The Georgia Scroll
April 1998
Strategic Trends for
Financial Managers
Keith S. Alexander
In today’s chaotic health care marketplace, it is increasingly important for all health care managers, including financial managers, to recognize and respond to significant trends. As a financial manager, the more you are able to recognize these trends, the better able you will be to help your organization adapt and succeed.
There are eight significant trends influencing the health care environment. Presented in "David Letterman" style, they are:
8. Consumerism
7. Balancing ethics, rights, and the cost factor
6. Information systems
5. Health care demand and delivery
4. Wall Street provider firms
3. Payer-provider relationships
2. Provider integration and dis-integration
1. Market-driven reform
Consumerism
Consumerism is one of the most significant trends influencing all of American society. However, this trend is having an even more profound influence on health care than on most other industries.
Historically, health care has been sheltered from consumerism. Individuals were more likely to simply "do what the doctor told them" than ask questions and explore other alternatives. People are now much more likely to:
Another indicator of consumerism is the negative press coverage surrounding many HMO’s. Reports of bureaucracy that interferes with care and the publication of physician and healthplan rankings are several examples of consumerism.
The bottom line is simply that people expect and are now demanding to receive:
If consumers perceive these needs are are not being met, they are increasingly likely to go elsewhere for their health care services.
Balancing ethics, rights, and the cost factor
Health care providers and insurers will continue to have a more challenging time weighing medical ethics and patient rights against the cost of care provided. As the incentives to control both utilization and costs continue (See Trend #5), providers and insurers have to make difficult decisions regarding how to allocate their limited financial resources. To complicate matters further, expensive technological advances are continuing to extend life expectancy and offer additional (more costly) treatment modalities. Moreover, with the competitive pressures of insurance premium pricing, consumerism, and profit insurers are finding it more difficult to finance emerging technologies and research.
Determining where along the continuum services dollars should be spent will become more complex. For example, does it make more sense to expend financial resources on newborns that require NICU care or on prenatal care and education for mothers in hopes that their newborns will not require NICU care?
Information systems
Information systems will:
Health care providers have historically expended a significantly lower percentage of their budgets than most other industries on information systems. To support the needs of integrated delivery systems, providers will increase their spending on information systems. Integrated delivery systems require enhanced information systems to assist with managed care, cost analysis, outcomes measurement, and a number of additional applications.
Although enhanced information systems are required for health care providers to compete successfully in the future, their capabilities will continue to lag behind the user’s expectations and demands.
Health care demand and delivery
Payment mechanisms, technology, and medical management will continue to drive down inpatient use rates (admissions and patient days per 1,000 population).
Although we have witnessed over 15 years of substantial inpatient use rate declines, the influence of managed care will continue the downward trend as an increasing number of Medicare and Medicaid beneficiaries enroll in managed care plans. Provider payment mechanisms (e.g., capitation) and improved medical management for Medicare, Medicaid, and commercial populations will continue to result in reduced inpatient use rates.
With the influence of advances in technology (e.g., surgical techniques, pharmaceuticals, etc.), health care services will continue to shift from inpatient to outpatient focused services.
Wall Street provider firms
Investor-owned providers currently represent approximately 12 percent of U.S. hospitals and 8 percent of physicians. For-profit provider firms will remain a significant force in the health care industry. Shareholders can provide the capital needed to compete successfully in today’s health care environment. (See Trend #6 for one example of capital requirements.)
Of course, shareholders’ demand that for-profit providers demonstrate profitability and the pressures to do so will not abate. For proprietary (and not-for-profit) physician practice management companies (PPMs) to become profitable they will need to focus on improving their existing operations, not simply on growth.
Payer-provider relationships
Payer-provider relationships will continue to change and distinctions blur. While some insurers appear to be getting out of the provider business (i.e., MedPartners acquiring Aetna U.S. Healthcare’s physician practice management business), both hospitals and PPMs have been entering the insurance business.
There has been an ever-increasing number of providers seeking to develop their own HMOs and provider sponsored networks to serve the commercial population. As a result of the Balanced Budget Act of 1997, many providers are preparing to offer managed care products to serve the Medicare and Medicaid population.
Whether providers will be successful in their efforts to "cut out the middle man" will be determined on a market by market basis. Payer-provider relationships will continue to evolve and there will be no single answer or "end state." Each provider organization must evaluate its own competitive situation and decide whether or not to compete or partner with health plans.
Provider integration and dis-integration
Provider integration will continue and provider dis-integration will be an increasing trend.
Successful integration demands compatible values, cultures, trust, specific objectives and a vision for the integration. Those organizations that are unable to evolve into a common, unified entity risk dis-integrating.
One example is hospital-owned physician practices that have been financially disappointing. Among the many reasons for poor performance are incentive structures that result in lower productivity. In addition, many hospital-employed physicians exhibit a lack of trust of their hospital employer.
In the future, many integrated delivery systems may "spin-off" employed physicians into physician-controlled and governed entities that have a strong contractual relationship with the hospital.
Market-driven reform
Market-driven reform will continue to force health care industry changes by demanding low prices, high measurable quality, and improved service. The price and quality demand pressures from employers, payers, Federal and State governments, and individual consumers will require that successful health care organizations continually transform the way they do business.
The key theme is that if you don’t deliver what the market wants, somebody else will.
These eight trends will influence the way your organization does business. As financial managers, it will be imperative to recognize how these trends affect your organization and develop strategies to help your organization adapt to them.
Keith S. Alexander is a consultant with Jennings Ryan & Kolb in Atlanta and a member of the Georgia chapter of HFMA. He has over 12 years of health care consulting experience, providing strategic, managed care, and business planning services. He welcomes questions and comments and can be reached at (404) 235-0305.
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Last modified: June 22, 2001