The Covid-19 pandemic rocked the health industry last year, but what can health systems and health plans expect financially?
Advisory Board‘s Natalie Trebes and Christopher Kerns sit down with Rachel Woods of Radio Advisory to discuss the financial outlook for health systems and health plans for the remainder of 2021 and beyond.
Read a slightly edited excerpt from the interview below and download the episode for the full interview.
Rachel Woods: The financial outlook is very different, not only because of the very specific conditions of the crisis we are going through, but also because one segment of the industry will not look like another. And even if you look at the same segments over the same time period, we still see differences. Christopher, how was the performance distribution on the hospital side of the industry?
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Christopher Kerns: If we look at the numbers on sales development, margin performance and overall cash flow performance, we found that by the end of 2020 even the 25th percentile of high performers performed a little better than the year before, which I think surprised a lot of people, but also the 75th percentile of the performers.
So what we saw was a growing gap between the haves and the haves when it came to hospitals and health systems. The larger, financially stronger organizations thus fared better and extended their lead over smaller organizations.
Well, that’s not true across the board, there have been a number of large organizations that have struggled and there have been a number of smaller organizations that have thrived, but by and large we have seen an expansion of the performance in 2020 that we have have not seen several years.
Forest: And what is your prediction of how this gap will change over time? Do we expect it to continue expanding or maybe move back to where it was in 2019?
Kerns: I would expect at least some stability of this gap, if not an increase in the course of the year. And one of the main reasons for that is the huge cost increases we’ve seen down the line – labor, materials, technology – and these will hit disproportionately smaller businesses that either don’t have the financial cushion or, frankly, the flexibility to handle them To bear costs or to adopt different personnel, supply or technology models. So I think we will see a slightly larger expansion between the haves and the haves in the course of 2021, and probably through 2022 as well.
Forest: Natalie, is the problem of having and not having the same problem with health insurance?
Natalie Trebes: Yes, I don’t think it’s that extreme, or rather, I think there are the have-a-little and the have-many rather than the haves and the have-nots, but the big variable for the plans is theirs Enrollment mix. And I think it’s worth teasing this out based on the health plan type.
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The big national plans you see now are making headlines for their massive gains, there is a reason; With their different companies, they are particularly well positioned for such school shifts. Most of them have really sizable Medicaid businesses. So they were willing to take some of that decline in employer coverage right into their own business, rather than lose it to other plans. In my opinion Cigna and Centene are both interesting outliers there; Cigna is pretty heavily focused on the commercial space, Centene is pretty heavily focused on the Medicaid space. But in general, the extremely high profit margins may be causing a stir right now, but these are blind enrollment shifts. And again, they’ll pay back the discounts later.
Forest: What about plans that are a little smaller? I think like a regional blues plan, what do we see there?
Trebes: Well, in my opinion the blues plans are particularly special, they are usually very difficult in the employers’ area, both self-financed and fully financed. And I make this distinction because it’s worth noting that a fully funded business is more profitable than a self-funded business.
Therefore, a decline in employer coverage can be particularly painful for them compared to nationals, who are largely self-financed. And then again because of this mix, they had less opportunity to capture this new Medicaid registration.
And finally, they are deeply integrated into their local market. So any kind of regional variation of what was going on with the economy or Covid policy will hit them more dramatically. So if we look at the blues, there is a range of about 12 percentage points in the margins over the blues from minus 5% to 7% positive. So the haves and the have-nots really play out in the blues room.
Forest: And what about the even smaller plans, I think the local ones?
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Trebes: This is where the differences in portfolio and geography become even more extreme, but on average these plans have tended to increase enrollment in the government sector, and particularly Medicaid and individuals.
I want to highlight the vendor sponsored local plans because they have this entire arm, the hospital system, that struggled at the start of the pandemic. And so I think a lot of them felt they really needed to focus on maintaining that low of care.
So they may not come out at the end of the year even if they’ve had growth at Medicaid or individuals in the same place as some of these national plans.
Forest: And all of this really comes back to back up our point that the headlines are on the attention grabbing story but won’t capture all of the differences between hospitals, between healthcare systems, or across the industry.
I’m surprised we haven’t talked about Medicare Advantage yet. And I think that’s because it’s really away from discussions that revolve around things like employment and insurance. What Happens in Medicare Advantage for Plans?
Trebes: So I think the really big story that is not talked about that much is the shifts. The growth of Medicare Advantage is really critical to plans right now for several reasons. It’s not tied to business cycles, so it’s a bit isolated from all of the rest of the churn we see everywhere else.
The margins are extremely high and it really is the only way that new growth plans have. So they get enrolled in Medicare Advantage by switching from traditional state Medicare to their own, while in other businesses they have to steal that market share from other plan competitors.