Corporate Research Group’s Weblog

Two bits of financial information about West Penn Allegheny Health System, which is being acquired by Highmark. 

1. WPAHS lost $146 million in the fiscal three years ended June 30, 2010 and an additional $20 million in the fiscal nine months ended March 31, 2011.

2. WPAHS gets about 24% of its revenues from Highmark.

Hospital executives in a survey by Cowen & Co. say they don’t expect any near-term recovery in utilization of medical services for commercial health plan members, and nearly a third of those surveyed believe that this lower-than-average trend may be the “new normal.”  To me that’s a sure sign that utilization is about to increase.  Executives admit, however, that utilization picked up a bit in the fourth quarter of 2010.  The survey notes:

Fewer surveyed hospital executives indicated large reductions in inpatient and outpatient volume in 4Q/10 relative to earlier in the year. Those hospitals witnessing down inpatient volume generally indicated declines in the 1-6% range versus 6%-plus. However, hospitals experiencing outpatient volume strength generally saw rises in the 1-3% range, with fewer indicating a rise of 4%-plus versus 3Q/10. Commercial volume trends in 4Q/10 seemed to consolidate towards an average of flat on both inpatient and outpatient metrics, with fewer extremes (either up or down). 

The Cowen survey mirrors those of other Wall Street firms.  An analysis by Credit Suisse finds that while hospital utilization volumes remained soft as late as the third-quarter of 2010, “volume trends improved as we moved through the quarter.”  Deutsche Bank also finds that declines in MCO inpatient utilization trends appear to be moderating.  In July, Deutsche Bank noted that MCO discharges were down 5.7%, compared to a 2.9% decline in September. 

Is this the “new normal” or just the end of a downcycle?  My guess is it’s the latter.

The Integrated Healthcare Assn. has released a report on the lessons of accountable care organizations in California, which contains some interesting tidbits for health plans.  (hat tip: Charles Boorady, Credit-Suisse).  Among the lessons cited in the report:

• “ACOs are not a panacea for health care spending control: Some of California’s provider organizations have been able to use their market clout to extract high payments from health plans, as the plans’ ability to exclude providers from their networks is limited by consumer demand and regulatory network adequacy requirements. Higher-cost and inefficient providers have not faced enrollment penalties because the current California market does not incentivize purchasers or consumers to choose lower-cost or more cost-efficient providers. As ACOs are rolled out across the country, health insurance benefit designs should reward patients for choosing higher-value ACOs.”
• “ACOs must be agnostic to insurance type: Most provider organizations in California have focused on commercial, Medicare, and Medicaid HMO plans…but for ACOs to be viable across the country, mechanisms must be found to encourage PPO and traditional Medicare and Medicaid patients to use their services.”
• “Health plans acting in concert on payment methods and performance measurement helped facilitate the growth of California’s provider organizations, and should also play an integral part in fostering ACO development nationally:…In the early days of medical group formation, plans often acted in concert and adopted similar capitation payment parameters, which lessened the administrative burden on groups….Health plans must be ready and willing to foster ACO formation along similar lines, as a critical mass of payers will be pivotal to their success.”

David Bertke, vice president of managed care at hospital system TriHealth Inc. (Cincinnati), in response to my LinkedIn question: Are medical homes/ACOs the future or just another fad?:

We have over 100 employed PCP’s and they are concerned about the future because of their relatively low pay. That could be attributed to the under value attributed to CMS weights. In a meeting recently, a medical director with Humana called medical home the last hope for PCP’s. So at least in the opinion of one person, the answer is that it better not be a fad.

Liz Sweeney of Standard & Poor’s discusses how healthcare reform will impact hospital finances in this video interview with our own Zarina Ahmed.  From the S&P offices in New York, May 20, 2010.

Fitch Ratings (New York) has maintained its negative outlook on not-for-profit hospitals and health systems, citing the recession and government cost-containment efforts, among other factors.  Fitch also hits on a theme I explored after the recent setback in the push for healthcare reform , i.e., the need for reform isn’t going away, no matter who the junior Senator from Massachusetts is:

The underlying factors that have been driving reform efforts, despite the recent halt in the legislative process, remain. These factors include the broadly supported view that the uninsured problem must be addressed, that there is a need to rein in healthcare spending, and unabated calls for greater transparency, quality and value. The same characteristics that Fitch believes provide credit strength and credit weakness in a contemplated reform environment still apply, whether change is mandated by statute or by market and regulatory mechanisms.

Now it’s the hospital industry’s turn to complain about proposed Medicare reimbursement cuts for 2010.

The Centers for Medicare & Medicaid Services said on Friday that it would raise rates for inpatient stays at acute and long-term care hospitals by 2.1% for fiscal 2010; however, after certain adjustments, the increase disappears.

According to Leerink analyst Jason Gurda, “All in, CMS is proposing to reduce FY2010 rates by 0.5% for inpatient hospitals and by 1.2% for skilled nursing facilities.” 

Not surprisingly, the American Hospital Assn. is upset: “The proposed rule includes an initial market-basket update of 2.1% for those hospitals that submit data on quality measures; hospitals not submitting data would receive a 0.1% update.  However, the rule then proposes a cut of 1.9% to eliminate what CMS claims is the effect of coding or classification changes the agency says do not reflect real changes in case-mix….When coupled with the lower-than-usual market basket and other policy changes, the average decrease in payments would be 0.5%.

“‘We’re extremely disappointed with the level of payment for FY 2010,’ said Tom Nickels, AHA senior vice president for federal relations. ‘The reductions go well beyond what is appropriate and fly in the face of data showing still-falling Medicare margins that are at an all-time low. Hospitals cannot sustain these additional cuts in an already exceptionally underfunded system.’”

I wonder how AHA would feel about a public health plan paying Medicare rates.

Addition (May 5, 2009): A CMS spokesman tells CRG that under the proposal for 2010, “Total payments (not rates) would fall 0.5%.  This reflects a 2.1% inflation (market basket) increase, which is offset by a 1.9% up-coding reduction, a 0.3% outlier reduction, a 0.2% reduction due to the expiration of Section 508, and a 0.2% reduction due to the residual effects of the DRG and wage index budget neutrality.”

The equity research department of Oppenheimer surveyed 50 hospitals and found that “same store inpatient admissions will grow 1.5% in 2008, down about 50 basis points from the admissions growth reported last year. This is slightly different that the volumes reported by the publicly traded hospitals, which reported volume growth of just 0.2% in 2007, and 0.6% in the first half of 2008.

“On average, inpatient hospital contracts are re-negotiated six months in advance of the start date on the new arrangement. As a result, hospital rates shouldn’t have much impact on the financial performance of [managed care] plans, since changes in unit cost should already be reflected in the premium rates set by plans.”

Not-for-profit hospitals may be hurting overall, as Standard & Poor’s recently reported, but Carilion Health System of Roanoke, VA, is among the hospitals able to utilize its dominant position to drive pricing and profits, according to an article in yesterday’s Wall Street Journal.  The merger of Carilion with Roanoke’s other hospital in 1989 created what critic’s claim (and what Carilion denies) is a monolopy in the local market that is driving up healthcare costs, the Journal article says.  Writes the Journal:

“The cost of health care in the Roanoke Valley—a region in southwestern Virginia with a population of 300,000—is soaring. Health-insurance rates in Roanoke have gone from being the lowest in the state to the highest.

“That’s partly a reflection of Carilion’s prices. Carilion charges $4,727 for a colonoscopy, four to 10 times what a local endoscopy center charges for the procedure. Carilion bills $1,606 for a neck CT scan, compared with the $675 charged by a local imaging center.

“Carilion’s market clout is manifest in other ways. With eight hospitals, 11,000 employees and $1 billion in assets, the tax-exempt hospital system has become one of the dominant players in the Roanoke Valley’s economy. Its dozens of subsidiaries include businesses ranging from athletic clubs to a venture-capital fund.”

Carilion is now trying to convert to a clinic model, angering local doctors who wish to remain independent, the Journal reports, and also plays hardball with patients who can’t afford to pay their bills. 

Of course, there are other hospital systems that dominate local areas—systems built in part as a response to the growth of managed care.  What’s interesting is that from 1991 through 2007 managed care premiums nationwide rose about 6% to 8% annually.  That encompasses years like 2003, when rates rose nearly 15%, as well as years like 1995, when rates actually fell slightly.  The figures are based on CRG’s annual survey of employers, health plans and employer coalitions.

Looking at it another way, per capita expenditures on healthcare in the U.S. have risen at a compounded annual rate of about 6% to 7% since 1970.

As I noted in an opinion piece two years ago, “So what caused the wild premium swings of the last decade?  The short answer is managed care.  We’re all familiar with the chain of events.  HMOs squeezed providers and limited access to care in the early 1990s and successfully drove down the rate of increase in costs.

“Then came the HMO backlash.  Consumers demanded open access.  Hospitals consolidated into health systems with negotiating clout.  Managed care plans—bleeding red ink in part because of an inability to control costs, in part from underpricing to win market share—did the predictable; they raised rates to avoid going out of business. 

“So after nearly two decades of bitter and destructive battles between health plans, consumers, providers, regulators and legislators, we sit here in 2007 with healthcare premiums still rising at about the same annual level as over the past 17 years and costs rising at about the same annual level as over the past 37 years.  The expectation is for national healthcare expenditures to rise a tad over 7% annually for the next five to six years as well.”

Not a pretty picture, no matter who you’re pointing fingers at.

Standard & Poor’s said a new report “Tough Times Take a Toll on Credit Quality of U.S. Not-for-Profit Health Care Sector” that it expects continued deterioration in the margins, balance sheets and therefore credit ratings of not-for-profit hospitals.  Writes S&P: “Credit quality in the U.S. not-for-profit health care sector continues to shift downward…Due to the sector’s weakened financial metrics, there has been an increase in negative rating changes and outlooks in the first half of this year….Standard & Poor’s expects the number of downgrades to exceed upgrades for the rest of 2008 and probably in 2009, as business and financial challenges squeeze operating margins and weaken balance sheets.”  S&P blames the margin squeeze on “shifing payer mixes toward greater dependence on government payers, increasing self-pay burdens, rising bad debt, business volume concerns, and difficulty in recruiting and retaining physicians.”

An interesting study (full report, press release) from the Public Policy Institute of California suggests that “Medi-Cal patients—not the uninsured—are most likely to use crowded hospital emergency departments.” 

That’s because only half of California doctors participate in Medi-Cal, the study said, “which means access is more difficult and an emergency room visit is more likely for these patients.”  Immigrants, meanwhile, are the least likely to seek E.R. treatment, the study found.  All told, the study said four in 10 E.R. visits are “potentially avoidable.”  Among the study’s other finding:

- “The uninsured are nearly twice as likely to visit the emergency department as the privately insured but far less likely than Medi-Cal or Medicare patients. This is likely a reflection of the insurance coverage of different age groups: Medi-Cal covers many children, while Medicare patients tend to be older and in frailer health.”

- “Children under 18 account for a quarter of emergency department visits. Children covered by Medi-Cal make more potentially avoidable emergency room visits than privately insured and uninsured children. “

- “The three counties with the highest per-capita emergency department visit rate are in the Central Valley: Stanislaus, Fresno, and San Joaquin. This is a region with some of the highest poverty levels in the state, fewer physicians, and large numbers of uninsured residents.”