Since the ACA was signed into law by President Barack Obama in March of 2010, expanded health insurance coverage nationwide has directly impacted the nation’s largest hospitals by increasing demand for care, reducing debt, and accelerating much needed quality and cost reforms. Seven years later, the market continues to hold its breath while awaiting the implementation of the Trump administration’s promised repeal and replace legislation. Following multiple unsuccessful replace attempts, it is difficult to forecast where things may go from here given the lack of legislative unanimity. With many hospitals already operating on thin margins, healthcare services investors are scrambling to determine how reform could impact hospital economics while assessing the effects of recent revisions to the MACRA proposed rule and related regulation like MIPS and APM. While most experts believe hospitals can eventually rebound, the road ahead will likely be long and difficult, as discussed in our recent call: (THC)(UHS)(CYH) – How will Hospitals Fare Amid Turbulent Healthcare Reform?. While we can still only speculate as to the ultimate outcome of any future healthcare reform, at this early juncture it appears likely that hospitals will be receiving fewer payments and more uninsured people at their doorsteps while facing overall greater scrutiny. 

Q2 2017 earnings season has only served to reinforce certain key themes across the healthcare space, with hospital stocks hit especially hard due to concerning fundamentals, including weak admissions volumes and escalating bad debt. The following are some key issues to monitor over the coming weeks as the market continues to attempt to identify potential winners and losers in various healthcare areas.  

1)Drug pricing issue is coming to a head: This week, the controversial 340b program – which allows hospitals to purchase certain expensive drugs at discounts and provide them to low-income and uninsured patients by charging privately insured and Medicare patients the full rate and then pocketing the savings – has found itself in the headlines after the CMS announced estimates that showed seniors are paying almost $200 million more annually in drug copays than they should, a conclusion that alleges hospitals are gaming the system. Meanwhile, pharma companies continue in their marketing push to promote the latest, most expensive drugs, resulting in a further rise in overall drug spend. Generic drug pricing, on the other hand, is apparently decreasing, but consumers aren’t necessarily realizing cost savings given their fixed Rx co-payments. At the same time, generic manufacturers are facing immense profit challenges as pharmacy benefit managers (PBMs) take their cut. Pricing pressures are likely to continue and result in difficult times ahead, a topic we will discuss in detail in our call – (TEVA) & Generics Peers’ Q2 Earnings Confirm Investors’ Fears Around Pricing Pressure, Value Proposition & Industry Outlook. 

2)Value based payments and revenue cycle management: Cost reductions, whether they be inpatient, outpatient, or Rx related, remain a top priority for hospitals, especially in the current climate where every penny matters. Commercial payments will continue to be pressured even as federal funding continues to decline. Payments bundling, a more attractive way to market services and align all parties involved, is becoming increasingly more commonplace and could prove to be a good thing if structured correctly. In the context of all these pressures, expect ever greater focus on revenue cycle management (RCM), which – while resource intensive and costly to implement – has reliably resulted in enhanced hospital profitability, especially when patient care is complex.  

 3)Technological advancements: The healthcare system continues to struggle to keep pace with the rapid rate of technological change while attempting to manage growing claims volumes and an abundance of data. The importance of sound infrastructure, security and IT beyond RCM platforms cannot be emphasized enough. Successful electronic medical/health record (EMR/EHR) platform selection, implementation and management is vital for the success of hospitals and health systems of all sizes, topics we covered in our recent call: Epic Customer Assessment of EMR Competitive Landscape and Available Offerings for Largest US Hospitals and Health Systems. Additionally, with the growing demand for population health management and the development of behavioral health initiatives, hospitals and physician practices are sure to lean on these technologies even further. 

4)Strategic M&A, Divestitures, and Closures: Consolidation in any sector can only yield so much in the way of synergies and efficiencies, an aphorism that has proven true for hospital systems as well. National health systems will likely stay put as others focus on regionalization and growing their footprint in markets where they already have a presence. Further asset sales and divestitures will be deliberate strategic moves by some, while other hospitals groups will be forced to close certain unprofitable facilities. Many smaller suburban and some rural hospitals have approached the larger health system players begging to be acquired, but most systems won’t take on a hospital that can’t support itself. Closures are becoming increasingly more common, in rural areas especially, resulting in compromised patient access to proper care. Many of these rural hospitals are also the largest employers in their areas, so shuttering their doors has outsize economic impact. 

5)Effective leadership and staffing of facilities: In our call (EVHC)(MD)(THC) – Hospital & Physician Staffing Market Trends, Capacity Outlook & Renewed Focus On Value Based Care, our expert walked us through the physician services state of affairs. Contracts between hospitals and physicians are no longer simple relationships and a certain level of risk has emerged that wasn’t present before. Many health practices deal with a lack of leadership, under-educated facility medical directors, employee turnover and the inability to keep a consistent group of good physicians, resulting in an overall lack of operational focus. This will likely represent an opportunity for experienced physician staffing companies.