What is the growth/decline in Long-Term Health Care Industry?
Last year we saw health technology develop at a tremendous pace. In 2014 alone, investment in health technology topped $5 million; more than double the investment of the previous year.
However, rapidly escalating costs, fast reducing budgets and more stringent regulations are putting the industry under more pressure than ever before, and the strain is starting to show. Cost cutting while improving treatment outcomes and complying with HIPAA, HITECH and Meaningful Use creates the biggest challenge for the healthcare industry in 2015.
The use of big data, powerful analytics, predictive technologies, the Internet of Things and 3D printing are all expected to have a major impact in 2015; however, predicting the trends that will have the most significant impact on the healthcare industry – in light of the daily technological advances – is a tall order.
Some of the major issues, innovative technologies and HIT trends to impact the healthcare industry over the course of the next 12 months – and beyond – have been listed below:
Preparations to Start for ICD-10 Compliance
In 1978 the final draft of the International Classification of Diseases (ICD) was accepted by the International Conference for the Ninth Revision of the International Classification of Diseases and became the new standard for monitoring progress, assessing disease control and evaluating medical care. It did not take long for the limitations of the classification system to be realized and five years later in 1983, work commenced on the new ICD-10 classification.
The limitation of just 17,000 codes demanded a rethink; with an expansion necessary to take into account a myriad of new procedures and diagnoses; with ICD-10 expanding the codes to 155,000. The new codes have now been adopted in numerous countries around the world, but the U.S has been slow to make the changeover. The problem now is that there are simply not enough codes and many of the ICD-9 categories are now full. The changeover to ICD-10 is overdue and now essential.
The U.S Centers for Medicare and Medicaid Services started using the new codes from April 1, 2010, although the deadline for compliance was set for October 1, 2013. Congress has not been keen to make the changeover and delayed mandatory use of ICD-10 for 12 months in 2013. Last year, with the deadline looming, congress again postponed its introduction. ICD-10 now scheduled to come into force on October 1, 2015 and a further delay, while possible, looks unlikely.
This year, all healthcare providers covered by the Health Insurance Portability and Accountability Act (HIPAA) will be required to adopt the new system and use ICD-10 diagnosis codes for all healthcare services provided in the U.S, while new procedure codes are also required for hospital inpatient procedures. Medicaid and Medicare claims for services will not be paid after the Oct 1 2015 deadline if the old codes are used.
The change to ICD-10-CM diagnosis codes is more straightforward as the codes are similar to the previous standard; however for medical procedures the change to ICD-10-PCS presents more of a challenge since the coding is substantially different.
The American Medical Association has pushed for full end to end testing which will be run between January 26-30, 2015, with a second sample to be assessed between April 26, 2015 and May 1, 2015 and further testing scheduled for July 20-24, 2015. The aim is to ensure claims can be submitted to Medicare under the new ICD-10 codes, that they can be properly adjudicated and also to ensure accurate remittance advices can be created.
With just over 9 months to go until the changeover, healthcare providers, clearing houses, payers and billing services will need to start testing ICD-10 products, an ICD-10 implementation plan will need to be developed – if it has not been already – costs will need to be assessed, budgets set and the plan put into action. This is sure to be a major challenge for HIPAA-covered entities in 2015, and one which can no longer be put off.
The Difficulties of Cost Alignment Will Grow
The healthcare industry has faced a continued struggle to provide affordable healthcare for as long as modern medicine has existed; however treatment costs have dramatically spiraled in recent years. Healthcare providers must now cover the cost of implementing new technology, health records need to be converted to digital formats and the industry is facing even tougher regulations.
Any healthcare providers that have struggled to stay profitable in 2014 are going to find the next 12 months extremely difficult financially. 2015 is only likely to see finances strained even more with budgets needing to be stretched further still.
Provided the cost of implementation can be covered, new technologies can be leveraged to improve patient care and can dramatically reduce costs. However, many physicians and hospital administrators have struggled to see the benefit from digitalization and changing over to EHR’s. The transition may be problematic, difficult and costly in the short term, but the long term advantages cannot be disputed. The move to EHRs facilitates more accurate reporting and the analysis of electronic data makes decision making easier.
As healthcare organizations develop their systems to provide clean and consistent data – which can be accessed through all systems – it should translate into much greater efficiency and allow for significant cost reductions to be made. This will of course be a major challenge for providers over the course of the next 12 months.
2015 is also likely to see increased collaboration between healthcare centers and greater use of electronic data to forecast expenditure, drive down costs, enhance revenues and improve patient outcomes.
|What are they doing about cost reduction now:
Enhancing performance within existing senior living communities represents a huge financial opportunity frequently overlooked by many owner/operators. The strategy is called “exploiting organic growth potential.” In 2015 and beyond, strategic focus must be placed on two major areas: 1) revenue/occupancy enhancement; 2) expense reduction.
In terms of occupancy enhancement, operators should recognize that at 80 to 85 percent occupancy, most of their fixed costs are already covered. Do you really have to buy more raw food or hire an additional employee when filling several additional units?
Therefore, units that are occupied above 85 percent typically enjoy a substantial incremental operating profit margin for each additional unit occupied of approximately 70 percent for independent living and 50 to 60 percent for assisted living.
For example, a property with vacant independent living units having an average monthly service fee of $3,000 will likely generate additional cash flow of $2,100 per unit per month, or $25,200 per year ($3,000 x 0.70 x 12).
For 10 additional occupied independent living units and using a conservative 50 percent operating profit margin, that could generate an additional $180,000 in cash flow that goes right to the bottom line as net operating income and cash flow. This would increase the capitalized value of the community by approximately $2.2 million using an 8 per-cent cap rate ($180,000 ÷ 0.08).
Modest expense reduction also produces a very favorable impact. A senior living community with
80 to 120 independent living units at 90 percent occupancy results in 26,280 to 39,420 annual occupied resident days. That figure is derived by multiplying the occupied units (residents) x 365 days.
A modest $2 per resident-day expense reduction (typically 1.5 to 2 percent of total expenses) produces additional bottom-line cash flow of $52,560 to $78,840 per year, depending upon the size of the community. The increased value using an 8 percent cap rate is $650,000 to $985,000.
Keep in mind that these two strategies represent a significant financial enhancement of an existing asset without having to design, construct, finance or operate another new physical plant. But these enhancements have to focus on more than just monetary value.
The ultimate expected outcomes for a community is increased value in four important areas: 1) resident satisfaction; 2) clinical care excellence; 3) increased cash flow; 4) enhanced value of the asset. The first two elements of value are relatively easy to comprehend. Increases in financial value have been addressed in Point No.3.
- Studies have shown that the delivery of home or community-based long-term care services is a cost-effective alternative to nursing homes. Care in the home or community—not nursing home care—is what most Americans would prefer.
- In 2004, the average daily rate for a private room in a skilled nursing facility was $192 for a private room or $70,080 annually, and $169 or $61,685 annually for a semi-private room. The hourly rate for a home health aide was $18.12.
- In 2000, annual cost estimates were $13,000 for adult day care and $25,300 for assisted living.
- Over two-thirds of the current health care dollar goes to treating chronic illness; for older persons the proportion rises to almost 95%.
- The aging of the population, especially those 85+—the most in need of long-term care—is expected to result in a tripling of long-term care expenditures, projected to climb from $115 billion in 1997 to $346 billion (adjusted for inflation) annually in 2040.
- One in four people age 45 and over are not at all prepared financially if they suddenly required long-term care for an indefinite period of time.
What are the challenges/struggles the industry faces:
- Annually 8,357,100 people receive support from the 5 main long-term care service; home health agencies (4,742,500), nursing homes (1,383,700), hospices (1,244,500), residential care communities (713,300) and adult day service centers (273,200).
- An estimated 12 million Americans needed long-term care in 2007.
- Most but not all persons in need of long-term care are elderly. Approximately 63% are persons aged 65 and older (6.3 million); the remaining 37% are 64 years of age and younger (3.7 million).
- The lifetime probability of becoming disabled in at least two activities of daily living or of being cognitively impaired is 68% for people age 65 and older.
- By 2050, the number of individuals using paid long-term care services in any setting (e.g., at home, residential care such as assisted living, or skilled nursing facilities) will likely double from the 13 million using services in 2000, to 27 million people. This estimate is influenced by growth in the population of older people in need of care.
- Of the older population with long-term care needs in the community, about 30% (1.5 million persons) have substantial long-term care needs (three or more ADL limitations). Of these, about 25% are 85 and older and 70% report they are in fair to poor health.
- In 2012, 14.8% of the 65+ population were reported to be below the poverty level.
- Among the population aged 65+, 69% will develop disabilities before they die, and 35% will eventually enter a nursing home.
- Nearly a fifth of older people will incur more than $25,000 in lifetime out-of-pocket long-term costs before they die.
- The prevalence of cognitive impairment among the older population increased over the past decade, while the prevalence of physical impairment remains unchanged.
- In 2002, the percentage of older persons with moderate or severe memory impairment ranged from about 5% among persons aged 65–69 to about 32% among persons aged 85 or older.
- Individuals 85 years and older, the oldest old, are one of the fastest growing segments of the population. In 2012, there are an estimated 5.9 million people 85+ in the United States. This figure is expected to increase to 19.4 million by 2050. This means that there could be an increase from 1.6 million to 6.2 million people age 85 or over with severe or moderate memory impairment in 2050.
|What does the future look like for the industry:
- Research suggests that if savings rates are not increased and government programs to assist the elderly are not strengthened, many retirees will face serious problems attaining needed health and long-term care services in the future. By 2030, many retirees will not have enough income and assets to cover basic expenditures or any expenses related to a nursing home stay or services from a home health provider.
- Shorter hospital stays and increased usage of outpatient procedures—changes that have increased the effectiveness of medical care—have shifted responsibility toward unpaid providers of care from paid providers, increasing burdens on family caregivers.
HIPAA Journal weighs in on 2015 healthcare technology trends at (http://www.hipaajournal.com/010-healthcare-technology-trends-2015/).
• The editors see major issues that include implementing new technologies, completing health record conversions to digital formats, and complying with government regulations.
• As do all the other reports, they cite wearable as a significant growth segment.
• The International Classification of Diseases revision, considered another problem area, has been finalized by the HHS.