2018: A Make or Break Year for Hospitals

Happy New Year! If you own stock, 2017 was a good year: the Dow closed Friday at 24,719—up 25% for the year, its 4th strongest on record since 1997. Ditto the performance of the Standard and Poor’s 500 up 19%, the NASDAQ composite up 28% and Dow industrials up 25%.

But if you run hospitals, practice medicine, operate a post-acute business or a public health program, 2017 was a mixed bag and 2018 promises to be a make or break year. “Reimbursement rate increases below inflation coupled with the continued swelling of staffing and technology expenses will put a damper on not-for-profit and public healthcare next year” Moody’s noted in its December 4 forecast. In addition to the normal operating pressures to deliver costs, measure results, recruit staff, comply with state and federal regulations and negotiate payments from insurers, Medicaid and Medicare, 5 issues loom large in next year’s agenda for hospitals, especially nonprofits:

The Impact of the Tax Cut and Jobs Act: In the next few weeks, attention will be on the impact of the Tax Cut and Jobs Act signed into law December 22 by President Trump. It repealed the individual mandate requiring most individuals to maintain health insurance coverage, or face a tax penalty (the 2017 tax penalty was the greater of $695 per adult, $347.50 per child, or 2.5% of household income). Per the Congressional Budget Office, 4 million will lose coverage next year, increasing hospitals’ uncompensated care, reducing operating margins and cash flow (Moody’s Investor Service). At the same time, for those insured, commercial insurance premiums will increase at least 10% and employers will double down on narrow networks and high deductible benefits. Medicaid reimbursement will shrink and Medicare will be targeted by federal budget hawks for additional cuts. And there’s more: the law…

·         limits the tax deduction companies take for the interest they pay on their debt to 30% of EBITDA (earnings before interest, taxes, depreciation and amortization) hurting debt-heavy hospital operators like Tenet and CHS

·         cuts the corporate tax rate from 35% to 21% benefiting investor owned healthcare companies like HCA, Tenet, LifePoint and others while hurting nonprofit health systems because “it makes tax-exempt bonds a less attractive investment for banks and other financial institutions” (Moody’s). Notably, Cowen predicts the tax bill will increase earnings per share for the 8 largest investor owned health plans 22-62%.

·         adds a new 20% excise tax on the top five earners who earn more than $1 million in tax-exempt organizations including hospitals, associations and other entities.

·         adds $1.5 trillion to the national debt by 2027, prompting House Speaker Ryan’s pledge to cut “entitlement spending” on Medicare, Medicaid and Social Security. Note: in 2017, the national debt was 108% of our GDP (International Monetary Fund); fifth highest in the industrialized world behind Japan (240%), Greece (180%), Italy (133%) and Portugal (126%). And the 3 below Japan were forced to implement painful austerity programs including pension cuts to stay afloat.

The law’s proponents are betting it will grow the nation’s GDP to 4% and lift wages for middle income households across the board. How that translates to insurance coverage or healthcare affordability is anyone’s guess. For hospitals, especially nonprofits, the new tax law is problematic.

Federal Programs in Limbo: The transition from the Obama administration to the Trump White House, coupled with control of both Houses of Congress by the GOP, means changes to federal policies, programs and priorities. Each impacts hospital planning and focus. At the top of that list are these urgent matters:

·         Funding for the Cost-sharing Reduction to Stabilize the Individual Insurance Market: Funding for the cost sharing reduction (CSR), which is paid to insurers by the federal government, is in limbo. The Alexander-Murray proposal to fund the CSR for 2 years was not included in the tax bill. Lacking funding, it’s likely insurance premiums in the individual market will increase at least 20% annually. For hospitals, especially those that sponsor health plans themselves, it means red ink.

·         Funding for CHIP: The Children’s Health Insurance Program (CHIP) provides health insurance for 9 million children and 370,000 pregnant women living in families whose incomes exceed the basic Medicaid eligibility but lack access to employer insurance for their children. Congress authorized temporary funding for the program that expires in March. Left unfunded, states will cut enrollment and dip into Medicaid funds to cover what they can. And hospitals and community health centers will shoulder a greater share of care for these populations.

·         Alternative Payment Programs: In a final rule issued in November, CMS officially canceled the hip fracture and cardiac bundled payment programs and rolled back some mandatory requirements in the Comprehensive Care for Joint Replacement Model. Concurrently, results for the Medicare Shared Savings Programs (aka accountable care organizations) have been mixed, so hospitals are left in suspense about their future: Will CMS double down on voluntary alternative payment models, or go a different route? How will APMs be structured to achieve Medicare’s aims for savings? What direction will HHS Secretary-nominee Alex Azar pursue once confirmed? Stay tuned.

·         Drug costs: Per CMS National Health Expenditure data, per capita prescription drug spending grew at a slow rate (0.6%) in 2016, compared to 8.2% in 2015 and 11.7% in 2014. Spending for prescription drugs reached $775 billion-- 12% of total U.S. healthcare spending vs. 7% through the 1990s. Contributing factors per the Government Accountability Office: limited competition in certain classes, consolidation among pharmaceutical companies and more concentration of drug development in more expensive biologics and orphan drugs (The share of approvals for biologics increased from 8% to 17% of all approvals from 2005 to 2015 while the share of orphan drugs increased from 5% to 16%). The results of FDA Commissioner Scott Gottlieb’s efforts to stimulate more generic competition are unknown at this point. Polls show the vast majority of voters believe the industry is guilty of price gauging at their expense. And costs for prescription drugs are the fastest growing expense in the hospital supply chain.

·         Veterans Choice Program: “(VA) In accordance with the Veterans Access, Choice, and Accountability Act of 2014, P.L. 113-146, VA published a Federal Register notice on December 20, 2017 notifying the public of the potential exhaustion of the Choice Fund. The President signed a Continuing Resolution on December 22, 2017 that appropriated $2.1 billion to the Choice Fund allowing the VA to continue to administer the Choice program into 2018”. The immediate issue: extension of funding for the program aimed at relieving long wait times for Vets; the bigger challenge--modernization of the $182 billion Veterans Affairs’ bureaucracy under leadership of Secretary David Shulkin. For hospitals, participation in the Choice program is a problematic: getting paid in a timely manner and assuming liability for the delivery of services to eligible vets are operational challenges that concern hospitals whose cooperation is essential to the program.

Mega-deals: Consolidation figured prominently in 2017. In 2018, we’ll know the outcome for mega-deals involving CVS and Aetna, Optum and Davita Medical Group, Catholic Health Initiatives and Dignity Health, Ascension and Providence St. Joseph, Partners HealthCare and Care New England, Sanford Health, Sanford Bismarck and Mid Dakota Clinic PC, the 5-party deal involving Beth Israel Deaconess system, Lahey Health system, New England Baptist Hospital, Mount Auburn Hospital, and Anna Jacques Hospital in New England and, no doubt, others to come. The issue is scale: these deals are bigger than in prior years (Kaufman Hall) and increasingly involve diversification. The questions for hospitals are straight-forward: how big is big enough? Is remaining independent an option? What are new sources of revenue and what capabilities are necessary to achieve success in these efforts? And, given increased pressure from payers to limit hospital cartels (studies by Deloitte, Northwestern, et al have shown hospital consolidation does not lower costs), will customers see value as a result of these deals?   

Public Health: On December 19, the Center for Disease Prevention and Control released results from its latest National Health Interview Survey: For the second year in a row, life expectancy in the U.S. declined due, in part, to a 21% increase in drug-overdose related deaths. Our homicide rate, at 7 times that in other industrialized nations, plays a role as well. The prevalence of obesity, smoking and a porous safety net for low income populations are contributors. So, proposed budget cuts to social services programs like Community Health Centers, the Substance Abuse and Mental Health Services Administration, the Prevention and Public Health Trust Fund and others mean providers, especially hospitals, will be expected to fill widening gaps in public health. To varying degrees every hospital operates as a safety net; for some, the responsibility will be greater as this burden is not shared equally.

Campaign 2018: Tuesday, November 6, 2018, Americans will go to the polls to elect all 435 Members of the U.S. House of Representatives, 33 of the 100 seats in the United States Senate, 39 state and territorial governorships and numerous state and local legislators. Healthcare will be the pivotal issue, especially for those that identify as independents or Democrats, Millennials, seniors, the uninsured and under-insured and those with lower household income. Policies about the future of the health system, its structure and funding, will be defined by those we elect. The potential that inpatient services will become a public utility, Medicare will be expanded or shrink, hospitals will be accountable for affordability and a range of testy issues are ultimately decided at the ballot box.

In 46 BC, Julius Caeser created the first calendar starting January 1 honoring Janus, the God of Beginnings. In 1788, Robert Burns penned Auld Lang Syne to bid farewell to “days gone by” and in 1907, the first ball dropped in Times Square. So, there’s a rich tradition in our land around celebrating a new year.

For hospitals, their business partners, physicians and suppliers, 2018 is destined to be a make or break year. The normal pressures of operating are compounded by an unprecedented set of 5 issues that will tax the will and resources of each institution. While each sector in healthcare faces unparalleled challenges, none is more vulnerable to conflicting public policies, expectations and resource constraints than hospitals.

Paul