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Uncertain Prognosis: Industries Impacted by Health Care Reform

Jul 30th 2013
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By Anna Son, IBISWorld Health Care Industry Analyst

With 2014 only a few months away, a major milestone in US health care history is drawing near. Three years have passed since President Obama signed the Patient Protection and Affordable Care Act (PPACA) into law in March 2010, and the most significant provisions are finally set to kick in. While many health care reform provisions have already been implemented, the key provisions will not take full effect until January 2014.

These provisions will not only drastically change the way Americans access and pay for health care services, but they will also transform the entire health care delivery system, affecting virtually every provider, consumer, and payer in every state, city, and local community. The PPACA is projected to expand health care coverage to about 27 million previously uninsured Americans by 2017, according to Congressional Budget Office estimates. 

IBISWorld examined its database of more than 1,000 US industries and identified those that are most affected by health care reform and preparing for the oncoming changes. The following markets contain companies in need of compliance advisory services to minimize potential losses and capitalize on the legislation's benefits. The new regulations present opportunities for accountants to proactively reach out to existing clients, build relationships, and increase billable hours, in addition to identifying and winning new business. 

Health care payers 

Health care reform will likely have the greatest impact on the health and medical insurance industry, with a mixed bag of benefits and drawbacks. Health insurance carriers are expected to benefit from an influx of newly insured patients through the insurance exchange and expansion of government programs, such as Medicare and Medicaid. Nevertheless, health insurance companies should prepare to face roadblocks pertaining to new regulations, including bans on preexisting exclusions for adults and children, all annual or lifetime limits, and charging higher rates to sick customers. 

In light of increasing demand for health care services, along with uncertainty and cost pressures stemming from health care reform, larger health insurers are continually acquiring smaller players to achieve economies of scale and diversify their customer base and service offerings. This is particularly evident in the government-sponsored insurance market, which is poised for strong growth due to the expansion of coverage under Medicare and Medicaid. For instance, insurance goliaths WellPoint, Aetna, and Cigna all acquired smaller Medicaid-focused coverage providers to bolster their government business in 2012. This activity demonstrates the recent trend of large insurers acquiring physician practices to guarantee their patients adequate access to primary care in light of anticipated physician and nurse shortages. Furthermore, to meet new rebate requirements, health insurance carriers will likely alter their pricing and modify product features and benefits. 

Health insurance companies will likely become more cooperative with health care providers to achieve maximum returns. For instance, according to health insurance giant Aetna, the company is altering its 160-year business model to stay abreast of regulatory changes by aiming to become a community-based organization. With this new model and an increased willingness to share proprietary technology and information to achieve the best outcomes, Aetna is shifting its focus away from negotiation and toward a partnership model with health care providers. These are a few of the tactics that small and midsized insurers may look to adopt in an effort to proactively hedge against potential losses upon compliance. In turn, insurance companies will seek accounting and consulting services to help them become adept at capitalizing on opportunities in the new-era insurance market. 

Health care providers 

With the aging baby-boomer population and the influx of newly insured patients, demand for health care services is expected to escalate in the coming years. While the PPACA emphasizes primary care, increasing payments to the primary care doctors industry, some operators in the specialist doctors industry are concerned that insurance coverage will not guarantee patients access to specialist care. By considerably increasing the number of insured individuals, health care reform has raised the stakes for hospitals and medical schools already scrambling to train more doctors and meet demand. Financial pressures and lower reimbursement from government payers will encourage more physicians to join hospitals and large physician practices. Physicians benefit from joining hospitals because they are paid for services at the hospital systems' rates, which are generally much higher than what insurers pay independent providers. 

Health care reform has already started making big waves in the hospitals industry, especially with nonprofit operators. The legislation adds new requirements for charitable hospitals that are exempt from federal taxation, including performance of periodic community needs assessments, limitations on charges, and financial assistance policy requirements for patients. These changes will trigger further consolidation between nonprofit and for-profit hospital operators, with more acquisitions of nonprofits forecast to occur in the next five years. Health care reform also encourages hospital consolidation through accountable care organizations (ACOs), which will allow hospitals to share cost savings or payments to achieve quality measures. These transitions will provide accountants the opportunity to advise hospital operators seeking to create partnerships to gain access to capital needed for expanding their operations. 

The legislation also includes changes to the nursing care facilities industry, including an infusion of federal funding to help state programs provide more care at home, resulting in a shift from nursing care facilities to at-home care. Health care reform also includes modifications to criteria for qualifying for payment, bundling payments for nursing services, and imposing enrollment limitations on new providers. In response to the changes, companies are expanding other areas of business to diversify revenue streams. For instance, operators may look to offer specialized services that attract patients with workers' compensation or private insurance and moving into community-based services (e.g., home care services) with multiple funding streams. 

Health care reform legislation supports the home care providers industry by encouraging Medicaid patients to receive home care, resulting in fewer paid patients for nursing care facilities. While many health care reform provisions make it easier for states to add home care services to their Medicaid programs and make new services permanent Medicaid benefits, the legislation also reduces the total reimbursement under the home health prospective payment system. Additionally, more home care providers are expected to take advantage of incentives under health care reform that provide additional payment for serving rural areas to address the shortage of health care practitioners, in turn, boosting profitability.

Health care suppliers 

In order to balance the overall expense of health care reform associated with the expansion of health insurance coverage, particularly through state Medicaid programs, new revenue streams were needed. One of these new sources is a medical excise tax, which has remained one of the most controversial key provisions of health care reform.

As of January 1, 2013, a 2.3 percent excise tax was levied on the domestic sale of medical devices paid by all manufacturers, regardless of size and revenue. The excise tax is projected to cost the medical device sector $20 billion in the next ten years and could place more strain on the US innovation system for medical technology, affecting investors' willingness to back startup companies seeking to commercialize new technologies. In March 2013, operators in the medical device manufacturing and medical instrument and supply manufacturing industries breathed a sigh of relief when the Senate voted to repeal the excise tax. Although the final decision has yet to be made, the voting results demonstrated the industries' lobbying clout; medical device manufacturers have been petitioning to repeal this part of health care reform since its introduction. 

While some manufacturers will likely pass the cost of the new tax on to end users, such as hospitals and clinics, others may reduce their labor force, slash research and development budgets, or delay expansion plans. Tightening regulations and intense competition, along with new market opportunities, are also prompting medical device companies to outsource manufacturing to areas with lower production costs. Merger and acquisition activity is expected to intensify because manufacturers are more likely to secure contracts with large purchasing organizations if they can offer a wide product assortment. In anticipation of additional costs associated with the excise tax and other health care reform provisions, medical device manufacturers will seek accounting services to maximize returns while keeping their books safe.

With all the anticipation, opposition, and uncertainty surrounding health care reform for the past three years, the implementation of its major provisions is rapidly approaching. Awareness of an industry's exposure to the changes brought on by the legislation will help accounting professionals anticipate and explain any potential change in returns to their clients, equipping them with the insight necessary to effectively minimize losses and boost profitability. 

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About the author:

Anna Son is an industry analyst at IBISWorld, covering the health care and social assistance sectors. She holds a bachelor's degree in business administration and a minor in marketing from Pepperdine University. Anna can be reached at [email protected], and the research featured in this article can be found at

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