State of the Industry 2005

October 1, 2004

Managed care organizations, hospitals and providers evolve, responding to market influences, but some key issues still command attention.

When discussing the state of the healthcare industry with anyone who has been around it for very long, it's tempting to call up the familiar refrain, "the more things change, the more they stay the same." However, this would be an unfair assessment of some real progress and promising developments made in the past year as we look to 2005. While it is premature to celebrate any significant breakthroughs in overcoming challenges related to access, cost and quality, at least things did not get any worse.

Fitch attributes the dramatic improvement in ratings to improved business strategies combined with lower cost of capital. However, it also notes that continued capital needs, rising labor costs, increased competition and increased cost containment legislation will create future uncertainty for the sector.

Unfortunately, access to capital is not guaranteed. Hospitals are competing for fewer available dollars (down 29% from 2001 to 2002), and those with strong balance sheets and disciplined disclosure policies are best positioned to tap the capital markets.

While the public sector has seen a strengthening in its fiscal health, so too have the nation's insurers, particularly HMOs. During the first nine months of 2003, the sector reported earnings of $6.7 billion, a 52% increase from the same period a year before. HMO performance has improved substantially since 1999, when following two years of losses, they had reported only $524 million in collective earnings.