Barclays Healthcare Summit – 2014, New York City: “A Baker’s Dozen” Presentation of Observations

In June 2014 Barclays hosted its annual Healthcare Summit at their offices in New York City. I had the honor of keynoting day two of the conference.

Barclays assembled a blue ribbon group of attendees and presenters composed of U.S. health system leaders, health system securities markets executives, credit rating agency executives and senior leaders from Barclays’ health markets investment bankers group.

The title of my talk was “Issues the Credit Markets Should Consider When Financing the U.S. Healthcare System.” The value I derived from the conference (and wish to pass on to blog readers) was comments from an informed line-up of presenters and discussion panel members. Listed here are observations gleaned from these presentations. Where I believe appropriate, I have added editorial comments. I have limited this entry to the most important “baker’s dozen,” based upon my opinion.

Observation #1

As the U.S. health system markets consolidate, there is no practical strategy that is based upon market monopolization. Health systems that believe they hold monopolistic market positions and related pricing power, should reconsider that thinking. Market demand for elective services (especially) is mobile based upon payer strategies and out-of-pocket exposures and changing incentives for the end users (patients).

Observation #2

The future of the “obligated asset group” is in question. As health systems integrate and diversify beyond the traditional hospital business, credit markets and rating agencies recognize the financial importance of health system strategies beyond the hospital; including the effects on what credit markets have typically relied upon for credit performance (i.e., the core business of the hospital). Credit markets are appreciating that system component parts are inseparable from the whole.

Observation #3

U.S. health systems preoccupation with the holding of what could be defined as “excessive liquidity” (especially days cash on hand) may not be viewed by healthcare investment markets as prudent management. While balance sheet strength remains important, the credit markets may become concerned when management believes the best use of company cash is investment in assets outside their core business.

Observation #4

Capital markets are clearly betting on accelerating provider-side consolidation. Small players will experience increasing challenges, especially capital access. Many will hold out until balance sheet liquidity is weak. Acquisitions then become increasingly dilutive to the acquirers.

Observation #5

Most health systems represented believe the payer markets will force a transition from FFS payer “mechanics” to pay-for-value. However, few have a committed view on what transformation actually looks like, or understand the costs of the bridge from the old world to the new.

Observation #6

Large health systems that own health plans recognize the historic capitalization of these plans to be a “big bet,” but now view these investments as a cornerstone of their market strategies moving forward. U.S. health system conference presenters reported health plan capitalization levels in excess of $250 million. They also reported holding liquidity at multiples of statutory requirements.

Observation #7

Health systems that evaluate their financial performance (including balance sheet condition) based upon peer rankings are missing the point.

The key question is not “How are we doing as compared with our peer group” but rather “How are we doing given the realities of the markets we live in”?

Observation #8

Some health systems in the group are spending significant time and resources on the assembly of networks of independent providers (physicians) dedicating significant time and resources to designs and mechanics required to “apportion financial risk transfers” from payers to networks of loosely assembled providers; with many (if not most) available to contract with multiple, competing health systems and payer strategies. The “bet” is a significant shift in payer contracting strategy. The question is the value of such efforts if this shift doesn’t occur.

Observation #9

Several executives asked questions of others that were indicative of their coming from health systems that are, perhaps, still in early stages of integration with physicians as employees. Chief among these were:

  1. “Do you permit your employed physicians to contract directly with payers?"
  2. “How do you divide profits earned on health plan contracts with employed physicians?”

Questions like these demonstrate how health systems that are comparatively new to integrated health system design and management are likely to misunderstand the nature of the employment relationship with physicians, i.e., employed providers do not and should not operate as they can and do in independent practice.

Observation #10

Leaders of academic health systems were present and candid. Key commentary from these AHC leaders highlighted:

  • Academic health centers must live and survive in the U.S. healthcare economy. “We will not be bailed out.”
  • Academic health centers must live and survive in the U.S. healthcare economy. “We will not be bailed out.”
  • “Less than 2% of the U.S. population receives healthcare from academic health centers (including those that control medical schools).”
  • “For 85% of all the care we provide we have local competitors.”
  • “Our opportunity to make it depends upon our ability to remain on the leading edge of healthcare innovations, which requires a well-managed strategy.”
  • "We are not good at holding ourselves to the discipline of financial accountability, especially as it pertains to the financial accountabilities required of our three principal mission components: clinical care, research and teaching."

Observation #11

Traders of U.S. healthcare securities (largely tax exempt securities) commented on health systems preoccupation with credit ratings. While the costs associated with downgrades are obvious and real, they stimulate market-trading action with increased profit potential for traders in these markets. The key comment was “If we believe in your story, down-grades can be positive as we pursue accumulation of your debt at desirable costs to us.”

Observation #12

Capital markets are becoming students of policy and related regulatory risk. Whether related to the ACA or other policy risk (e.g., the future of “provider-based billing”) capital markets (and market makers) are keen students of policy and potential risks to credits.

Observation #13

A number of health system executives reported their approach to presenting market risk with either a “wait and see” attitude or a “walk before we run” attitude, implying that in their markets, they are able to dictate the pace of transition, expressing almost inconsequential concern for “market disruptors,” to derail their pace of change.


This was an impressive conference with knowledgeable and experienced presenters who represented a range of perspectives on the future of the U.S. healthcare markets.

For me, the thirteen observations summarized here distill to what may be two important questions in the health markets ahead:

  1. Will a consolidated health insurance market (including the federal government) be willing to transfer a sizable proportion of the “premium dollar” to the provider side of the industry that admits having limited experience in the management of total costs of care for populations?
  2. Do health systems that wish to enter the “risk business” have balance sheets sufficient to support the costs of significant shifts in: organizational culture, strategy, business models and operating incentives?