Recently Congress approved a two-year Federal budget deal that raises funding levels and suspends debt limits until 2017. This has generated lots of controversy among opinion leaders and stakeholders in the healthcare industry.
While it is a known fact that present realities of the state of the world economy has strained the American economy, which affects the government’s spending power, it has been revealed that the budget cuts were focused on health care to generate funding for other sectors of the economy. I predict this will have a massive impact on the health care industry.
Cuts will most certainly include Medicare, FDA, NIH, CDC, and Affordable Care Act programs that have been instituted to bring care to citizens with low spending power. High among the impacts of these cuts is a reduction in Medicare expenditures, which greatly inhibits the ability of medical schools and other teaching hospitals to provide critical care.
The 2% cut in Medicare reimbursements that come with the budget will ultimately mean the average major teaching hospital will have almost $14 million dollars less to support critical patient care services often unavailable in most communities―most impacted are trauma centers, poison centers, psychiatric units, burn units, etc.
Already many hospitals within the country are faced with patients carrying illnesses and injuries of varying degrees that require the use of sophisticated instruments, technology, and expertise. The budget cuts will affect the availability of equipment required to perform high tech surgeries such as various transplants. The cuts won’t result in a loss across the board because some high-tech teaching hospitals will effectively cope with the demand for their services.
Health care budget cuts will also affect medical research. Part of the budget cut (sequestration agreement) is the plan to reduce funding for medical research by up to $1.5 billion in the first year alone and then more later that will result in approximately 703 fewer new and competing research projects and 1,357 fewer research grants in total. Cuts have also led to a 21.6% drop in grants awards.
How does an organization survive? Mergers and affiliations?
That is a question that most healthcare entities are trying to figure out. We are seeing consolidation everywhere in health care ranging from health systems to payers, and even on the health IT vendor side. It seems as if I hear about a potential merger or affiliation weekly on the hospital provider side.
The question is: How big does a health system have to be to survive? $2 billion? $6 billion?
I will speculate that the magical number should be between $3.5 billion to $4 billion for a stable future. There are a few key areas to be aware of during mergers.
According to Moody’s, consolidation among hospitals and hospital systems will have a negative credit rating for the acquirers due to integration risks and the increase in leverage where a purchase is financed with debt. The smaller hospital that is acquired could gain a positive credit rating from being bought by larger, stronger systems.
The positive credit rating will definitely be an attraction for small to mid-sized hospitals in the affiliation discussion. The affiliation model allows the bigger organization to expand their foot print, increase their buying power, and increase their negotiation power while allowing the smaller to acquired mid-size hospital to remain independent.
This is the trend we will see for the remaining of 2015 and especially in 2016.
We are starting to see a lot of creativity in mergers, especially among competitors. Recently, Kaiser Northern California and Dignity Health announced a joint venture to own St. Joseph Medical Center in Stockton. Kaiser will own 20% while Dignity will have an 80% stake.
The two health systems both already have a presence in the area and this partnership will allow both systems to focus on population health management to the benefit of area patients. No one would have guessed a few years ago that competing health systems would work together in a joint venture.
As we see the shift and decline in reimbursement, health systems have to be creative in their solutions.
David Chou
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