Trend watchers: growth, troubles ahead

May 1, 1999

Pharmaceutical Representative

Despite proliferation in the number of competitors and growing member enrollment, many sectors of the health care environment are suffering in terms of profitability.

Despite proliferation in the number of competitors and growing member enrollment, many sectors of the health care environment are suffering - and will continue to suffer - in terms of profitability, according to recent data analyzed by Chicago-based SMG Marketing Group.

From health maintenance organizations to nursing homes, many health care businesses have been unable to fatten their bottom lines in the latter half of the 1990s.

"Pharmaceutical costs, pressure from employers, increasing market power of physicians and consumer concerns have all contributed to a prolonged period of belt-tightening," explained John Henderson, president of SMG Marketing Group.

Although Henderson said he saw great potential for the business of managed care tomorrow, SMG's data indicate a troubled environment for those businesses today. For example, the percentage of HMOs showing profitability decreased from 83% in 1993 to 43% in 1998. And although the number of integrated health networks grew 5%, suggesting fiscal health, several of those faced serious financial problems in 1998; some even danced with bankruptcy.

In response to these problems, SMG predicted that HMOs will become more serious about restructuring and consolidation and integrated health networks may follow the leads of its strongest members - those with managed care components.

Growth in managed care

Preferred provider organizations and medical group practices are segments within the managed care industry that appear to have good growth potential for the years ahead.

For example, the number of PPOs rose from 998 in 1996 to 1,018 in 1998 as the number of eligible employees rose from 88.6 million in 1997 to 89.1 million last year. SMG said that PPOs are expected to continuing growing "as large regional and national organizations divide their operations locally, increasing the total number of plans."

Medical group practices have grown stronger, too, as physicians have recognized the benefits of joining a practice. In medical practice groups, physicians hold more sway in negotiating managed care contracts, shaving costs and gaining management control.

According to SMG, the number of medical group practices rose 25% from 16,697 in 1997 to 20,576 in 1998. In all, 157,194 physicians were affiliated with medical group practices last year.

Aging America

Nursing homes and the long-term care market emerged at the focus of debate on many levels in 1998, adding to what was already a tumultuous year of acquisitions and mergers.

The Health Care Finance Administration's new Medicare Prospective Payment System, which was implemented last year, forced many providers to devote time to keeping their nursing homes profitable and financially stable, according to SMG. The proposed Nursing Home Patient Protection Act, with its additional restrictions, could make 1999 an equally challenging year for America's 15,246 nursing homes.

One unexpected short-term boon for the industry, however, is the probable postponement of Medicare reform. Heavy cutbacks and a healthy economy gave the Medicare program a financial boost last year that will keep it running until 2015 - seven years longer than expected. As a result, reform debate and legislation will likely be delayed.

Therefore, SMG indicated that "nursing homes will use traditional methods to control spending and try to increase efficiency in delivering long-term care" in 1999. PR

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