2020 Healthcare Financial Trends

Many of the trends that have dominated the healthcare industry in recent years will remain influential in 2020. CommerceHealthcare^® actively monitors industry directions and offers this 2020 Healthcare Finance Trends Report to assist healthcare executives. It synthesizes independent research and practice experience to describe nine economic, governmental, financial and technology trends which will shape the industry in the coming year.

Payment Environment Continues to Stress Organizations’ Financial Health

The industry shift from volume to value-based reimbursement is driven by the scope and dynamics of healthcare economics. Recent and projected data suggests continued financial pressure on organizations.

• National Spending. At the macro level, health expenditures continue to rise at north of inflation, coming in at 4.6% in 2018 according to CMS. Through September 2019 total health spending increased 4.9% year over year. Figure 1 shows how U.S. spending is distributed.¹ Looking ahead, CMS projects compound annual growth of 5.5% through 2027 to reach almost 20% of GDP.

• Cost Increase Drivers. Spending was up across the board, but highest in prescription drugs at 8%.² Vizient says organizations should plan for another 4.6% rise in 2020.³ Behavioral health is also growing, with 20% of Americans said to be afflicted with behavioral disorders and costs 75% higher for those exhibiting both behavioral and physical conditions.⁴
• Revenue at Risk. The call to “bend the cost curve” has led to multiple enacted and proposed regulatory changes that could reduce federal payments to hospitals by more than $250 billion.⁵ (Figure 2)

• Alternative Payment Models. Organizations are preparing for further erosion of fee-for-service reimbursements. This movement is still in early stages. As displayed in Figure 3, current estimates indicate that 26% of revenue is derived from value-related payments.⁶ Only 13% of organizations believe they are “very prepared to manage evolving payment and delivery models” and 23% are very confident in their ability to adjust strategies quickly.⁷

• Margins. Organizations’ already-squeezed margins are certainly at risk in this environment. Fitch Ratings sees “continued pressure on margins resulting from the shift to value-based/risk-based contracts.”⁸ Other factors include greater price competition, growth of lower-margin Medicaid care and slowing commercial rate increases.

Drug Costs, Transparency Lead Political Considerations

Certainly, planning needs to account for 2020 as a major political year with healthcare front and center in the debate. At the broadest level, intense discussion surrounds national insurance in the form of “Medicare for All” and single payer options. Only 19% of healthcare leaders feel Congress is likely to institute Medicare for All.⁹ Three other governmental issues will be prominent in 2020:

• Lowering drug costs.
• Price transparency. Hospitals will be required in 2021 to publish, in readily accessible form, negotiated standard rates for their services. CMS has proposed extending this requirement to insurers. According to a recent survey, 53% of organizations perceive the heightened transparency as both threat and opportunity.¹⁰
• Cuts to Medicaid Disproportionate Share Hospital payments estimated to total $4 billion. Since such funds represent over half of hospital uncompensated care costs, the impact is substantial.

Whatever the future holds on the various issues, healthcare leaders can anticipate uncertainty to reign throughout the year and beyond.

Patient Financial Pressure is Mounting

Much attention is being devoted to the increasing financial obligation patients are shouldering for care. A recent extensive analysis of health benefits showed:

• Total family premiums have grown 22% over the past five years with a 25% increase in worker contributions.
• The percentage of workers subjected to an annual $2,000 or greater deductible is now 28%.
• Average copayment for a hospital stay is $326.¹¹

Similarly, Commonwealth Fund calculated that combined premium contributions and deductibles have grown steadily to reach 11.5% of median household income.¹² (Figure 4)



Many individuals enrolled in high deductible plans say they lack savings sufficient to cover the deductible. It is also important to note that of those 19-64, 10% are uninsured and 29% are underinsured.¹³ It is a challenge the healthcare industry is watching closely. In a recent survey, 82% of healthcare leaders said they believe it is extremely or very challenging for patients to assess their out-of-pocket costs.¹⁴ The mounting pressures are creating significant stress, and the American Psychological Association suggests that this situation spans income levels, as shown in Figure 5.¹⁵



In response, an increasing number of hospitals and providers are offering patient lending programs, usually in concert with banks, to assist with the financial obligations. Many of these patient lending programs carry low or no interest and cover small to large medical expenses. This consumer-friendly strategy is expected to see further expansion in 2020.

Revenue Cycle Management Strategies in the Spotlight

Organizations have increasingly targeted their revenue cycle management (RCM) as a source of meaningful cost savings and efficiencies. These organizations are advancing key initiatives across many fronts. Figure 6 shows the efforts financial leaders consider as offering the greatest near-term impact. Denial management and documentation improvement are clear priorities, but strong attention is also being devoted to payment, collection and other RCM automation.¹⁶



Many believe an accelerated push is needed to attain success. A survey of over 500 hospitals concluded that 26% “do not have an effective healthcare revenue cycle management solution in place” and lack a plan to optimize or replace legacy systems.¹⁷ This gap constrains capability to meet value-based care demands. Survey respondents heavily indicated (85%) that they will rely on outside financial partners to help.

Five leading RCM strategies to watch in 2020:

1. Continued expansion of electronic funds transfer (EFT). Despite progress, the industry still relies heavily on paper for patient bills and insurance remittances, creating costly manual processing. EFT is certainly growing. NACHA reports that 307 million payments were made from payers to providers in 2018 via the ACH Network, up a solid 11.5% over the previous year.¹⁸ The value of those payments is estimated at $1.59 trillion. Additionally, a report by CAQH, a non-profit alliance of health plans and trade associations, found the medical and dental industries could save an estimated $12.4 billion annually through greater payment automation. The report states the greatest portion of savings, $8.5 billion, can be realized by healthcare providers.¹⁹
2. Growing automation in receivables/remittance processes. A report on “most wired” hospitals noted that they grew adoption in 2019 by 8 percentage points each in two automation areas:

• Electronic reconciliation of patient charges according to insurance agreements. (67% deploy this capability)
• Distribution and management of bundled payments. (51%)

3. Requiring up front patient payments. As patient obligation grows, organizations are being more proactive in seeking payments in advance of care in order to improve both collections and cash flow. In a recent article, over half of healthcare leaders say their organizations now have such policies (see Figure 7), though only 25% consider them very effective.²⁰



4. More electronic refunds. A notable consequence of this pre-payment drive, exacerbated by the persistent complexity of billing, is that patient refunds are growing. Typical refund approaches are issuing checks or pre-paid cards. Both can incur processing costs, staff time, escheatment risk and difficulties with system integration. A move to optimize the process is gaining ground centered on increasing use of electronic refunds such as:

• Direct credits back to the patient’s credit card to avoid forfeiting transaction fees.
• Email, text and other “e-payments.”

5. Renewed focus on revenue growth. Following years of intense emphasis on cost cutting, attention is now pivoting to the front end of the cycle. Recently, 90% of executives said “new revenue streams were an urgent priority and expected to yield a return in the next three years.”²¹ Three major growth strategies were identified:

• Bringing care model innovations to the market. A prominent opportunity is direct-to-consumer telemedicine. One survey found 34% of respondents own or partner with a telemedicine firm.²²
• Transforming cost centers to profit centers.
• Increasing royalties from drugs, devices and diagnostics.

Digital Payment Innovation Expanding

Checks continue to decline in usage in favor of more consumer- and business-friendly digital payments. Indeed, a 2019 cross-industry survey of finance professionals showed that checks account for 42% of B2B payments, down from 50% in 2004.²³ Some spotlight areas in the digital payments space include:

• APIs and Open Banking. Financial executives see substantial impact on payments from growing use of application programming interfaces that facilitate tight systems integration and from “open banking” that permits wide network access to financial data. Technology forecaster IDC predicts that by 2023, 30% of corporate payments will originate from firms that have integrated with banks via APIs.²⁴
• Real time payments. The U.S. is playing catchup to other countries in real-time funds transfer, but consumers and organizations increasingly want immediate availability rather than the customary three-day wait. A confluence of technologies and bank partnerships is making this a viable option on the near-term horizon.
• Payments as a Service (PaaS). Add the power of cloud computing to APIs and Open Banking and the result is an emerging innovation many are calling Payments as a Service. In this model, the various financial participants can access a cloud-based platform for a spectrum of services and transactions. The ability to offer flexibility, convenience and scalability makes this avenue very attractive. Figure 8 offers an overview of the typical PaaS architecture.²⁵
  
  

• Payment Kiosks. Kiosks are proliferating in healthcare settings for everything from registration to telemedicine. Current usage for patient payments appears limited, but growth is anticipated in coming years in response both to rising consumerism and greater care in ambulatory settings where kiosks may see significant use.

Technology Streamlining Financial Processes, Improving Decisions

Technology is transforming healthcare in both clinical and business operations. Managing technology strategy can be a daunting task. For one, organizations must balance the “duality of digital: the twin imperatives to digitize legacy businesses and create new ones.”²⁶ In addition, they must adapt to the fact that “achieving a digitally driven healthcare system at scale is immensely complex,” the conclusion reached in a study that found only 32% of physicians and 27% of consumers rating healthcare as doing well introducing digital technologies.²⁷

Many technologies are in play and frequently work in tandem. Among the most promising combinations involve artificial intelligence (AI), machine learning (ML) and data analytics. A healthcare leadership report indicated that 40% of respondents were using AI. The same number said AI strategy is being directed by the C-suite.²⁸ Among the most significant “use cases” are:

• Robotic Process Automation (RPA). One technologist defined RPA as “software that allows users to configure “bots” to take on repetitive tasks by emulating and integrating the actions of a human within digital systems to perform a business process.”²⁹ Revenue cycle is a clear opportunity for RPA. The technology is in its infancy: just 15% of health system leaders said they were looking to RPA for revenue cycle improvement.³⁰ Gartner sees growth, since “process automation is the number one use case” for AI.³¹
• Predictive Analytics. Advanced algorithms, ML, and large data sets have fueled a tremendous rise in analytics that has generated fresh insights into every area of the healthcare enterprise. Analytics is quickly moving into a “predictive” phase where it can intelligently guide clinicians and staff in both process improvement and better decision-making. An annual survey tracking this subject found predictive analytics used by 60% of organizations, a 13-point increase from 2018. Both payers and providers drove the increase.³² Organizations will want to explore emerging opportunities to apply predictive analytics to patient financing, AP management and other financial processes.
• Creation of a Digital Workforce. IDC believes that AI will create “digital coworkers” that “will revolutionize the future of work in one out of three health systems” by 2023.³³

Maintain Vigilance on Security and Fraud

Information security breaches and fraud continue to plague the industry. The numbers capture the problem’s magnitude:

• Security. There were 503 recorded data breaches in 2018, affecting over 14 million patient records.³⁴ The attacks are not abating. Through June of 2019, 285 breaches were reported, with 47 in October 2019 alone.
• Fraud. FY2018 saw 1,139 new criminal and 918 civil Medicare/Medicaid fraud investigations initiated. Convictions or settlements netted $2.3 billion.³⁵ Healthcare is not alone in this area. Last year, 82% of companies experienced payments fraud - 70% underwent check fraud.³⁶ That same survey also revealed that 25% received no mitigation advice from their banks, underscoring the vital need for trusted, experienced financial institution partners.

Breaches and fraud are intertwined. A recent analysis of nearly 1,500 breaches registered 71% as involving “financial or demographic information that may cause identity theft or fraud.”³⁷ Payers and health systems are battling back, but the effort is a major push. The Most Wired survey uncovered only 30% who have a “comprehensive” security program that entails such best practices as:

• Board-level attention
• A Chief Information Security Officer
• Annual risk assessments
• Advanced network authentication, medical device security and other tools.³⁸

Payers Adapting to Major Shifts

As partners and, increasingly, as competitors, payers and providers face many of the same trends. The insurance market has its own unique characteristics that color its strategies and loom large in healthcare finance. Figure 9 succinctly captures 8 key insurer trends identified by a leading industry consulting firm.”³⁹



Payers are also prioritizing the consumer experience through more personalized benefits. IDC sees this trend accelerating, noting that 30% of health plans – will offer “Benefit Plans of One” within three years.⁴⁰

Innovation/Technology Driving Investment Funding

The healthcare capital investment landscape is also reflecting the trends delineated in this report. Seeking new revenue and competitive advantage, healthcare organizations will pursue two major capital-intensive strategies in 2020:

• M&A. The consolidation wave in recent years shows every sign of continuing. In fact, 68% of executives expect their M&A activity to increase over the coming 3 years, and 71% see the dollar value of deals increasing.⁴¹
• Investment in Innovation. Organizations are taking a more proactive stance in funding innovation initiatives. A major driver is speed. Only 38% of health systems believe they can scale innovation somewhat quickly. The commitment is growing: 86% of systems have an executive responsible for innovation management, while 48% have a defined innovation department.⁴² More systems are launching formal venture arms. Deals in 2018 involving at least one provider-based fund totaled $1.3 billion.⁴³

Conclusion

Healthcare finance will be in the spotlight again in 2020. Planning needs to account for the complex set of market, technology and operational trends described here. CommerceHealthcare^® is committed to ongoing surveillance of these trends, offering healthcare organizations advice and solutions that promote success.

Resources

1. Altarum Center for Value in Health Care, “Insights from Monthly National Health Spending Data,” Spending Brief, November 15, 2019.
2. Same.
3. A. Paavola, “Hospitals Can Expect to Spend 4.57% More on Drugs in 2020,” Becker’s Hospital Review, August 6, 2019.
4. American Hospital Association, 2020 Environmental Scan, December 2019.
5. Dobson DaVanzo & Associates, Estimate of Federal Payment Reductions to Hospitals Following the ACA: 2010-2029, October 15, 2019.
6. CHIME, Healthcare’s Most Wired: National Trends 2019.
7. Kaufman, Hall & Associates, 2019 CFO Outlook, 2019.
8. K. Halloran, “Market Outlook: Trends and Longer-Term Perspective,” HFMA Annual Conference presentation, 2019.
9. Modern Healthcare survey quoted in Modern Healthcare, May 27, 2019.
10. HealthLeaders, Revenue Cycle Intelligence Report, October 2019.
11. Kaiser Family Foundation, Employer Health Benefits: Summary of Findings, 2019.
12. Commonwealth Fund, Trends in Employer Health Care Coverage 2008-2018, November 2019.
13. American Hospital Association, 2020 Environmental Scan, December 2019.
14. L. Dafny and C. DiRienzo, “Patients Lack Information to Reduce the Cost of Care,” NEJM Catalyst, March 2019.
15. American Psychological Association, Stress in America: Uncertainty About Healthcare, January 2018.
16. HealthLeaders, Revenue Cycle Intelligence Report, October 2019.
17. J. LaPointe, “26% of Hospitals Without Effective Revenue Cycle Management System,” RevCycle Intelligence, December 10, 2018.
18. “Healthcare Providers are Receiving More Claim Payments by ACH,” Nacha News, January 16, 2019.
19. “Conducting Electronic Business Transactions: Why Greater Harmonization Across the Industry is Needed,” 2019 CAQH INDEX®, December 17, 2019.
20. HealthLeaders, Revenue Cycle Intelligence Report, October 2019.
21. A.Kacik, “Urgent Need for New Revenue Streams Will Shape Providers’ Strategies,” Modern Healthcare, April 15, 2019.
22. J. Bees, “Survey Snapshot: Mega-Mergers and Telemedicine Accelerate Convenient Care Growth,” NEJM Catalyst, July 25, 2019.
23. Association for Financial Professionals, 2019 Electronic Payments Survey, September 2019.
24. IDC, FutureScape: Worldwide Payment Strategies 2020.
25. McKinsey & Company, Global Payments Report 2019, September 2019.
26. McKinsey & Company, “The Shortlist Blog,” January 25, 2019.
27. EY, What Connections Will Move Health From Reimagining to Reality? 2019.
28. M. Tierney, “AI in Healthcare 2020 Leadership Survey Report,” AI in Healthcare, 2019.
29. J. Warrelmann, “Three Myths about Robotic Process Automation in Healthcare, Debunked,” HIT Consultant, October 28, 2019.
30. A. Pecci, Not Up on Robotic Process Automation for the Rev Cycle? Time to Pay Attention,” HealthLeaders, September 25, 2019.
31. Gartner, “Top Ten Strategic Technology Trends for 2020,” web presentation, December 2019.
32. Society of Actuaries, 2019 Predictive Analytics in Healthcare Trend Forecast, 2019.
33. IDC, FutureScape: Worldwide Health Industry 2020.
34. American Hospital Association, 2020 Environmental Scan, December 2019.
35. U.S. HHS and DOJ, Health Care Fraud and Abuse Control Program Annual Report for Fiscal Year 2018, May 2019.
36. Association for Financial Professionals, 2019 Electronic Payments Survey, September 2019.
37. J. Drees, “Most Hospital Data Breaches Contain Financial, Demographic Info that Risks Identity Theft,” Becker’s Hospital Review, September 24, 2019.
38. CHIME, Healthcare’s Most Wired: National Trends 2019.
39. Capgemini, Top Trends in Health Insurance: 2020, November 2019.
40. IDC, FutureScape: Worldwide Health Industry 2020.
41. HealthLeaders, Navigating the M&A Landscape, April 2019.
42. Center for Connected Medicine, Trends for Scaling Innovation in Health Care, June 2019.
43. T. Abraham, “Hospitals Look to Venture Capital as R&D Extension,” Healthcare Dive, April 3, 2019.