Category Archives: Market Trends

The Implications of Losing Access to Tax-Exempt Financing

Posted on by • Posted in Credit Downgrade, Credit Management, Credit Quality, Credit Ratings, Credit Upgrade, Health System, Hospital, Hospital Industry, Market Consolidation, Market Trends, Market Uncertainty, Tax Exempt Debt, Tax Exempt Status, Tax-Exempt Status • Leave a comment

https://www.kaufmanhall.com/insights/thoughts-ken-kaufman/implications-losing-access-tax-exempt-financing

On January 17, 2025, a list of potential cost reductions to the federal budget was released by Republicans on the House Budget Committee. The list is long and covers the federal budget waterfront, but it spends considerable time focusing on reductions to healthcare spending. This laundry list of cost reductions is important because the highest priority of the Trump administration is a further reduction in federal taxes. A reduction in taxes would, of course, reduce federal revenue; if federal expenses are not proportionately reduced then the federal deficit will increase. When the deficit increases then the federal debt must increase and at that point the overall impact on the American economy becomes concerning and possibly damaging. There has already been much public speculation as to how the Federal Reserve might react to such a scenario.

It is not possible right now to highlight and describe all of the House budget proposals, but one proposal absolutely stands out: The suggestion to eliminate the tax-exempt status for interest payments on all municipal bonds, or potentially in a more targeted manner, for private activity bonds, including those issued by not-for-profit hospitals. Siebert Williams Shank, an investment banking firm, described the elimination of tax exemption for municipal bonds as “the most alarming of the proposed reforms impacting non-profit and municipal issuers.”[1] This is certainly true for hospitals, since over the past 60 years the growth and capability of America’s hospitals has been substantially constructed on the foundation of flexible and relatively inexpensive tax-exempt debt. Given all of this, it is not too early to begin speculating on the impact of the elimination of tax-exempt debt on hospital finances and strategy.

We should also point out that a separate topic is under discussion, related to the potential loss of not-for-profit status for hospitals and health systems. Such a maneuver could potentially expose hospitals to income taxes, property taxes, and higher funding costs. For now, that is beyond the scope of this blog but may be something we write about in future posts.

Below is a series of important questions related to the elimination of tax-exempt financing and some speculations on the overall impact:

  1. What immediately happens if 501(c)(3) hospitals lose the ability to issue tax-exempt bonds? Let’s treat fixed rate debt first. Assume for now that only newly issued debt would be affected and that all currently outstanding tax-exempt fixed rate debt would remain tax-exempt. We could see an effort to apply any changes retroactively to existing bonds, but we view that as unlikely. Therefore, our current expectation is that outstanding fixed-rate debt would not see a change in interest expense.

    However, it is possible that outstanding floating rate debt would immediately begin to trade based on the taxable equivalent. Historically the tax-exempt floating rate index trades at about 65% of the taxable index. The difference between the tax-exempt and taxable floating rate indices in the current market is 175 basis points. For every $100 million of debt, this would increase interest expense by $1.75m annually.
  2. How would new hospital debt be issued? New debt would be issued in the municipal market on a taxable basis or in the corporate taxable market. The taxable municipal market would need to adapt and expand to accommodate a significant level of new issuance. The concern in the corporate taxable market is greater. Currently, the corporate market requires issuance of significant dollar size and generally the issuer brings significant name recognition to the market. Many hospitals may have difficulty meeting the issuance size of the corporate debt market and/or the necessary market recognition. As such, smaller and less frequent issuers would expect to pay a penalty of 25-50 basis points for issuing in the corporate market.
  3. If tax-exempt debt goes away will certain hospitals be advantaged and others disadvantaged? Larger hospitals with national or regional name recognition that issue bonds with sufficiently large transaction size and frequency will likely borrow at better terms and lower rates. Smaller- to medium-sized hospitals may find borrowing much more difficult, and borrowing may come with more problematic terms and/or amortization schedules and likely higher interest rates.
  4. Will borrowing costs go up? The cost of funds for new borrowings would increase for all hospital borrowers. For a typical A-rated hospital, annual interest expense would increase by approximately 30%. For example, in the current market, on $100 million of new debt, average annual interest expense would increase by $815,000 annually.
  5. Will debt capacity go down? All other things being equal, interest rates will go up and hospital debt capacity will go down. Also, if the taxable market shortens amortization schedules, then that will decrease overall debt capacity as well.
  6. What would the impact of the elimination of tax-exempt debt be on synthetic fixed rate structures? Hospitals have long employed derivative structures to hedge interest rate risk on outstanding variable rate bonds and loans. The loss of tax-exemption for outstanding variable rate bonds and loans would precipitate an adjustment to taxable rates, but corresponding swap cash flows are not designed to adjust. Interest rate risk is hedged, but tax reform risk is not. The net effect to borrowers would be an increase in cost similar to the cost contemplated above for variable rate bonds.
  7. What are the rating implications of the elimination of the tax-exempt market? Rating implications will be varied. Hospitals with strong financial performance and liquidity are likely to absorb the increased interest expense of a taxable borrowing with little to no rating impact. In fact, over the past decade, many larger health systems in the AA rating categories have successfully issued debt in the taxable market without rating implications despite a higher borrowing rate. Even amid the pandemic chaos of 2021, numerous AA and A rated systems issued sizable, taxable debt offerings to bolster liquidity as proceeds were for general corporate purposes and not restricted by a third-party, such as a bond trustee.

    Lower-rated hospitals with modest performance and below-average liquidity will be at greater risk for a downgrade. These hospitals may not be able to absorb the increased interest expense and maintain their ratings. While interest expense is typically a small percentage of a hospital’s total expenses, it is a use of cash flow.

    We do not anticipate the rating agencies will take wholesale downgrade action on the rated portfolio as there would likely be a phase-in period before the elimination occurs. Rather, we expect the rating agencies will take a measured approach with a case-by-case evaluation of each rated organization through the normal course of surveillance, as they did during the pandemic and liquidity crisis in 2008. A dialogue on capital budgets and funding sources, typically held at the end of a rating meeting, would be moved to the top of the agenda, as it will have a direct impact on long-term viability.
  8. How would the loss of the tax-exempt market impact the pace of consolidation in the hospital industry? If a hospital cannot afford the taxable market, then large capital projects would need to be funded through cash and operations. This inevitably will limit organizational liquidity, which will lead to downward rating pressure. Some hospitals, in such a situation, will be unable to both fund capital and adequately serve their local community and, therefore, will need to find a partner who can. We anticipate that the loss of the tax-exempt bond market will lead to further consolidation in the industry.

Let’s indulge in one last bit of speculation. What is the probability that Congress will pass legislation that eliminates tax-exempt financing? Sources in Washington tell us that it is premature to wager on any of the items put forth by the Budget Committee. And it should be noted that over the years the elimination of tax-exempt financing has been proposed on several occasions and never advanced in Congress. However, one well-informed source noted that as the tax and related legislation moves forward, there is likely to be significant horse-trading (especially in the House) to secure the necessary votes to pass the entire package. What happens during that horse-trading process is anybody’s guess. So the best advice to our hospital readership right now is to not take anything for granted. But be absolutely assured that the maintenance of tax-exempt financing is an essential strategic component for the successful future of America’s hospitals.

Pace of Downgrades Slowed in 2024: Five Key Takeaways

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https://www.kaufmanhall.com/insights/blog/pace-downgrades-slowed-2024-five-key-takeaways

Downgrades continued to outpace upgrades in 2024 although at a lower rate than in 2023. When combining the rating actions of the three rating agencies, the number of downgrades (95) declined while the number of upgrades (37) increased, compared to 116 and 33, respectively, in 2023. Many of the downgrades reflected ongoing expense pressure that exceeded revenue growth, even as volumes headed back to pre-pandemic levels and the use of contract labor declined. Other downgrades reflected outsized increases in debt to fund pivotal growth strategies. Most of the upgrades reflected mergers of lower-rated hospitals into higher-rated systems. Rating affirmations remained the majority rating action in 2024, as in prior years.

Key takeaways include:

  1. The ratio of downgrades to upgrades narrowed at Moody’s (2.0-to-1 in 2024 from 3.2-to-1 in 2023) and Fitch (1.5-to-1 from 3.5-to-1). S&P saw a wider spread in the ratio: 4.5-to-1 in 2024 from 3.8-to-1 in 2023.
  2. Downgrades reflected a wide swath of hospitals, from small independent providers to large regional systems. Large academic medical centers and children’s hospitals saw downgrades, even with exclusive tertiary services that provided differentiation with payers. Shared, recurring downgrade factors included weaker financial performance, payer mix shifts to more governmental and less commercial, and thinner reserves. Many of the downgrades were concentrated along the two coasts: California and the Pacific Northwest and New York and Pennsylvania. Many of the ratings were already in low or below investment grade categories.
  3. Multi-notch downgrades continued in 2024, ranging from two to four notch movements in one rating action. One of the hospitals that experienced a four-notch downgrade subsequently defaulted on an interest payment (Jackson Hospital & Clinics, AL). Multi-notch upgrades reflected mergers into higher-rated systems, the largest being a seven-notch upgrade of a small, single-site hospital into a 19-hospital system in the Midwest.
  4. Five hospitals experienced multiple rating actions in 2024, with rating committees convening not once but two and three times during the year. These were distressed credits whose financial performance and reserve levels dropped materially from quarter to quarter, a characteristic of high-yield or speculative rated borrowers.
  5. While some of the upgrades followed mergers, other upgrades reflected improved financial performance and stable or growing liquidity. Likewise, some of the upgraded hospitals began receiving new supplemental funds known as Direct Payment Programs (DPPs). Unlike other supplemental funds, DPPs are subject to annual federal and state approval, making their long-term reliability uncertain. Numerous types of providers saw upgrades—including academic medical centers, independent hospitals and regional health systems—and were located across the U.S. Most of the upgraded hospitals (excluding those involved in mergers) were already investment grade.

As in past years, rating affirmations represented the overwhelming majority of rating actions in 2024. This is welcome news for the industry as many hospitals and health systems will turn to the bond market to borrow for their capital projects. Investors’ view of the industry should be bolstered by the change in industry outlooks. S&P moved to Stable from Negative and Fitch moved to Neutral from Deteriorating in December 2024, joining Moody’s revision to Stable from Negative in 2023.

We expect rating affirmations will again be the majority rating action in 2025. However, even with the stability viewed by the agencies, we expect downgrades to outpace upgrades given a growing reliance on government payers, labor challenges and a competitive environment. Policy and funding changes will also cast uncertainty into the mix in 2025 and may cause credit deterioration in future years.

CVSHealth Eyes Breakup: A Reckoning for Corporate Health Care’s Vertical Empire

Posted on by • Posted in Antitrust, Complex, CVS Health, Federal Trade Commission, Federal Trade Commission (FTC), Health Insurance Industry, Healthcare Economics, Market Consolidation, Market Power, Market Trends, Retail Clinic, Retail Healthcare, Retail Pharmacy, Unwind, Vertical Consolidation, Vertical Integration, Vertical Merger, Vertical Mergers, Wall Street • Leave a comment
https://healthcareuncovered.substack.com/p/cvshealth-eyes-breakup-a-reckoning?utm_source=post-email-title&publication_id=255152&post_id=150102654&utm_campaign=email-post-title&isFreemail=true&r=59t65&triedRedirect=true&utm_medium=email

In a surprising turn of events, sources say that CVS Health is exploring the possibility of breaking up its business empire — a move that could unravel years of aggressive vertical integration, including its $70 billion acquisition of health insurer Aetna back in 2017.

While details are still slim, such a move signals just how dire the situation has become for CVSHealth as it navigates mounting financial and regulatory pressures on multiple fronts.

It’s yet another chapter in a story that has seen CVSHealth evolve from a retail pharmacy chain into a health care behemoth — but perhaps one that grew too big, too fast. And to be honest, I’m not surprised. I’ve seen this movie before. In fact, I saw it many times – although each time with different stars – during my 20 years in the health insurance business. One of the most memorable featured Aetna, which in the late 1990s and early 2000s had to retrench, at Wall Street’s insistence, after a buying spree of smaller health insurers that brought the company a ton of unprofitable accounts and disappointing bottom lines. Aetna followed its buying spree with a purging spree, dumping as many as eight million health plan enrollees in short order to get back into Wall Street’s good graces.

It seems that CVSHealth also bought too much too fast. The results? Rising expenses, frustrated patients, and now potential cracks in the corporate structure itself.

CVS: A Cautionary Tale of Vertical Integration

Large corporations like CVS and its peers have used their size to dominate various aspects of health care—whether it’s insurance, retail pharmacy, physician practices and clinics, and controlling the drug supply chain. But as these mega-corporations continue to grow, they also become harder to manage, and their inefficiencies start to become evident. 

CVS’s acquisition of Aetna was hailed at the time as a strategic masterstroke — a way to streamline health care by bringing together the different parts of the system under one corporate umbrella. It was supposed to deliver “efficiencies” that would benefit both the company and patients. 

But it’s not just the purchase of Aetna. From pharmacy benefit manager Caremark to Aetna to health care providers Signify Health and Oak Street Health — CVS’s business model has become increasingly complex, making it difficult to navigate regulatory scrutiny, rising costs and fierce competition in the retail pharmacy space.

The latest reports suggest that CVS’s board is trying to figure out where Caremark would land in the event of a breakup. Would it stay with the retail side or with the insurance arm?

This isn’t just an internal debate; it’s emblematic of the broader issue—CVS has built a vertically integrated structure that was supposed to work together to improve care, but investors are now questioning how and even if these pieces should fit together. 

It’s Been a Hard Few Years for CVS

Federal Trade Commission’s Legal Action Against CVS’s Caremark and Other PBMs

Instead, those supposed efficiencies have largely translated into higher costs for consumers and increased scrutiny from regulators, especially with CVS’s Caremark at the center of anti-competitive practices allegations by the Federal Trade Commission (FTC). PBMs like Caremark control the drug pricing landscape in ways that lack transparency and disproportionately affect patients and independent pharmacies.

Now, as CVS grapples with rising medical costs within its Aetna business — just like its biggest competitors, UnitedHealth and Humana —the company’s management appears to be in damage control mode. While nothing is certain, discussions about splitting the business have reached the boardroom level, according to sources familiar with the matter. This comes as activist investors, like Glenview Capital, push for structural changes to improve CVS’s declining financial performance.

CVS’s Aetna Medicare Advantage Loss in New York City

New York City Mayor Eric Adams had a plan to force city municipal retirees out of traditional Medicare and into a corporate Aetna Medicare Advantage plan. The NYC Organization of Public Service Retirees vehemently opposed the move and spent months fighting it.

In August, a Manhattan Supreme Court judge permanently halted the mayor and Aetna’s attempts.

Wall Street Woes

For CVS Health, 2024 started off bad. CVS 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. 

An astonishing 65.7 million shares of CVS stock were traded that day. The company’s sin: paying too many claims for seniors and people with disabilities enrolled in its Medicare Advantage plans. 

Also in August, CVS Health cut its 2024 forecast for a third time, citing troubles covering seniors via the company’s private Medicare Advantage business. Operating income for CVS Health’s insurance arm, Aetna, dropped a whopping 39% in Q3, which forced the company to shake up its leadership – moving CEO Karen Lynch into the role of managing insurance and publicly firing one of her lieutenants, Executive Vice President Brian Kane.

What’s Next?

The notion that CVS could split its operations would effectively unwind one of the most high-profile health care mergers in recent memory. A split up of the company would mark the end of an era in which health care conglomerates could grow unchecked. CVS’s struggle isn’t happening in isolation—other companies, like Walgreens and Rite Aid, are facing similar financial difficulties and structural questions.

CVS’s potential breakup could signal a broader industry trend toward unwinding massive, vertically integrated health care corporations. 

Whether CVS breaks up or not, it’s clear that the model of health care mega-mergers, designed to consolidate power and increase corporate profits, is facing serious headwinds. Cigna recently announced that it is getting out of the Medicare Advantage business and Humana is getting out of the commercial insurance market. UnitedHealth, meanwhile, so far seems to be weathering those headwinds, but it, too, will be facing even more scrutiny by lawmakers and regulators in the months and years ahead.

What is the Medicare Advantage?

Posted on by • Posted in Market Trends, Medicare Advantage, Medicare Advantage Denials, Medicare Denials, MedPAC • Leave a comment
What is the Medicare Advantage?

On October 15, the open enrollment period for Medicare begins running through December 7 for coverage starting in January 2025. In this period, 67 million Medicare eligible seniors can review features of Medicare plans offered in their area, switch from traditional Medicare to a Medicare Advantage (MA) plan (or vice versa), change their MA selection and add/change their Medicare Part D prescription drug plans.

In 2024, Medicare Advantage plans enrolled 33 million seniors and Medicare paid private insurers $462 billion to pay for their care.

But conditions for Medicare Advantage have changed in recent years prompting many to ask ‘what is the Medicare Advantage?’

Background:

Medicare began July 30, 1965 as a key element in President Lyndon Baines Johnson’s Great Society program offering federal-government-paid insurance coverage for seniors at the age of 65.  “Original Medicare” had two parts: Part A to cover hospitals and Part B to cover physicians and outpatient services. In 1972, coverage for adults with disabilities was added, and in 2003, coverage for prescription drugs (Part D) was added.

Its funding comes from payroll taxes paid by employers and their employees, and those who are self-employed PLUS income taxes paid on Social Security benefits, interest earned on the Medicare trust fund’s investments and Part A premiums from people who aren’t eligible for premium-free Part A.

Along the way, Congress authorized seniors the option of accessing Medicare through private insurers aka Part C (Balanced Budget Act of 1997), expanded its scope (Medicare Modernization Act of 2003) and supplemented its funding differential above Original Medicare (Patient Protection and Affordable Care Act 2010) to stimulate enrollment growth. The rationale for MA was straightforward: it offered federal regulators a lab to test care management for seniors with the dual aims of lowering their health costs and improving their health. Private insurers responded. By design, funding for MA was set above Original Medicare rates to encourage private insurer participation.

It worked.  This year, the average MA enrollee had 43 plans from which to choose. By three measures, Medicare Part C has been successful:

  • Enrollment growth: Enrollment in MA plans has increased from 31% of Medicare eligible adults in 2014 to 51% in 2024 and is projected to increase in 2025. Notably, enrollment in special needs and employer-sponsored MA plans has increased faster than the individual MA market which is subject to open enrollment periods. Satisfaction appears high (69% of members do not shop for another plan during open enrollment periods) and member churn is low.
  • Medicare has saved money: Per the 2024 Medicare Trustees’ Report, MA has contributed to slower growth in Medicare spending than forecast. “The Social Security and Medicare programs both continue to face significant financing issues…The Hospital Insurance (HI) Trust Fund will be able to pay 100% of total scheduled benefits until 2036, 5 years later than reported last year. At that point, that fund’s reserves will become depleted and continuing program income will be sufficient to pay 89% of total scheduled benefits.”
  • Private insurer participation has been strong: For health insurers, Medicare Advantage is profitable: PMPM contribution margins are 50-100% higher than individual and group lines of business. And, as CMS payments to MA have tightened, the MA insurer market consolidated with 3 (UnitedHealth, Humana, CVS-Aetna) taking advantage of operating pressures on small players to increase their share to 58% of total enrollment. Advantage: Seniors, Medicare and Corporate Insurance.

But conditions going forward suggest the MA advantage might not be as strong. The market signals are clear:

  • Insurer belt tightening: Since 2023, seniors’ use of hospitals, specialty care and prescription drugs has returned to pre-pandemic normalcy cutting into insurer margins. In its CY 2025 Rate Announcement September 27, CMS announced “The average monthly plan premium for all MA plans, which includes MA plans that provide prescription drug coverage and MA Special Needs Plans (SNPs), is projected to decrease from $18.23 in 2024 to $17.00 in 2025. Benefit options will remain stable, including MA supplemental benefit offerings such as hearing, dental, and vision. The amount of rebate dollars, which can be used for supplemental benefits, will remain stable, with a slight increase, from 2024 to 2025. Enrollment in MA is projected to be 35.7 million in 2025, an increase from 2024, with MA enrollment representing approximately 51% of all people enrolled in Medicare.” This translates to lower margins for MA plans, fewer supplemental benefits for enrollees and lower payments to hospitals and physicians.
  • Increased regulatory scrutiny: The Medicare Payment Advisory Commission (MedPAC) concluded that MA plans receive payments from CMS that are 122%of spending for similar beneficiaries in traditional Medicare, on average, translating to an estimated $83 billion in overpayments in 2024. Congress is investigating. In 2023, CMS adopted tougher audit standards specific to diagnosis codes used by private MA plans to bill Medicare on behalf of their enrollees. Audits conducted by the U.S. Department of Human Services’ Office of Inspector General (OIG) applying the new standards found the majority of private MA plans guilty of upcoding and thereby overpaid by Medicare. In 2025, cut points used by CMS to award star ratings have been modified resulting in fewer plans getting 4-star ratings that enable their participation in 5% bonus payments—a major reason recent stock declines for UHG, HUM, CVS and others. Regulatory scrutiny of MA plan marketing practices, coding, denials and prior authorization procedures will intensify reflecting bipartisan intent to constrain MA profits.

Understandably, tension between MA insurers and providers has intensified as insurers seek to protect their margins.  The Change Healthcare (CH) cyber-attack (February 21, 2024) that disabled insurer payments to hospitals and physicians stoked animosity since CH is a subsidiary of UnitedHealth Group–the largest sponsor of MA plans and the healthcare juggernaut. Though operating margins for half of U.S. hospitals have recovered, insurer cuts coupled with labor and prescription drug costs have decimated care delivery in almost every community. Participation in MA plan provider networks, once SOP is now a tough call for hospitals, medical groups and other providers.

My take:

What is the Medicare Advantage?

  • As a lab for innovation in care management for seniors, it’s promising.
  • As an engine to drive lower costs for senior health and extended solvency to the Medicare program, it’s unclear.
  • As a platform to shift incentives from fee-for-service to value across the system, it’s helpful.

But until and unless hospitals, physicians, insurers, business leaders and regulators commit to implement a transformed system of health that’s comprehensive, affordable, efficient and accountable, the Medicare Advantage will be marginalized.

In many ways, the headwinds facing MA are part of the larger narrative facing healthcare:

public sentiment against consolidation and corporatization has eroded its cherished trust and confidence. It’s true for insurance, hospitals, prescription drug companies and PBMs. The blame is shared: no one of these owns the moral high ground (though a few organizations in their ranks aspire).

U.S. Healthcare in 2025 and Beyond: Three Major Predictions

Posted on by • Posted in Consumer Price Index (CPI), Cost Management, Cost Reduction, Future, Future State, Inflation, Market Outlook, Market Trends, Private Equity, Value Based Care Model, Value Creation, Value Journey, Value Proposition • Leave a comment
U.S. Healthcare in 2025 and Beyond: Three Major Predictions

With days before voters decide the composition of the 119th U.S. Congress and the next White House occupant, the immediate future for U.S. healthcare is both predictable and problematic:

It’s predictable that…

1-States will be the epicenter for healthcare legislation and regulation; federal initiatives will be substantially fewer.

At a federal level, new initiatives will be limited: continued attention to hospital and insurer consolidation, drug prices and the role of PBMs, Medicare Advantage business practices and a short-term fix to physician payments are likely but little more. The Affordable Care Act will be modified slightly to address marketplace coverage and subsidies and CMSs Center for Medicare and Medicaid Innovation (CMMI) will test new alternative payment models even as doubt about their value mounts. But “BIG FEDERAL LAWS” impacting the U.S. health system are unlikely.

But in states, activity will explode:  for example…

  • In this cycle, 10 states will decide their abortion policies joining 17 others that have already enacted new policies.
  • 3 will vote on marijuana legalization joining 24 states that have passed laws.
  • 24 states have already passed Prescription Drug Pricing legislation and 4 are considering commissions to set limits.
  • 40 have expanded their Medicaid programs
  • 35 states and Washington, D.C., operate CON programs; in 12 states, CONs have been repealed.
  • 14 have legislation governing mental health access.
  • 5 have passed or are developing commissions to control health costs.
  • And so on.

Given partisan dysfunction in Congress and the surprising lack of attention to healthcare in Campaign 2024 (other than abortion coverage), the center of attention in 2025-2026 will be states. In addition to the list above, attention in states will address protections for artificial intelligence utilization, access to and pricing for weight loss medications, tax exemptions for not-for-profit health systems, telehealth access, conditions for private equity ownership in health services, constraints on contract pharmacies, implementation of site neutral payments, new 340B accountability requirements and much more. In many of these efforts, state legislatures and/or Governors will go beyond federal guidance setting the stage for court challenges, and the flavor of these efforts will align with a state’s partisan majorities: as of September 30th, 2024, Republicans controlled 54.85% of all state legislative seats nationally, while Democrats held 44.19%. Republicans held a majority in 56 chambers, and Democrats held the majority in 41 chambers. In 2024, 27 states are led by GOP governors and 23 by Dems and 11 face voters November 5.  And going into the election, 22 states are considered red, 21 are considered blue and 7 are tagged as purple.

The U.S. Constitution affirms Federalism as the structure for U.S. governance: it pledges the pursuit of “life, liberty and the pursuit of happiness” as its purpose but leaves the lion’s share of responsibilities to states to figure out how. Healthcare may be federalism’s greatest test.

2-Large employers will take direct action to control their health costs.

Per the Kaiser Family Foundation’s most recent employer survey, employer health costs are expected to increase 7% this year for the second year in a row. Willis Towers Watson, predicts a 6.4% increase this year on the heels of a 6% bump last year. The Business Group on Health, which represents large self-insured employers, forecasts an 8% increase in 2025 following a 7% increase last year. All well-above inflation, ages and consumer prices this year.

Employers know they pay 254% of Medicare rates (RAND) and they’re frustrated. They believe their concerns about costs, affordability and spending are not taken seriously by hospitals, physicians, insurers and drug companies. They see lackluster results from federal price transparency mandates and believe the CMS’ value agenda anchored by accountable care organizations are not achieving needed results. Small-and-midsize employers are dropping benefits altogether if they think they can. For large employers, it’s a different story. Keeping health benefits is necessary to attract and keep talent, but costs are increasingly prohibitive against macro-pressures of workforce availability, cybersecurity threats, heightened supply-chain and logistics regulatory scrutiny and shareholder activism.

Maintaining employee health benefits while absorbing hyper-inflationary drug prices, insurance premiums and hospital services is their challenge. The old playbook—cost sharing with employees, narrow networks of providers, onsite/near site primary care clinics et al—is not working to keep up with the industry’s propensity to drive higher prices through consolidation.

In 2025, they will carefully test a new playbook while mindful of inherent risks. They will use reference pricing, narrow specialty specific networks, technology-enabled self-care and employee gainsharing to address health costs head on while adjusting employee wages. Federal and state advocacy about Medicare and Medicaid funding, insurer and hospital consolidation and drug pricing will intensify. And some big names in corporate America will step into a national debate about healthcare affordability and accountability.

Employers are fed up with the status quo. They don’t buy the blame game between hospitals, insurers and drug companies. And they don’t think their voice has been heard.

3-Private equity and strategic investors will capitalize on healthcare market conditions. 

The plans set forth by the two major party candidates feature populist themes including protections for women’s health and abortion services, maintenance/expansion of the Affordable Care Act and prescription drug price controls. But the substance of their plans focus on consumer prices and inflation: each promises new spending likely to add to the national deficit:

  • Per the Non-Partisan Committee for a Responsible Federal Budget, over the next 10 years, the Trump plan would add $7.5 trillion to the deficit; the Harris plan would add $3.5 trillion.
  • Per the Wharton School at the University of Pennsylvania, Harris’ proposals would add $1.2 trillion to the national deficits over 10 years and Trump’s proposals would add $5.8 trillion over the same period

Per the Congressional Budget Office, federal budget deficit for FY2024 which ended September 30 will be $1.8 trillion– $139 billion more than FT 2023. Revenues increased by an estimated $479 billion (or 11 percent). Revenues in all major categories, but notably individual income taxes, were greater than they were in fiscal year 2023. Outlays rose by an estimated $617 billion (or 10 percent). The largest increase in outlays was for education ($308 billion). Net outlays for interest on the public debt rose by $240 billion to total $950 billion.

The federal government spent $6.75 trillion in 2024, a 10% increase from the prior year. Spending on Social Security (22% of total spending) and healthcare programs (28.5% of total spending) also increased substantially. The U.S. debt as of Friday was $37.77 trillion, or $106 thousand per citizen.

The non-partisan Congressional Budget Office (CBO) reports that federal debt held by the public averaged 48.3 % of GDP for the half century ending in 2023– far above its historic average. It projects next year’s national debt will hit 100% for the first time since the US military build-up in the second world war. And it forecast the debt reaching 122.4% in 2034 potentially pushing interest payments from 13% of total spending this year to 20% or more.

Adding debt is increasingly cumbersome for national lawmakers despite campaign promises, and healthcare is rivaled by education, climate and national defense in seeking funding through taxes and appropriations. Thus, opportunities for private investors in healthcare will increase dramatically in 2025 and 2026. After all, it’s a growth industry ripe for fresh solutions that improve affordability and cost reduction at scale.

Combined, these three predictions foretell a U.S. healthcare system that faces a significant pressure to demonstrate value.

They require every healthcare organization to assess long-term strategies in the likely context of reduced funding, increased regulation and heightened attention to prices and affordability. This is problematic for insiders accustomed to incrementalism that’s protected them from unwelcome changes for 3 decades.  

Announcements last week by Walgreens and CVS about changes to their strategies going forward reflect the industry’s new normal: change is constant, success is not. In 2025, regardless of the election outcome, healthcare will be a major focus for lawmakers, regulators, employers and consumers.  

Optum’s behavioral health business: 5 things to know

Posted on by • Posted in Access & Quality of Healthcare, Behavioral Health, Market Consolidation, Market Share, Market Trends, Mental Health, Mergers & Acquisitions, Optum, Optum Health, Optum Insight, Optum Rx, OptumRx • Leave a comment
https://www.beckersbehavioralhealth.com/behavioral-health-news/optums-behavioral-health-business-5-things-to-know.html?origin=PayerE&utm_source=PayerE&utm_medium=email&utm_content=newsletter&oly_enc_id=2893H2397267F7G

UnitedHealth Group’s Optum, the largest employer of physicians in the U.S., is expanding its reach in behavioral health. 

The company added 45,000  therapists, psychiatrists and behavioral health providers to its network in 2023, and it has more than 430,000 behavioral health clinicians in its network overall. 

Here are five things to know about Optum’s behavioral health offerings: 

  1. The company is acquiring behavioral health clinics. Optum recently picked up Care Counseling, which employs more than 200 clinicians at 10 clinics in the Minneapolis area. In 2022, Optum acquired Refresh Mental Health, which operates more than 300 outpatient sites in 37 states.
  2. Optum’s acquisitions of behavioral health providers have helped cut wait times for patients, Optum CEO Heather Cianfrocco said in May.

    “On average it takes over 50 to 60 days to get an appointment for high-quality behavioral care,” she said. “We started acquiring our own behavioral providers to be able to reduce that access issue.” 
  3. The company is also targeting in-home behavioral care. In December 2023, Amar Desai, MD, CEO of Optum Health, said the company had integrated behavioral care into its home health offerings.

    “As a practicing physician, I am particularly excited that we are becoming the practice and partner of choice in the marketplace,” Dr. Desai said of the business.
  4. Optum also administers behavioral health benefits systems for states, though it recently lost contracts to manage programs in Maryland and Idaho.
  5. OptumRx, a pharmaceutical benefit manager, provides medication management for behavioral health, substance use disorder and other complex drugs for more than 1 million people each year.

Hospital M&A turns to strategy over scale

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Health systems put an emphasis on strategy over scale in hospital transactions announced in the second quarter of 2024, according to a July 9 report from Kaufman Hall.

“As pressure intensifies to transform the current healthcare system to bring greater value to patients and communities, the impetus for M&A activity will rely less on seeking capital in traditional ways and instead move toward new, strategic partnership models,” Anu Singh, managing director and mergers & acquisitions practice leader with Kaufman Hall, said in a July 9 news release. “Many of these M&A transactions enable hospitals to sustain and enhance access to care, launch new services, or strengthen and stabilize systems, which allows for future growth.”

Five things to know:

1. There were 11 hospital transactions announced in the second quarter of 2024, below historic Q2 averages. There were 20 hospital transactions announced in the second quarter of 2023.

2. Despite fewer overall deals, total transacted revenue in the quarter remained near historic highs at $10.8 billion.

3. Three of the 11 announced transactions involved religiously affiliated acquirers. Two involved academic or university-affiliated acquirers. The other six involved not-for-profit health system acquirers.

4. For the first time since Kaufman Hall tracked this data, there were no for-profit health system acquirers in the quarter. Kaufman Hall said in the report that this continues a trend of low for-profit buy-side activity. In the first quarter of 2024, just one of the 20 announced transactions involved a for-profit acquirer.

5. The emphasis on strategy over scale “characterized the most significant transactions of Q2 2024 and built upon trends we have been commenting on in recent past reports,” Kaufman Hall said.

Those trends are:

  • Pursuit of intellectual capital and new or complementary capabilities through a strategic partnership, often involving an innovative partnership model.
  • Focus of large regional or national systems on market reorganization and strategic realignment of their system portfolios.
  • The development of networks involving academic health systems and community hospital partners to sustain and enhance access to care.

Read the full report here.

The Healthcare Economy: Three Key Takeaways that Frame Public and Private Sector Response

Posted on by • Posted in American Hospital Association (AHA), Congressional Budget Office (CBO), Consumer Price Index (CPI), Cost Management, Cost Reduction, Forecast, Health Policy, Health System, Healthcare Industry, Healthcare Market, Healthcare Price Index, Healthcare Reform, High Cost Therapies, High Deductible Health Plans, High Drug Prices, High Premiums, Highly Specialized Drugs, Hospital, Hospital Industry, Market Outlook, Market Trends, Out of Network, Out of Pocket Expenses, Prescription Drugs, Value-Based Contracting, Value-Based Healthcare • Leave a comment
The Healthcare Economy: Three Key Takeaways that Frame Public and Private Sector Response

Last week, 2 important economic reports were released that provide a retrospective and prospective assessment of the U.S. health economy:

The CBO National Health Expenditure Forecast to 2032: 

“Health care spending growth is expected to outpace that of the gross domestic product (GDP) during the coming decade, resulting in a health share of GDP that reaches 19.7% by 2032 (up from 17.3% in 2022). National health expenditures are projected to have grown 7.5% in 2023, when the COVID-19 public health emergency ended. This reflects broad increases in the use of health care, which is associated with an estimated 93.1% of the population being insured that year… During 2027–32, personal health care price inflation and growth in the use of health care services and goods contribute to projected health spending that grows at a faster rate than the rest of the economy.”

The Congressional Budget Office forecast that from 2024 to 2032:

  • National Health Expenditures will increase 52.6%: $5.048 trillion (17.6% of GDP) to $7,705 trillion (19.7% of GDP) based on average annual growth of: +5.2% in 2024 increasing to +5.6% in 2032
  • NHE/Capita will increase 45.6%: from $15,054 in 2024 to $21,927 in 2032
  • Physician services spending will increase 51.2%: from $1006.5 trillion (19.9% of NHE) to $1522.1 trillion (19.7% of total NHE)
  • Hospital spending will increase 51.6%: from $1559.6 trillion (30.9% of total NHE) in 2024 to $2366.3 trillion (30.7% of total NHE) in 2032.
  • Prescription drug spending will increase 57.1%: from 463.6 billion (9.2% of total NHE) to 728.5 billion (9.4% of total NHE)
  • The net cost of insurance will increase 62.9%: from 328.2 billion (6.5% of total NHE) to 534.7 billion (6.9% of total NHE).
  • The U.S. Population will increase 4.9%: from 334.9 million in 2024 to 351.4 million in 2032.

The Bureau of Labor Statistics CPI Report for May 2024 and Last 12 Months (May 2023-May2024): 

“The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in May on a seasonally adjusted basis, after rising 0.3% in April… Over the last 12 months, the all-items index increased 3.3% before seasonal adjustment. More than offsetting a decline in gasoline, the index for shelter rose in May, up 0.4% for the fourth consecutive month. The index for food increased 0.1% in May. … The index for all items less food and energy rose 0.2% in May, after rising 0.3 % the preceding month… The all-items index rose 3.3% for the 12 months ending May, a smaller increase than the 3.4% increase for the 12 months ending April. The all items less food and energy index rose 3.4 % over the last 12 months. The energy index increased 3.7%for the 12 months ending May. The food index increased 2.1%over the last year.

Medical care services, which represents 6.5% of the overall CPI, increased 3.1%–lower than the overall CPI. Key elements included in this category reflect wide variance: hospital and OTC prices exceeded the overall CPI while insurance, prescription drugs and physician services were lower.

  • Physicians’ services CPI (1.8% of total impact): LTM: +1.4%
  • Hospital services CPI (1.0% of total impact): LTM: +7.3%
  • Prescription drugs (.9% of total impact) LTM +2.4%
  • Over the Counter Products (.4% of total impact) LTM 5.9%
  • Health insurance (.6% of total) LTM -7.7%

Other categories of greater impact on the overall CPI than medical services are Shelter (36.1%), Commodities (18.6%), Food (13.4%), Energy (7.0%) and Transportation (6.5%).

Three key takeaways from these reports:

  • The health economy is big and getting bigger. But it’s less obvious to consumers in the prices they experience than to employers, state and federal government who fund the majority of its spending. Notably, OTC products are an exception: they’re a direct OOP expense for most consumers. To consumers, especially renters and young adults hoping to purchase homes, the escalating costs of housing have considerably more impact than health prices today but directly impact on their ability to afford coverage and services. Per Redfin, mortgage rates will hover at 6-7% through next year and rents will increase 10% or more.
  • Proportionate to National Health Expenditure growth, spending for hospitals and physician services will remain at current levels while spending for prescription drugs and health insurance will increase. That’s certain to increase attention to price controls and heighten tension between insurers and providers.
  • There’s scant evidence the value agenda aka value-based purchases, alternative payment models et al has lowered spending nor considered significant in forecasts.

The health economy is expanding above the overall rates of population growth, overall inflation and the U.S. economy. GDP.  Its long-term sustainability is in question unless monetary policies enable other industries to grow proportionately and/or taxpayers agree to pay more for its services. These data confirm its unit costs and prices are problematic.

As Campaign 2024 heats up with the economy as its key issue, promises to contain health spending, impose price controls, limit consolidation and increase competition will be prominent.

Public sector actions

will likely feature state initiatives to lower cost and spend taxpayer money more effectively.

Private sector actions

will center on employer and insurer initiatives to increase out of pocket payments for enrollees and reduce their choices of providers.

Thus, these reports paint a cautionary picture for the health economy going forward. Each sector will feel cost-containment pressure and each will claim it is responding appropriately. Some actually will.

PS: The issue of tax exemptions for not-for-profit hospitals reared itself again last week.

The Committee for a Responsible Federal Budget—a conservative leaning think tank—issued a report arguing the exemption needs to be ended or cut.  In response,

the American Hospital Association issued a testy reply claiming the report’s math misleading and motivation ill-conceived.

This issue is not going away: it requires objective analysis, fresh thinking and new voices.  For a recap, see the Hospital Section below.

Dow Jones Industrial Average hits 40,000 for the 1st time

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The Dow Jones Industrial Average crossed 40,000 for the first time in history on Thursday.

This is a significant and symbolic milestone for the index that tracks 30 of the most valuable publicly traded companies in the U.S.

The Dow is now up about 6% so far this year.

The recent rally in the Dow, S&P 500 and Nasdaq has been fueled by data showing inflation is cooling, which would allow the Federal Reserve to begin its long-awaited interest rate cuts.

Inflation data released on Wednesday showed that price increases slowed slightly from the annual rate recorded in the previous month, ending a surge of inflation that stretches back to the beginning of 2024.

In recent months, the Fed had all but abandoned its previous forecast of three quarter-point rate cuts this year. But the slowdown of price hikes offered hope of rekindling those plans.

“The combination of the Fed likely to be lowering interest rates because inflation is moderating with a resilient economy is a beautiful scenario for a bull market,” Ed Yardeni, the president of market advisory firm Yardeni Research and former chief investment strategist at Deutsche Bank’s U.S. equities division, told ABC News.

“It’s more enjoyable to say the market is going to these nice, round numbers in record-high territory than coming back down to them,” Yardeni added.

The inflation news on Wednesday sent each of the major stock indexes up more than 5% for the day, propelling all of them to record highs. In early trading on Thursday, the Dow had ticked up a quarter of a percentage point.

Observers have also attributed this year’s stock market rally to the rise in value of some major tech firms, driven largely by enthusiasm about artificial intelligence.

Inflation cools, reassuring Fed after unexpectedly hot gains in Q1

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The yield on the benchmark 10-year Treasury note fell on investor speculation that slower inflation will prompt the Fed to sooner cut borrowing costs.

Dive Brief:

  • The consumer price index excluding volatile food and energy prices rose last month at the slowest pace this year, giving Federal Reserve policymakers some relief from a barrage of first-quarter data that shook confidence inflation will steadily slow to their 2% goal.
  • So-called core CPI gained 0.3% in April compared with 0.4% during the prior month, and eased to 3.6% on an annual basis from 3.8% in March, the Bureau of Labor Statistics said Wednesday. Shelter costs rose 0.4% last month, pushing up core CPI more than any other category. Prices for transportation, apparel and medical care also increased.
  • “Inflation should show some signs of more material disinflation over the coming months as upside surprises in Q1 reverse and shelter inflation continues to soften, particularly” during the second half of this year, David Page, head of macroeconomic research at AXA IM, said in a report.

Dive Insight:

Fed Chair Jerome Powell has repeatedly said this month that unexpectedly high first-quarter inflation eroded his confidence that price pressures are falling steadily enough to warrant a reduction in the highest federal funds rate in 23 years.

“I would say my confidence in that is not as high as it was, having seen these readings in the first three months of the year,” Powell said Tuesday.

Investor speculation that cooling inflation will prompt the Fed to sooner trim borrowing costs pushed down the yield on the benchmark Treasury note on Wednesday by about 0.1 percentage point to 3.86%. Equity prices rose.

“Today’s data may be a relief relative to past months, and that should reduce any fears that the Fed might have to raise rates,” Eric Winograd, developed market research director at AllianceBernstein, said in an email.

Still, “today’s data are not good enough to move the policy needle,” Winograd said, forecasting that the central bank will not cut the main interest rate until the fourth quarter.

“Unless the labor market weakens appreciably, it will take several months of inflation steadily decelerating before the Fed will be comfortable cutting rates,” he said.

Traders in interest rate futures put 69% odds that the Fed will trim the main interest rate by at least 0.5 percentage point by the end of this year, compared with 57% odds on Tuesday, according to the CME FedWatch Tool.

“The Fed is making progress, but taming inflation is taking time,” Scott Helfstein, head of investment strategy at Global X, said in an email response to questions.

“The Fed will probably be patient,” Helfstein said, forecasting either no change to the federal funds rate this year or at most a quarter-point cut in December. “A stable rate and inflation environment, most importantly, is good for companies.”

Powell predicted that inflation will eventually slow to a more moderate pace. “I expect that inflation will move back down on a monthly level, on a monthly basis, to levels that were more like the lower readings we were having last year,” Powell said Tuesday.

A separate report Wednesday showed consumers may be pocketing their wallets in response to higher borrowing costs and the waning of savings built during the pandemic.

Retail sales in April were unchanged from March, the Census Bureau said, releasing data that was lower than expected by economists. Growth in retail sales in March was marked down to 0.6% from 0.7%.

Still, “the consumer is okay,” Helfstein said, predicting that “economic growth will likely be driven by corporate investment through the back part of the year.”