Magazine article The Journal of Lending & Credit Risk Management

Health Care Outlook 1997-2005: Transitions, Transactions, and Transformations

Magazine article The Journal of Lending & Credit Risk Management

Health Care Outlook 1997-2005: Transitions, Transactions, and Transformations

Article excerpt

The key themes for health care between 1997 and 2005 are transitions, transactions, and transformations. California, Minnesota, Oregon, Florida, and other trend-setting markets will be the ones to watch for new cost-effective models and arrangements.

Transitions

Health care will continue to be a price-driven market, but employer demand for report cards on employee satisfaction will shift purchasing decisions towards satisfaction and health improvement efforts.

Federal budget cuts to Medicare and Medicaid are likely and may force Medicare health maintenance organizations (HMOs) to bid for rates; the current 95% of the average area per-capita cost goes primarily to fee-for-service Medicare.

Response to consumer demands may increase insurance costs, prompting HMOs and insurers to shift financial risk to provider-sponsored networks. These networks would operate under global capitation arrangements to integrated systems or specialty subcapitation such as cardiology.(1) Capitation of provider-sponsored networks would accelerate acute-care downsizing, with increasing substitution of continuum-of-care settings such as subacute, skilled nursing, and assisted living. One California capitated physician network has reduced its Medicare HMO inpatient hospital days to 600 per 1,000 enrollees (U.S. average use rate is more than 2,000 days for fee-for-service Medicare patients) but is also purchasing another 600 days of continuum-of-care services.

Implications for Lenders

The health care sector will show increasing financial risk and volatility, with inpatient care downsizing. Nonetheless, the rate of hospital closure will remain relatively low, as hospitals reduce operating beds and convert capacity to continuum-of-care and other uses. Hospitals have already reduced their dependence on inpatient revenues. More than 50% of many hospitals' revenues now come from ambulatory care.

Transactions

Provider consolidations will result in three or four dominant health care networks in each regional market and some of the largest networks will consolidate on a statewide basis. These consolidations will force 2030% closure or conversion of hospital beds over the next five years and create three to five dominant managed care plans in each market or state. Mergers of traditional insurers with more agressive HMOs are likely, following the Aetna-U.S. Healthcare consolidation. The large health plans will create multiyear exclusive relationships with dominant provider-sponsored networks. Purchasers (employers, business coalitions, government) will negotiate 5- to 10-year deals with HMOs and providers as strategic partners. Physician management companies and hospitals will employ 25-35% of all physicians; more than 30% of physicians are now salaried, and 40-50% may be salaried within the next five years.

Implications for Lenders

Health care will have a transaction-rich environment for at least another five years. The days of the free-standing hospitals and solo physicians are waning. Mergers, acquisitions, and strategic business relationships will transform HMOs and providers into large regional cartels, some on a multi-state basis. Merger and acquisition activity among hospitals could drive a new round of refinancings. Consolidation among publicly traded HMOs and physician management companies will rise, following current Wall Street trends. …

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