Providers could face big squeeze in '09

Next year isn't likely to be pretty for providers. As a story in this week's newsletter notes, insurance companies have been watching profits fall, so they're likely to raise premiums in 2009. Then, the dominoes begin to fall: In an effort to save, employers will raise deductibles and co-pays, employees will carry bigger financial burdens and voilà--bad debt will rise. Worse, with health plans struggling to regain their profit levels, providers are likely to face tougher pressure to maintain, or even cut their rates. Then, of course, there's the crisis currently roiling the financial markets, which limits providers' ability to get loans, issue bonds and finance deals.

Add in the likelihood that health system reforms could be in play next year--when the U.S. swears in a new president--and you're looking at a scary 2009. If things don't play out just right, providers could face a serious squeeze, with patients who can't pay on one side and insurers who won't on the other.

Hospitals are particularly vulnerable here. With far too many operating on razor-thin margins (or losing money), next year could turn out to be a bloodbath, with the U.S. seeing an explosion of hospital bankruptcies and closures. Small wonder many are battening down and beginning to demand up-front cash payments for services where they can, though that, too has its down side. (This practice may slash bad debt, but it's not exactly warm and fuzzy, and besides, in a tough competitive market consumers may just go elsewhere.)

All that being said, providers aren't powerless. This is the year to begin partnering aggressively--one reason why physician-hospital JVs seem to be coming back into vogue--and to consider mergers and acquisitions that beef up your bargaining muscle quickly. After all, if I were a health plan negotiator, I'd try a "divide-and-conquer" strategy to get the best deals.

Now, it's your turn, readers. What strategies do you think providers (especially hospitals) need to pursue to survive the next year or two? Do you think their salvation lies in better managed care contracting? Building volume? Partnering? Attracting venture capital? Investing in new vehicles (say, medical real estate or biomedical start-ups)?  I'd love to hear your thoughts. - Anne