After UnitedHealth Group CEO Andrew Witty’s appearances at two congressional committee hearings last week, I had planned to write a story about what the lawmakers had to say. One idea I considered was to publish a compilation of some of the best zingers, and there were plenty, from Democrats and Republicans alike.
I reconsidered that idea because I know from the nearly half-century I have spent on or around Capitol Hill in one capacity or another that those zingers were carefully crafted by staffers who know how to write talking points to make them irresistible to the media. As a young Washington correspondent in the mid-to-late’70s, I included countless talking points in the stories I wrote for Scripps-Howard newspapers. After that, I wrote talking points for a gubernatorial candidate in Tennessee. I would go from there to write scads of them for CEOs and lobbyists to use with politicians and reporters during my 20 years in the health insurance business.
I know the game. And I know that despite all the arrows 40 members of Congress on both sides of the Hill shot at Witty last Wednesday, little if anything that could significantly change how UnitedHealth and the other big insurers do business will be enacted this year.
Money in politics is the elephant in any Congressional hearing room or executive branch office you might find yourself in (and it’s why I coauthored Nation on the Take with Nick Penniman).
You will hear plenty of sound and fury in those rooms but don’t hold your breath waiting for relief from ever-increasing premiums and out-of-pocket requirements and the many other barriers Big Insurance has erected to keep you from getting the care you need.
It is those same barriers doctors and nurses cite when they acknowledge the “moral injury” they incur trying to care for their patients under the tightening constraints imposed on them by profit-obsessed insurers, investors and giant hospital-based systems.
Funny not funny
Cartoonist Stephan Pastis captured the consequences of the corporate takeover of our government, accelerated by the Supreme Court’s 2010 landmark Citizens United vs. Federal Election Commission ruling, in his Pearls Before Swine cartoon strip Sunday.
Rat: Where are you going, Pig?
Pig: To a politician’s rally. I’m taking my magic translation box.
Rat: He doesn’t speak English?
Pig: He speaks politicianish. This translates it into the truth. Come see.
Politician: In conclusion, if you send me to Washington, I’ll clean up this corrupt system and fight for you everyday hard-working Americans. God bless you. God bless the troops. And God bless America.
Magic translation box: I am given millions of dollars by the rich and the powerful to keep this rigged system exactly as it is. Until you change that, none of this will ever change and we’ll keep hoping you’re too distracted to notice.
Politician’s campaign goon: We’re gonna need a word with you.
Magic translation box: This is too much truth for one comic strip. Prepare to be disappeared.
Rat: I don’t know him.
Back to Sir Witty’s time on the hot seat. It attracted a fair amount of media coverage, chock full of politicians’ talking points, including in The New York Times and The Washington Post. (You can read this short Reuters story for free.) Witty, of course, came equipped with his own talking points, and he followed his PR and legal teams’ counsel: to be contrite at every opportunity; to extol the supposed benefits of bigness in health care (UnitedHealth being by far the world’s largest health care corporation) all the while stressing that his company is not really all that big because it doesn’t, you know, own hospitals and pharmaceutical companies [yet]; and to assure us all that the fixes to its hacked claims-handling subsidiary Change Healthcare are all but in.
Congress? Meh. Paying for care? WTF!
Wall Street was relieved and impressed that Witty acquitted himself so well. Investors shrugged off the many barbs aimed at him and his vast international empire. By the end of the day Wednesday, the company’s stock price had actually inched up a few cents, to $484.11. A modest 2.7 million shares of UnitedHealth’s stock were traded that day, considerably fewer than usual.
Instead of punishing UnitedHealth, investors inflicted massive pain on its chief rival, CVS, which owns Aetna. On the same day Witty went to Washington, CVS had to disclose that it missed Wall Street financial analyst’s earnings-per-share expectations for the first quarter of 2024 by several cents. Shareholders’ furor sent CVS’ stock price tumbling from $67.71 to a 15-year low of $54 at one point Wednesday before settling at $56.31 by the time the New York Stock Exchange closed. An astonishing 65.7 million shares of CVS stock were traded that day.
Postscript: I do want to bring to your attention one exchange between Witty and Rep. Buddy Carter (R-Ga.) during the House Energy and Commerce committee hearing. Carter is a pharmacist who has seen firsthand how UnitedHealth’s virtual integration–operating health insurance companies with one hand and racking up physician practices and clinics with the other–and its PBM’s business practices have contributed to the closure of hundreds of independent pharmacies in recent years. He’s also seen patients walk away from the pharmacy counter without their medications because of PBMs’ out-of-pocket demands (often hundreds and thousands of dollars). And he’s seen other patients face life-threatenng delays because of industry prior authorization requirements. Carter was instrumental in persuading the Federal Trade Commission to investigate PBMs’ ownership and business practices. He told Witty:
I’m going to continue to bust this up…This vertical integration in health care in general has got to end.
Sometimes a health policy story comes along that should be shouted from the rafters — well at least reported by media that cover the subject. Brett Arends’ story for Dow Jones’ MarketWatch is one of those stories.
The revelations about overpayments come from the Medicare Payment Advisory Commission, MedPAC for short, some of whose recommendations over the years have resulted in high rate increases for Advantage plan sellers that helped make it possible for them to offer groceries, bits of dental care, and other goodies seniors have snapped up. The media’s role in revealing and dissecting those overpayments is long overdue.
The last several months news outlets have been paying more attention to the downsides of Medicare Advantage plans.
Arends’ story focused on one thread in the story: MedPAC’s latest report to Congress that revealed something health policy wonks — but not the public — have known for a long time. Medicare Advantage plans are taking advantage of the federal gravy train.
“The private insurers who now run more than half of all Medicare plans are overcharging the taxpayers by a staggering $83 billion a year,” Arends wrote. “They are charging us taxpayers 22% more than it would cost us to provide the same health insurance to seniors directly if we just cut out the private insurance companies as middlemen.”
MedPAC was set up by the Balanced Budget Act of 1997, “back when people in Washington were actually doing their jobs,” Arends points out. The commission’s job is to advise Congress on issues involving Medicare. MedPAC reports discuss the financial situation of the Medicare trust funds, and over the years those reports often revealed that the private health plans have been overpaid. Until recently, there has been little to no pushback from the government or most of the media, in effect leaving the insurance industry a clear path to sell Medicare Advantage plans to more than half of the Medicare market. The media have recently begun to ask why.
Arends calls the Medicare Advantage arrangement “a rip-off, pure and simple,” noting that what sellers of the plan are paid “is more than twice as much as it would cost simply to provide free dental, hearing and vision care to all traditional Medicare beneficiaries, not just those in private ‘Medicare Advantage’ plans.”
I have covered Medicare for decades now and have often asked the experts why there couldn’t be a level playing field that would allow beneficiaries in the traditional program to receive vision and dental benefits. The answer was always, “We can’t afford that.”
Arends debunks that thinking by directly quoting the MedPAC report:
“It reads: ‘We estimate that Medicare spends approximately 22 percent more for MA enrollees than it would spend if those beneficiaries were enrolled in FFS (fee for service or traditional) Medicare, a difference that translates into a projected $83 billion in 2024.’ MedPAC reported that its review of private plan payments suggests that over the 39-year history with private plans, they “have never yielded aggregate savings for the Medicare program. Throughout the history of Medicare managed care, the program (Medicare Advantage) has paid more than it would have paid if beneficiaries had been in FFS (fee for service) Medicare.”
I checked in with Fred Schulte, who now writes for KFF Health News, and who over his career has written many prize-winning stories documenting the shenanigans insurers have used to enhance their reimbursements from Medicare, such as upcoding. That’s the practice of billing Medicare for ailments that are more serious than what patients actually have. “For example, instead of reporting a patient has diabetes, the insurers would say diabetes with neuropathy or eye problems and receive higher reimbursement,” he explained.
“It took a very long time for the government and the Justice Department to understand what was going on here with this coding,” Schulte said. “The codes just kept getting higher and higher, and profits kept going up and up.”
A year ago, Paul Ginsburg, a senior fellow at the University of Southern California’s Schaffer Center, said, “The current Medicare Advantage structure results in overpayments, markedly higher than previously understood.”
Even Michael Chernow, who heads the Medicare Payment Advisory Commission authorized by Congress in 1997, recently admitted on Twitter that Medicare Advantage “has never saved Medicare money.” But he added, “that doesn’t mean Medicare Advantage isn’t a key pillar of Medicare sustainability. At its best it can provide better care at lower cost.”
Arends’ story doesn’t sound hopeful about the direction of Medicare. He concludes, “Medicare Advantage isn’t making the rest of Medicare better. It is putting the rest of Medicare out of business. And not by being more efficient, but by being less efficient. It is driving up the overall cost of Medicare by 22%. And not by being more efficient but by being less efficient.
The logical outcome is that traditional Medicare ceases to exist and that Medicare dollars pass through the hands of private insurance companies at 122 cents on the dollar.”
Arends’ prediction may well come true, but perhaps not without a fight. David Lipschutz, associate director at the Center for Medicare Advocacy, says a “confluence of factors have come together to make it harder to ignore the problems of Medicare Advantage by the press and policymakers.”
After covering the Medicare privatization crisis for over two years, an investigative reporter takes a step back and examines what’s at stake.
Medicare, the country’s largest and arguably most successful health care program, is under duress, weakened by decades of relentless efforts by insurance companies to privatize it.
A rapidly growing Medicare Advantage market — now 52% of Medicare beneficiaries, up from 37% in 2018 — controlled by some of the largest and most powerful corporations in the world, threatens to both drain the trust fund and eliminate Medicare’s most important and controversial component: its ability to set prices.
It is not an overstatement to call it a heist of historic proportions, endangering the health not only of the more than 65 million seniors and people with disabilities who depend on Medicare but all Americans who benefit from the powerful role that Medicare has historically played in reining in health care costs.
The giant corporations that dominate Medicare Advantage have rigged the system to maximize payments from our government to the point that they are now being overpaid between $88 billion and $140 billion a year. The overpayments could soar to new heights if the insurers get their way and eliminate traditional Medicare.
All of America’s seniors and disabled people who depend on Medicare could soon be moved to a managed care model of ever-tightening networks, relentless prior authorization requirements and limited drug formularies. The promise of a humane health care system for all would be sacrificed at the altar of the almighty insurer dollar.
The Medicare Payments Advisory Commission (MedPAC), the independent congressional agency tasked with overseeing Medicare, last month released a searing report which found that Medicare spends 22% more per beneficiary in Medicare Advantage plans than if those beneficiaries had been enrolled in traditional fee-for-service Medicare. That’s up from a 6% estimate in the prior year.
A similar cost trend exists for diagnosis coding.
Medicare Advantage plans and their affiliated providers increasingly upcoded diagnoses to get higher reimbursements. In 2024, overpayments due to upcoding could total $50 billion, according to MedPAC, up from $23 billion in 2023. These enormous overpayments drive up the cost of premiums — MedPAC’s conservative estimate is that the premiums paid to Medicare out of seniors’ Social Security checks will be $13 billion higher in 2024 because of those overpayments.
There is evidence that Americans and lawmakers are starting to wake up.
Medicare Advantage enrollment growth slowed considerably in 2023. Support within the Democratic Party for Medicare Advantage is cratering. In 2022, 147 House Democrats signed an industry-backed letter supporting Medicare Advantage. This year, just 24 House Democrats signed the letter. Earlier this month, the Biden administration cut Medicare Advantage base payments for the second year in a row(while still increasing payments overall), over the fierce opposition of the insurance lobby. The investment bank Stephens called Biden’s decision a “highly adverse” outcome for insurers. Wall Street has taken note, punishing the stock price of the largest Medicare Advantage insurers, with Barron’s noting that Wall Street’s “love affair” with Humana is “ending in tears.” The cargo ship is turning. It is up to us to determine if that will be enough.
We can’t attack a problem if we don’t know how to diagnose it. I spoke with some of the most knowledgeable critics of Medicare Advantage about the danger the rapid expansion of Medicare privatization presents to the American public.
Rick Gilfillan is a medical doctor who in 2010 became the first director of the Center for Medicare and Medicaid Innovation (CMMI). He would go on to serve as CEO of Trinity Health from 2013 to 2019. In 2021 he launched an effort to halt the involuntary privatization of Medicare benefits.
“Right now, all investigations are finding tremendous overpayments,” Gilfillan said. “The overpayments are based on medical diagnoses that may or may not be meaningful from a patient care standpoint. Insurers are using chart reviews, nurse home visits and AI software to find as many diagnoses as possible and thereby inflate the health risks of the patients and the premium they get from Medicare. The overpayments are just outrageous,” he said.
The problem could get worse if the Supreme Court curtails the powers of regulatory agencies, as it may do this year. “It would make a huge difference in what CMS would be able to do,” Gilfillan said.
The logic behind Medicare privatization is that seniors and people with disabilities use too much care, egged on by their doctors. If true, a solution could have been to enforce the Stark Law, which bans physicians from having financial relationships with providers they refer to, or other anti-kickback statutes. States could also enforce laws 33 of them have enacted that prohibit the “corporate practice of medicine.”
Instead, health insurers were invited and incentivized by previous administrations to compete with the original Medicare program and “manage” beneficiaries’ care. Under this model— set in its modern form in 2003 — Medicare Advantage insurers are paid a rate based on a complex risk modeling process and estimated costs.
But Medicare Advantage plans have never been cheaper than traditional Medicare, as MedPAC has repeatedly pointed out.
This is a far more complex approach than the fee-for-service model in which CMS sets prices in health care in a public and transparent manner, Gilfillan notes. The prices negotiated by Medicare Advantage companies, by contrast, are not disclosed.
“With fee-for-service, a patient is provided a service, treatment or medication. The physician who provides the service charges a specific amount for that service,” Gilfillan said. “And then Medicare pays whatever it decided it was worth for that service. The benefit is you pay for what you get.”
Some Medicare Advantage plans use a “capitated” approach in paying primary care physicians. The amount is based on the premium they receive for the patient. The more codes submitted, the higher the capitation, the greater the profit. That approach is having far-reaching economic impacts on health care, said Hayden Rooke-Ley, an Oregon-based lawyer and health care consultant who co-authored a recent New England Journal of Medicine article on the corporatization of primary care. It is the capitation model, he says, that drives the rampant upcoding among Medicare Advantage plans.
From Horizontal to Vertical
“An undercovered aspect of Medicare Advantage is the way it is fueling vertical consolidation” in the insurance business, Rooke-Ley added, noting that until recent years, insurers bulked up by buying smaller competitors (known as horizontal integration). “With so much government money, we’re seeing insurance companies restructuring themselves as vertically integrated conglomerates [through the acquisition of physician practices, clinics and pharmacy operations] to become even more profitable, especially in Medicare Advantage.”
“A key part of this strategy is to own primary care practices,” he said, citing Humana’s partnership with the private-equity firm Welsh Carson to become the largest owner of Medicare-based primary care, CVS/Aetna’s acquisition of Oak Street, and UnitedHealth’s roll up of doctors practices across the country.
As Rooke-Ley explained, control of primary care allows insurance companies to more easily manipulate “risk scores” to increase payments from the government by claiming patients are in worse health than they really are.
“The easiest way to increase risk scores, short of simply fabricating diagnosis codes, is to control the behavior of physicians and other clinicians,” he said.
“When an insurance company owns the physician practice, it can configure workflows, technology, and incentives to drive risk coding.
UnitedHealth, for example, can preferentially schedule Medicare Advantage patients – and it can choose to reach out to health plan enrollees it identifies with its data as having high ‘coding opportunities.’ It can require its doctors to go to risk-code training, and it can prohibit doctors from closing their notes before they address all the ‘suggested’ diagnosis codes.”
“While Medicare Advantage insurance companies tout all their provider acquisitions as investments in value-based care, the concern is that it’s really just looking like a game of financialization,” Rooke-Ley said. “MA was supposed to save Medicare money, but the exact opposite has happened.
According to MedPAC, the government will over-subsidize MA to the tune of $88 billion this year, with $54 billion of that due to excess risk coding relative to what we see in traditional Medicare. That’s a staggering amount of money that could go directly to patients and clinicians by strengthening traditional Medicare.”
Two Possible Futures
There are two options for the future of Medicare, said Dr. Ed Weisbart, former chief medical officer of the pharmacy benefit manager Express Scripts, which Cigna bought in 2018, who now leads the Missouri chapter of Physicians for a National Health Program.
In one future, he said, “We will change the trajectory and get rid of the profiteers, and manage to divert the funds that are being profiteered to patient care.”
In another future, the business practices of Medicare Advantage plans “will be unfettered and more damaging and harmful than they are today,” he said. “If we continue on this course we’ll find an increasingly polarized health care system that caters increasingly to the wealthy and privileged. The barriers to care will be worse.”
The Affordable Care Act turned 14 on March 23. It has done a lot of good for a lot of people, but big changes in the law are urgently needed to address some very big misses and consequences I don’t believe most proponents of the law intended or expected.
At the top of the list of needed reforms: restraining the power and influence of the rapidly growing corporations that are siphoning more and more money from federal and state governments – and our personal bank accounts – to enrich their executives and shareholders.
I was among many advocates who supported the ACA’s passage, despite the law’s ultimate shortcomings. It broadened access to health insurance, both through government subsidies to help people pay their premiums and by banning prevalent industry practices that had made it impossible for millions of American families to buy coverage at any price. It’s important to remember that before the ACA, insurers routinely refused to sell policies to a third or more applicants because of a long list of “preexisting conditions” – from acne and heart disease to simply being overweight – and frequently rescinded coverage when policyholders were diagnosed with cancer and other diseases.
While insurance company executives were publicly critical of the law, they quickly took advantage of loopholes (many of which their lobbyists created) that would allow them to reap windfall profits in the years ahead – and they have, as you’ll see below.
I wrote and spoke frequently as an industry whistleblower about what I thought Congress should know and do, perhaps most memorably in an interview with Bill Moyers. During my Congressional testimony in the months leading up to the final passage of the bill in 2010, I told lawmakers that if they passed it without a public option and acquiesced to industry demands, they might as well call it “The Health Insurance Industry Profit Protection and Enhancement Act.”
A health plan similar to Medicare that could have been a more affordable option for many of us almost happened, but at the last minute, the Senate was forced to strip the public option out of the bill at the insistence of Sen. Joe Lieberman (I-Connecticut), who died on March 27, 2024. The Senate did not have a single vote to spare as the final debate on the bill was approaching, and insurance industry lobbyists knew they could kill the public option if they could get just one of the bill’s supporters to oppose it. So they turned to Lieberman, a former Democrat who was Vice President Al Gore’s running mate in 2000 and who continued to caucus with Democrats. It worked. Lieberman wouldn’t even allow a vote on the bill if it created a public option. Among Lieberman’s constituents and campaign funders were insurance company executives who lived in or around Hartford, the insurance capital of the world. Lieberman would go on to be the founding chair of a political group called No Labels, which is trying to find someone to run as a third-party presidential candidate this year.
The work of Big Insurance and its army of lobbyists paid off as insurers had hoped. The demise of the public option was a driving force behind the record profits – and CEO pay – that we see in the industry today.
The good effects of the ACA:
Nearly 49 million U.S. residents (or 16%) were uninsured in 2010. The law has helped bring that down to 25.4 million, or 8.3% (although a large and growing number of Americans are now “functionally uninsured” because of unaffordable out-of-pocket requirements, which President Biden pledged to address in his recent State of the Union speech).
The ACA also made it illegal for insurers to refuse to sell coverage to people with preexisting conditions, which even included birth defects, or charge anyone more for their coverage based on their health status; it expanded Medicaid (in all but 10 states that still refuse to cover more low-income individuals and families); it allowed young people to stay on their families’ policies until they turn 26; and it required insurers to spend at least 80% of our premiums on the health care goods and services our doctors say we need (a well-intended provision of the law that insurers have figured out how to game).
The not-so-good effects of the ACA:
As taxpayers and health care consumers, we have paid a high price in many ways as health insurance companies have transformed themselves into massive money-making machines with tentacles reaching deep into health care delivery and taxpayers’ pockets.
To make policies affordable in the individual market, for example, the government agreed to subsidize premiums for the vast majority of people seeking coverage there, meaning billions of new dollars started flowing to private insurance companies. (It also allowed insurers to charge older Americans three times as much as they charge younger people for the same coverage.) Even more tax dollars have been sent to insurers as part of the Medicaid expansion. That’s because private insurers over the years have persuaded most states to turn their Medicaid programs over to them to administer.
We invite you to take a look at how the ascendency of health insurers over the past several years has made a few shareholders and executives much richer while the rest of us struggle despite – and in some cases because of – the Affordable Care Act.
BY THE NUMBERS
In 2010, we as a nation spent $2.6 trillion on health care. This year we will spend almost twice as much – an estimated $4.9 trillion, much of it out of our own pockets even with insurance.
In 2010, the average cost of a family health insurance policy through an employer was $13,710. Last year, the average was nearly $24,000, a 75% increase.
The ACA, to its credit, set an annual maximum on how much those of us with insurance have to pay before our coverage kicks in, but, at the insurance industry’s insistence, it goes up every year. When that limit went into effect in 2014, it was $12,700 for a family. This year, it has increased by 48%, to $18,900. That means insurers can get away with paying fewer claims than they once did, and many families have to empty their bank accounts when a family member gets sick or injured. Most people don’t reach that limit, but even a few hundred dollars is more than many families have on hand to cover deductibles and other out-of-pocket requirements.
Now 100 million Americans – nearly one of every three of us – are mired in medical debt, even though almost 92% of us are presumably “covered.” The coverage just isn’t as adequate as it used to be or needs to be.
Meanwhile, insurance companies had a gangbuster 2023. The seven big for-profit U.S. health insurers’ revenues reached $1.39 trillion, and profits totaled a whopping $70.7 billion last year.
SWEEPING CHANGE, CONSOLIDATION–AND HUGE PROFITS FOR INVESTORS
Insurance company shareholders and executives have become much wealthier as the stock prices of the seven big for-profit corporations that control the health insurance market have skyrocketed.
NOTE: The Dow Jones Industrial Average is listed on this chart as a reference because it is a leading stock market index that tracks 30 of the largest publicly traded companies in the United States.
REVENUES collected by those seven companies have more than tripled (up 346%), increasing by more than $1 trillion in just the past ten years.
PROFITS (earnings from operations) have more than doubled (up 211%), increasing by more than $48 billion.
The CEOs of these companies are among the highest paid in the country. In 2022, the most recent year the companies have reported executive compensation, they collectively made $136.5 million.
U.S. HEALTH PLAN ENROLLMENT
Enrollment in the companies’ health plans is a mix of “commercial” policies they sell to individuals and families and that they manage for “plan sponsors” – primarily employers and unions – and government/enrollee-financed plans (Medicare, Medicaid, Tricare for military personnel and their dependents and the Federal Employee Health Benefits program).
Enrollment in their commercial plans grew by just 7.65% over the 10 years and declined significantly at UnitedHealth, CVS/Aetna and Humana. Centene and Molina picked up commercial enrollees through their participation in several ACA (Obamacare) markets in which most enrollees qualify for federal premium subsidies paid directly to insurers.
While not growing substantially, commercial plans remain very profitable because insurers charge considerably more in premiums now than a decade ago.
(1) The 2013 total for CVS/Aetna was reported by Aetna before its 2018 acquisition by CVS. (2) Humana announced last year it is exiting the commercial health insurance business. (3) Enrollment in the ACA’s marketplace plans account for all of Molina’s commercial business.
By contrast, enrollment in the government-financed Medicaid and Medicare Advantage programs has increased 197% and 167%, respectively, over the past 10 years.
(1) The 2013 total for CVS/Aetna was reported by Aetna before its 2018 acquisition by CVS.
Of the 65.9 million people eligible for Medicare at the beginning of 2024, 33 million, slightly more than half, enrolled in a private Medicare Advantage plan operated by either a nonprofit or for-profit health insurer, but, increasingly, three of the big for-profits grabbed most new enrollees. Of the 1.7 million new Medicare Advantage enrollees this year, 86% were captured by UnitedHealth, Humana and Aetna. Those three companies are the leaders in the Medicare Advantage business among the for-profit companies, and, according to the health care consulting firm Chartis, are taking over the program “at breakneck speed.”
(1) The 2013 total for CVS/Aetna was reported by Aetna before its 2018 acquisition by CVS. (2,3) Centene’s and Molina’s totals include Medicare Supplement; they do not break out enrollment in the two Medicare categories separately.
It is worth noting that although four companies saw growth in their Medicare Supplement enrollment over the decade, enrollment in Medicare Supplement policies has been declining in more recent years as insurers have attracted more seniors and disabled people into their Medicare Advantage plans.
OTHER FEDERAL PROGRAMS
In addition to the above categories, Humana and Centene have significant enrollment in Tricare, the government-financed program for the military. Humana reported 6 million military enrollees in 2023, up from 3.1 million in 2013. Centene reported 2.8 million in 2023. It did not report any military enrollment in 2013.
Elevance reported having 1.6 million enrollees in the Federal Employees Health Benefits Program in 2023, up from 1.5 million in 2013. That total is included in the commercial enrollment category above.
At Cigna, Express Scripts’ pharmacy operations now contribute more than 70% to the company’s total revenues. Caremark’s pharmacy operations contribute 33% to CVS/Aetna’s total revenues, and Optum Rx contributes 31% to UnitedHealth’s total revenues.
WHAT TO DO AND WHERE TO START
The official name of the ACA is the Patient Protection and Affordable Care Act. The law did indeed implement many important patient protections, and it made coverage more affordable for many Americans. But there is much more Congress and regulators must do to close the loopholes and dismantle the barriers erected by big insurers that enable them to pad their bottom lines and reward shareholders while making health care increasingly unaffordable and inaccessible for many of us.
Several bipartisan bills have been introduced in Congress to change how big insurers do business.
And as noted above, President Biden has asked Congress to broaden the recently enacted $2,000-a-year cap on prescription drugs to apply to people with private insurance, not just Medicare beneficiaries. That one policy change could save an untold number of lives and help keep millions of families out of medical debt. (A coalition of more than 70 organizations and businesses, which I lead, supports that, although we’re also calling on Congress to reduce the current overall annual out-of-pocket maximum to no more than $5,000.)
I encourage you to tell your members of Congress and the Biden administration that you support these reforms as well as improving, strengthening and expanding traditional Medicare. You can be certain the insurance industry and its allies are trying to keep any reforms that might shrink profit margins from becoming law.
If Congress in the next year or two succeeds in transforming Medicare into something that looks like a run-of-the mill Medicare Advantage plan for everyone – not just for those who now have the plans – it will mark the culmination of a 30-year project funded by the Heritage Foundation.
A conservative think tank, the Heritage Foundation grew to prominence in the 1970s and ’80s with a well-funded mission to remake or eliminate progressive governmental programs Americans had come to rely on, like Medicare, Social Security and Workers’ Compensation.
Some 30 million people already have been lured into private Medicare Advantage plans, eager to grab such sales enticements as groceries, gym memberships and a sprinkling of dental coverage while apparently oblivious to the restrictions on care they may encounter when they get seriously ill and need expensive treatment. That’s the time when you really need good insurance to pay the bills.
Congress may soon pass legislation that authorizes a study commission pushed by Heritage and some Republican members aimed at placing recommendations on the legislative table that would end Medicare and Social Security, replacing those programs with new ones offering lesser benefits for fewer people.
In other words, they would no longer be available to everyone in a particular group. Instead they would morph into something like welfare, where only the neediest could receive benefits.
How did these popular programs, now affecting 67.4 million Americans on Social Security and nearly 67 million on Medicare, become imperiled?
As I wrote in my book, Slanting the Story: The Forces That Shape the News, Heritage had embarked on a campaign to turn Medicare into a totally privatized arrangement. It’s instructive to look at the 30-year campaign by right-wing think tanks, particularly the Heritage Foundation, to turn these programs into something more akin to health insurance sold by profit-making companies like Aetna and UnitedHealthcare than social insurance, where everyone who pays into the system is entitled to a benefit when they become eligible.
The proverbial handwriting was on the wall as early as 1997 when a group of American and Japanese health journalists gathered at an apartment in Manhattan to hear a program about services for the elderly. The featured speaker was Dr. Robyn Stone who had just left her position as assistant secretary for the Department of Health and Human Services in the Clinton administration.
Stone chastised the American reporters in the audience, telling them: “What is amazing to me is that you have not picked up on probably the most significant story in aging since the 1960s, and that is passage of the Balanced Budget Act of 1997, which creates Medicare Plus Choice” – a forerunner of today’s Advantage plans.
“This is the beginning of the end of entitlements for the Medicare program,” Stone said, explaining that the changes signaled a move toward a “defined contribution” program rather than a “defined benefit” plan with a predetermined set of benefits for everyone. “The legislation was so gently passed that nobody looked at the details.”
Robert Rosenblatt, who covered the aging beat for the Los Angeles Times, immediately challenged her. “It’s not the beginning of the end of Medicare as we know it,” he shot back. “It expands consumer choice.”
Consumer choice had become the watchword of the so-called “consumer movement,” ostensibly empowering shoppers – but without always identifying the conditions under which their choices must be made.
When consumers lured by TV pitchmen sign up for Medicare Advantage, how many of the sellers disclose that once those consumers leave traditional Medicare for an Advantage plan, they may be trapped. In most states, they will not be able to buy a Medicare supplement policy if they don’t like their new plan unless they are in super-good health.
In other words, most seniors are stuck. That can leave beneficiaries medically stranded when they have a serious, costly illness at a time in life when many are using up or have already exhausted their resources. I once asked a Medicare counselor what beneficiaries with little income would do if they became seriously ill and their Advantage plan refused to pay many of the bills, an increasingly common predicament. The cavalier answer I got was: “They could just go on Medicaid.”
The push to privatize Medicare began in February 1995 when Heritage issued a six-page committee brief titled “A Special Report to the House Ways and Means Committee”, which was sent to members of Congress, editorial writers, columnists, talk show hosts and other media. Heritage then spent months promoting its slant on the story. Along with other right-wing groups dedicated to transforming Medicare from social insurance to a private arrangement like car insurance, Heritage clobbered reporters who produced stories that didn’t fit the conservative narrative.
The right-wing Media Research Center singled out journalists who didn’t use the prescribed vocabulary to describe Heritage plans. Its newsletter criticized CBS reporter Linda Douglas when she reported that the senior citizens lobby had warned that the Republican budget would gut Medicare. The group reprimanded another CBS reporter, Connie Chung, for reporting that the House and Senate GOP plans “call for deep cuts in Medicare and other programs.” Haley Barbour, then Republican National Committee chairman, vowed to raise “unshirted hell” with the news media whenever they used the word “cut.” He wined and dined reporters, “educating” them on the “difference” between cuts and slowing Medicare’s growth. Former Republican U.S. Rep. John Kasich of Ohio, who chaired the House budget committee, called reporters warning them not to use the word “cut,” later admitting he “worked them over.”
As I wrote at the time, by fall of that year reporters had fallen in line. Douglas, who had been criticized all summer, got the words right and reported that the Republican bill contained a number of provisions “all adding up to a savings of $270 billion in the growth of Medicare spending.”
Fast forward to now. The Heritage Foundation’s Budget Blueprint for fiscal year 2023 offered ominous recommendations for Medicare, some of which might be enacted in a Republican administration. The think tank yet again called for a “premium support system” for Medicare, claiming that if its implementation was assumed in 2025, it “would reduce outlays by $1 trillion during the FY 2023-2032 period.” Heritage argues that the controversial approach would foster “intense competition among health plans and providers,” “expand beneficiaries’ choices,” “control costs,” “slow the growth of Medicare spending,” and “stimulate innovation.”
The potential beneficiaries would be given a sum of money, often called a premium support, to shop in the new marketplace, which could resemble today’s sales bazaar for Medicare Advantage plans, setting up the possibility for more hype and more sellers hoping to cash in on the revamped Medicare program. Many experts fear that such a program ultimately could destroy what is left of traditional Medicare, which about half of the Medicare population still prefers.
In other words, most seniors are stuck.
That can leave beneficiaries medically stranded when they have a serious, costly illness at a time in life when many are using up or have already exhausted their resources. I once asked a Medicare counselor what beneficiaries with little income would do if they became seriously ill and their Advantage plan refused to pay many of the bills, an increasingly common predicament. The cavalier answer I got was: “They could just go on Medicaid.”
The push to privatize Medicare began in February 1995 when Heritage issued a six-page committee brief titled “A Special Report to the House Ways and Means Committee”, which was sent to members of Congress, editorial writers, columnists, talk show hosts and other media. Heritage then spent months promoting its slant on the story. Along with other right-wing groups dedicated to transforming Medicare from social insurance to a private arrangement like car insurance, Heritage clobbered reporters who produced stories that didn’t fit the conservative narrative.
The right-wing Media Research Center singled out journalists who didn’t use the prescribed vocabulary to describe Heritage plans. Its newsletter criticized CBS reporter Linda Douglas when she reported that the senior citizens lobby had warned that the Republican budget would gut Medicare. The group reprimanded another CBS reporter, Connie Chung, for reporting that the House and Senate GOP plans “call for deep cuts in Medicare and other programs.” Haley Barbour, then Republican National Committee chairman, vowed to raise “unshirted hell” with the news media whenever they used the word “cut.” He wined and dined reporters, “educating” them on the “difference” between cuts and slowing Medicare’s growth. Former Republican U.S. Rep. John Kasich of Ohio, who chaired the House budget committee, called reporters warning them not to use the word “cut,” later admitting he “worked them over.”
As I wrote at the time, by fall of that year reporters had fallen in line. Douglas, who had been criticized all summer, got the words right and reported that the Republican bill contained a number of provisions “all adding up to a savings of $270 billion in the growth of Medicare spending.”
Fast forward to now. The Heritage Foundation’s Budget Blueprint for fiscal year 2023 offered ominous recommendations for Medicare, some of which might be enacted in a Republican administration. The think tank yet again called for a “premium support system” for Medicare, claiming that if its implementation was assumed in 2025, it “would reduce outlays by $1 trillion during the FY 2023-2032 period.” Heritage argues that the controversial approach would foster “intense competition among health plans and providers,” “expand beneficiaries’ choices,” “control costs,” “slow the growth of Medicare spending,” and “stimulate innovation.”
The potential beneficiaries would be given a sum of money, often called a premium support, to shop in the new marketplace, which could resemble today’s sales bazaar for Medicare Advantage plans, setting up the possibility for more hype and more sellers hoping to cash in on the revamped Medicare program. Many experts fear that such a program ultimately could destroy what is left of traditional Medicare, which about half of the Medicare population still prefers.
In a Republican administration with a GOP Congress, some of the recommendations, or parts of them, might well become law. The last 30 years have shown that the Heritage Foundation and other organizations driven by ideological or financial reasons want to transform Medicare, and they are committed for the long haul. They have the resources to promote their cause year after year, resulting in the continual erosion of traditional Medicare by Advantage Plans, many of which are of questionable value when serious illness strikes.
The seeds of Medicare’s destruction are in the air.
The program as it was set out in 1965 has kept millions of older Americans out of medical poverty for over 50 years, but it may well become something else – a privatized health care system for the oldest citizens whose medical care will depend on the profit goals of a handful of private insurers. It’s a future that STAT’s Bob Herman, whose reporting has explored the inevitable clash between health care and an insurer’s profit goals, has shown us.
In the long term, the gym memberships, the groceries, the bit of dental and vision care so alluring today may well disappear, and millions of seniors will be left once again to the vagaries of America’s private insurance marketplace.
Wall Street has fallen out of love with big insurers that depend heavily on the federal government’s overpayments to the private Medicare replacement plans they market, deceptively, under the name, “Medicare Advantage.”
I’ll explain below. But first, thank you if you reached out to your members of Congress and the Biden administration last week as I suggested to demand an end to the ongoing looting by those companies of the Medicare Trust Fund.
As I wrote on March 26, the Center for Medicare and Medicaid Services was scheduled to announce this week how much more taxpayer dollars it would send to Medicare Advantage companies next year. On January 31, CMS said it planned to increase the amount slightly to account for the increased cost of health care, based on how much more the government likely would spend to cover people enrolled in the traditional Medicare program. It uses traditional Medicare as a benchmark.
Big insurers like UnitedHealthcare, Humana and Aetna, owned by CVS, howled when CMS released its preliminary 2025 rate notice that day. They claimed they wouldn’t be getting enough of taxpayers’ dollars. So they launched a high-pressure campaign to get CMS to give them more money. They demanded extra billions because, they said, their Medicare Advantage enrollees had used more prescription drugs and went to the doctor more often in 2023 and January of this year than the companies had expected.
CMS announced after the market closed Monday that it was sticking to its plan to increase payments to Medicare Advantage plans by 3.7% – more than $16 billion –from 2024 to 2025. That would mean that it would pay companies that operate MA plans between $500 and $600 billion next year, considerably less than insurers wanted.
Shocked investors began running for the exits right away. When the New York Stock Exchange closed at 4 p.m. ET on Tuesday, more than 52 million shares of the companies’ stock had been traded–many millions more than average–driving the share prices of all of them way down. And the carnage has continued throughout this week.
By the end of trading yesterday, UnitedHealth, Humana and CVS/Aetna had lost nearly $95 billion in market capitalization. To put that in perspective, that’s more than the entire market cap of CVS, which fell to $93 billion yesterday.
All seven of the big for-profit companies with Medicare Advantage enrollment had a bad week, although Cigna, where I used to work and which announced recently it is getting out of the Medicare Advantage business next year, suffered the least. Its shares were down a little more than 1% as of yesterday afternoon.
Humana, the second largest MA company, which last year said it was getting out of the commercial insurance business to focus more fully on Medicare Advantage, by contrast, was the biggest loser of the bunch–and one of the biggest losers on the NYSE. Its shares fell more than 13% on Tuesday. As of yesterday, they were still down nearly 12%.
Noting that Humana’s stock has fallen 40% this year, he wrote:
Last fall, the insurer Humana was on top of the world. The stock was trading above $520 per share, as the company’s major bet on Medicare Advantage—the privately-run, publicly-funded insurance program for U.S. seniors—seemed to be paying off.
Long a darling of Wall Street’s analyst class, the stock had returned nearly 290% since the start of 2015, handily outperforming the S&P 500 over the same period.
Over the past five months, that position has crumbled. Humana shares were down to $308 Tuesday morning, as the outlook for Medicare Advantage and, by extension, for Humana’s business, has grown dimmer and dimmer.
Humana shares dived 12.3% early Tuesday, after the latest blow to the future prospects for the profitability of the Medicare Advantage business. Late Monday, the Centers for Medicare and Medicaid Services announced Medicare Advantage payment rates for 2025 that fell short of investor expectations.
The other companies also had a disastrous week. Shares of UnitedHealth, the biggest of the group in terms of Medicare Advantage enrollment (and overall revenues and profits), had fallen by 7% by the end of the day yesterday. CVS/Aetna’s shares were down 7.1%; Elevance’s were down 3.37%; Molina’s were down 7.15%; and Centene’s were down 7.33%.
When I was at Cigna, one of my responsibilities was to handle media questions when the company announced quarterly earnings, mergers and acquisitions, and whenever there was a major event like the CMS rate notice. The worst days of my 20-year career in the industry were when some kind of news triggered a stock selloff. I had to try to put the best spin possible on the situation. But my job was relatively easy compared to what the CEO, CFO and the company’s investor relations team had to do.
You can be certain they have been on the phone and in Zooms all week with Wall Street financial analysts, big institutional investors and even the company’s big employer customers in attempts to persuade them that the sky has not fallen.
You can also be certain that the companies will now shift their focus to the political arena. To keep this from happening again, they will begin pouring enormous sums of your premium dollars into campaigns to help elect industry-friendly candidates for Congress and the presidency this November. We provided a glimpse of where they’re already sending those donations in a story last November. We will continue to monitor this in the months ahead.
Of late, private equity investors in healthcare services have faced intense criticism that their business practices have compromised patient safety and raised costs for consumers. March 5, the FTC, DOJ and HHS announced the launch of an investigation into the inner workings of PE in healthcare. It comes on the heels of U.S. Senate investigations in their Finance, HELP and Budget Committees to explore legislative levers they might pull to address their growing concerns about affordability, competition and accountability in the industry.
PE funds don’t welcome the spotlight.
Their business model lends to misinformation and disinformation: company takeovers by new owners are rarely treated as good news unless the circumstance under prior ownership was dire. Even then, attention shifts quickly to the fairness of the PE business model playbook: acquire the asset on favorable terms, replace management, reduce operating costs, grow and the sell in 5-7 years at a profit using debt to finance the deal along the way. In exchange, the PE fund’s General Partner gets an annual management fee of 2% plus 20% of the value they create when they sell the company or take it public, and favorable tax treatment (carried interest) on their gain.
Concern about PE in healthcare services comes at a particularly delicate time: hospitals. nursing homes, outpatient care, medical practices, clinics et al) are still feeling the after-effects of the pandemic, proposed reimbursement bumps by Medicare for hospitals and physicians do not offset medical inflation and the Change Healthcare cybersecurity breach February 21 has created cash flow issues for all.
Concern about PE ownership was high already.
Innovations funded through PE-backed organizations have been drowned out by the steady drip of peer reviewed and industry-sponsored studies a causal relationship between PE ownership decreased quality and patient safety and increased prices and worker discontent. Nonetheless, PE-owns 4% of hospitals (among 36% that are investor-owned, 13% of medical practices and 6% of nursing homes today and they’re increasing in all cohorts of health services.
Here are the facts:
Private equity enjoys significant influence in public policy including healthcare. Direct lobbying activity by PE funds in Congress and state legislatures is well-funded and effective, especially by the It is increasingly 20 global fund sponsors that control 46% of assets under management. Cash on hand and fund-raising by PE are strong and healthcare remains an important but non-exclusive target of PE investing.
2023 was a down year for PE, 2024 will be strong: the IPO market and sponsor- to sponsor transactions dipped, and deal values shrank. Even with interest rates remaining high, returns exceeded overall growth in the stock market for deals consummated. At the same time, PE raised $1.2 trillion last year and has $2.6 trillion of dry powder to invest. Healthcare services will be a target as PE deal activity increases in 2024.
In U.S. healthcare, PE investments are significant and increasing. Technology-enabled services that lower unit costs and AI-based solutions that enable standardization and workforce efficiency will garner higher valuations and greater PE interest than traditional services. Valuations will recover from record 2023 lows and dry powder will be deployed for roll-ups despite antitrust concerns and government investigations. Congress will investigate the impact on PE on patient safety, prices and competition and, in tandem with FTC and DOJ issue guidance: compliance will be mandated and financial penalties added. But displacement of PE in health services is unlikely.
Some notable data:
Private equity funds have $2.49 trillion of cash on hand to invest—up 7% from 2022. They raised $1.2 trillion globally in 2023. 26% of its global dry powder is more than 4 years old—undeployed.
Private equity groups globally are sitting on a record 28,000 unsold companies worth more than $3tn. 40% of the companies waiting to be sold are at least four years old. Last year, the combined value of companies that the industry sold privately or on public markets fell 44% and the value of companies sold to other buyout groups fell 47%.
Private equity investments in almost every sector in healthcare are significant, and until lately, increasing. Last year, deals were down 16.2% (from 940 to 788) cutting across every sector. In some sectors, like physician services, PE deals were tuck-in’s to their previous platform investments increasing from 75 deals in 2012 to 484 deals in 2021.
PE investments in US healthcare exceeded $1 trillion in the last 10 years. Investments in healthcare services i.e. acute, long-term, ambulatory and physician services– have been less profitable to investors than PE investments in technology, devices and therapeutics (based on the ratio of Enterprise Value to EBITDA) but exceed equity-market returns overall.
Peer reviewed studies have shown causal relationships between private equity ownership of hospitals, nursing homes and medical practices with lower operating costs, higher staff turnover, high prices and higher profits.
My take:
Like it or not, private equity investment in healthcare is here to stay. The likelihood of higher taxes paid by employers and individuals to fund the health system is nil. The majority (69%) of the public think it wasteful and inefficient (See Polling below). The majority believe it puts its profits above all else. The majority think it needs major change. That’s not new, but it’s felt more intensely and more widely than ever.
That means accommodation for private capital, including private equity, is not a major concern to voters: the prices they pay matters more than who owns the organization.
Tighter regulation of private equity, including more rights given to the Limited Partners who invest in the PE funds and limitations on public officials who become fund advisors, are likely. Bad actors will be vilified by regulators and elected officials. Media scrutiny of specific PE funds and their GPs will intensify as PE public reporting regulations commence. And investments made by not-for-profit multi-hospital systems and independent hospitals will be critical elements in upcoming Congressional and regulatory policy setting about their community benefit accountability and tax exemptions.
The public’s major concern about its healthcare industry is affordability. To the extent PE-backed solutions offer lower-cost, higher-value alternatives on a playing field that’s level with respect to equitable access and demand-management, they will be at the table.
To the extent PE-backed solutions cherry-pick the system’s low-hanging fruit at the expense of patient safety and affordability sans any regulatory restriction, they’ll breed public discontent from those they choose to ignore.
So, the reality is this: PE’s focus is generating profits for its GP and their LPs. Doing business in a socially responsible way is a fund’s prerogative. Some do it better than others.
PE is part of healthcare’s solution to its poorly structured, perpetually inadequate and mal-distributed funding. But creating a level playing field through meaningful regulatory reform is necessary first.
PS Among the stickier issues facing hospitals is site-neutral payments. Hospitals oppose the proposal reasoning the overhead structure for their outpatient services (HOPD) include indirect & direct costs for services provided those unable to pay i.e. emergency services. Proponents of the change argue that what’s done is the key, not where it’s done, and uniform pricing is common sense. Leavitt Partners has advanced a compromise: a Unified Ambulatory Payment System for HOPDs, ASCs and physician clinics that would be applied to 66 services starting
If you’re a U.S. health industry watcher, it would appear the $4.5 trillion system is under fire at every corner.
Pressures to lower costs, increase accessibility and affordability to all populations, disclose prices and demonstrate value are hitting every sector. Complicating matters, state and federal legislators are challenging ‘business as usual’ seeking ways to spend tax dollars more wisely with surprisingly strong bipartisan support on many issues. No sector faces these challenges more intensely than hospitals.
In 2022 (the latest year for NHE data from CMS), hospitals accounted for 30.4% of total spending ($1.35 trillion. While total healthcare spending increased 4.1% that year, hospital spending was up 2.2%–less than physician services (+2.7%), prescription drugs (+8.4%), private insurance (+5.9%) and the overall inflation rate (+6.5%) and only slightly less than the overall economy (GDP +1.9%). Operating margins were negative (-.3%) because operating costs increased more than revenues (+7.7% vs. 6.5%) creating deficits for most. Hardest hit: the safety net, rural hospitals and those that operate in markets with challenging economic conditions.
In 2023, the hospital outlook improved. Pre-Covid utilization levels were restored. Workforce tensions eased somewhat. And many not-for-profits and investor-owned operators who had invested their cash flows in equities saw their non-operating income hit record levels as the S&P 500 gained 26.29% for the year.
In 2024, the S&P is up 5.15% YTD but most hospital operators are uncertain about the future, even some that appear to have weathered the pandemic storm better than others. A sense of frustration and despair is felt widely across the sector, especially in critical access, rural, safety net, public and small community hospitals where long-term survival is in question.
The cynicism felt by hospitals is rooted in four conflicts in which many believe hospitals are losing ground:
Hospitals vs. Insurers:
Insurers believe hospitals are inefficient and wasteful, and their business models afford them the role of deciding how much they’ll pay hospitals and when based on data they keep private. They change their rules annually to meet their financial needs. Longer-term contracts are out of the question. They have the upper hand on hospitals.
Hospitals take financial risks for facilities, technologies, workforce and therapies necessary to care. Their direct costs are driven by inflationary pressures in their wage and supply chains outside their control and indirect costs from regulatory compliance and administrative overhead, Demand is soaring. Hospital balance sheets are eroding while insurers are doubling down on hospital reimbursement cuts to offset shortfalls they anticipate from Medicare Advantage. Their finances and long-term sustainability are primarily controlled by insurers. They have minimal latitude to modify workforces, technology and clinical practices annually in response to insurer requirements.
Hospitals vs. the Drug Procurement Establishment:
Drug manufacturers enjoy patent protections and regulatory apparatus that discourage competition and enable near-total price elasticity. They operate thru a labyrinth of manufacturers, wholesalers, distributors and dispensers in which their therapies gain market access through monopolies created to fend-off competition. They protect themselves in the U.S. market through well-funded advocacy and tight relationships with middlemen (GPOs, PBMs) and it’s understandable: the global market for prescription drugs is worth $1.6 trillion, the US represents 27% but only 4% of the world population.
And ownership of the 3 major PBMs that control 80% of drug benefits by insurers assures the drug establishment will be protected.
Prescription drugs are the third biggest expense in hospitals after payroll and med/surg supplies. They’re a major source of unexpected out-of-pocket cost to patients and unanticipated costs to hospitals, especially cancer therapies. And hospitals (other than academic hospitals that do applied research) are relegated to customers though every patient uses their products.
Prescription drug cost escalation is a threat to the solvency and affordability of hospital care in every community.
Hospitals vs. the FTC, DOJ and State Officials:
Hospital consolidation has been a staple in hospital sustainability and growth strategies. It’s a major focus of regulator attention. Horizontal consolidation has enabled hospitals to share operating costs thru shared services and concentrate clinical programs for better outcomes. Vertical consolidation has enabled hospitals to diversify as a hedge against declining inpatient demand: today, 200+ sponsor health insurance plans, 60% employ physicians directly and the majority offer long-term, senior care and/or post-acute services. But regulators like the FTC think hospital consolidation has been harmful to consumers and third-party data has shown promised cost-savings to consumers are not realized.
Federal regulators are also scrutinizing the tax exemptions afforded not-for-profit hospitals, their investment strategies, the roles of private equity in hospital prices and quality and executive compensation among other concerns. And in many states, elected officials are building their statewide campaigns around reining in “out of control” hospitals and so on.
Bottom line: Hospitals are prime targets for regulators.
Hospitals vs. Congress:
Influential members in key House and Senate Committees are now investigating regulatory changes that could protect rural and safety net hospitals while cutting payments to the rest. In key Committees (Senate HELP and Finance, House Energy and Commerce, Budget), hospitals are a target. Example: The Lower Cost, More Transparency Act passed in the the House December 11, 2023. It includes price transparency requirements for hospitals and PBMs, site-neutral payments, additional funding for rural and community health among more. The American Hospital Association objected noting “The AHA supports the elimination of the Medicaid disproportionate share hospital (DSH) reductions for two years. However, hospitals and health systems strongly oppose efforts to include permanent site-neutral payment cuts in this bill. In addition, the AHA has concerns about the added regulatory burdens on hospitals and health systems from the sections to codify the Hospital Price Transparency Rule and to establish unique identifiers for off-campus hospital outpatient departments (HOPDs).” Nonetheless, hospitals appear to be fighting an uphill battle in Congress.
Hospitals have other problems:
Threats from retail health mega-companies are disruptive. The public’s trust in hospitals has been fractured. Lenders are becoming more cautious in their term sheets. And the hospital workforce—especially its doctors and nurses—is disgruntled. But the four conflicts above seem most important to the future for hospitals.
However, conflict resolution on these is problematic because opinions about hospitals inside and outside the sector are strongly held and remedy proposals vary widely across hospital tribes—not-for profits, investor-owned, public, safety nets, rural, specialty and others.
Nonetheless, conflict resolution on these issues must be pursued if hospitals are to be effective, affordable and accessible contributors and/or hubs for community health systems in the future. The risks of inaction for society, the communities served and the 5.48 million (NAICS Bureau of Labor 622) employed in the sector cannot be overstated. The likelihood they can be resolved without the addition of new voices and fresh solutions is unlikely.
PS: In the sections that follow, citations illustrate the gist of today’s major message: hospitals are under attack—some deserved, some not. It’s a tough business climate for all of them requiring fresh ideas from a broad set of stakeholders.
PS If you’ve been following the travails of Mission Hospital, Asheville NC—its sale to HCA Healthcare in 2019 under a cloud of suspicion and now its “immediate jeopardy” warning from CMS alleging safety and quality concerns—accountability falls squarely on its Board of Directors. I read the asset purchase agreement between HCA and Mission: it sets forth the principles of operating post-acquisition but does not specify measurable ways patient safety, outcomes, staffing levels and program quality will be defined. It does not appear HCA is in violation with the terms of the APA, but irreparable damage has been done and the community has lost confidence in the new Mission to operate in its best interest. Sadly, evidence shows the process was flawed, disclosures by key parties were incomplete and the hospital’s Board is sworn to secrecy preventing a full investigation.
The lessons are 2 for every hospital:
Boards must be prepared vis a vis education, objective data and independent counsel to carry out their fiduciary responsibility to their communities and key stakeholders. And the business of running hospitals is complex, easily prone to over-simplification and misinformation but highly important and visible in communities where they operate.
Business relationships, price transparency, board performance, executive compensation et al can no longer to treated as private arrangements.
Healthcare is big business. That’s why JP Morgan Chase is hosting its 42nd Healthcare Conference in San Francisco starting today– the same week Congress reconvenes in DC with the business of healthcare on its agenda as well. The predispositions of the two toward the health industry could not be more different.
Context: the U.S. Health System in the Global Economy
Though the U.S. population is only 4% of the world total, our spending for healthcare products and services represents 45% of global healthcare market. Healthcare is 17.4% of U.S. GDP vs. an average of 9.6% for the economies in the 37 other high-income economies of the world. It is the U.S.’ biggest private employer (17.2 million) accounting for 24% of total U.S. job growth last year (BLS). And it’s a growth industry: annual health spending growth is forecast to exceed 4%/year for the foreseeable future and almost 5% globally—well above inflation and GDP growth. That’s why private investments in healthcare have averaged at least 15% of total private investing for 20+ years. That’s why the industry’s stability is central to the economy of the world.
The developed health systems of the world have much in common: each has three major sets of players:
Service Providers: organizations/entities that provide hands-on services to individuals in need (hospitals, physicians, long-term care facilities, public health programs/facilities, alternative health providers, clinics, et al). In developed systems of the world, 50-60% of spending is in these sectors.
Innovators: organizations/entities that develop products and services used by service providers to prevent/treat health problems: drug and device manufacturers, HIT, retail health, self-diagnostics, OTC products et al. In developed systems of the world, 20-30% is spend in these.
Administrators, Watchdogs & Regulators: Organizations that influence and establish regulations, oversee funding and adjudicate relationships between service providers and innovators that operate in their systems: elected officials including Congress, regulators, government agencies, trade groups, think tanks et al. In the developed systems of the world, administration, which includes insurance, involves 5-10% of its spending (though it is close to 20% in the U.S. system due to the fragmentation of our insurance programs).
In the developed systems of the world, including the U.S., the role individual consumers play is secondary to the roles health professionals play in diagnosing and treating health problems. Governments (provincial/federal) play bigger roles in budgeting and funding their systems and consumer out-of-pocket spending as a percentage of total health spending is higher than the U.S. All developed and developing health systems of the world include similar sectors and all vary in how their governments regulate interactions between them. All fund their systems through a combination of taxes and out-of-pocket payments by consumers. All depend on private capital to fund innovators and some service providers. And all are heavily regulated.
In essence, that makes the U.S. system unique are (1) the higher unit costs and prices for prescription drugs and specialty services, (2) higher administrative overhead costs, (3) higher prevalence of social health issues involving substance abuse, mental health, gun violence, obesity, et al (4) the lack of integration of our social services/public health and health delivery in communities and (5) lack of a central planning process linked to caps on spending, standardization of care based on evidence et al.
So, despite difference in structure and spending, developed systems of the world, like the U.S. look similar:
The Current Climate for the U.S. Health Industry
The global market for healthcare is attractive to investors and innovators; it is less attractive to most service providers since their business models are less scalable. Both innovator and service provider sectors require capital to expand and grow but their sources vary: innovators are primarily funded by private investors vs. service providers who depend more on public funding. Both are impacted by the monetary policies, laws and political realities in the markets where they operate and both are pivoting to post-pandemic new normalcy. But the outlook of investors in the current climate is dramatically different than the predisposition of the U.S. Congress toward healthcare:
Healthcare innovators and their investors are cautiously optimistic about the future. The dramatic turnaround in the biotech market in 4Q last year coupled with investor enthusiasm for generative AI and weight loss drugs and lower interest rates for debt buoy optimism about prospects at home and abroad. The FDA approved 57 new drugs last year—the most since 2018. Big tech is partnering with established payers and providers to democratize science, enable self-care and increase therapeutic efficacy. That’s why innovators garner the lion’s share of attention at JPM. Their strategies are longer-term focused: affordability, generative AI, cost-reduction, alternative channels, self-care et al are central themes and the welcoming roles of disruptors hardwired in investment bets. That’s the JPM climate in San Franciso.
By contrast, service providers, especially the hospital and long-term care sectors, are worried. In DC, Congress is focused on low-hanging fruit where bipartisan support is strongest and political risks lowest i.e.: price transparency, funding cuts, waste reduction, consumer protections, heightened scrutiny of fraud and (thru the FTC and DOJ) constraints on horizontal consolidation to protect competition. And Congress’ efforts to rein in private equity investments to protect consumer choice wins votes and worries investors. Thus, strategies in most service provider sectors are defensive and transactional; longer-term bets are dependent on partnerships with private equity and corporate partners. That’s the crowd trying to change Congress’ mind about cuts and constraints.
The big question facing JPM attendees this week and in Congress over the next few months is the same: is the U.S. healthcare system status quo sustainable given the needs in other areas at home and abroad?
Investors and organizations at JPM think the answer is no and are making bets with their money on “better, faster, cheaper” at home and abroad. Congress agrees, but the political risks associated with transformative changes at home are too many and too complex for their majority.
For healthcare investors and operators, the distance between San Fran and DC is further and more treacherous than the 2808 miles on the map.
The JPM crowd sees a global healthcare future that welcomes change and needs capital; Congress sees a domestic money pit that’s too dicey to handle head-on–two views that are wildly divergent.
Saturday, Congress voted overwhelming (House 335-91, Senate 88-9) to keep the government funded until Nov. 17 at 2023 levels. No surprise. Congress is supposed to pass all 12 appropriations bills before the start of each fiscal year but has done that 4 times since 1970—the last in 1997. So, while this chess game plays out, the health system will soldier on against growing recognition it needs fixing.
In Wednesday night’s debate, GOP Presidential aspirant Nicki Haley was asked what she would do to address the spike in personal bankruptcies due to medical debt. Her reply:
“We will break all of it [down], from the insurance company, to the hospitals, to the doctors’ offices, to the PBMs [pharmacy benefit managers], to the pharmaceutical companies. We will make it all transparent because when you do that, you will realize that’s what the problem is…we need to bring competition back into the healthcare space by eliminating certificate of need systems… Once we give the patient the ability to decide their healthcare, deciding which plan they want, that is when we will see magic happen, but we’re going to have to make every part of the industry open up and show us where their warts are because they all have them”
It’s a sentiment widely held across partisan aisles and in varied degrees among taxpayers, employers and beyond. It’s a system flaw and each sector is complicit.
What seems improbable is a solution that rises above the politics of healthcare where who wins and loses is more important than the solutions themselves.
Perhaps as improbable as the European team’s dominating performance in the 44th Ryder Cup Championship played in Rome last week especially given pre-tournament hype about the US team.
While in Rome last week, I queried hotel employees, restaurant and coffee shop owners, taxi drivers and locals at the tournament about the Italian health system. I saw no outdoor signage for hospitals and clinics nor TV ads for prescriptions and OTC remedies. Its pharmacies, clinics and hospitals are non-descript, modest and understated. Yet groups like the World Health Organization (WHO) and the Organization for Economic Cooperation Development (OECD) rank Servizio Sanitario Nazionale (SSN), the national system authorized in December 1978, in the top 10 in the world (The WHO ranks it second overall behind France).
“It covers all Italian citizens and legal foreign residents providing a full range of healthcare services with a free choice of providers. The service is free of charge at the point of service and is guided by the principles of universal coverage, solidarity, human dignity, and health. In principle, it serves as Italy’s public healthcare system.” Like U.S. ratings for hospitals, rankings for the Italian system vary but consistently place it in the top 15 based on methodologies comparing access, quality, and affordability.
The U.S., by contrast, ranks only first in certain high-end specialties and last among developed systems in access and affordability.
Like many systems of the world, SSN is governed by a national authority that sets operating principles and objectives administered thru 19 regions and two provinces that deliver health services under an appointed general manager. Each has significant independence and the flexibility to determine its own priorities and goals, and each is capitated based on a federal formula reflecting the unique needs and expected costs for that population’s health.
It is funded throughnational and regional taxes, supplemented by private expenditure and insurance plans and regions are allowed to generate their own additional revenue to meet their needs. 74% of funding is public; 26% is private composed primarily of consumer out-of-pocket costs. By contrast, the U.S. system’s funding is 49% public (Medicare, Medicaid et al), 24% private (employer-based, misc.) and 27% OOP by consumers.
Italians enjoy the 6th highest life expectancy in the world, as well as very low levels of infant mortality. It’s not a perfect system: 10% of the population choose private insurance coverage to get access to care quicker along with dental care and other benefits. Its facilities are older, pharmacies small with limited hours and hospitals non-descript.
But Italians seem satisfied with their system reasoning it a right, not a privilege, and its absence from daily news critiques a non-concern.
Issues confronting its system—like caring for its elderly population in tandem with declining population growth, modernizing its emergency services and improving its preventive health programs are understood but not debilitating in a country one-fifth the size of the U.S. population.
My take:
Italy spends 9% of its overall GDP on its health system; the $4.6 trillion U.S spends 18% in its GDP on healthcare, and outcomes are comparable. Our’s is better known but their’s appears functional and in many ways better.
Should the U.S.copy and paste the Italian system as its own? No. Our societies, social determinants and expectations vary widely. Might the U.S. health system learn from countries like Italy? Yes.
Questions like these merit consideration:
Might the U.S. system perform better if states had more authority and accountability for Medicare, CMS, Veterans’ health et al?
Might global budgets for states be an answer?
Might more spending on public health and social services be the answer to reduced costs and demand?
Might strict primary care gatekeeping be an answer to specialty and hospital care?
Might private insurance be unnecessary to a majority satisfied with a public system?
Might prices for prescription drugs, hospital services and insurance premiums be regulated or advertising limited?
Might employers play an expanded role in the system’s accountability?
Can we afford the system long-term, given other social needs in a changing global market?
Comparisons are constructive for insights to be learned. It’s true in healthcare and professional golf. The European team was better prepared for the Ryder Cup competition. From changes to the format of the matches, to pin placements and second shot distances requiring precision from 180-200 yards out on approach shots: advantage Europe. Still, it was execution as a team that made the difference in its dominating 16 1/2- 11 1/2 win —not the celebrity of any member.
The time to ask and answer tough questions about the sustainability of the U.S. system and chart a path forward. A prepared, selfless effort by a cross-sector Team Healthcare USA is our system’s most urgent need. No single sector has all the answers, and all are at risk of losing.
Team USA lost the Ryder Cup because it was out-performed by Team Europe: its data, preparation and teamwork made the difference.
Today, there is no Team Healthcare USA: each sector has its stars but winning the competition for the health and wellbeing of the U.S. populations requires more.
HENRY KOTULA 