The state of the healthcare system is a consistent topic of public debate and discourse, so much so that it is one of the most polarizing topics confronting the entire nation. Uncertainty surrounding the healthcare industry has never been greater, as the new Presidential administration is seemingly committed to modifying or repealing the Affordable Care Act originally enacted in 2010.
 
ABL Advisor recently reached out to Gordon Brothers for the company’s insights into the major issues impacting this challenged and evolving sector – one that will surely have an impact on the asset-based lending industry.

In the following joint interview, Bob Maroney, President, Commercial and Industrial and Rick Schmitt, President, Valuations, share their collective insights.

ABL Advisor: The healthcare sector has experienced significant challenges over the past few years. Some industry analysts attribute these challenges to the impact of the Affordable Care Act (ACA), while others attribute them to changes in how healthcare services are provided today. From your perspective, what is/are the major underlying factor(s) causing this sector the greatest level of financial stress?

Bob Maroney & Rick Schmitt: It’s really a combination of everything you just mentioned. We’re seeing a confluence of significant financial challenges, most of which stem from reimbursement cuts, the shift from inpatient to outpatient services, and rising costs to maintain or update equipment and technology to meet industry standards.

Reduced reimbursement from health insurers, coupled with necessary investments in personnel, equipment and technology, as well as the overall rising cost of care, have led to significant margin compression in the traditional hospital setting. And the increasing challenges associated with complying with HIPAA and the HITECH Act – especially in today’s digital world of electronic medical records – have created complex, expensive financial stressors. Providers in general face high costs in compliance as well with a range of federal laws, including anti-kickback and general medical malpractice rules.

There is also a shift in payments – one of the ACA’s primary objectives is to change healthcare incentives, rewarding quality of care rather than quantity of care – which has adversely impacted hospitals serving Medicare patients the most. Those providers with high Medicaid/Medicare patient populations will need to adapt in order to survive in a world with lower reimbursements.

Further complicating matters are changes in consumer behavior, driven largely by the increase in high-deductible plans. Patients are no longer necessarily looking for the most convenient place for services; they are now considering their out-of-pocket cost, an approach that has driven many consumers to seek care outside of traditional hospitals. Finally, a challenge facing some rural hospitals is a scarcity of medical talent, particularly in primary care and in highly specialized areas such as cardiology and oncology. This problem is another reason contributing to consolidation.

ABL Advisor: What are some of the implications of these pressures and challenges?

Maroney & Schmitt: What our team has seen is that these financial challenges have led to a steady increase of healthcare bankruptcies and consolidation over the last three years, a trend that began in Q4 2014 and has continued as hospitals merge or become part of larger health systems. In fact, the number of distressed M&A deals involving healthcare providers in the U.S. swelled from 13 transactions during 2013 and 2014 to 94 transactions during 2015 and 2016, according to data compiled from CapitalIQ.

It’s a particularly tough environment for hospitals in rural America right now. Over 60 hospitals in rural areas have closed since 2010 (North Carolina Rural Health Research Program). We see this trend continuing, especially since the reduction in Medicaid/Medicare reimbursements and the increasing availability of alternative healthcare solutions directly impacts hospitals in rural areas. Another reason these hospitals will have an increasingly difficult time staying relevant and profitable is that the increase in outpatient providers will reduce the need for beds in a hospital setting. The fact that some states have failed to expand Medicaid or opted out of Medicaid makes the problem even worse.

In addition, independently employed physicians are aligning themselves with hospitals or healthcare systems to relieve their own financial burdens and take advantage of the technology, equipment and economies of scale that a larger entity provides. Increasing regulatory and administrative requirements favor larger providers with dedicated staff relative to small, independent practices.

ABL Advisor: You mentioned specialized outpatient solutions, which are now available from a myriad of healthcare providers (orthopedic clinics, urgent care clinics and the like).  What impact will the growth of these specialty providers have on the already struggling hospitals? Is further hospital consolidation a truly-effective “survival strategy” for hospitals?

Maroney & Schmitt: As mentioned before, the increase in outpatient services is lessening demand for traditional hospital beds. We’re seeing more satellite locations, bigger hospitals getting bigger, and smaller hospitals getting smaller. And, just like hospitals in rural areas, smaller hospitals will be forced to close or consolidate with larger healthcare systems, strengthening the probability of larger hospital survival.

That said, specialty providers offer a more consumer-friendly option, as they provide speed, availability and affordability. And consumers are responding to lower prices and more streamlined approaches offered by outpatient and urgent care clinics. This has bifurcated revenue away from hospitals, causing another layer of stress. 

Hospitals should also consider expanding service line offerings and specialty programs related to oncology and rehabilitation services, especially since treating cancer and other serious illness or injury typically requires extended outpatient care in a hospital setting. These are two very lucrative service areas that should help preserve patient loyalty and retention, as well as generate long-term revenue streams that could help support the hospital for many years to come.

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