate results, aligning benefit design with the COE program, and cultivating strong business relationships with leading employers and health plans.
These new rules have significant and far-reaching implications for all health care systems, and after initial implementation, ongoing monitoring and analysis of these six areas will continue to be critical as organizations evaluate and make decisions about their delivery models and related pricing.
Solid health care provider deal flow will persist as healthtech grows
2020 has been a solid year for health care services investment from both financial buyers, e.g., private equity, and strategic or corporate buyers. Despite the global pandemic putting a halt to most deal flow during the summer, 2020 capped off a 10-year run, post-global financial crisis that saw $822 billion invested into health care service providers across 11,054 deals, according to PitchBook data. Private equity-backed deals accounted for 28% of dollars invested ($231 billion), and 48% of total deal volume (5,355 deals). Corporate deal activity, such as CVS acquiring Aetna, accounted for the balance.
Since the end of the global financial crisis, private equity’s deal activity within health care service providers has increased in total, and private equity’s proportion of deal flow relative to corporate activity has increased from approximately 40% to 60% over time.
We expect private equity investors will continue to show moderate growth in capital deployed and strong growth in deal count in the near term.
Consolidation has led many private equity investors to move downstream and evaluate smaller deals as they search for opportunities to bring synergies and value to more providers. Particularly in the aftermath of the COVID-19-related public health emergency, many independent providers experienced financially lean periods and have become motivated sellers.
The pandemic also pulled forward interest in health care technology as millions of patients and thousands of physicians used virtual health services for the first time. So while the opportunity for investment in physical service providers will eventually decline as the sector consolidates, the door will open to health care technology investment.
Historically, health care has underinvested in (nonmedical) innovation relative to other sectors, particularly financial services, which is also highly regulated. Health care venture capital and corporate mergers and acquisitions investment in health tech post-global financial crisis represented 6% of annual sector revenue compared to the 62% the financial services sector had similarly invested in fintech.
Patients are demanding the same customized, on-demand experience for their health care that they receive in most other aspects of their lives. Companies and investors that can deliver that experience will be positioned to capture significant long-term tailwinds.
As of this writing, we are uncertain how the regulatory environment may change with the Biden administration. Vice President Kamala Harris and incoming Health and Human Services Secretary Xavier Becerra have histories of health care mergers and acquisitions scrutiny during their separate tenures as attorneys general of California. Time will tell what effect the administration may have on the overall health care M&A environment.
Legislative and regulatory outlook for health care
Health care has long been an industry heavily affected by legislation and regulation. As we look forward to the first quarter of 2021 and beyond, we continue to expect that to be true. In 2020, the industry saw nearly $200 billion in stimulus payments to help provide some relief from the financial effects of the pandemic. However, with the speed of the rollout, it did present challenges to many of our clients when determining how to meet the terms and conditions of the Provider Relief Fund grant. With the passage of the Consolidated Appropriations Act, 2021, some of those challenges subsided.
What did the Consolidated Appropriations Act, 2021 (the Act) do and how will it affect 2021 for the health care ecosystem? From a challenges perspective the Act mainly provided two things: one, the Act, yet again, changed the calculation of “lost revenue;” however, in this round the changes are largely beneficial to allow for an actual budget calculation rather than a strict year over year methodology. Two, it provided an opportunity for providers that are parent organizations with subsidiaries that received targeted distributions to allocate those distributions to other eligible health care providers within the organization. The Act also provided for many of what is referred to as the “Medicare extenders.” An example of this would be eliminating the Disproportionate Share Hospital cuts.
For many recipients of the Provider Relief Funds, the change to the determination of lost revenue and the flexibility to allocate targeted distributions as well as the Medicare extenders will allow for them to enter 2021 with a bit more financial certainty. Many providers found themselves in a predicament when the calculation of lost revenue was defined for calendar year 2019 versus calendar year 2020. As shown below, through November 2020, many providers had growth in revenues rather than reductions. Many factors contributed to growth in 2020 by providers. However, despite the growth, the providers were not growing as fast as they had budgeted, which then provided profitability concerns as the budgeted revenues drove decisions around expenditures, many of which were fixed.
As shown in the chart, while the average provider grew revenue year over year (adjusted for Provider Relief Funding), they experienced a shortfall relative to the budget of 2.3%. Given the operational leverage typically present in providers, which was exacerbated by prohibitions on nonemergent or elective procedures, this caused expenses per adjusted discharge to exceed budget by 15.9% on average.
In addition to the stability provided by the Provider Relief Fund, many health care providers with large investment balances saw a year of growth within their investment portfolios as well as increased philanthropic activities. With the stability and more financial certainty, we expect most health care providers to continue with the majority of their planned expenditures.
The $1.4 trillion government funding bill, which was passed alongside the Act, also included legislation aimed to protect patients from so-called “surprise billing” for emergency services and other instances in which a patient is unknowingly treated by an out-of-network provider. The “No Surprises Act” would cap patients’ out-of-pocket responsibility for emergency care to what they would pay for in-network services. Providers are also unable to bill out of network for planned procedures unless the patient gives explicit consent. Billing disputes for covered procedures would be handled in arbitration. One key change is the No Surprises Act forbids arbiters to consider Medicare and Medicaid rates or the provider’s billed charges when ruling for the amount the insurer should pay the provider. The patient cannot pay more than the in-network rate and is not involved in the arbitration process.
The No Surprises Act will likely reduce total patient responsibility for care and may reduce total revenues for certain providers. Payers will not be able to reference the generally low rates of Medicare or Medicaid in arbitration, but nor will they have to disclose pharmacy benefit manager relationships and rebate structures, which previously proposed bills called for. It remains to be seen whether this legislation will fundamentally change how care is provided and the viability of certain provider business models, or if it is simply step one of a much larger change to the regulatory and legislative environment. However, we also note the pandemic has caused some to consider their physical footprint versus their digital presence.
Reported breaches continue to rise
Cybersecurity and data protection continue to be a point of concern within the health care industry. Over the last few quarters in 2020, we have seen an increase in the number of hacking incidents as attackers continue to leverage the pandemic for their own benefit. Although many organizations claim to have a sophisticated cybersecurity program, attackers continue to gain access to patient financial and medical information. If proper protocols are in place, why do the attacks continue? RSM security and privacy risk professionals state two ways cybercriminals break into health care organizations:
- Remote workers exposing the organization to phishing emails, ransomware and vulnerable storage locations
- Third-party vendors and partners transferring the organization’s data insecurely from system to system
As a result, there has been a significant increase in the number of individuals affected by health care data breaches within the past five months. For example, in the month of September 2020, there were over 9 million individuals affected by 87 data breaches (an increase of 373% compared to September 2019) reported to the Office of Civil Rights. Further, 68% of the total breaches reported to the OCR during 2020 were related to a hacking/information technology incident affecting 23 million individuals.
The 2020 NetDiligence Cyber Claims Study indicates that attackers are shifting their preference to small and midsized organizations, which explains the increase in breach reports within the health care industry over the past five months.
This shift in focus leaves the health care industry vulnerable to exploitations during a time where most organizations are cutting their IT budgets and resources in response to the pandemic.
According to Black Book Research, 88% of providers revealed that lack of budget was the major obstacle to properly securing and protecting health information, up from 68% in 2019. Eighty-two percent of hospital chief information officers in inpatient facilities under 150 staffed beds and 90% of practice administrators collectively state they are not even close to spending an adequate amount on protecting patient records from a data breach.
According to the 2020 NetDiligence Cyber Claims Study, a data breach on average costs small to midsize organizations $276,000 (per claim) in lost business income and $26,000 in recovery expenses alone. It is important for health care organizations to evaluate their exposure to cyberrisks. Reduced IT budgets and resources are contributing to an increase in attacks and incident costs. While most large organizations would seem to be the prime target for attackers, small to midsize organizations have experienced the most attacks, contributing to over 98% of the study’s claims. It is no longer a matter of “if” but “when” health care organizations will be the target of a cyberattack, and to ignore such a risk will prove to be extremely costly.
In assessing the overall cost/benefit of investing in a robust cybersecurity program, health care organizations should evaluate the costs to address a breach, which includes the following:
- Cyber incident costs: costs associated with investigating the incident (averaging about $123,000 per claim)
- Service costs: costs associated with hiring breach counsel, forensics, notifications, credit monitoring and public relations (averaging about $78,000 per claim)
- Legal costs: costs associated with lawsuit defense, lawsuit settlement, regulatory action defense and regulatory fines (averaging about $401,000 per claim)
In the coming months, we expect these costs and the reported number of attacks to continue to rise. As a result, health care organizations must be diligent and increase their focus on data security over patient information and the systems they use to treat them.
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