Healthcare reform and intense pressures related to this nation’s mounting deficit crisis are two forces that could dramatically alter the financial landscape for investor-owned hospital management companies.
There is a plausible scenario that suggests that over the next five to seven years all will not be well for the nation’s largest publicly owned hospital management companies. Their tribulations will occur not because they are bloated, inefficient operations. No, most are extremely efficient, a tribute to management’s laser focus on reducing costs and daily, if not hourly, scrutiny of performance metrics, mainly staffing. Because they are publicly owned, the real threat will come from their inability to meet Wall Street expectations for year over year growth in earnings.
As Medicare reimbursements are reduced -- most certainly to be followed by cuts in payments by the nation’s managed care providers -- hospitals all across America will get less money for the services they provide. Highly efficient investor-owned hospitals, which have for years bragged that they were lean machines, unlike, they say, the stodgy, poorly managed not-for-profits community medical centers will have less opportunity to reduce costs to maintain margins. This is not to say that investor-owned hospitals will suddenly begin losing money. They won’t. But -- and this is a big but -- they will not be able to sustain their historical performance in terms of growth in earnings, something Wall Street demands. There is only so much fat you can cut before you start hacking away at the bone, the core of your business.
There is an old story of two men flying in a remote region of the Andes Mountains when a vicious storm forced them to make a crash landing. One man was overweight -- some would stay fat. The other was a long-distance runner, the picture of good health. The overweight man survived while the fit man died -- because he had no excess body fat to burn when they ran out of food.
Investor-owned hospitals which depend on their growth in earnings to sustain investor confidence, which then paves the way for access to capital with the most favorable of rates, will face more skeptical lenders and less flexibility to acquire more hospitals in healthcare reform’s period of consolidation. Instead, look for some investor-owned companies to spin off their marginal performers to not-for-profit regional health systems or new, marginally capitalized start-ups. In the end, the losers will be the physicians and the communities who thought they had ensured the future of their hospital when they sold out years earlier.
Isn’t reality ironic?
What do you think? Is this a plausible scenario or a misread of how deficit reduction cuts to Medicare will impact hospital management?
© 2011 John Gregory Self
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