Health Care: Growing but Not Glowing

-- Employees will pay more as insurers keep raising rates

-- New legislation may help hospitals and physicians

For a glimpse of the challenges facing the health-care industry, consider the travails of Tenet Healthcare Corp. (THC ) In December, the hospital operator slashed its earnings projections following revelations that much of its growth had come from higher pricing rather than increased hospital admissions. Anticipating new restrictions in contracts with health maintenance organizations and Medicare, Tenet executives now admit that they must adopt more conservative billing practices and that profits could fall in the fiscal year beginning June, 2003.

Tenet's rapid fall demonstrates the vulnerability of health-care players to a variety of pressures. Granted, the industry is in great shape compared with 2002's many laggards. It's poised for growth, thanks to an inexorable demographic trend: 75 million aging baby boomers demanding quality care. The U.S. will spend $1.7 trillion on health care in 2003, up 13% from last year. But advances in medical devices and drug therapy, while improving care, will also raise costs. Factor in the nursing shortage and legislative reforms, and you could end up with a high-risk profile.

Once again, industry experts predict, health-care companies will offload much of that risk. Employers and consumers are certain to pick up more of the health-care bill, with premiums projected to jump 16% in 2003, according to consultants Towers Perrin. That's the fourth consecutive year of double-digit rate hikes and the highest increase since 1990. Consequently, 2003 should be an upbeat year for health insurers, as premium increases more than cover costs.

The higher rates will force employers to look for ways to reduce their health-care burden. More companies will adopt defined-contribution plans, in which they set aside a fixed amount of money that each employee can use to purchase his or her own medical care. In 2002, the Internal Revenue Service ruled that funds for such plans are tax-exempt, which should increase their popularity. Several large insurers, including Aetna Inc. (AET ) and Humana Inc. (HUM ), are helping companies develop such programs. "We'll see more managed-care players capitalizing on the trend," predicts Rakesh Shankar, a health-care analyst for Economy.com Inc.

Hospitals have a different set of pressures. For one thing, a persistent nursing shortage continues to dog the industry. Bain & Co. estimates that 7% of nursing spots will remain unfilled in 2003, up from 6% in 2002. Hospitals will have to boost wages and spend more on other perks, such as career-development programs. "They need better ways to keep nurses from leaving the profession," says Russ Hagey, managing director of Bain's Los Angeles office.

Hospitals, however, may find it hard to boost prices. Insurers are already protesting relentless price increases. The Centers for Medicare & Medicaid Services has vowed to increase its scrutiny of hospital-billing practices. The agency wants to close loopholes that allowed companies like Tenet to collect unusually high payments.

The best hope for providers is relief from the government. George Bush has ballyhooed a prescription drug plan for seniors, and the government is debating stemming Medicare payment cuts to doctors and placing caps on malpractice-damage awards--"clear positives for the industry," says Rita Friedman, an analyst for PNC Advisors. Health-care providers can only hope that she's right.

By Arlene Weintraub in Los Angeles

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