When old people get older

Investors have plenty of capital to invest in acute care hospitals, and hospitals need that cash to prepare for the demographic wave that's about to crash over them.

Richard Rollo, a managing director in the New York City office of Hammond Hanlon Camp, gave that assessment in a recent interview.

The firm, which refers to itself as H2C, sells strategic consulting and investment banking services to health care organizations. The consultants help client organizations figure out what kinds of deals to make, and how to pay for the deals.

Rollo said, based on research he did for a white paper, that he believes most people involved with health care services planning are suffering from a critical misunderstanding about U.S. patient demographics.

"They all know people are getting older," Rollo said. "But they haven't really applied the math."

The U.S. baby boom started in 1946 and ended in 1964. The oldest boomers started turning 65 in 2011. This year, the oldest boomers are turning 70.

Because the baby boom generation is so much bigger that the preceding generation, the silent generation, and the younger members of the silent generation have been more numerous than the older members of the silent generation, the average age of the U.S. senior population has been falling since about 2006, Rollo said.

In other words, even though the average age of people in the United States has been rising, the average age of the biggest consumers of hospital services has been dropping, Rollo said.

"That's about to reverse," Rollo said.

The charts he's made, based on Census Bureau figures that anyone can download, show that the average age of the Medicare-eligible population will start to increase rapidly around 2020, and that this trend will continue until about 2040.

"By that time," he said, "you have an enormous senior population."

Pressure to control costs

Hospitals generally like caring for Medicare enrollees, but Medicare bargains for low prices, and the rapid aging of the Medicare-eligible population will make the pressure on Medicare program managers to push for even tighter control of costs more intense than most health care services executives are expecting, Rollo said.

Rollo sees little obvious cost fat in the commercial health coverage sector.

Many, for example, point to California as a state in which strict health maintenance organizations have done a good job of holding down costs.

But one of the big, well-known HMOs there looks as good as it does because it has few Medicaid patients, Rollo said.

Similarly, Rollo said, he thinks the idea that acute care hospitals are full of easy-to-cut cost fat is mistaken.

Hospitals tend to have some extra resources because they need extra resources to cope with the unexpected, he said.

"There's no silver bullet" for killing high costs quickly, Rollo said.

But Medicare does appear to have over-use, and it and hospitals will probably have to attack that over-use with methodical, slow-acting, unexciting reimbursement realignment efforts based on the new "population health management" philosophy, rather than the old fee-for-service approach, he said.

For insurers and plan sponsors in the commercial health insurance sector, another implication is that hospitals will face even more of an incentive than they do to shift whatever costs they can onto the backs of commercial payers, Rollo said.

Rollo said one challenge is that poorly thought-out reimbursement reform efforts could destroy the best hospitals.

Many proposed reforms call for hospitals to accept responsibility for the total cost of their patients' care.

If a top hospital starts a plan itself, or if the hospital participates in a few narrow-network plans in a market, and the hospital assumes some risk for those narrow-network plan enrollees, the sickest patients may flock to the plan, or plans, offered by that top hospital and smother the top hospital with excess health care costs, Rollo said.

Another challenge Rollo sees is difficulties with getting the kinds of data he'd like to have to analyze what's really going on with health care costs.

California makes large amounts of detailed hospital data easily available to the public, and New York state can offer similar data to researchers who know how to ask, Rollo said.

In other cases, he said, he finds that the data sources he wants are unavailable, or available only through expensive data vendors.

The lack of data makes answering even basic questions, such as why U.S. health care costs so much, difficult, Rollo said.

A rough analysis suggests that the amount of time health care workers are spending on "nonproductive work," such as insurance claim administration, may be increasing, and that might be one part of the problem, Rollo said.

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