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GE Healthcare Camden Group Insights Blog

2017 Brings Continued Transformation to Healthcare, Driving Innovative Approaches, Solutions, and Experiences

Posted by Matthew Smith on Jan 17, 2017 12:51:21 PM

In an industry now characterized by constant change, 2017 will bring continued transformation to the nation’s healthcare system. Our annual outlook for the coming year forecasts the trends related to the likely changes to the Affordable Care Act ("ACA"), adoption of value-based payer models, and emerging consumerism will drive a greater need for cost reduction and innovation. Here’s a look at the trends and factors that will impact the system during the coming year:

Macro Trends

A number of significant macro trends are at play, driving the need for change. These include:

  • U.S. healthcare costs are rising faster than inflation.
  • U.S. healthcare expenses per capita have been historically low compared to the previous few decades; however, those costs are expected to rise over the next few years.
  • There have been cumulative increases in health insurance premiums and workers’ contributions to premiums compared to the rate of inflation and the rise in workers’ earnings.
  • Between 2014 and 2060, the size of the population age 65 and older will have more than doubled to 98 million.

Consolidation in Many Forms

  • Mergers and acquisitions among providers will continue and expand on an even grander scale as regional players, as well as large, multi-state systems, such as Dignity/CHI, explore the benefits of consolidation. The need to serve larger populations to succeed in risk-based payment models has prompted many systems to join forces. Expect statewide or multi-state population health collaboratives or joint-ventured population health service organizations. "In addition, traditional healthcare providers will seek endeavors with experts in urgent care, retail medicine, outpatient surgery, post-acute care, occupational health and digital health to take advantage of ‘best in class’ care and business expertise. Some systems will discover they have over-extended, or need to pause and integrate what they have acquired, formed, or merged into," said Laura Jacobs, MPH, president, GE Healthcare Camden Group.
  • Similar dynamics will impact the payer landscape. Regardless of whether the Federal Trade Commission approves mergers between Anthem/Cigna and Aetna/Humana, many markets may have more limited insurance options. With the uncertainty in the future of Health Insurance Marketplace or insurance exchanges, given expected changes to the ACA, payers will carefully weigh the benefits of offering select products market by market. In addition, as Medicaid shifts to managed care in many markets, experienced payers, such as Molina Healthcare, are increasing their national footprint. Medicare Advantage payers rated less than four stars will experience increasing difficulty to compete, resulting in growing membership in the higher-rated plans.
  • Finally, the lines between payers and providers will continue to blur. In some markets, regional health systems have moved into the payer marketplace -- often as a Medicare Advantage plan or a plan to cover the health system’s own employees -- to create competition and affordable options for their consumer base. Some payers will be increasingly open to partnerships with providers in launching new health plan products or delivery models.

Payment Models: Focus on Value

  • Regardless of the specific changes that may come with changes to the ACA, payers (Medicare, Medicaid, employers, and commercial insurance carriers) will seek ways to lower costs and improve the experience (quality and satisfaction) for patients.
  • With Medicare setting the trend, payment models have shifted to include performance measures, based on factors such as hospital-acquired conditions, readmissions, patient experience and quality scores. Bundled payments are still being pursued by commercial carriers, and, for now, Centers for Medicare & Medicaid Services ("CMS").
  • The Medicare Access & CHIP Reauthorization Act of 2015 ("MACRA") will have a significant impact on physicians, while CMS allows different paces of entry. These changes mean that physician payment will depend more on quality, patient experience, use of electronic medical records and resource utilization. Even in markets where risk-based models (downside risk, capitation or percentage of premium) are not yet practiced, private commercial carriers have adopted CMS approaches, including models such as accountable care organizations, pay-for-performance, and bundled payments. As a result, this will require smaller physician practices to seek assistance to report required metrics – or join larger practices or systems that have the required infrastructure.
  • Overall, one of the most difficult challenges for healthcare organizations today and for 2017 will be harmonizing population health strategies with the market’s movement to value-based payment; moving too fast or too slowly will affect financial performance.

Cost Drivers: Pharmacy and Behavioral Health Under Scrutiny

  • While inpatient and physician care account for the majority of healthcare costs, pharmacy costs have been increasing at a faster pace, a trend that is likely to continue into 2017.
  • The new year also will bring a greater focus on behavioral health. Because individuals with mental health disorders often have higher medical costs and tend to use emergency departments more frequently, behavioral health also will engender greater scrutiny. This is a particular concern with the Medicaid and dual Medicaid/Medicare population, when behavioral health is often untreated, or other socio-economic conditions, such as lack of housing and poor nutrition exacerbate health risks. Social determinants of health will be raised more frequently as factors to consider in population health programs, requiring health systems to connect with community service organizations to drive better outcomes and better health for at-risk individuals.

 Cost Reduction: The Pressure Is On

  • Many hospitals have experienced relatively stable financial performance over the last couple of years -- some, even better than expected due to a rise in volume, particularly in outpatient services. Yet other issues will come into play moving forward. Higher employment rates and expanded coverage for individuals through the ACA have increased demand at the same time the nation is experiencing primary care shortages. High emergency department volume will place increased pressure on inpatient capacity, operating room schedules and care management resources.
  • Lower rate increases also amp up the need to reduce costs. Facilities must manage patient throughput even more efficiently and reduce variation through defined work flows and clinical protocols. Precious resources, like hospital beds and ORs, must be optimally utilized to avoid potentially unnecessary capital outlays for new bed towers or surgery centers. Some leading hospitals are exploring capacity command centers commonly used in complex industries such as aviation and power. These initiatives combine systems engineering principles with predictive analytics to manage and optimize patient flow, safety, and experience.
  • The physician enterprise, which in most cases operates at a loss, must be managed to optimize physician time and align compensation models with goals and population health strategies.

Innovation: Delivering New Experiences and Approaches

  • Consumers will exercise more leverage, forcing providers to focus on the “consumer” experience – not simply the “patient” experience. This concept encompasses physical space, logistics, communication, and an organization’s approach to care. As systems expand, this means providing a consistent consumer experience across the continuum and locations. Rising deductibles will contribute to increasing selectivity, as will new disrupters in the digital and care delivery space. Issues to focus on include price transparency; access -- where, when, and how the patient desires; quality reporting; social media strategies; and digital outreach to create consumer awareness and loyalty.
  • Care models will continue to evolve in 2017 thanks to the explosion of mobile technology, applications for home and self-monitoring, and expansion of urgent care facilities and retail care centers. New digital tools and approaches to primary and complex care will emerge, backed by private equity and employers. One component of this trend, telemedicine, will expand beyond rural areas into the mainstream for the convenience of consumers who prefer not to leave their home or office. Home and self-monitoring will provide more responsive care to the elderly and other patients with complex conditions. These dynamics expand the geography of competition, which could arise from anyplace accessible by cell phone. To remain competitive, health systems will have to partner with entities providing these options, adopt them, or devise their own solutions.
  • After making significant investments in electronic medical records and a plethora of other information technology ("IT") tools -- financial systems, data warehousing, care management, predictive analytics, disease management, and scheduling among them – there’s a new dynamic at play. During 2017, healthcare systems will focus on getting these systems to work together to optimize decision-making and forward-looking actions. It will be essential to have a clear data governance structure and system architecture focused on required operational and clinical outcomes.
  • Looking ahead, artificial intelligence (for example, IBM’s “Watson”) and the “internet of things” (the way digital equipment “talks” to each other) will change the roles and responsibilities of healthcare providers and team members, as well as care pathways.
  • Expect additional traction on noteworthy clinical advances:
  • Precision medicine based on the genetic profile of an individual will be more accessible, particularly for cancer care, but not yet mainstream. But watch this trend; it could accelerate rapidly.
  • 3D printers will enhance the ability to replace organs and tissues, but for now remains largely in the province of research labs.
  • Robotics will continue to be used in operating rooms and will begin moving to the bedside, lifting, moving, or even interacting with patients.
  • Academic medical centers may discover expanded opportunities to partner with community providers to research and deploy new clinical treatment options.
  • In an industry where labor costs still comprise the lion’s share of operating expenses, workforce management has always been essential. Today, the responsibilities of clinicians and non-clinicians are also changing as health systems transform in response to population health and value-based care models. Generational differences and job burnout from constant change and rising expectations will require new approaches to recruitment, talent development and training, workforce management, and engagement.

Topics: Payment Models, Care Model Redesign, Healthcare Transformation, M&A, Healthcare Innovation

10 Do’s and Don’ts for a Smart Transaction as a Healthcare Provider

Posted by Matthew Smith on Dec 15, 2016 11:22:35 AM

By Brian Hackman, MBA, MSIS, ASA, Manager, GE Healthcare Camden Group 

Many, if not most, healthcare organizations have been involved in a transaction with another business entity within the past several years, whether with a physician practice, outpatient center, hospital, or health system.2014 and 2015 saw record numbers of healthcare M&A transactions, and the desire and pace of healthcare organizations to complete deals will likely remain strong even in light of the recent presidential election results.

Now more than ever, it’s important to reemphasize the fundamentals of a successful transaction. Below is a list of ten “do’s” and “don’ts” for a smart transaction as a healthcare provider. In the current environment, it is imperative that healthcare organizations properly prepare and execute a prudent transaction process. Otherwise, a lot of time, money, and attention can be diverted from managing core business operations.

Do

  1. Identify a strategic vision for the transaction. A strategic vision lays the groundwork for the transaction. Be able to articulate and defend the vision of the transaction and the environmental factors and business rationale leading to it. Draft a post-transaction governance, transaction, and organizational structure and outline any preliminary terms and conditions. Finally, confirm the transaction is consistent with your strategic plan. Two questions to contemplate: (1) Does the transaction better position the organization for a value-based environment and (2) does the transaction add a competency or resource necessary to succeed?
  1. Seek an independent, third party to perform a business valuation and anti-trust assessment. Transactions in the healthcare industry involve a number of legal, regulatory, and tax considerations. By engaging with an independent third party, you gain a greater level of assurance that the purchase price is fair. It also limits your exposure to potential compliance and regulatory issues (i.e., Stark Law, Anti-Kickback Statute), and provides proper documentation if ever audited by a governing body, such as the Centers for Medicare and Medicaid Services, the Internal Revenue Service, or the Federal Trade Commission. Outside counsel to inform potential anti-trust or other regulatory risks is also crucial.  A market assessment to determine the potential market impact, as well as potential consumer benefits of the transaction should be performed to assure that all parties are informed of the opportunities, requirements of the transaction, as well as potential risks.
  1. Complete thorough due diligence. The purpose of the due diligence phase of a transaction is to gain a greater understanding of your target company. Use this process to research and evaluate any potential issues, liabilities, or concerns. An analysis of the target company typically includes, but is not limited to, a review of its operations, such as revenue, expenses, volume/productivity, and coding and documentation; its finances, including the cash flow and strength of the target’s balance sheet; and any legal considerations, including pending litigation that could impact future profitability. In addition, pay keen attention to the cultural fit between the two organizations. If the cultures are too divergent, or the cultural integration is back-burnered until after the transaction, it is unlikely that a deal will work out. Depending on the findings of the due diligence, it may be necessary to renegotiate the proposed structure of the transaction. Don’t be afraid to walk away from the transaction if the risk profile of the target company exceeds the risk tolerance of your organization.
  1. Develop internal financial projections. Based on the information provided during the due diligence process, develop financial projections for the target company or combined entity. It is likely these internal financial projections will differ from those generated during the business valuation, as the projections will incorporate contract rates from your organization and any prospective synergies to be gained from the transaction, which the business valuation may not include. Depending on the type of transaction, a business plan of efficiencies (“BPOE”) can be a useful guideline to articulate where and how operational and structural efficiencies will be created. Use these financial projections to understand the impact of the transaction on your current financials and cash flow. These are also good ways to measure future performance versus targets. Calculate the return on investment to ensure it is consistent with your organization’s goals..
  1. Understand the impact of the transaction on your balance sheet. Take into account and plan for how the transaction will affect your balance sheet. Will the transaction be financed with cash, debt, or a combination of both, and what are the advantages and disadvantages of each? How will the purchase price be allocated on the balance sheet? Be sure to understand how or whether the transaction will impact any debt covenants or key balance sheet ratios, which can influence your credit rating.  

Don’t

  1. Be bewitched by the shiny rock. At some point, an opportunity may arise to pursue a transaction with a top organization in your market. At first glance, the concept of joining forces may be compelling. However, in this situation, it is particularly critical to follow the steps outlined above and evaluate the financial and operational merits with clarity and objectivity. Ensure it isn’t too good to be true and really is in the best interest of the organizations and their patients.
  1. Buy into overly optimistic integration synergies. Rosy projections can make any potential transaction seem like a no-brainer. Run various scenarios (e.g., expected, best case, and worst case) to test the primary assumptions or question the main drivers of the projections for reasonableness. It is advisable to hash out and understand the operational and financial risks during the due diligence process rather than after the transaction closes.
  1. Assume the integration process will be 100 percent seamless. While the transaction process can be long and time consuming, don’t assume that once the transaction closes, the hard work is over. In fact, the hard work is just beginning. The integration of two organizations can involve numerous operational and cultural hurdles, including blending corporate cultures, information technology systems, human resource systems, operating mechanisms, etc. Successful integration requires thorough pre-transaction planning and consistent ongoing communication. Consider employing change acceleration processes to facilitate the integration process.
  1. Lose focus on what you do well. Most organizations typically have a small number of core strengths. Acquiring business lines outside of this portfolio of expertise can sometimes dilute management’s ability to run each efficiently. In such situations, a higher level of due diligence may be required to ensure you have the internal capability to manage that business line. If not, consider bringing in outside expertise through a management services agreement or hire the required talent from outside. Alternatively, consider other types of transactions, such as joint ventures or joint operating agreements, where the day-to-day management can be handled by partners who specialize in that particular space.
  1. Engage in this process alone. Outside third party expertise can help ensure a higher probability of success. Form a team of advisors to create a sounding board for your thoughts and ideas. Legal, financial, and operational support can not only mitigate potential compliance and regulatory risks, but also assist in validating the rationale for the transaction to the various stakeholders in the respective organizations. Post-transaction, advisors can help navigate the inevitable challenges that will arise during the integration process.

Hackman.jpgMr. Hackman is a manager with GE Healthcare Camden Group and specializes in healthcare finance. His focus includes fair market valuations and strategic planning for both nonprofit and for-profit healthcare organizations. He also has experience in reimbursement analysis, service line planning, and financial forecasting. He may be reached at [email protected].

 

 

 

Topics: Hospital mergers and acquisitions, Mergers and Acquisitions, Brian Hackman, M&A

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