What's happening to hospitals and other acute care centers?

May 1, 1999

Pharmaceutical Representative

A trends update.

Mergers and acquisitions continued in the hospital market in 1998, with multihospital chains and networks, such as Columbia/HCA, closing facilities and consolidating services. At year-end, 7,054 hospitals were open and operating, as opposed to the 7,119 hospitals in 1997. Expect this consolidation trend to continue in 1999.

In addition, Medicare cuts may force closings of rural hospitals in 1999. Under the auspices of the Balanced Budget Act of 1997, the government has implemented structural changes to the Medicare payment plan, which will reduce the growth rate of the per discharge fees Medicare pays most hospitals. The reductions are estimated to account for nearly half of the $29.7 billion in savings to the Medicare system created by the Balanced Budget Act.

With managed care's impact increasingly drawing more patients from inpatient to lower cost outpatient care, the trend toward hospital specialization into centers of excellence - organizations specializing in a highly sophisticated area of medical practice such as cardiac care, for example - will continue in 1999.

The average number of acute care admissions per hospital has increased by 8% over the past decade. However, this increase does not signify an increase in hospital utilization. The hospitals that closed during the past 10 years created a decrease in the supply of hospitals, thereby boosting the average number of admissions for the remaining hospitals.

Managed care pressure to move patients to outpatient care has also been a contributing factor in declining occupancy rates over the last decade. The decline in lengths of stay has caused the occupancy rate in hospitals to decrease nearly 8% over the last 10 years. The national occupancy level now stands at 61%.

In 1999, hospitals will compete through the following strategies:


• Increase specialization to position themselves as "centers of excellence" that draw patients from broader geographic areas and payer types.


• Increase outpatient-based services. Nearly 57% of hospital surgical procedures were performed on an outpatient basis this past year, a 1% increase from last year.


• Increase alliances with integrated healthcare networks, managed care organizations and physician hospital organizations to ensure a strong, steady stream of patients.

Freestanding outpatient surgery centers

There were 2,665 freestanding outpatient surgery centers in June 1998, according to data from Chicago-based SMG Marketing Group - nearly a 10% increase over last year. The total surgical volume was 5,264,759 - a 9% increase over 1997.

The multi-facility chain market experienced substantial merger and acquisition activity. In July 1998, HealthSouth bought 33 surgery centers from Columbia/HCA Healthcare Corporation. With these newly added centers, HealthSouth accounts for approximately 20% of the $5 billion in revenue brought in by the outpatient surgery industry.

Nearly 11% of all freestanding outpatient surgery centers in the nation are hospital-owned. It seems the largest threat for hospitals in this sector are the multi-facility, chain-owned, freestanding outpatient surgery centers that have captured 41% of the freestanding outpatient surgical market.

Independent centers still lead the market in surgical cases, performing 2,529,654 cases in 1998, which is almost a 4% increase over last year. Multi-facility chains seemed to have fared the best in both the number of new centers, up 16% over last year, and in the total number of surgical cases, up 17% from last year.

In the coming year, one of the most important factors facing freestanding outpatient surgery centers is implementation of the Health Care Finance Administration's new Medicare Prospective Payment System for outpatient services. Surgery centers will be searching for new ways to cut costs, such as more cost-effective and efficient surgical techniques. This could also mean that independently owned facilities might seek partnerships with multi-facility chains and hospitals in increasing numbers.

Some industry experts say the new Medicare rates implemented October 1,1998, by HCFA for the ambulatory payment classification system will likely result in a decrease of more than 20% in Medicare payments. The industry's deepest concerns lie with the deletions of certain procedures currently covered by Medicare, as well as significant reductions in reimbursement for many procedures.

Specialization continues to have a strong presence in the surgery center market. The number of gastroenterology cases is growing at a faster rate than any type of procedure, showing a 9% increase since 1997. Although the number of ophthalmological cases remained flat with only a 0.7% increase, these cases still lead the market with more than a 27% share.

Cancer Centers

Medicare continued to be the leading payer of cancer treatment services in 1998. As a result of the Balanced Budget Act of 1997, Medicare has instituted several important new benefits for prevention and screening for several cancer types, including breast, colorectal and cervical.

The number of outpatient visits to cancer centers nearly doubled from 1996 to 1998, booming from 1.4 million to 2.2 million. The National Cancer Institute predicts that more than 40% of Americans will be diagnosed with cancer during their lifetime. Also contributing to the increase is the expanding elderly population - those older than 65 - a market segment which, according to the Department of Health and Human Services, is 10 times more prone to cancer than younger Americans.

Nearly 44% of all 1998 outpatient visits were for radiation therapy, followed by chemotherapy (42%) and medical oncology (8%).

Cancer centers are seeking alternative sources of research funding. Cost-conscious managed care companies, reluctant to fund patient care in research protocols, are looking instead to care for their enrollees through the utilization of traditional treatments with known outcomes. Insurance companies fear that experimental treatments limit quality of care and drive up costs.

Consequently, data reflects the downward trend of cancer center involvement in clinical trials. For example, 34% of outpatient centers in 1997 were interested in participating in clinical trials. However, by 1998, the centers' willingness to participate in clinical trials had decreased to 11%.

Cancer center chains continue to dominate the cancer service provider market. The growth and success of these cancer center chains is primarily due to their focus on contracting and administration, which frees physicians to focus on caring for patients. Providing such indispensable services will allow cancer networks to continue to grow and acquire more outpatient centers. PR