The CFA Perspective

Why Many Hospital CFOs Are More Optimistic About the Future

Posted by Peter Spiers

3/18/17 8:03 AM

Why Many Hospital CFOs Are More Optimistic About the Future.jpgThe Basis for Renewed Financial Optimism

After more than a decade of paltry economic growth, many CFOs and healthcare sector financial analysts are becoming more bullish on the future of their health services organizations’ financial positions and performance. This is due in part to the changing financial landscape emerging within the US economy.  A number of promising signs and trends1 support this notion:

  • Significant tax reform will most likely be enacted and made retroactive to January 1, 2017
  • $3 trillion increase in the US stock market value over the past 2-3 months
  • New plans/executive action to decrease the overall regulatory burden on US businesses, including the healthcare sector
  • Increased jobs growth and new business start-ups
  • Enactment of a projected $1 trillion US infrastructure bill
  • Increased market-based healthcare reforms will increase access, reduce costs/taxes and regulation
  • New tax and business-friendly environment stimulating repatriation of nearly $1 trillion in wealth from international companies
  • Analysts are predicting 2017-2018 will result in a better investment climate for hospitals/health systems

So, how do any of these factors pertain to increased hospital CFO optimism?  And why would any of this positively impact hospital/health system cardiovascular services?

Potential Impacts on Hospitals/Health Systems

From capital budget support to bolstering operational revenues, hospitals have relied on various types of non-healthcare-related revenue streams to survive and thrive.  Even many of the tax exempt not-for-profit hospitals have – in the tepid economic, high tax, heavily regulated US business environment of the last decade– been operating with the wind not beneath their wings, but blowing against them.  With the steady decline in reimbursement rates from all payer types, and increasing bundled payment, uncompensated care and cost ratios, hospitals require substantial financial support from investment income, cost reduction and other revenue streams.

The anticipated new financial landscape is a welcome change.  For example, in California, and many large metropolitan markets across the country, many hospitals operate in high “at risk,” revenue discounted and Medicaid-heavy environments. They must deal with high levels of uncompensated care, reimbursement erosion and/or over-saturation of competitor hospitals, making sustainable and/or increasing positive margins difficult.

A review of publicly-reported California hospital financial performance data from 2010-2015 showed that 23% to 41% of total revenues for California hospitals came from investment income and other sources2.  California hospitals are not the only ones in the US relying on non-patient care generated revenue to maintain operations.  With the recent positive changes in the economic outlook, CFOs are beginning to feel for the first time, in a long time, the wind may be starting to blow beneath their wings again!

Are New Capital Projects a Possibility?

Many hospital CFOs now sense that their consolidated financial statements will likely improve with a more robust economy, tax relief, expanded investment portfolios and GDP growth above 2%.  A likely net result is that hospitals will be in a better position to develop strategic and other business ventures and grow investment income.  Based on the rate and magnitude of economic growth going forward, and the implementation of some or most of the economic changes discussed above, CFOs will most likely be in better positions financially to develop new clinical programs and services.  Putting long shelved projects back on the to-do list will be a good sign that things are better – with the net result being steadily improving financial portfolios and operating performance for their organizations.

Is New Heart Program Development on the Horizon?

For over a decade, new heart program start-ups or expansions have been declining.  Based on our strategic hospital growth analysis, CFA predicts the beginnings of an uptick in new and/or expanded cardiovascular program development in selected markets.  With early growth likely to begin in late 2017 and early 20183, this will mark the first increase in the development of new cardiac programs in nearly 10 years.

CFA’s business intelligence data and published reporting by other analysts show a minimum of 9-12 states with nearly 30 rural and 20 urban markets which are ripe for new cardiovascular program starts ups and/or expansion4.  Many CEOs with little or no cardiovascular program capability are becoming much more interested in keeping and/or re-directing more of their out-migrating cardiovascular business.

What About Pending Healthcare Reform?

As we post this blog, Dr. Tom Price is busy managing his first major legislative initiative as HHS Secretary:  repealing and replacing the Affordable Care Act.  While the sausage making continues, there are a few predictable changes coming that are, by all accounts, positive for the US economy and the US healthcare sector:  It appears that there will be a steady shift to more market-based, patient-centered and physician-friendly approaches to government oversight and intervention into healthcare access and delivery.

  • Dr. Price’s overall philosophy toward the provision of healthcare is to determine what the government does and doesn’t do well by asking the question, “Is this best for the patient, their families and their healthcare providers?”
  • Secretary Price told Sen. Bob Casey (D-PA) that when it comes to the final version of the MACRA rule, “significant challenges remain with respect to provider burden.”
  • And he expected some changes to the regulation because it creates an “unnecessary extra paperwork burden on hospitals and doctors.”

Conclusion

The shift to reducing government regulation and focusing on simplifying and streamlining the provision of patient care can help decrease unnecessary healthcare costs and increase user satisfaction.  Dr. Price is looking at number of innovative field-tested, patient-centered care models developed by physicians, hospitals and medical groups that are producing positive results. Tort reform, increased insurance competition and the use of new customized insurance models – based on need and consumer choice – are welcome changes to the one-size-fits-all approach of the Affordable Care Act and should reduce premium costs for employers and for younger, healthier populations.

Government healthcare reform and the new focus on decentralizing government control and regulation on healthcare access and delivery is a challenge.  The overall change in the economic landscape and the convergence of demonstrable enthusiasm for robust financial growth in the new administration and the business community creates a positive environment to make these things happen!

As always, CFA invites your comments, suggestions and questions.  For additional information, including strategies for developing new or expanded cardiac services, please call us at 1-949- 443-4005 or send us a confidential email at cfa@charlesfrancassociates.com.

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Footnotes

[1] US Economic Outlook 2017, see https://www.thebalance.com/us-economic-outlook-3305669?utm_source=emailshare&utm_medium=social&utm_campaign=shareurlbuttons
[2] California DPH-OSHPD Hospital Financial Report 2010-2015
[3] CFA Internal Analysis 2017
[4] Expansion of Invasive Cardiac Services in the US. Circulation. 2013