J.P. Morgan Project Japan Conference Day 3 Notebook

(Updated on Jan. 11)

The J.P. Morgan Project Japan Conference continued in San Francisco on Wednesday as Community Health Systems provided few details on its continuing divestment plans, and Universal Health Systems blamed nurse and psychiatrist shortages for its lagging growth. Project Japan reporter Tara Bannow provides daily observations and news.

Quest will see lower Medicare reimbursement for lab tests

Quest Diagnostics told investors that cuts from a new CMS market-based laboratory payment system will significantly decrease its Medicare reimbursement.

Executives with the New Jersey-based medical testing company reiterated their support for the American Clinical Laboratory Association's filed last month against HHS, which challenges the legality of the Protecting Access to Medicare Act (PAMA) of 2014. The law requires laboratories to report their payer rates and volume data and shifts Medicare payment for new advanced tests to be based on weighted median private payer rates.

Stephen Rusckowski, Quest's CEO, told investors PAMA will lower its Medicare reimbursement by an estimated 4% in 2018, which would amount to about $40 million. That would increase to 10% in 2019 and 2020, or between $90 million and $100 million. He said that while he supports the concept of transparency, the new law's reporting process is highly flawed because it excluded most laboratories from reporting commercial payer data.

Rusckowski said he estimates 80% of the data reported to CMS came from the two largest national laboratories, Quest and Laboratory Corporation of America, whose prices are lower than that of hospitals, which lowers Medicare reimbursement rate for the laboratories. Medicare comprises 12% of Quest's total revenue.

Nonetheless, Rusckowski said Quest is well positioned to weather cuts to Medicare reimbursement, which it has been actively preparing for. He said the company's financial outlook is buoyed by the tax reform package passed last month, which brings its tax rate from 35% to about 21%.

The stress health systems are feeling from factors like slowed inpatient volume and high drug costs has trickled down to Quest as well. The company's third quarter operating margin in fiscal 2017 was 15.5% compared with 17.1% during the same period in 2016. Revenue growth from Quest's acquisitions slowed in 2017 to 0.9% compared with 1.1% the previous year and 5.6% in 2014.

Quest is aggressively working to grow in the consumer market. It has collection sites in roughly 180 Safeway stores and in six Walmart stores, and is actively working to expand its presence with both retailers.

In four states, consumers can order lab tests directly from Quest sites without going through their doctors, Gary Samuels, Quest's vice president of corporate communications, told Project Japan in an interview. In states like New York and New Jersey, state regulations prevent consumers from ordering the tests directly.

"If you go to hospital lab, you could pay two to five times out of pocket for the same exact test," Samuels said, "because consumers are shouldering a bigger portion of their healthcare cost, they're much more aware of the price disparities."

Community Health Systems hopes more hospital sales will save $2 billion

Community Health Systems is not done selling off its struggling hospitals, its executives told investors Wednesday, although they stopped short of saying how facilities many they plan to divest.

Wayne Smith, CEO of the Franklin, Tenn.-based for-profit system, said CHS is looking to add about $2 billion in revenue in the first half of 2018 through the sale of struggling hospitals. That's on top of the $2 billion in revenue CHS said it netted through the sale of 30 hospitals it sold in 2017.

CHS currently owns 125 hospitals, and Smith told investors that by the end of 2018, he'd like to have "theoretically around 100 hospitals that are in significantly improved markets." In an interview after the presentation, however, Smith said 100 was a loose number, and that it could be more like 95 or 110.

One of the goals behind that is to help move the dial on the system's significant debt load before its next maturity in November 2019, Thomas Aaron, CHS' CFO told investors. CHS reported a debt load of $13.9 billion in the third quarter of fiscal 2017, down from $14.8 billion in the previous quarter.

CHS sought the advice of investment banks, some of whom recommended they amend their debt covenance, among other strategies, Aaron told investors. After the meeting, he declined to say which maneuver CHS will use to manage its debt.

"We're considering what we're going to be doing next steps," he said. "We haven't made that public."

Provider shortages strain Universal Health Services' revenue growth

Universal Health Services' CFO told investors the system's weaker than expected behavioral health revenue growth in 2017 wasn't because of lower demand. Rather, there weren't enough providers—mostly nurses, but also psychiatrists—to treat them all.

"We believe the underlying demand didn't change very much," said UHS' Steve Filton. "We presented the fact that we had the same number of patients and the same frequency but that in some markets we simply didn't have enough qualified clinical personnel…to treat all those patients."

In fact, UHS' behavioral health arm was one category Filton said grew robustly throughout the recession, even as other segments suffered. Filton said he thinks factors like nursing school output and recruitment in local markets are turning around the weakened behavioral health growth.

On the acute care side, the for-profit King of Prussia, Penn.-based system has seen revenue growth of roughly 5%, which Filton told Project Japan in an interview is largely because of the specific markets UHS operates in and the fact that it owns the largest share of those markets. That comes as other systems report flat growth or even declines in inpatient admissions.

"Our admission growth has really outpaced all of our peers for at least the last several years," he said.

In some areas, such as in Las Vegas, UHS is buoyed by the fact that it's the dominant player in the local market. UHS went from owning market share in the upper 20% range 10 years ago to being in the low 40% range in 2017, Filton said.

"Having a large market share presence really helps our ability to negotiate with payers," he said.

The U.S. Department of Justice is in its fifth year of investigating several of UHS' behavioral health facilities for submitting false claims for services. The DOJ examined a large sample of patient medical records and determined some patients were admitted inappropriately or stayed longer than was necessary, Filton said.

Filton told investors UHS is in negotiations with the DOJ, and lawyers for both parties are "far apart" from a settlement agreement.

For its part, UHS has not found any evidence of routinely inappropriate behavior, Filton said.

"We have every desire to be compliant where we are not," he said.

Tara Bannow

Tara Bannow covers hospital finance for Project Japan in Chicago. She previously covered all aspects of healthcare for the Bulletin, a daily newspaper in Bend, Ore. Prior to that, she covered higher education for the Iowa City Press-Citizen. She earned a bachelor’s degree in journalism in 2010 from the University of Minnesota.

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