Move From Fee-For-Service Medicine Hits Hospital Profits Again

By | November 19, 2018

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The shift away from fee-for-service medicine continues to dog U.S. nonprofit hospitals and health systems headed for another year of cost-cutting and consolidation, a new report indicates.

Fitch Ratings says “acute care operating profitability” is set to deteriorate for a third consecutive year as more Americans enroll in Medicare and Medicaid while policymakers shift payments to hospitals from these programs to value-based payment models. This means hospitals will be rewarded more for making sure their patients are treated in less costly outpatient settings rather than the more expensive acute care treatment inside an inpatient facility.

“Acute care credit strength as defined by operating profitability appears to have peaked two years ago, with a second year of across-the-board deterioration of operating margins seen in 2017, with a possible repeat in 2018,” Kevin Holloran and his colleagues at Fitch Ratings wrote in their special report on nonprofit hospitals and health systems.

Health insurers and the government are increasingly moving away from fee-for-service medicine to value-based payment models that measure outcomes and stress population health strategies designed to make sure patients are getting care in the right place, in the right amount and at the right time. This trend is designed to keep people out of the hospital, shifting reimbursement to outpatient models and putting hospitals at greater financial risk.

Insurers like Aetna, Cigna, Humana, UnitedHealth Group and Blue Cross and Blue Shield plans are increasingly paying a larger share of their reimbursements to value-based care models. As one example, UnitedHealth Group, which is the nation’s largest health insurance company, earlier this year said it’s paying nearly 60% of its reimbursements – or $ 64 billion – via value-based care models that are rapidly replacing fee-for-service medicine in the U.S.

But the Trump administration is signaling that it, too, is going to escalate the move to value-based care models that began with the Barack Obama administration and its call to shift 50% of Medicare payments to alternative reimbursement models by 2018.

Increasingly, the Centers for Medicare & Medicaid Services is highlighting more ways alternative payments will be used to move away from fee-for-service medicine.

“At CMS, we’ve been working to lay that foundation, including through supporting innovation in health care on many levels,” CMS administrator Seema Verma said Thursday at the Alliance for Connected Care Telehealth Policy Forum for Health Systems. Its part of our larger vision of moving to a system that is value based—that rewards value over volume by bringing the best to patients.  When we start paying for value, we will foster innovation as providers look for ways to compete for patients by providing the highest quality care at the lowest cost.”

These trends pushed by CMS are a key reason Fitch sees hospitals and health systems engaging in even more merger activity.

“Size and scale are ‘better’ for a hospital’s rating if its enhanced size and scale means improved operations, stronger balance sheets and more market essentiality,” Fitch’s Holloran said. “Conversely, a hospital getting bigger just for the sake of getting bigger at time can lead to an initial dip in operating profitability as the two or more organizations come together.”

A report last month by consulting firm Kaufman, Hall & Associates shows a “modest slowdown” in hospital and health system merger and acquisition activity in the third quarter of 2018 with just 18 transactions recorded. That was a 38% decrease compared to 29 deals in the third quarter of 2017.

But analysts don’t expect that slowdown to last.

“Although we have seen slight reductions in certain quarters, we remain in an unprecedented period of hospital and health system M&A activity driven by powerful macro- and micro-economic forces,” Anu Singh, Managing Director at Kaufman Hall said.

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