Many hospitals and healthcare facilities have come face-to-face with the reality that factors largely out of their control, like insurance reimbursement and government funding, will ultimately determine whether they survive—perhaps in a different form with a new owner or in a downsized facility—or shut down.
This environment creates huge challenges for chief executive officers to stay one step ahead of the executioner, as the current situation only offers the dark promise of higher operating costs and dwindling margins.
To CEOs, it can seem like a never relenting recurrence of Nightmare on Elm Street, as many healthcare leaders are kept up at night by the impending threat of:
These and other environmental trends are impacting the hospital industry as never before. While healthcare nationally continues to grow in dollar value and as a percentage of GDP (from 8.8% in 1980 to 16.1% in 2007), the hospital share of the national healthcare budget has dropped precipitously. In 1980, for every $100 spent on healthcare, over $41 was spent on hospital services. In 2007, that number dropped to $29. This ongoing trend will only result in continuing revenue pressure on hospitals at a time when demands for capital have never been greater--resulting in a "capital shortfall" where use far exceeds available resources.
Over the next few years, hospital industry experts expect a period of prolonged difficulty, characterized by increased revenue uncertainty and cost pressures, reduced access to capital, and a continued erosion of public and political support. Coupled with the ongoing operational challenges of aging physical plants and equipment, as well as the environmental challenges mentioned earlier, there is growing concern for the health of the industry and its long-term ability to meet the needs of the communities it serves—especially the poor and underserved.
A Movement towards 'Deeper Waters'
Within the last few months several major healthcare facilities located on the eastern seaboard, ranging from nonprofit acute-care hospitals to imaging centers to nursing homes, have filed for Chapter 11 bankruptcy protection. Simply put, they ran out of cash. Decreased reimbursement and rising costs, with an overabundance of indigent care, aging facilities, and expensive technology, are responsible for this deteriorating trend, with indications that more bankruptcies loom on the horizon.
Increased Chapter 11 filings will likely become a common occurrence in states like New York, New Jersey, California, Florida, Michigan, Texas and Hawaii, which have high healthcare delivery costs and declining economies. In addition, the advent of the "Federal Initiatives Deficit Reduction Act of 2005," created to establish a Medicaid Integrity program, will have a large impact on imaging centers because the federal government has lowered its reimbursement to them, which threatens their operating margins and future stability. It also appears that the government feels some states have an overabundance of healthcare facilities and only the strong will survive. Organizations will need to have a lean operating expense and a continued commitment to generating marketing referrals and getting their new business bill out and collecting on it.
As a result of all of the above considerations, I see the following sectors under attack:
Other Likely Scenarios
It's not all gloom and doom. I also believe that:
It's going to be a turbulent time for the healthcare sector. Only the savviest healthcare leaders will weather the storm unscathed.