Much has been written about hospital consolidation premised upon the search for efficiencies driven by scale and integration as reflected in the white hot hospital merger market over the last several years. While no doubt that will continue, stakeholders including hospitals, payers, providers and investors are now seeing the enormous role that Post-Acute Care (PAC) plays in the the health care puzzle. Why?

Outpatient revenues are forecasted by all to far exceed inpatient revenues for all large systems within a short period of time. Inpatient margins have shrunk or gone negative. Reimbursement incentives including readmission penalties and value based purchasing are ramping up the pressure on inpatient providers to partner with PAC providers. Historically, that has never happened based on reimbursement silos, business and cultural issues. That is changing. Hospitals not only see PAC as a means to limit downside (e.g. readmit risk) but as a way of sourcing better margin revenues to fund their key physician, primary care, outpatient, IT and other initiatives.

From the PAC side, forces are pushing PAC providers toward their acute care counterparts as well. The Center for Medicare and Medicaid Innovation had a robust response to its Model 3 bundled payment initiative in the first quarter of this year which signals that PAC providers are embracing the new paradigm of outcomes management. Hospital systems will be logical partners.

Just recently, a joint Commission of Congress prepared draft legislation entitled The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT). This legislation if enacted would refocus payment on outcomes rather than the setting of care and require SNFS, home health, IRFs and LTACs to report quality data to arrive at an “apples to apples” comparison of outcomes irrespective of setting. No PAC provider can ignore the need to collaborate with acute care systems given these trends.

Five Areas to Watch in Connection With This Space Which Signal Opportunities

  1. Creative partnerships between hospitals and PAC providers, inside and outside Pioneer and MSSP ACOs
  2. Investments by private equity in the tools to facilitate patient care, patient tracking, quality measurement, and communication
  3. Payors providing solutions to collaboration amongst providers in form of IT help, risk management techniques, and partnership management
  4. Growth of care management firms that coordinate but do not provide care
  5. New business platforms owned jointly by PAC and inpatient acute care to address bundled payment models

The sheer size and growth of Medicare spending in the PAC area in the years to come will present opportunity and challenges for all stakeholders— the smart players will look down the road and embrace change even, if on a short term basis, it entails some learning and yes, costs.