View from the top--health care CEOs share insights for 2006 and beyond.

It was admittedly painful when Austin, Texas, CEO William Gamel, MD, gathered 10 vice presidents last fall for a 2006 budget meeting.

On the table: The Centers for Medicare & Medicaid Services (CMS) asked his quality improvement organization, Texas Medical Foundation Health Quality Institute, to give up 10 percent more revenue for 30 percent more work.

"We had to decide (whether) to let people go, cut travel or reign in health care costs," says Gamel, a gastroenterologist.

Across the country at Duke University Medical Center in Durham, N.C., CEO William Fulkerson, MD, ran a similar planning meeting and summoned specialty physician leaders to pinpoint market trends.

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"Technological discoveries are exploding every day. Being able to identify those initiatives or services and adapt them to your institution or enterprise is increasingly important," Fulkerson says.

One budget expansion target: outpatient ambulatory activity, including surgery centers to handle the continuing uptick in noninvasive procedures and competition from non-hospitals.

Meanwhile, out west in the desert at Sierra Health Services, Inc., Nevada's largest health care plan, CEO Anthony Marlon, MD, is hatching his own aggressive plans for 2006.

Sierra owns nine subsidiaries, including the 200-member Southwest Medical Associates multispecialty group practice. Marlon, a cardiologist, plans to capitalize on the aging boomer demographic and build a nursing home in 2006.

Predicting the future

These are some of the plans shared by more than half a dozen physician CEOs from various health care sectors who talked about their financial insights for 2006 with The Physician Executive.

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Some were pessimistic, like Alfred Tector, MD, a cardio-thoracic surgeon and CEO of Midwest Heart Surgery Institute, a five-man group practice in Milwaukee. If malpractice insurance premiums increase and Medicare pay cuts are approved, the institute might have to lay off personnel. "It will make it harder to get things done," Tector says.

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Others are decidedly upbeat, like Richard Gliklich, MD, a head and neck surgeon who is CEO of Outcome Sciences Inc., Cambridge, Mass. He projects 50 percent company growth in 2006.

Outcome is riding a wave of popularity as it collects and analyzes health data for vogue programs such as disease management, pay for performance and clinical trials.

Executives uniformly agree on some trends, such as the inevitability of universal electronic health records and extra pay for meeting quality targets. But there is no consensus on dire forecasts of severe physician and bed shortages.

What is overall undisputed: medicine is a complicated business and change is on the horizon. Here, then, are 14 trends for 2006.

1. Medical liability rates will flatten

"The dramatic escalation in the cost of medical malpractice insurance is largely behind us," says Richard Anderson, MD, CEO of the Napa, Calif.-based The Doctor's Company, among the top five U.S. medical malpractice carriers by premium volume.

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"We've entered an era of relative stability," Anderson adds, "However, the bad news is that there is no reason to believe that rates will turn lower. The pressure on rates continues to be upward, not downward, though rate increases will be modest."

States that have passed effective tort reforms, such as California and Texas, have a more positive outlook and premiums will trend down, Anderson says. Ohio and Florida, which passed limited reforms, will need to enact more legislation before doctors see reductions.

Physicians frustrated by liability rates and other issues who could afford to retire have likely left practice. "We'll see less migration out of the specialties because those who have wanted to leave and had the capital will have done so," says the CEO.

It is only tort reform that can decrease the cost of health care and increase access, the two most pressing issues in health care today, Anderson proclaims. He does not expect national reform, despite President George Bush's widely publicized efforts to place a $250,000 federal cap on non-economic damages.

The safety movement, however, may help. "Patient safety offers the potential to reduce some adverse outcomes that would result in litigation, complications, re-hospitalizations and long convalescences," Anderson says.

2. New income streams

Bread and butter income for Midwest Surgery Institute in Milwaukee used to be coronary bypass and aortic surgeries, both of which have declined considerably because of the advent, advance and acceptance of angioplasties and stents.

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"We have had to develop other areas to make up," Tector says. He and his four partners plan to further increase their lung business in 2006, such as lung transplants, infections and cancers. They will attend tumor and other conferences to make contact with referring physicians to obtain more of these cases.

Gamel, CEO at TMF, faced with reduced revenue, will use the talent of his 140-member organization to increase a quality consulting business, an alternate revenue stream.

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Private practice physicians have long since ditched Wednesday golf games and cannot see more patients.

"To maintain income, surgeons are building surgery centers, orthopods are building physical therapy centers, GI docs are building endoscopy centers and cardiologists are buying nuclear cameras," says Nathan Kaufman, senior vice president, ACS Healthcare Solutions, Dearborn, Mich., (formerly Superior Consulting).

Many of these efforts will allow physicians to bill facility fees as well as the clinical component.

3. Medicare pay cuts

Starting this month, unless new legislation is passed, CMS will reduce physician reimbursement by 4.4 percent. Further cuts are scheduled in succeeding years.

Most CEOs interviewed thought the figure was just a starting point in discussions when the decision was made by CMS last April.

Then came some of the costliest hurricanes on record. Health professionals feared that while Hurricanes Katrina, Rita and Wilma may have affected a small geographical area of America, the disquieting financial aftermath of these natural disasters might be used to make sweeping cuts in federal spending.

The possibility was made more real after a September 2005 U.S. House of Representatives Republican Study Committee report called "Operation Offset" called for significant Medicare reductions.

"It would be a terrible thing if it happened," says Jeffrey Goldsmith, PhD, a Charlottesville, Va., health care futurist. "Physicians will leave the program, stop taking new Medicare patients."

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CMS leader Mark McClellan, MD, PhD, echoed similar sentiments when he testified before Congress in September. "Such negative updates raise real concerns about this payment system in terms of assuring access to quality care for Medicare beneficiaries," he said.

An American Medical Association survey of 5,486 physicians in February and March 2005 on projected Medicare physician payment cuts indicated that:

* More than a third (38 percent) of physicians would decrease the number of new Medicare patients they accept

* More than half (54 percent) of physicians would defer the purchase of information technology

* About a quarter (24 percent) of physicians would close satellite offices

* A third (34 percent) of physicians whose practices serve a rural patient population would discontinue rural outreach services.

* More than half said they would be less likely to participate in Medicare HMO/PPOs or Advantage plans.

Depending on individual payer mixes and patient demographics, some CEOs expect doctors will not drop Medicare patients because income from those patients pays fixed costs such as rent and salaries. In recent years, more doctors accept Medicare. From 1990-2004, the number of Medicare-participating allopathic and osteopathic physicians and other practitioners has nearly doubled from 48 to 92 percent.

A few CEOs are resigned.

"I believe with certainty there's going to be renewed pressure on hospital and physician finances because of Medicare and Medicaid funding reductions," says Fulkerson.

"We're anticipating building it into revenue projections. The way you plan for it is to have been planning in the last 5-10 years to be more efficient, less wasteful, more productive, and adaptive."

But Marlon adds, "We're threatened with Medicare cuts every year and sometimes cuts become a reality and sometimes not. We're not going to diminish the numbers of our Medicare patients."

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Gamel, of TMF Health Quality Institute, says even if there are no fee reductions, Medicare does not currently reimburse doctors for operating costs, a contention supported by the AMA. A "freeze" in physician payments would be akin to a payment cut, according to the AMA.

"When the government announces a 4.4 percent pay cut and at the last minute drops it to zero, doctors think they got something. Their costs are still more than their payments," states ACS health care consultant, Kaufman.

4. Pay for performance is inescapable

While they do not unanimously support it, all CEOs interviewed agree pay for performance is a freight train rolling down the tracks of medicine in 2006.

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"Doctors need to prepare for pay for quality. It's coming. Many stakeholders--payers, Medicare, employer coalitions--are moving this way," says Gliklich, CEO of Outcome. Gliklich's company recently created a program in test phase that enables physician practices to collect and report P4P.

One CEO, David Callender, MD, of UCLA Health System, Los Angeles, an otolaryngologist, is allotting more support to monitor and improve quality through pharmacy system upgrades, people and space, he says.

In testimony before the House Ways and Means Committee on health last fall, McClellan outlined how federal P4P would take hold in the next few years. Starting this month, physicians may voluntarily report on 36 evidence-based measures created by National Quality Forum, the AMA and others. Doctors would add "G" HCPCS codes to standard claim forms.

For example, a diabetic patient visit that might be billed to Medicare as a 99213 would have the additional code, G8016, added if hemoglobin AIC is below 9 percent. Doctors will get confidential reports back in mid-2006 they can access electronically to let them know how they fare.

Perhaps in 2007, physicians would be paid for reporting. In succeeding years, they would be paid for reaching quality targets, then paid for achieving quality with efficiency.

"We are assessing implementation issues under a scenario where reporting and subsequent performance could result in a payment differential for physicians," says McClellan. "Medicare would then move to a system where the payment differential would be based on performance for the measures," he adds.

CMS started a similar program in 2002 with U.S. hospitals. Hospitals eventually started receiving a .4 percent incentive payment for reporting. Initially, only 70 hospitals participated; today, 70 percent report on 17 quality measures, McAllen told Congress.

"The experience from the hospital side has been positive--subsequently attaching reimbursement differential led to more hospital reporting overnight," Gliklich says. The hospital voluntary reporting program resulted in the launch of www.hospitalcompare.hhs.gov, which compares institutions in an area by diseases, procedures and treatment efficacies.

The physician reporting program might also lead to a doctor shopping guide.

5. Physician/nurse shortage

"We're facing a shortfall of all health care providers, physicians and nurses, relative to the current demand, based on the aging of the population," UCLA's Callender says. To make matters worse, the pipeline supplying health care workers is limited, he says.

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To offset impending insufficiencies, the university plans to cater to workers. "We are trying to become an employer of choice to attract and retain people, to look at opportunities to develop people and to treat them well. Benefits and wages are important but system environment is one of the most critical issues. We're investing in career and leadership development and the newest thing--the wellness of employees. We beefed up our nutrition program and added exercise equipment around the campus."

Two widely quoted independent studies by Edward Salsberg and Richard Cooper, MD, predict a shortage of either 85,000 or 200,000 doctors, respectively, by 2020.

Among the reasons cited by experts is that doctors who once spent their entire lives in patient care and who have become frustrated with the medical climate have found other uses for medical training in industry. There are also productivity declines.

Younger physicians view medicine as less of a calling and more of a job. They work fewer hours and focus more on lifestyle needs. Women, who make up nearly half of all medical school graduating classes, also work fewer hours. Training programs cut in the 1990s for fear of a physician oversupply were wrong. "It takes 15 years to rectify a mistake," Kaufman says.

"We've started to see it with generations X and Y," says Barbara LeTourneau, MD, a St. Paul, Minn. emergency physician and consultant. "Fewer applications, less respect, less status, less admiration, less pillars of the community and medical education is getting more expensive."

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Medical school applications were down 21 percent in 2005 compared to 1996 and the average debt load of medical students who took out loans for private school is $140,000.

Like other CEOs, Fulkerson foresees shortages in some disciplines but no major supply issues. Gliklich contends the shortage is regional, not national. Gamel of TMF felt there was only a shortage in states where there is no or limited tort reform and only in certain specialties like obstetrics.

6. Health care is 2008 election issue

CEOs interviewed disagreed on whether health care would be the #1 campaign issue of candidates warming up for the 2008 presidential race. All conceded, however, it would be in the Top 10.

Increasing numbers of uninsured, rising bankruptcies attributed to unaffordable health care costs and corporations such as Starbucks and General Motors acknowledging health care is their biggest expense are all contributing factors.

Kaufman opines that candidate proposals may include a means test for wealthier Medicare recipients to pay co-pays and deductibles if they can afford them and a mandate for large employers to offer bare bones policies to all employees, regardless of whether they work part time. Some of the poorest may receive health care stamps like food stamps to purchase some form of care.

A single payer system is remote but possible, suggests Marlon.

7. More regulatory oversight

More intense state and federal regulation of the health business in 2006 and beyond is a certainty, the chief executives agree.

Data previously shared only among hospital staffs will have to be reported, such as medical errors, infection rates, mortality and morbidity and adherence to protocols--such as giving aspirin to heart attack patients.

8. More hospital closures

It can't be stated with certainty precisely how many hospitals have closed in recent years since the numbers are commingled with openings, mergers and consolidations.

Nevertheless, in 1995 there were 873,000 U.S. community hospital beds available; today there are 808,000, a 7 percent decline. This comes as the first baby boomers are turning 60.

Kaufman foresees a shortage of beds that will allow hospitals an edge in payer negotiations. Fewer beds may also force patients, who might have compared hospitals on price and efficacy, to choose facilities based solely on bed openings.

"More hospitals will close and more will convert from not-for-profit to for-profit status," says Goldsmith. "They need the cash from the marketplace because they are not operating efficiently. There's great variation in the quality of not-for-profit hospital leadership."

Not-for-profits have been declining since 2000, from 3,003 to 2,967, while for-profits have been rising steadily, from 749 to 835, according to the American Hospital Association.

Most CEOs interviewed agree that marginal hospitals that do not adhere to quality guidelines would probably close or change status. "Hospitals that don't respond to quality may lose Medicare reimbursement extra pay and then for-profits will buy them up," says Gamel.

"We will see more hospitals close to financial failure. Costs are escalating, there are aging facilities built under the Hill-Burton Act, access to capital is not great and they are using their endowments to handle operations," Callender says.

The reasons for hospital closures and status changes are well documented. A majority of hospitals lose money serving Medicare and Medicaid patients while a third of the nation's 4,919 community institutions lose money overall, according to AHA.

Community hospitals are being pressured to install information technology, keep pace with advances in medicine and assure disaster readiness. Simultaneously, they continue to sustain care shifts to more convenient ambulatory centers, physician offices and specialty hospitals, leaving them to absorb uninsured and severely ill patients on whom it is difficult to make a profit.

Outpatient surgery centers increased 93 percent from 1996 to 2004, according to the market research company, Verispan. The number of surgical cases performed at these centers nearly doubled during the same period, from 4.3 million to 8.3 million.

Marc Koch, MD, CEO of Somnia in a New Rochelle, N.Y., is poised to take advantage. His company specializes in selling ambulatory anesthesiology products and helping outpatient surgery centers obtain accreditation.

"By migrating procedures from hospitals, we can reduce costs. There are huge savings for the health care system," Koch says. He estimates the savings in billions. "Hospitals have always been the traditional mainstay venue but they have huge overhead costs."

9. Hospitalists to dominate inpatient care 

A health care system urgently seeking ways to reduce costs has latched onto inpatient physicians. Consistent financial evidence derived from multiple studies confirm that hospitalists save institutions money, especially by reducing length of stay.

Like restaurateurs whose earnings are based on how quickly they turn over dining tables, hospitals generate more income by turning over beds.

CEOs agree that hospitalists will gain a lot of steam in 2006 because primary care doctor's earnings go up by staying in their offices rather than taking a couple of hours out of each day to go to a hospital.

The hospitalist concept only got started in the mid 1990s when there were fewer than 100 providers. Today there are 12,000 U.S. hospitalists whose ranks are growing so fast that they cannot be counted accurately.

By 2015, 30,000 hospitalists are expected to assume the care of inpatients, projects the Society of Hospital Medicine in Philadelphia, a national hospitalist trade group.

About half of all U.S. hospitals with more than 200 beds already have a hospitalist program. In some markets, such as Boston, most medical groups turn over the majority of their admitted patients to hospitalists, according to a 2005 report by the Washington, D.C., trend research group, Center for Studying Health System Change.

10. Electronic medical records

While all of the CEOs interviewed believe electronic medical records will be a reality in a few years, there was no consensus on who was going to pay for it.

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"Doctors will struggle but they are going to have to absorb these costs. They will get help from hospitals, insurers and the federal government," says Marlon.

Gamel suggests that Uncle Sam should offer practices tax credits for EMR. Bills introduced in Congress provide an exemption from Stark self-referral and anti-kickback laws to allow hospitals, health plans and others to offer information technology to physicians, Gliklich says.

Goldsmith believes EMR will be more broadly available and affordable. "Hospitals will figure a way to fund physician practices," he says.

And Kaufman predicts EMR is going to be an unfunded mandate by government, like HIPAA. "The government is going to say if you want to participate in Medicare, your EMR has to be at a certain level."

Tector says his Milwaukee group practice does not currently have an EMR but expects to obtain one in the next few years. He also forecasts he will not need as many clerks and secretaries once it is installed. "It might pay for itself," he says.

Anderson agrees EMR will pay for itself but in fewer liability claims. "A national, well-designed, well-thought-out electronic health record will prevent medical errors," says Anderson. "The problem is that it will cost tens of billions."

11. More group practice formations

For years, futurists have predicted the death of solo practice since physicians who band together earn more through better bargaining power with insurers and have access to ancillary services like X-ray, economies of scale and infrastructure to meet government regulation.

In fact, the numbers of solo practitioners is declining, albeit slowly. In 1999, 42 percent of all U.S. self-employed practicing physicians were soloists; by 2001, there were 37 percent, according to the AMA.

Now, however, a new wave of group practices is expected to form for more efficient uses of technology and EMR. "I believe strongly that doctors have to come together to share resources," says Marlon.

Younger doctors may simply want to collect a paycheck as a lifestyle decision. "The average trainee with debt coming out of a private medical school is $140,000. They will be loathe to take risk and start a practice, buying equipment, renting space, so they are attracted to a regular salary and guaranteed vacation," says Gamel.

Gliklich sees the potential resurgence of physician practice management systems a la Phycor and MedPartners, though it won't look the same. "Physicians will be affiliated more loosely," he says.

12. Consumer-driven health plans to skyrocket

Employers will continue to restructure benefits with larger deductibles and lower premiums for those assuming more risk, says Goldsmith.

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More cost shifting to employees will not necessarily make consumers better at shopping for doctors and hospitals. It may merely slow utilization and encourage self-rationing so that patients entering the health system will be sicker, says Kaufman.

Additionally, "There will be more of a burden on patients to live healthier lifestyles to reduce their health care costs," adds Gamel.

13. Unnatural selection

Some CEOs admitted that, for financial survival, doctors would diminish their numbers of patients on plans with paltry reimbursement. "All of us hate that but that's a financial reality," says UCLA's Callender.

How would it work?

"When new patients call for appointments, clerks will ask for the name of their insurance plans. If they have a plan that doesn't pay well, they will say, 'We have an opening in three months'," explains Kaufman.

Tector does not see that happening unless he is further squeezed. "Things would have to get much worse," he says.

"In a free enterprise system, you can't be forced to see a patient at a loss," Gamel adds.

14. Part D won't get much use

Medicare Part D is a bewildering array of choices promoted by sponsors of the prescription drug plan that took effect this month.

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"My own father called and asked me what to do," says UCLA's Callender. In some parts of the country, seniors have dozens of Medicare plans to choose among, with premiums that average $32 per month, but coverage and co-payments vary widely.

Physicians are going to see a lot of patient anxiety as patients try to figure out what prescription plan to choose. "Some seniors will be so confused by it, they won't use it. They may be so scared of making the wrong choice--they may not see the cost benefit," Gliklich says.

"It's very complicated. I've studied it and I can't tell you what the benefits are," admits Gamel.

Maureen Glabman is a Miami-based health care reporter and recipient of the 2000 Reuters Fellowship in Medical Journalism at Columbia University's Graduate School of Journalism.