Coming off a $1.2B net loss in 2021, Minneapolis-based insurtech Bright Health announced this week it will stop offering commercial and Medicare Advantage (MA) plans in all states except Florida and California, where it will solely offer MA plans. In its remaining markets, the company plans to focus on its care delivery and provider support business, NeueHealth. Bright has reportedly struggled to contain its medical spend, due to rapid growth and COVID-related costs; its claims processing backlog also earned a $1M fine from the Colorado Department of Insurance last April. Once valued at over $11B, Bright’s stock has lost 95 percent of its value since going public in June 2021.
The Gist: The largest digital health IPO to date is now rapidly shrinking, not even two years later—and Bright is not alone amongst its peers. After years of hype, most insurtechs still have minimal market share, and most have yet to turn a profit. With a market cap now under $1B—and dropping by the day—Bright could be an easy pickup for an established health plan interested in its consumer-centric technology, though given reports of dissatisfied beneficiaries, the value of that technology is still unclear.
In an Oct. 5, 2022, commentary, Ken Kaufman offers a full-throated and heartfelt defense of non-profit healthcare during a time of significant financial hardship. Ken describes 2022 as “the worst financial year for hospitals in memory.” His concern is legitimate. The foundations of the nonprofit healthcare business model appear to be collapsing. I’ve known and worked with Ken Kaufman for decades. He is the life force behind Kaufman Hall, a premier financial and strategic advisor to nonprofit hospitals and health systems. The American Hospital Association uses Kaufman Hall’s analysis of hospitals’ underlying financial trends to support its plea for Congressional funding. Beyond the red ink, Ken laments the “media free-for-all challenging the tax-exempt status, financial practices, and ostensible market power of not-for-profit hospitals and health systems.” He is referring to three recent investigative reports on nonprofits’ skimpy levels of charity care (Wall Street Journal), aggressive collection tactics (New York Times) and 340B drug purchasing program abuses (New York Times). Ken has never been timid about expressing his opinions. He’s passionate, partisan and proud. His defense of nonprofit healthcare chronicles their selfless care of critically ill patients, the 24/7 demands on their resources and their commitment to treating the uninsured. These “must have clinical services…don’t just magically appear.” Nonprofit healthcare needs “our support and validation in the face of extreme economic conditions and organizational headwinds. ”Given his personality, it’s not surprising that Ken’s strident rhetoric in defending nonprofit healthcare reminds me of the famous “You can’t handle the truth” exchange between Lieutenant Kaffee (Tom Cruise) and Colonel Jessup (Jack Nicholson) from the 1992 movie “A Few Good Men.” Kaffee presses Jessup on whether he ordered a “code red” that led to the death of a soldier under his command. When Kaffee declares he’s entitled to the truth, Jessup erupts,… I have neither the time nor the inclination to explain myself to a man that rises and sleeps under the blanket of the very freedom I provide and then questions the manner in which I provide it. I would rather you say, “thank you” and be on your way. Should American society just say “thank you” to nonprofit healthcare and provide the massive incremental funding required to sustain their current operations?
Truth and Consequences (Download PDF here)The social theorist Thomas Sowell astutely observed, “If you want to help someone, tell them the truth. If you want to help yourself, tell them what they want to hear.” In this commentary, Ken Kaufman is telling nonprofit healthcare exactly what they want to hear. The truth is more nuanced, troubling and inconvenient. Healthcare now consumes 20 percent of the national economy and the American people are sicker than ever. Despite the high healthcare funding levels, the CDC recently reported in U.S. life expectancy dropped almost a full year in 2021. Other wealthy nations experienced increases in life expectancy. Combining 2020 and 2021, the 2.7-year drop in U.S. life expectancy is the largest since the early 1920s. During an interview regarding the September 28, 2022, White House Conference on Hunger, Nutrition and Health, Senator Cory Booker highlighted two facts that capture America’s healthcare dilemma. One in three government dollars funds healthcare expenditure. Half of Americans suffer from diabetes or pre-diabetes.As a nation, we’re chasing our tail by prioritizing treatment over prevention. Particularly in low-income rural and urban communities, there is a breathtaking lack of vital primary care, disease management and mental health services. Instead of preventing disease, our healthcare system has become adept at keeping sick people alive with a diminished life quality. There is plenty of money in the system to amputate a foot but little to manage the diabetes that necessitates the amputation. Despite mission statements to the contrary, nonprofit healthcare follows the money. The only meaningful difference between nonprofit and for-profit healthcare is tax status. Each seeks to maximize treatment revenues by manipulating complex payment formularies and using market leverage to negotiate higher commercial payment rates. According to Grandview Research, the market for revenue cycle management in 2022 is $140.4 billion and forecasted to grow at a 10% annual rate through 2030. By contrast, Ibis World forecasts the U.S. automobile market to grow 2.6% in 2022 to reach $100.9 billion. Unbelievably, in today’s America, processing medical claims is far more lucrative than manufacturing and selling cars and trucks. According to CMS’s National Expenditure Report for 2020, hospitals (31%) and physicians and clinical services (20%) accounted for over half of national healthcare expenditures. This included $175 billion allocated to providers through the CARES Act. Despite the massive waste embedded within healthcare delivery, the CARES Act funding gave providers the illusion that America would continue to fund its profligate and often ineffective operations. It’s not at all surprising that healthcare providers now want, even expect, more emergency funding. Change is hard. Not even during COVID did providers give up their insistence on volume-based payment. Providers did not embrace proven virtual care and hospital-at-home business practices until CMS guaranteed equivalent payment to existing in-hospital/clinic service provision. Even with parity payment and the massive CARES Act funding, there was uneven care access for COVID patients. Particularly in low-income communities, tens of thousands died because they did not receive appropriate care. More of the same approach to healthcare delivery will yield more of the same dismal results. Healthcare providers have had over a decade to advance value-based care (VBC). I define VBC as the right care at the right time in the right place at the right price. Instead of pursuing VBC, providers have doubled-down on volume-driven business models that attract higher-paying commercially-insured patients. Despite the relative ease of migrating service provision to lower-cost settings, providers insist on operating high-cost, centralized delivery models (think hospitals). They want society, writ large, to continue paying premium prices for routine care. It’s time to stop. As a country, we need less healthcare and more health.
When I give speeches to healthcare audiences, I typically begin with three yes-or-no questions about U.S. healthcare to establish the foundation for my subsequent observations. Here they are. Question #1: The U.S. spends 20% of its economy on healthcare. The big country with the next highest percentage spend is France at 12%. How many believe we need to spend more than 20% of our economy to provide great healthcare to everyone in the country? No one ever raises their hand. Question #2: The CDC estimates that 90% of healthcare expenditure goes to treat individuals with chronic disease and mental health conditions. How many believe we’re winning the war against chronic disease and mental health conditions? No one ever raises their hand. Question #3: Given the answer to the previous two questions, how many believe the system needs to shift resources from acute and specialty care into health promotion, primary care, chronic disease management and behavioral health? Everyone raises their hands. This short exercise is quite revealing. It demonstrates that healthcare doesn’t have a funding problem. It has a distribution problem. It also demonstrates that providers aren’t adequately addressing our most critical healthcare challenge, exploding chronic disease and mental health conditions. Finally, the industry needs major restructuring.
The real questions about reforming healthcare are less about what to reform and more about how to undertake reform. The increasing media scrutiny that Ken Kaufman references as well as growing consumer frustrations with healthcare service provision, demonstrate that healthcare is losing the battle for America’s hearts and minds.
Markets are unforgiving. The operating losses most nonprofit providers are experiencing reflect a harsh reality. Their current business models are not sustainable. An economic reckoning is underway. The long arc of economics points toward value. As healthcare deconstructs, the nation’s acute care footprint will shrink, hospitals will close and value-based care delivery will advance. The process will be messy.
The devolving healthcare marketplace led me to ask a fourth question recently in Nashville during a keynote speech to the Council of Pharmacy Executives and Suppliers. Here it is. Question #4: As the healthcare system reforms, will that process be evolutionary (reflecting incremental change) or revolutionary (reflecting fundamental change). Two-thirds voted that the change would be revolutionary. That response is just one data point but it reflects why post-COVID healthcare reform is different than the reform efforts that have preceded it. The costs of maintaining status-quo healthcare are simply too high. From a policy perspective, either market-driven healthcare reforms will drive better outcomes at lower costs (that’s my hope) or America will shift to a government-managed healthcare system like those in Germany, France and Japan.
Like Ken Kaufman, I admire frontline healthcare workers and believe we need to make their vital work less burdensome. I also sympathize with health system executives who are struggling to overcome legacy business practices and massive operating deficits. Unfortunately, most are relying on revenue-maximizing playbooks rather than reconfiguring their operations to advance consumerism and value-based care delivery.
Unlike Ken Kaufman, I believe it’s time for some tough love with nonprofit healthcare providers. Payers must tie new incremental funding to concrete movement into value-based care delivery. This was the argument Zeke Emanuel, Merrill Goozner and I made in a two-part commentary (part 1; part 2) in Health Affairs earlier this year. It’s also why the HFMA, where I serve on the Board, has made “cost effectiveness of health (CEoH)” its new operating mantra.
While this truth may be hard, it also is liberating. Freeing nonprofit organizations from their attachment to perverse payment incentives can create the impetus to embrace consumerism and value. Kinder, smarter and affordable care for all Americans will follow.
We’re fortunate to be privy to many of the big, complex strategic issues being discussed in health system boardrooms and executive meetings these days: care model innovations, new investments in technology, the digital revolution in care, market-shaping partnerships, the future of the healthcare workforce, and on and on. It’s a precarious and strategically critical moment for incumbent systems in many ways. But we’re often reminded that the nuts and bolts of running hospital facilities still demands attention, even at a board level.
Case in point: the perennial discussion about what otherwise seems like a minor issue—parking. You’d be shocked how often parking comes up in board-level discussions (partly because many board members are older, active users of hospital services, who spend significant time looking for a place to park). We’ve been witness to knock-down, drag-out arguments about whether to charge for parking, and why more parking isn’t available for patients, physicians, and others.
At first it seems like a trivial issue, but of course it isn’t. In reality, it’s a tangible example of how much patient experience matters in the design and operation of healthcare delivery. We’ve also found it’s a useful analogy in explaining to leaders why “frictionless access” should be at the heart of digital patient experience as well—a poorly-designed digital “front door” can be just as frustrating as not being able to find an inexpensive and convenient place to park before a medical appointment.
Delivering reliable, affordable, high-quality care is critical, but getting the small experiential details (like parking) right can be incredibly impactful. Next time you visit a medical facility, think about what the parking experience is telling you about how “patient-centered” your provider really is.
Although the patient-centered medical home (PCMH) practice model was first conceived over 50 years ago, its rapid adoption coincided with the launch of ACOs and value-based care. Primary care practices which adopted the medical home model expanded access and support available to patients, enhanced focus on chronic disease management, and embraced team-based care, with a focus on practice and provider sustainability.
But despite the model’s success, a recent conversation with a physician leader suggests that some of most progressive primary care practices are looking to move beyond the medical home. A primary care physician himself, he leads a network of hundreds of doctors, with nearly all the primary care practices PCMH-certified. He shared that “the medical home model in its traditional form doesn’t quite encapsulate what we’re trying to do now”. In his mind, it now feels paternalistic, focusing on what physicians think patients need without paying as much attention to what patients want from their healthcare.
We started brainstorming how a “consumer-centered medical home” might look. Built on the foundation of the PCMH, it would deliver access on the patient’s terms, bringing care online and into the home. Team-based care, supported by technology and even artificial intelligence tools, would enable easy, ongoing communication with patients.
As the list grew, it became increasingly clear that while a small practice could adopt the PCMH, scale is critical for these enhanced capabilities—being able to deliver more services to patients without increasing provider burnout. A tall order for sure, but an exciting vision for primary care that builds consumer loyalty in a competitive marketplace, while keeping the focus on improved care management and outcomes.
Last week, we introduced our framework for value delivery as a “healthcare platform”, in which an organization’s proximity to both the consumer and to the premium dollar determines how it competes as a “care supplier,” a “care ecosystem,” a “premium owner,” or a “population manager.” Traditionally, different healthcare companies have operated primarily in one of these four domains. However, as shown in the graphic below, we’ve recently seen many shift their business into one or more additional quadrants, as they seek to expand their value propositions. UnitedHealth Group is an obvious example: it has moved well beyond the traditional insurance business, via numerous provider and care delivery acquisitions across the continuum.
Other players have shifted from their own “pure play” positions toward more comprehensive “platform” strategies as well: One Medical adding Iora Health to enhance population health capabilities; Walmart moving beyond retail and pharmacy services, partnering with Oak Street Health to expand its ability to manage Medicare patients; Amazon getting into the employer health business.
There’s a clear pattern emerging—value propositions are converging on a “strategic high ground” that encompasses all four dimensions of platform value, creating a comprehensive set of solutions to deliver accessible care, promote health, and grow consumer loyalty, with an aligned financial model centered on managing the total cost of care. Health systems looking to build platform strategies will find many of these competitors also vying for pride of place as the “platform of choice” for healthcare consumers and purchasers.
The digital platform is designed to provide consumers with a coordinated healthcare experience across care settings. It’s being sold to Aetna’s fully insured and self-insured plan sponsors, as well as CVS Caremark clients, and is due to go live next year. According to CVS Health, the new offering “enables consumers to choose care when and where they want,” whether that’s virtually, in a retail setting (including at a MinuteClinic or HealthHUB), or through at-home services.
Patients will have access to primary care, on-demand care, medication management, chronic condition management, and mental health services, as well as help in identifying other in-network care providers.
The Gist: CVS Health has been working to integrate its retail clinics, care delivery assets, and health insurance business. This new virtual-first care platform is aimed at coordinating care and experience across the portfolio, and streamlining how individuals access the range of services available to them.
CVS is not alone in focusing here: UnitedHealth Group, Cigna, and others have announced virtual-first health plans with a similar value proposition. Any payer or provider who aims to own the consumer relationship must field a similar digital care platform that streamlines and coordinates service offerings, lest they find themselves in a market where many patients turn first to CVS and other disruptors for their care needs.
The combination of the Omicron surge, lackluster volume recovery, and rising expenses have contributed to a poor financial start of the year for most health systems. The graphic above shows that, after a healthier-than-expected 2021,the average hospital’s operating margin fell back into the red in early 2022, clocking in more than four percent lower than pre-pandemic levels.
Despite operational challenges, however, many of the largest health systems continue to garner headlines for their sizable profits, thanks to significant returns on their investment portfolios in 2021.
While CommonSpirit and Providence each posted negative operating margins for the second half of 2021, and Ascension managed a small operating profit, all three were able to use investment income to cushion their performance.
A growing number of health systems are doubling down on investment strategies in an effort to diversify revenue streams, and capture the kind of returns from investments generated by venture capital firms. However, it is unlikely that revenue diversification will be a sustainable long-term strategy.
To succeed, health systems must look to reconfigure elements of the legacy business model that are proving financially unsustainable amid rising expenses, shifts of care to lower-cost settings, and an evolving, consumer-centric landscape.
We’re picking up on a growing concern among health system leaders that many states with “certificate of need” (CON) laws in effect are on the cusp of repealing them. CON laws, currently in place in 35 states and the District of Columbia, require organizations that want to construct new or expand existing healthcare facilities to demonstrate community need for the additional capacity, and to obtain approval from state regulatory agencies. While the intent of these laws is to prevent duplicative capacity, reduce unnecessary utilization, and control cost growth, critics claim that CON requirements reduce competition—and free market-minded state legislators, particularly in the South and Midwest, have made them a target.
One of our member systems located in a state where repeal is being debated asked us to facilitate a scenario planning session around CON repeal with system and physician leaders. Executives predicted that key specialty physician groups would quickly move to build their own ambulatory surgery centers, accelerating shift of surgical volume away from the hospital.
The opportunity to expand outpatient procedure and long-term care capacity would also fuel investment from private equity, which have already been picking up in the market. An out-of-market health system might look to build microhospitals, or even a full-service inpatient facility, which would be even more disruptive.
CON repeal wasn’t all downside, however; the team identified adjacent markets they would look to enter as well. The takeaway from our exercise: in addition to the traditional response of flexing lobbying influence to shape legislative change, the system must begin to deliver solutions to consumers that are comprehensive, convenient, and competitively priced—the kind of offerings that might flood the market if CON laws were lifted.
Insurers, retailers, and other healthcare companies vastly exceed health system scale, dwarfing even the largest hospital systems. The graphic above illustrates how the largest “mega-systems” lag other healthcare industry giants, in terms of gross annual revenue.
Amazon and Walmart, retail behemoths that continue to elbow into the healthcare space, posted 2021 revenue that more than quintuples that of the largest health system, Kaiser Permanente. The largest health systems reported increased year-over-year revenue in 2021, largely driven by higher volumes, as elective procedures recovered from the previous year’s dip.
However, according to a recent Kaufman Hall report, while health systems, on average, grew topline revenue by 15 percent year-over-year, they face rising expenses, and have yet to return to pre-pandemic operating margins.
Meanwhile, the larger companies depicted above, including Walmart, Amazon, CVS Health, and UnitedHealth Group, are emerging from the pandemic in a position of financial strength, and continue to double down on vertical integration strategies, configuring an array of healthcare assets into platform businesses focused on delivering value directly to consumers.