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Healthcare is in 'an economic boom,' and that means it's time to plan for disruption

Despite favorable conditions, hospitals must shore up efficiencies, distinguish themselves from competitors, and 'make it on Medicare payments.'

Beth Jones Sanborn, Managing Editor

Healthcare spending continued its upward trajectory last month to $3.6 trillion annually and mostly for a pair of reasons: Hospitals keep raising prices while Americans are spending more on care services. 

While some experts said that such hospital pricing growth might be attributable to and help bring about favorable economic conditions that have spurred more hiring, others contended that it is symptomatic of an old business model and lack of transparency. 

Either way, those interviewed agreed that what's status quo today will change dramatically over the next five years and hospital leaders need to prepare.

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Upside: Hospitals are fueling job growth

The Health Care Price Index rose by 2.2 percent last month compared to the previous year, the highest rate in six years since January 2012, according to a new report from Altarum. What's more, the main driver behind that record was a 3.7 percent spike in high hospital price growth, a figure largely unchanged since February, which was the highest rate seen in more than 8 years.

Additionally, year-over-year healthcare spending growth rose from 4.5 percent in December 2017 to 4.9 percent in February 2018 led by hospital spending growth, which grew to 4.3 percent in February, up from a recent low of 2.7 percent in November 2017. It now represents 32 percent of national health spending. 

Year-over-year spending increased in all major categories. Nursing home care grew the fastest at 7.9 percent and prescription drugs the slowest at 4.2 percent, the report said, and national health spending grew by almost 5 percent in February 2018 to $3.6 trillion.

The good news? Through the first quarter of 2018 the health sector added 70,000 jobs, a number consistent with 2017 average quarterly growth, and it was hospitals that were responsible for 30,000 of those jobs. In fact, the slow rise in hospital hiring offset slight declines in hiring in ambulatory settings and nursing and residential care. The hospital numbers fall in line with a continued trend that started last year, adding 8,000 jobs in 2017 Q1; 18,000 in Q2; 24,000 in Q3; and 27,000 in Q4, Altarum said.

Paul Hughes-Cromwick and Ani Turner, codirectors of sustainable health spending strategies for Altarum wrote the report and said there is a connection between the spike in hospital pricing and job growth. The hospital pricing is showing up particularly in public payer prices and that would generally be due to some policy change or new set of rates coming out of Medicare, for example, but looking at CMS policy that there wasn't all that big of a in reimbursement. 

"It looks like on the inpatient side there was about a 2 percent increase in basic Medicare reimbursement levels, but there are a lot of other things that determine actual reimbursement," Turner said.  

If all this looks like hospitals are simply charging more for the same services, Ashley Thompson, senior vice president of policy at the American Hospital Association, said that the cost of providing care has also risen. Thompson pointed specifically to drug pricing, which soared $63,2 percent during the last decade as just one example. 

"The cost of providing care continues to rise due to a range of factors including increased regulatory burdens and because Medicaid and Medicare continue to pay less than the cost of care," Thompson added. "Another major challenge hospitals and health systems face when working to reduce the cost of care is rapidly escalating drug prices. For example, a 2015 study conducted by NORC at the University of Chicago for the AHA found that inpatient drug spending per admission increased 38.7% from 2013 to 2015. In addition, hospitals and health systems provided $38.3 billion in uncompensated care in 2016, up from $35.7 billion in 2015."

Healthcare's 'economic boom' 

Short of any indication that a policy change triggered pricing growth, one piece of evidence could very well be labor expenses and investments. Hospitals were not acquiring new talent at all in 2013 and 2014. Then came increases in hiring with expanded coverage under the Affordable Care Act. After a tapering off in late 2016 into 2017, hospital hiring is looking pretty solid again.

"In Q1 2018, we're adding 30,000 jobs in hospitals," Turner said. "That's about where it was in late 2015 early 2016 when we were still in what we were thinking of as reaction to expanded coverage, more paying customers and a better financial situation for hospitals, particularly those in expansion states. Now late 2017 and early 2018 hospital hiring is picking up again, not tapering off. So hiring does seem to go along with data about increased prices."

Indeed, many hospitals are likely taking advantage of favorable economic conditions to try and hire in preparation for forecasted physician and nursing shortages.

"We are in an economic boom. We know that our population is aging and we also know that providers will be facing increasing difficulties with their own hiring. So it does make some sense that this would be a good time to try to hire and that would tend to bid up the wages that they pay," Hughes-Cromwick said.

Hughes-Cromwick and Turner said highly skilled nurses are the most in demand and it's likely that bidding wars are emerging in these very hot markets. A large segment of the experienced nurse population is right at retirement age so there is a looming nurse shortage on the horizon. 

"While nursing schools have been ramping up and there are a lot of new graduates, it takes a little time to get the experience. That may be another area where they are looking to strengthen," Turner said.

They also said even though that 32 percent share of total healthcare spending for hospitals might seem big, it has been a fairly consistent figure for years and is expected to decrease, albeit very slowly. 

"There's been a shift away from inpatient care to outpatient care, that is why that number isn't bigger, but you are still talking about more than a trillion dollars annually."

Beyond the boom: Disruption

Altarum's findings come with a modicum of caution, too, if only because they are in stark contrast to what was behind the ACA in 2010 and the push by Washington to get the industry into value-based payments, said Rita Numerof, president and co-founder of consulting firm Numerof and Associates.

"Health systems need to know there's a ceiling and the fact that it's still rising is concerning to me," Numerof said. "It's going to invite more regulation, more competition and also opportunities for innovation and disruption."

[Also: New Jersey beats Amazon to the punch on self-insured health plan]

Numerof cited the proposed CVS Health/Aetna merger, Walmart's steady move into the healthcare space, and the head-turning move by Amazon, JP Morgan and Berkshire Hathaway in announcing a their own joint healthcare venture as indicators that decades of the status quo have pushed the healthcare industry and consumers to a point where disruption is inevitable.

She said hospitals have been hit by downward pressure on reimbursement, have had massive layoffs and part of it is because volumes have been soft. Providers are trying to maintain elective procedures and revenue, and stem the shift to outpatient procedures.

"Hospital leaders should be concerned," Numeroff said. "They are going to have to understand their own costs differently and be able to define service lines across the continuum and create an economic and clinical value argument with data behind it that's going to be compelling to consumers, payers, employers and others that would want to use their services."

Making it on Medicare payments

Altarum's Hughes-Cromwick said one thing that's has been true since the country emerged in June 2009 from the recession to an historic slow down in healthcare spending is that providers have had to get very serious about trying to contain their costs. The hospitals that are the best performers not only focus on clinical indicators but are also doing their best to take out unnecessary costs. 

"In the past, hospital CEOs would say they have to 'make it' on their commercial business," Hughes-Cromwick added. "Now they will acknowledge that to be successful more and more you have to try to make it on your Medicare payments."

Turner cautioned that between full employment, expanded coverage, less uncompensated care and the dust still not quite settling yet on offsetting adjustments to DSH payments, hospitals have been in a favorable period. But it's a little bit of calm before the storm. 

"Budgetary constraints, the aging population and the fact that more and more of the payer mix is going to be in publicly funded programs like Medicare means now is the time to tighten efficiencies and expect more tightening in the years to come," Turner said.

Twitter: @BethJSanborn
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