As we head into 2013, we see distinct winners and losers in the new healthcare economy. This article briefly outlines some of our observations on various sectors for 2013.
1. Hospitals and health systems. Hospitals and health systems face certain tailwinds and headwinds. On the positive side, hospitals are as politically protected as any sector given their importance in almost every district of every politician. Further, they were the clear winners in the healthcare reform legislation. Hospitals and health systems are the clearest party capable of building an integrated system that can take on risk for a large percent of the payor dollar (very large physician groups can also accomplish this). Between 2009 and 2010, Medicare spent roughly $153 billion on roughly 10 million inpatient admissions and $166 million hospital outpatient services. Under Medicare payment systems, hospitals typically receive higher reimbursements than individual doctors and other providers such as freestanding surgery centers and imaging facilities for the same services1. This desire to build an integrated system and disparity in reimbursements are two factors driving the trend of acquisitions of physician-practices by hospitals. Hospitals and health systems also face several headwinds. Hospitals face hurdles with regard to the challenging combination of expanded eligibility for Medicaid participation as a result of the Patient Protection Affordable Care Act coupled with slower and lower Medicaid pay2. Furthermore, many systems have high operating costs and liability/debt levels that may not flex well with reimbursement changes, increasing labor costs and physical plant needs. For example, many hospitals and health systems face large unfunded or critically underfunded pensions. Also, through increasing employment of physicians, hospitals have growing ongoing carrying costs. These pitfalls make some hospitals and health systems ill-positioned for the reduction/change in reimbursement rates or transition from fee-for-service to shared-risk or whole-risk contracting.
2. Ambulatory surgery centers. Ambulatory surgery centers have been a great business in the past and still remain a very good business despite obstacles in surgeon numbers and reimbursement rates. On the plus side, surgery centers are a true cost saver to Medicare and can be for other payors too. Movement of surgical procedures from hospital outpatient departments to ASCs reduces aggregate program spending because Medicare pays ASCs substantially less than HOPDs for the same services. In 2010, ASCs provided services to roughly 3.3 million Medicare beneficiaries — an increase of 0.9 percent from 20093. ASCs have reasonable political strengths due to their numbers, the ASC Association and their presence in most states. The number of Medicare-certified ASCs increased by 1.9 percent from 2009 to 5,316 ASCs nationwide in 2010. The industry also has great management company leadership in several places. Surgery center revenues, however, are wholly dependent on the number of cases multiplied by the reimbursement for services provided. Centers face some erosion and pressure on both fronts. Independent surgeons are declining in numbers, and increased payor and hospital control over the payment dollar places pressure on reimbursement. Out of network and workers’ compensation payments are also increasingly under attack.
3. Urgent care. Urgent care is a booming sector of healthcare whose greatest strength is that it provides consumers with services they truly want and truly need. An estimated 3 million patients visit an urgent care clinic each week4. Urgent care clinics have seen a rapid boom in popularity and are becoming one of the fastest growing specialties in medicine5. Since 2008, the number of facilities has increased by 17 percent and growth is expected to occur at an even quicker rate over the next several years. This growth coincides with the PPACA’s insurance mandate requiring health coverage for many currently uninsured Americans. Typically services provided at urgent care centers are a cost-effective proposition — they cost less than those provided at hospitals and are typically reimbursed similar to primary care6. The lower costs of urgent care have drawn the attention of payors who seek urgent care as a way to get patients out of emergency departments and to bypass the increased costs that comes with ER visits. A 2010 RAND study found that almost 1 in 5 visits to hospital ERs could be treated at urgent care centers, potentially saving $4.4 billion annually in healthcare costs. While the typical price of a visit to an urgent care center is comparable to a doctor’s office visit (approximately $100), the visit can be multiple times cheaper than a visit to the ER. Hospitals and health systems are also driving business in the urgent care sector by adding their own urgent care centers. For example, in July 2012, Dignity Health, the nation’s 5th largest hospital system, bought U.S. HealthWorks, the 2nd largest urgent care chain, with 147 centers.
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4. Home healthcare. In 2011, about 3.4 million Medicare beneficiaries received home healthcare services from almost 11,900 home health agencies7. According to preliminary data, Medicare spent roughly $19.4 billion on home health services in 2010. Moreover, in 2010, about 80 percent of agencies had positive margins8. The introduction of home health benefits, decades ago, was one of the government’s great miscalculations. Between 1990 and 1995, the number of annual users of home health services increased by 75 percent and the number of visits more than tripled to about 250 million a year. Spending also increased from $3.7 billion in 1990 to $15.4 billion in 1995 and in an effort to curb the spending on home healthcare services the government is continuously researching methods of cost savings and increasing regulation of this area through investigation, introduction of co-payments and other efforts. In 2011, Medicare implemented two major changes to strengthen program integrity for Medicare home health services. One, the PPACA includes several reductions intended to bring payments more in line with costs, which includes a reduction in the standard 60-day episode rate by 2.5 percent. Two, CMS implemented a new requirement for tighter supervision of therapy services provided under the home health benefit. In addition to the hefty costs and governmental scrutiny, the home healthcare industry also faces challenges in finding highly qualified personnel to handle the demands of home care services and increased billing complexity. In all, opportunities in home healthcare remains fairly fragmented.
5. Skilled nursing facilities. The skilled nursing facility business is estimated at close to a $180 billion a year industry, and Medicare spent $32 billion on SNFs in 20119. SNFs remain an interesting area for investors in part fueled by unlimited demand from an aging population, notwithstanding the uncertainty of regulatory investigations and periodic efforts at payment reform. Despite the demand, the great issue that recycles in nursing homes and SNFs is payment ability as states wrestle with Medicaid costs. In four years, states have made almost a complete reversal from the number of states providing rate increases (37 in fiscal year 2009) to the current situation of 31 states implementing rate restrictions in fiscal year 201210. Medicaid is by far the single largest payor for SNF services and an area of intense budgetary challenges. Changes in reimbursement and eligibility lead entrepreneurial owners to seek out different types of patients, e.g., developmentally disabled, sub-acute care and others. For example, as Medicaid reimbursement suffered, nursing homes more aggressively marketed to Medicare patients. In its March 2012 report to Congress, MedPAC noted that “in 2010, the average Medicare margin for freestanding SNFs was 18.5 percent; it was the 10th year in a row with Medicare margins above 10 percent.” Furthermore, MedPAC noted that “non-Medicare margins improved between 2008 and 2010 but remained slightly negative (-1.2 percent), while total margins for all payors and all lines of business improved to 3.6 percent in 2010.” Despite Medicare cost reductions, we expect that Medicare patients will continue to be a real focus of homes. Typically nursing homes have countered payment cutbacks with reduced staffing; however, in the long-term, this move can impact the quality of care provided and create increased financial, regulatory and litigation risk profiles for the SNFs. Major players in the nursing home industry include ManorCare, Golden Horizons, and Kindred, operating, respectively, nearly 500, 300 and 230 nursing homes.
6. Medical devices. The medical device industry faces significant headwinds driven by pressures on overall economic growth, pressure from the medical device tax and pressure on hospital spending and cost containment. In 2012, approximately 7,000 jobs were shed in the medical device industry, representing approximately 1.5 percent of the industry workforce11. The medical devices business is facing the greatest pressure to date from increased efforts by buyers to cut reimbursement and the price paid for devices. The revenue growth rate decreased by 12 percent from 2005 to 2011, according to an October 2012 report by PwC. The device business, as one looks at all of the factors, leads one to conclude that while the sector was once an incredible business it is still a very good business. The $12 billion U.S. orthopedic market is now growing by only 2 percent to 3 percent a year, according to Frost and Sullivan, a market research firm. But, the Chinese orthopedics market is expected to soar from $1.6 billion last year to $2.7 billion by 2015, according to Frost, along with a broader surge in Chinese health spending that has attracted investors 12. Analysts note that the numbers are on the side of the sector — from the increasing number of baby-boomers reaching retirement age, living more active lives and willing to pay out of their own pockets for procedures they find valuable to the burgeoning middle class in the BRICS (Brazil, Russia, India, China and South Africa) countries seeking access to new medical devices. Analysts also predict large growth in the market combining health information technology with medical devices. InMedica predicted the telehealth market to expand by 55 percent globally in 201313, and the mobile health technology market, which includes apps, devices and services, was approximately a $1.2 billion global industry in 2012 and is predicted to reach $10.2 billion in 201814.
7. Dental practice management. There remains tremendous investor interest in the dental practice management arena. This is for at least two key reasons. First, everyone needs a dentist. Second, many state Medicaid programs have supported dentistry fairly well, especially children’s dental needs. DPM companies now account for approximately 8 percent of U.S. dentists. According to CMS, Medicaid payments for dental care rose 63 percent to $7.3 billion from 2007 to 201015 and CMS predicts overall spending on dental services to have modest increases16. Certain large dental practice management companies in the United States have achieved more than $100 million in annual revenue and revenues continue to increase. We see tremendous interest in dental from many fronts. The biggest headwinds in the DPM sector come from increased regulatory and litigation scrutiny to DPM structures and increased budget pressure at the state level. For example, during 2012 in Texas, a DPM company agreed to pay a $1.2 million settlement agreement related to Medicaid fraud and a bill was introduced in the legislature to strengthen regulation of DPM companies17. Another DPM firm faces a class action lawsuit.
8. Rehabilitation and addictive treatment. This is a tremendous growth area driven much like the urgent care center sector is driven. That is, rehabilitation and addictive treatment is something consumers actually want, and treatment is needed by a not insignificant part of the community. Results from the 2011 National Survey on Drug Use and Health show that a large treatment gap exists in the U.S. In 2011, “an estimated 21.6 million Americans (8.4 percent) needed treatment for a problem related to drugs or alcohol, but only about 2.3 million people (less than 1 percent) received treatment at a specialty facility.”18 It is also increasingly paid for by payors and it is the kinds of treatment families are willing to expend large sums for. From 2002 to 2011, the National Survey found increases in respondents using Medicaid (23.1 percent increase) and Medicare (19.5 percent increase) payments for treatment and in 2011, 46.4 percent of survey respondents reported using out-of-pocket funds for treatment. Overall, the U.S. addiction treatment industry is expected to increase revenues by 55 percent from 2005 to 2014 and experience revenues of $34 billion by 201419.
9. Hospital-based specialists. The demand for hospital-based specialists remains fairly strong, including hospitalists, anesthesiologists, neurology, surgery, obstetrics and radiologists. The number of hospitalists has grown rapidly from around 1,000 hospitals fifteen years ago to approximately 30,000 hospitalists in 201120. Hospitalists can be effective in reducing the time demands on revenue-generating admission-driven physicians. An article in JAMA noted that specialty hospitalists can act in a variety of cost-efficient ways for healthcare systems. For example, the potential for reduced liability costs associated with the continuous on-site presence of an obstetrician hospitalist or the satisfaction of the Level I trauma center requirement of always having a surgeon on-site with the presence of with a surgeon hospitalist21. Anesthesia management remains a quickly growing business with more and more focus around the hospital. Finally, hospitals continue to generate serious margins from interventional radiology.
10. Health information technology. We are starting to see the next generation of efforts aimed at utilizing data mined from an abundance of technology being deployed in healthcare. A first generation of efforts aimed to automate many functions in healthcare. A second generation of efforts aimed at putting electronic medical records in place. Now, as a third generation effort, we are witnessing huge data mining efforts by health systems and companies. Analysts argue that “understanding how to transform disparate data sources into meaningful tools to both improve patient care, patient safety, improve security and ultimately profit from it is the next great challenge.”22 On Jan. 15th, the Wall Street Journal reported on a new effort by UnitedHealth Group to combine efforts with Mayo Clinic to mine data and glean insights23. Some efforts are being driven for basic research motives. Some efforts are more applied and more focused. Others are aimed at marketing efforts. According to recent surveys a multitude of players in the healthcare industry expect to hire technical analysts to perform clinical analytics. Thirty-five percent of providers plan to hire additional clinical informaticists, 70 percent of insurance companies are boosting their clinical analytics staff, and hospitals are predicted to experience a rapid increase in the use of data analytics tools from only a 10 percent implementation rate in 2011 to an approximately 50 percent adoption by 201624. In any event, there appears to be an infinite number of new products, services and initiatives being introduced to try and utilize some of the technology that has been put into place. See, for example, Teletracking efforts and offerings aimed at capacity management. Spending on non EMR efforts are predicted to expand as many hospitals have already paid out substantial sums for EMR.