Predicting Health System Goals Based on Macroeconomics
- Published on August 30, 2018 originally on Linked in
Depending on where you live, you believe that healthcare is changing dramatically or you believe that it will never change. The map below from the Center on Budget and Policy Priorities provides clues to where there is proactive motivation to change in health systems based on current economics. Of course change appetite is related to leadership and personality types. This post just focuses on economic motivation. This is a broad generalization and does not include safety net and other hospitals that are financial victim (and privileged to serve) challenging demographics and location specific zip code geography. These latter hospitals have had to adjust and sometimes close despite the great financial health of their states.
If NonProfit health systems increase the amount of cash on capital or equity markets fall, then Non Profit health systems could get into trouble. The purpose of this post is to empower healthcare executives, in particular physician executives to have mature, productive discussions with their teams about the impacts of economics on their health systems.
Operating margins for not-for-profit hospitals fell to 1.6 percent in FY17, the lowest level one rating agency, Moody’s has ever found in its tracking. However, most insiders don’t predict behavior change by health systems until risk contracting crosses a 20% threshold.
The Moody’s Investor’s Service analysis of audited FY17 financial statements for 303 free-standing hospitals, single-state health systems, and multi-state healthcare systems found “significant income contraction” cut median operating margins from 2.7 percent in 2016.
Therefore, “more health systems are considering risk contracting with real upside and downside risk corridors.” according to the Healthcare Financial Management Association (HFMA)
How Intermountain is Bucking (or Setting) the Trend
Why did some Intermountain employees complain about the CEO and executive team’s transformation plan in a recent Utah Deseret news article? Because Utah as an economy overall is doing well and IHC currently has healthy capital reserves. In their complaints, these specific employees had trouble understanding the need for changes in light of current IHC economics. Dr. Harrison can now show them this recent Moody’s analyst report depicting expenses exceeding revenues for the Non Profit sector, two years in a row. He could underscore how if Utah (or Texas, Arizona, California, fill in the blank) fortunes changed, then IHC would be quickly scrambling to react rather than have the opportunity to execute the plan they have put in place.
You can broadly predict current appetite for transformation in health systems based on state economics for the last two years. This mirrors what we hear from healthcare execs nationwide as well.
Federal Funds Rate
The seemingly good news for NonProfit health systems is that if central bankers see widespread lack of wage growth (like there is now), they may not raise interest rates and may still be able to suppress inflation. In the past, when interest rates have been kept low for too long, it’s triggered inflation. But we’re living in unique times for a variety of reasons, namely the concentration of the job market. This could buy NonProfits some time from restructuring and cutting costs. Though there is another factor.
Interest Rates on Debt:
Your health system may be able to delay transformation or not depending on interest rates for debt.
“At times, debt markets in effect do central bankers’ job, pushing long term interest rates higher, as soon as loanable funds become more scarce.” according to Forbes
Basically if your team believes both:
1) Interest rates will not rise, therefore will not make buying stock less affordable.
2) That the top companies in the Fortune 50 have nowhere to go but up.
If you and your board board believe these two statements, you might bet on a continued bull run (equity markets staying up) as a reason not to transform your health system.
According to Moody’s, the decline in median operating margins is off from a recent peak of 3.4 percent in 2015. In addition, median operating cash flow declined from 9.4 percent in FY16 to 8.1 percent in FY17.
“The significance is that the decline has been happening for two years now and it is at an all-time low,” Rita Sverdlik, a Moody’s analyst, said in an interview. “The general takeaway is that profitability levels are declining.”
The findings echoed a preliminary 10-year analysis of 160 hospitals’ FY17 performance that Moody’s issued in April. In December 2017, Moody’s revised its outlook for the not-for-profit and public healthcare sector from stable to negative.
What’s Driving the Decline
Behind the declining margin growth, according to Moody’s, is a faster decline in the median annual revenue growth rate (from 6.1 percent in 2016 to 4.6 percent in 2017) than the decline in median annual expense growth rate (from 7.1 percent in 2016 to 5.7 percent in 2017). Drivers behind those expenses include labor shortages and high-cost temporary labor. Revenue is suffering from lower commercial insurance rate increases, a growing share of low-pay governmental payers, and increased supply costs. Moody’s also found that the median commercial insurance rate declined to 31.9 percent from 32.6 percent.
Here is an example from Becker’s Hospital review of unaudited bondholder documents which shows one hospital’s net income https://emma.msrb.org/ES1194379-ES933433-.pdf.
We hope this is helpful for the strategic, proactive healthcare executives, in particular physicians to engage in dialogue around scenario considerations related to broader economics.