Issue 24 

At S&P Global Ratings' annual health care conference on Oct. 12, 2022, panelists addressed the conference's overall theme of "A Sector Under Pressure: How Do We Recover And Redefine?"

Fireside Chat: A CEO's Perspective On The Rising Demand For Behavioral Health Services And What That May Mean For Providers

• There is a rising, unmet demand for behavioral health.
• Accessibility and affordability remain two major challenges in the segment, exacerbated by the labor shortage.
• A growing awareness of mental health needs has allowed the segment to expand and integrate into other aspects of health care, both operationally and financially.
• Investors should see value in the ongoing development of behavioral health, and the segment remains optimistic about funding sources.

Brent Turner, CEO of Summit Behavioral Healthcare LLC, noted that the industry has come a long way in no longer needing to justify the importance of expansive behavioral health services. However, even as the segment is evolving and expanding, patients still struggle to access care as demand rises but is not matched. Turner stated, "Access isn't about a cost. It's about reaching a provider you might not be able to get if it had to be in person."

Practices during the COVID-19 pandemic helped to destigmatize and expand telehealth services, which has helped provide access points for patients. Telehealth will likely level out in use and is unlikely to replace routine in-person behavioral health care. Still, Turner said it "isn't going to just disappear," and sees a future in integrating telepsychiatry as an important component into the care delivery model.

Labor shortages remain a major access and cost headwind. Turner said that the industry will not be able to meet the high demand for mental health services without implementing strategies "to encourage and develop professionals," such as by supporting certification programs and targeting medical schools. Companies are focusing on recruiting and retention more than ever, as labor directly restricts how much care the industry can provide. Direct care staffing is particularly short, with a consistent challenge in recruiting and retaining nurses and technicians.

Affordability also ties into access, as patients struggle to find providers within their networks that insurance will cover. While the Affordable Care Act and other legislation ramped up coverage around 2010 by requiring mental health coverage alongside physical, Turner noted "it just takes time" to evolve the system between providers giving immediate care and payors governing costs. For example, while addiction services have broadly moved from private pay to being covered by health insurance, debates on how much and how long it should be covered remain.

The reimbursement payment model is going strong within behavioral health. Turner noted, "As an industry, we're making a very good case for reimbursement and why reimbursement is important." Increasing validation for the outcomes of behavioral health support the model. Most services are still using a fee-for-service model, such as in inpatient services, which is paid per day. While a value-based approach is possible in the future, the expenditures required of it do not support an immediate transition.

In all, behavioral health is integrating into wider models of health care. It's not a segment that can be isolated from overall health, nor is it linear. Addressing mental health earlier in a patient's care supports overall health care equity and ultimately can lower total cost of care. Turner stated, "It's a cost benefit that matches up with what the patient needs and also with providers and payors."

CFO Perspectives: Navigating Health Care Through Multiple Challenges and Transitions

• Operating headwinds persist in the hospital and provider sector, and while certain expenses are easing from earlier in the year, the sector will likely experience heightened pressures through the next year.
• The health care industry continues to transition in the aftermath of COVID-19, evolving the relationships providers and payors have with each other and the community.
• Partnerships, joint ventures, and to some degree, mergers and acquisitions (M&A) are avenues organizations are using to broaden access while keeping care affordable amid labor limitations.
• Companies are focusing on fluid strategies to respond to the challenging, rapidly changing sector and economy.

As health care organizations attempt to recover from the pandemic, many look to evolve the very foundation of the industry. Companies are focusing on improving affordability, increasing access to quality care, and eliminating barriers that prevent health equity. By adjusting expectations around labor, cost efficiencies, and free cash flow, the industry can move toward an innovative future that has been permanently changed by COVID-19.

Overall, panelists said that labor remains a major headwind in health care due to costs and availability. During the pandemic, contract rates for traveling nurses shot up over the cost of nurses employed full time. While contract rates have decreased, they are still elevated as organizations struggle to recruit and retain full-time nurses as well as other ancillary posts. Brian Dean, CFO of Sutter Health, stated that there are many strategies around expanding the supply of staff, retention, access, and capacity including an ongoing focus on retaining first- and third-year clinicians.

Some successful responses to the nursing shortage involves moving to a central recruiting system. Kevin Hammons, President and CFO of Community Health Systems, stated that previously, the organization recruited locally. Moving to a central model allowed CHS to "cast a wider net" while providing more data and control on a real-time basis. For Mitch Perry, CFO of Blue Cross and Blue Shield of North Carolina, being a health insurer with a local presence in all 100 counties in the state has made the company acutely aware of regional provider shortages and access to care issues. He mentioned the importance of training physicians and nurses locally because these providers are more likely to practice in the state. More broadly, panelists said that bonuses, help with student loan repayment, and extra time off that is sometimes mandated by the state are also strategies to promote reduced turnover rates.

Organizations are looking to tap into preexisting infrastructures through partnerships to increase access and deliver quick operating results. Dean said, "Partnership is a competency," and that joint ventures can accelerate capacity and access, whereas traditional organic approaches would see slow, incremental growth. He further stated, "We have to think differently in how we have to support the organization in terms of capital allocation and work force." As an example, Dean pointed to a recent partnership with R1, a revenue cycle management firm, which they expect to create value in the near-term.

Providers are looking at ways to make delivery more efficient, and the current environment may push organizations to provide services in different ways, changing how both front-end and back-end business is run. Employers drive innovation; they likely will want to retain flexibility but also see health care costs as a key area to manage, particularly if there are more economic challenges.

Because of the challenges, many are compressing financial plans into shorter timelines and using rolling forecast models. That creates some complexity in planning for long-term capital projects. Dean stated that Sutter brought in all planning into shorter timelines, because a single quarter can see significant business interruptions. By leaning into the complexity of rolling forecast models that reflect real-time views, organizations can employ capital expenditures (capex) strategically and modify plans to adjust to demographic shifts. Dean mentioned that recovery for the sector isn't necessarily going to be a typical J-curve, as thought in early 2021, and will likely be a journey as the input costs stabilize. Many organizations are focused on what cash flow is required for investments and some uncertainty lingers around the costs, which could spur further innovation to operate more efficiently.

Perry pointed out that importance of affordability as a key driver in their annual pricing discussions with clients and contract negotiations with providers—and having these discussions as early in advance as possible. Related to capital investments, Perry said that they are doing more capital scenario testing than ever, which has allowed them to better calibrate how they deploy capital for the short and long-term. As an example, Perry noted how they've been able to offset the cost of long-term strategic investments with shorter-term savings in areas such as pharmacy costs for clients.

CHS is undergoing a portfolio rationalization effort to ensure money and care are going to the facilities as they are needed, shifting the organization to focus on flexible networks and expanding its continuum of care through partnerships with local groups. By focusing regionally, care focuses on the changing needs of a community. Perry noted that at BCBS North Carolina, by working with a coalition of employers, payors, and consumers with aligned values of providing quality care, it's possible to show a path of investment that all parties involved with the health care network can support. He's seen success by sharing data and supporting providers through innovations and risks. By collaborating with providers and welcoming them into holistic conversations about how to drive down the total cost of care, "We're collectively building [solutions] together," Perry stated. Dean also noted that Sutter is looking at partnerships and joint ventures for revenue and geographic diversification, while also investing in value-based care initiatives, including primary care capabilities, as they remain responsive to employers.

Perry and Hammons both noted that simply passing costs onto consumers through higher deductibles and copays is not a sustainable model. Often, the burden turns back onto providers that are forced to collect payments. As it's uncertain what legislation the government may introduce to shift payment and reimbursement structures, providers are conscious of controlling costs.

Within the next couple of years, insurance and providers will likely need to come together to innovate their clinical and data capabilities. For now, many solutions are dealing with the symptoms of wider macroeconomic problems. The true test of leadership in the health care industry will be navigating the headwinds towards sustainable, foundational change, as demand for health care will only increase with time.

Health Care's Long and Winding Road Toward Value-Based Care

• While the pace across the industry remains uneven, our panelists expect continued growth in value-based health care.
• They consider the value-based care model part of the solution to health care affordability in the U.S., although not the sole answer.
• The industry is seeing the benefits of value-based care, but has struggled in how to best measure patient outcomes.
• More M&A, both vertical and horizontal, to come, but also partnerships.

Cheryl Matejka, Senior Vice President and CFO of Mercy Health, opened the panel by noting that Mercy has been incorporating value-based care since the early 2000s. Looking at the industry, she sees wide variation: some companies are far along, while others are still just talking about the concept. For Mercy, Matejka estimates "about 40%-50% of revenues are under some level of value-based arrangement." The industry may hit a slowdown point for this method of care, but she thinks it's part of the solution to health care affordability in the U.S. Tim Gronninger, Chief Value-Based Solutions Officer of Signify Health Inc., thinks the transition has varied by region, noting that BCBS North Carolina is one regional provider at the forefront of the transition. Medicare Advantage health plans, in particular, have also progressed in value-based care, and he sees some pockets of progress in providers as well.

When assessing the financial impact of value-based care, Gronninger said he "would certainly not want to tell investors to look at anything besides financial metrics." He said it's also important to look at individual contracts and companies to judge financial potential, and noted that if contracts have poor terms, it becomes harder for companies to invest in services that reduce poor patient outcomes. In Matejka's view, the industry is "seeing the benefits of value-based care, but we're having a hard time explaining the overall impact." For example, while the traditional measure of market share is patient discharges, it's unclear if that's the best measure for value-based care, which can have benefits such as moving patient care upstream or improving the percentage of the population controlling high blood pressure.

The sector struggling the most with the shift to value-based care, in Gronninger's opinion, is employer-sponsored insurance, due to some hesitancy to limit provider choice for their employees, as well as a broker system that's generally not looking to shift to value-based care models. As the transition continues, Matejka thinks that as an industry, "we still have some investments to do in access and technology," specifically in ways for patients to access health care providers digitally. Gronninger agreed that "there remain a lot of investment opportunities in this space."

Discussing how the COVID-19 pandemic has affected value-based care, both panelists said that it accelerated some elements of value-based care, including the shift to digital services and virtual care. However, as the effects of the pandemic linger, some providers, facing continued workforce and margin pressures, could pull back from value-based care initiatives.

Matejka thinks the industry will likely see more vertical integration as smaller or narrower players expose different opportunities, for example health care systems partnering with other players to run primary care on the value-based care side. Mercy's approach is to remain open and try to learn from--and in some cases partner with--more narrow players. She also thinks the industry will have some horizontal mergers and acquisitions (M&A) as health systems look for capabilities that they don't have. Gronninger also emphasized the significance of partnerships: Signify has over 50 partners it works with.

Both panelists agreed that the government will likely create the largest amount of pressure for the sector to transition to value-based care. In addition, while Matejka isn't sure the industry will ever transition to 100% value-based care, she thinks that "we'll certainly see growth from where we are today." She and Gronninger agreed that some of the major milestones to look for are more states entering into Medicaid risk programs, more vertical integration and partnerships, and higher levels of home-based care and alternative care venues, with Gronninger also noting that it's worth watching what the government does with Medicare alternative payment models (APMs) over the next 18 months.

House Views: Risks Of Further Economic Weakness And Sector Challenges In 2023

• We've seen significant headwinds for the not-for-profit and corporate health care sectors since the start of the year, and we expect inflationary and labor pressures to continue into next year.
• Our ratings on the health insurance sector have generally held up well, but cost pressure and recession risks exist.

S&P Global Ratings analysts discussed how continuing uncertainty could affect credit trends in the not-for-profit health care, corporate health care, and health insurance sectors heading into next year. Anne Cosgrove, Director & Lead Analyst, said that despite the stable outlook on the for-profit health care sector, we've seen a lot of headwinds since the start of the year. In her view, labor issues are the sector's most pressing challenge, with supply and demand difficulties as well as retention struggles. High inflation and investment market volatility are also pressuring the sector, with some increases in negative rating and outlook actions in recent months. Overall, she emphasized, "there's a lot of uncertainty."

On the corporate health care side, Arthur Wong, Senior Director, U.S. Corporate Health Care, said that the sector outlook is stable, although it's "increasingly on shaky ground." We've seen a spike in negative rating actions (which include both downgrades and outlook revisions) in the last few months, and inflationary risk remains our top concern. Wong thinks that health care service providers are especially vulnerable as we head into next year because they tend to occupy the lower end of our rating spectrum and their ability to pass on rising costs to their payors is uncertain.

Francesca Mannarino, Associate Director, said that the health insurance sector is overall a highly rated sector and generally ratings have held up well during the pandemic. Premium increases and growth in Medicare and Medicaid have boosted top-line results, while the sector's balance sheet demonstrates strength. However, we see three key risks going into 2023. We think there's risk of a recession in the U.S. next year, as highlighted by S&P Global Ratings' Chief Economist, which could squeeze commercial membership, further COVID-19 surges and flu resurgence could exacerbate cost pressures, and insurers will continue to diversify and integrate through M&A.

While hospitals and health systems are dealing with labor challenges, health care temporary staffing companies have done well amid the labor shortage, especially last year. However, Wong said that we've already seen temporary staff rates drop, so "staffing companies won't be in for as good of a year this year as they were last year." That said, Wong noted that the demand for temporary staffing will remain elevated for quite some time compared to pre-pandemic levels because of longstanding supply/demand issues.

Finally, the panelists discussed the passage of the Inflation Reduction Act. While Wong would "rank [the IRA] as game-changing on paper," he views the drug pricing reforms as watered down in its initial form, particularly because of the delayed implementation, and doesn't think "there's a near-term ratings impact on the pharma industry at this point." However, the legislation could pressure pharmaceutical companies to do more M&A. Mannarino said that the IRA will increase insurers' financial risk in Medicare Part D products and limit their ability to raise premiums for those products, which will be a slight negative for the industry, though a manageable risk because insurers will have time to prepare.

Writers: Elora Karim and Darcy Bullock