The Eight C’s that will Define Healthcare in 2018 and Beyond

2018 is shaping up to be a pivotal year in U.S. healthcare with implications for decades to come. Here’s the eight areas where boards and management teams will see major changes:

Costs: Costs in healthcare are expected to increase 5.6% next year and through 2024 (Congressional Budget Office). The 17 million in our healthcare workforce expect their wages to increase at 3% of more and our drug supply costs will be up 6-7% next year. A third of households will be uninsured or underinsured as employers eliminate or shrink their coverage, and insurance premiums will increase 10-14% for the rest. Affordable care will be the storyline: it’s impacting every household and employer. Competing as the low-cost provider, with transparent pricing and competitive quality, is key to accessing markets share for every organization in the healthcare supply chain as well as providers themselves.

Capital: On December 12, The Federal Reserve raised the short-term interest rate .25% and is likely to increase it again three times in 2018. Borrowers will see higher costs and stricter credit requirements. Not for profit hospitals saw their ability to issue tax free bonds disappear last week, and Moody’s, Fitch and Standard and Poor’s issued negative outlooks on their sector while offering a more optimistic view for their investor owned competitors. With corporate tax rates set to drop as a result of the tax reform bill that’s likely to pass tomorrow, and likely cuts in Medicare spending ahead as Congress grapples with its growing deficit, the big companies in healthcare will benefit, using their capital to acquire, diversify and leverage their scale. Access to affordable capital will separate winners from losers in 2018: the debt organizations carry on their balance sheets and their ability to use it efficiently to grow will be key to their sustainability, especially in capital-intense sectors like acute, post-acute, ambulatory services and others where facilities and technologies require deep pockets.

Consolidation: Horizontal consolidation has been the staple in healthcare: in each sector, organizations merge to achieve scale or improve their purchasing clout. As 2017 closed, high profile combinations were in the works: CHI-Dignity, Ascension-Provident St. Joseph’s, Aurora-Advocate and others. In these, federal regulators (Dept. of Justice, FTC) have been cautious in their approvals. Vertical integration, a staple in other industries, has been less prominent in healthcare. Speculation about the impact of CVS's acquisition of Aetna, Amazon’s activity in medical devices and Optum’s acquisition of the Davita Medical Group center on how the landscape might change as large, diversified, well-capitalized corporations engage directly in care delivery and financing. In every sector, gaining scale while broadening scope seems necessary to follow the puck as healthcare transition from a facility-dependent, acute centric model to population health and chronic care management. Independence and specialization might be too risky for many.

Consumerism: Consumers are aging but more than 80 million are Millennials under the age of 35. Each of these generations, and Gen X and Gen Y between them, depends on the health system and believe it hard to navigate, afford or avoid. For all, out of pocket costs for healthcare are growing faster than their food, transportation and housing (NerdWallet) and the majority have no money set aside in the event it’s needed for an unexpected healthcare event.  As a result of the tax reform legislation, 8 million will see their medical expense deduction shrink from 10% to 7.5% and as many as 13 million lower income Americans will lose their insurance subsidies or see federal funding for Medicaid expansion shrink. Consumers are voters, users and purchasers; they’re not satisfied with the health system. They want care and coverage that’s understandable, convenient, affordable and necessary. And they have the tools to compare between organizations that promise and those that deliver.

Competition: Traditionally, competition has been between peer organizations in a given sector or in a local community. No more. Competition is increasingly driven by upstarts that challenge traditional rules of engagement. They are not encumbered by existing customer relationships. Rather, they seek competitive advantage by offering a stronger value proposition compared to the traditional players. They prey on noticeable flaws in the strategies and execution of incumbents and chip away at market share incumbents think they control. Ally is challenging banks with a model void of local branches: it’s a cyber bank. CarsDirect is challenging auto retailers: it sells its cars online. Netflix has redefined the movie market; churchgoing has shifted from established denominations to independents and cyber-churches. Brands like Zappos, Glassdoor and others challengers now dominate their sectors challenging sacred cows and rules of engagement set by incumbents. And Amazon is considered a threat to incumbents in every industry, including healthcare. In every sector of healthcare, the environment is ripe for disruption.

Compliance: Risk management in healthcare is a burgeoning issue. Our laws are complicated. Our organizations are diversified and many trade globally. Insurers face daunting oversight in state and federal jurisdictions. Our hospitals employ half of the physicians in the U.S. and over a hundred also sponsor insurance plans. Drug manufacturers, wholesalers and distributors face drug dependency and collusion in pricing. And so on. Legal counsel to avoid penalties or prosecution is under-appreciated and under-budgeted relative to the enormity of risk every organization in healthcare faces. It’s more than fraud and abuse. As margins thin and access to capital becomes more difficult for many, regulatory compliance will be a central issue.

Culture: 2017 will be remembered in our society as a watershed year for workplace culture. The reputations of Wells Fargo, Uber, Fox News, Mylan, Touring, Valeant, Weinstein and many more are stained by stories of harassment, questionable business practices and workplace hostility. Per the National Association of Corporate Directors, “culture is revealed through the behaviors of employees at all levels, particularly those that result in rewards or advancement on the one hand, or punishment on the other. If values are about the what and why of an organization, then culture is the how—the way in which those values are lived on a day to day basis.” (NACD Culture as a Corporate Asset). Culture as a focus for differentiating organizations in healthcare will be increasingly important. A company’s spin about its culture, workforce credentials and capabilities, customer satisfaction and leadership will be exposed to greater scrutiny, especially in social media where would-be customers and employees look first. A healthcare organization spends millions over many years to build and protect its reputation: revelations about a company’s unhealthy culture can negate those investments in a matter of days.

Certainty: Probably not! There are major policy and industry questions looming for which answers are unknown: How will the corporate tax reduction in the tax bill impact companies that trade in healthcare: will savings on their taxes mean lower prices for the devices, drugs, technologies and services we buy? And will corporate tax breaks result in higher wages for workers so they can afford their healthcare, or be passed through to their shareholders instead? How will the results of Campaign 2018 play out, and what do they mean for national health policy? How will policymakers address deficit reduction, including the forecast addition of $1.46 trillion to the national debt over next decade? Will cuts to Medicare be part of that solution? What happens to insurance premiums in 2019 and what is the fate of Healthcare.gov? Will the FDA’s solution to encourage generic competition to depress branded drug prices work? Will mega-deals like CVS-Aetna be approved by regulators? How will the medical profession address its growing burnout and frustration? And so on. No one knows for sure.

Next year is pivotal to the future of our system of health. It’s a Campaign year when political gamesmanship will feature punditry about its future from all sides. Every board and management team in healthcare will be tested. Reviewing assumptions and refreshing strategies in the areas noted above is a start: as Yogi Berra once said “it’s hard to make predictions, especially about the future”.

Paul

P.S. No Keckley Report next Monday (December 25). I need some down time to reflect, study the new tax plan and look ahead. Enjoy your holiday and thank you for being a reader!