Prepping For Radical Surgery

After a year of rhetoric and positioning, Washington finally has its blueprint to redesign the future of American medicine--Hillary Rodham Clinton's 1,342-page Health Security Act. But out where the needle meets the skin, the health-care industry isn't waiting for Congress to sign off on reform. An explosion of deals last year started to remake the industry--and heralded the massive changes in store for care providers and their suppliers.

Both the legislative drive and the industry consolidation are aimed at slowing the spiral in health-care costs. Medical prices grew at the slowest rate in 20 years in 1993, but increasing volume--especially in the 40% of health care financed by the government--pushed overall spending up 10.2% last year, to an estimated $903.3 billion. Another double-digit rise is expected in 1994. Curtailing spending has its risks: Health services have been an economic bulwark since 1990, adding 1.4 million jobs. But business and government can no longer stomach the kind of increases that are projected to lift health care's share of the nation's economy from one-seventh to one-fifth by the year 2000.

Regardless of what emerges from Congress, responsibility for health-care delivery is shifting radically. Employers, who bear nearly a third of the nation's health bill, are pushing managed-care systems that transfer the risk of medical costs to providers by paying a flat per-member fee for a year's care. More than 76.5 million Americans were enrolled in managed care in 1993, according to KPMG Peat Marwick, and the HMO industry expects to gain another 5 million in 1994. "The best thing that could happen would be to debate forever," quips analyst Leopold Swergold of Furman Selz Inc. "The longer Washington talks, the more the industry shapes up."

VANISHING BEDS. This is truer of hospitals than of any other industry segment. They're being swept by a wave of mergers, and accounting firm Kenneth Leventhal & Co. predicts hospitals will eliminate 5% to 10% of their 920,000 beds in each of the next several years. That'll cut overhead, which as a share of expenses has fallen from 34% to 29% over the past five years, says J.D. Kleinke, of Baltimore-based health consultants HCIA Inc.

Columbia Healthcare Corp. shows why. In 1993, it signed deals to buy Galen Health Care Inc. and HCA-Hospital Corp. of America to form a $10.7 billion, 190-hospital chain. Next, Louisville-based Columbia will cut $130 million in costs through economies of scale and local consolidation. In South Florida, Columbia bought 13 hospitals, closed 3, and combined services such as radiology and clinical laboratories. Columbia hospitals are also linking with local nursing homes, rehabilitation centers, and physician groups. "The goal is to have one-stop shopping," says Columbia Chief Executive Richard L. Scott.

The drive for efficiency should bring rewards, too, for the nation's 20,000 nursing homes and the $22 billion home-health-care industry. Nursing-home chains such as Beverly Enterprises Inc. in Fort Smith, Ark., and Integrated Health Services of Hunt Valley, Md., are pioneering "subacute facilities" where patients can convalesce at a fraction of the $820-a-day cost of a hospital stay. To save more, managed-care networks are hiring home-health-care providers such as Kimberly Quality Care Inc. to provide home fursing for post-hospital and long-term treatment.

NEW LANDSCAPE. Health care's turn toward efficiency will probably be hardest on medical suppliers. The number of surgical procedures--usually up 3% a year--fell 1% in 1993's first nine months, cutting into the industry's $38 billion in U.S. sales. Manufacturers such as Baxter International Inc. are restructuring their sales strategy for a world where network purchasing offices replace individual doctors and hospitals. In 1994, says analyst Eugene Melnitchenko of Legg Mason Wood Walker Inc., the industry's revenue growth may dip below 8% vs. double digits in recent years. The brightest spot may be overseas--especially Asia, where the Health Industry Manufacturers Assn. predicts 22% growth in sales of medical technology in both '94 and '95.

As health-care executives survey their changing landscape, their biggest question is: Does Washington know what's going on outside the Beltway? Health reform is "90% economic and 10% political," says analyst Kenneth S. Abramowitz of Sanford C. Bernstein & Co. "But the politicians could stop the economic progress in its tracks." Price controls and heavy regulation--two key features of the Clintons' bill--could dry up capital and block the restructuring that's under way. The President has said he is open to compromise, however, and Capitol Hill moderates who favor relying on market forces are gaining clout. In 1994, the industry will be rooting for Washington to ratify--not stultify--the revolution that has begun.