Hospitals with larger market shares were among the worst offenders, the Rand Corporation found.
Dive Brief:
Employers and private insurers continue to pay hospitals more for inpatient and outpatient services than Medicare would have reimbursed, according to a newstudy from policy think tankthe Rand Corporation.
In 2022, private insurers and employers paid on average 254% of what Medicare would have paid for the same care services — up from 224% two years prior.
Health systems often argue they hike up commercial rates to offset losses from government underpayments, according to the study. However, a hospital’s market share, rather than population of Medicare or Medicaid patients, more accurately predicted pricing, with larger health systems charging higher prices.
Dive Insight:
Since 2021, health systems and insurers have been required to post pricing information for their 300 most common procedures as the government pushes to make healthcare prices more transparent.
However, researchers have accused hospitals and insurers of failing to fully comply with the regulations.
The Rand study found inpatient prices for hospital services were 255% above what Medicare paid in 2022 while outpatient hospital service prices averaged 289%, according to the report, which was based on an analysis of 4,000 hospitals across 49 states.
Prices for services at outpatient ambulatory surgical centers was slightly lower at 170% of Medicare payments.
There were also differences in pricing by geography. Arkansas, Iowa, Massachusetts, Michigan and Mississippi kept relative prices below 200% of Medicare prices during the study period. However, others had relative prices above 300% of Medicare. Hospitals in Florida and Georgia negotiated the highest relative rates.
Price transparency could be a tool for administrators of employer-sponsored plans to better negotiate employee benefits. Although employer-sponsored plans cover 160 million Americans, researchers said employers operate at a disadvantage when negotiating prices with providers and insurers due to a lack of detailed pricing information.
“The widely varying prices among hospitals suggests that employers have opportunities to redesign their health plans to better align hospital prices with the value of care provided,” said Brian Briscombe, lead researcher for the Rand hospital price transparency project, in a statement. “However, price transparency alone will not lead to changes if employers do not or cannot act upon price information.”
State and federal policymakers could rebalance negotiations by cracking down on noncompetitive healthcare markets, placing limits on payments for out-of-network hospital care or allowing employers to buy into Medicare or other public options, the report said.
The nation’s largest hospital lobby, the American Hospital Association, has rejected previous analyses of pricing data — including reports from Patient Rights Advocate.
On Monday, Molly Smith, AHA’s vice president for policy, pushed back against the Rand study, saying it was “suspiciously silent on the hidden influence of commercial insurers in driving up health care costs for patients, as evidenced by issues like the recent concerning allegations against MultiPlan.”
Last week, Community Health Systems filed suit against MultiPlan alleging it had colluded with insurers to raise prices for patients and lower payments to providers. The lawsuit is the third against MultiPlan in under a year.
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
Tuesday, the, FTC, and DOJ announced creation of a task force focused on tackling “unfair and illegal pricing” in healthcare. The same day, HHS joined FTC and DOJ regulators in launching an investigation with the DOJ and FTC probing private equity’ investments in healthcare expressing concern these deals may generate profits for corporate investors at the expense of patients’ health, workers’ safety and affordable care.
Thursday’s State of the Union address by President Biden (SOTU) and the Republican response by Alabama Senator Katey Britt put the spotlight on women’s reproductive health, drug prices and healthcare affordability.
Friday, the Senate passed a $468 billion spending bill (75-22) that had passed in the House Wednesday (339-85) averting a government shutdown. The bill postpones an $8 billion reduction in Medicaid disproportionate share hospital payments for a year, allocates $4.27 billion to federally qualified health centers through the end of the year and rolls back a significant portion of a Medicare physician pay cut that kicked in on Jan. 1. Next, Congress must pass appropriations for HHS and other agencies before the March 22 shutdown.
And all week, the cyberattack on Optum’s Change Healthcare discovered February 21 hovered as hospitals, clinics, pharmacies and others scrambled to manage gaps in transaction processing. Notably, the American Hospital Association and others have amplified criticism of UnitedHealth Group’s handling of the disruption, having, bought Change for $13 billion in October, 2022 after a lengthy Department of Justice anti-trust review. This week, UHG indicates partial service of CH support will be restored. Stay tuned.
Just another week for healthcare: Congressional infighting about healthcare spending. Regulator announcements of new rules to stimulate competition and protect consumers in the healthcare market. Lobbying by leading trade groups to protect funding and disable threats from rivals. And so on.
At the macro level, it’s understandable: healthcare is an attractive market, especially in its services sectors. Since the pandemic, prices for services (i.e. physicians, hospitals et al) have steadily increased and remain elevated despite the pressures of transparency mandates and insurer pushback. By contrast, prices for most products (drugs, disposables, technologies et al) have followed the broader market pricing trends where prices for some escalated fast and then dipped.
While some branded prescription medicines are exceptions, it is health services that have driven the majority of health cost inflation since the pandemic.
UnitedHealth Group’s financial success is illustrative:
it’s big, high profile and vertically integrated across all major services sectors. In its year end 2023 financial report (January 12, 2024) it reported revenues of $371.6 Billion (up 15% Year-Over-Year), earnings from operations up 14%, cash flows from operations of $29.1 Billion (1.3x Net Income), medical care ratio at 83.2% up from 82% last year, net earnings of $23.86/share and adjusted net earnings of $25.12/share and guidance its 2024 revenues of $400-403 billion. They buy products using their scale and scope leverage to pay less for services they don’t own less and products needed to support them. It’s a big business in a buyer’s market and that’s unsettling to many.
Big business is not new to healthcare:
it’s been dominant in every sector but of late more a focus of unflattering regulator and media attention. Coupled with growing public discontent about the system’s effectiveness and affordability, it seems it’s near a tipping point.
David Johnson, one of the most thoughtful analysts of the health industry, reminded his readers last week that the current state of affairs in U.S. healthcare is not new citing the January 1970 Fortune cover story “Our Ailing Medical System”
“American medicine, the pride of the nation for many years, stands now on the brink of chaos. To be sure, our medical practitioners have their great moments of drama and triumph. But much of U.S. medical care, particularly the everyday business of preventing and treating routine illnesses, is inferior in quality, wastefully dispensed, and inequitably financed…
Whether poor or not, most Americans are badly served by the obsolete, overstrained medical system that has grown up around them helter-skelter. … The time has come for radical change.”
Johnson added: “The healthcare industry, however, cannot fight gravity forever. Consumerism, technological advances and pro-market regulatory reforms are so powerful and coming so fast that status-quo healthcare cannot forestall their ascendance. Properly harnessed, these disruptive forces have the collective power necessary for U.S. healthcare to finally achieve the 1970 Fortune magazine goal of delivering “good care to every American with little increase in cost.”
He’s right.
I believe the U.S. health system as we know it has reached its tipping point. The big-name organizations in every sector see it and have nominal contingency plans in place; the smaller players are buying time until the shoe drops. But I am worried.
I am worried the system’s future is in the hands of hyper-partisanship by both parties seeking political advantage in election cycles over meaningful creation of a health system that functions for the greater good.
I am worried that the industry’s aversion toprice transparency, meaningful discussion about affordability and consistency in defining quality, safety and value will precipitate short-term gamesmanship for reputational advantage and nullify systemness and interoperability requisite to its transformation.
I am worried that understandably frustrated employers will drop employee health benefits to force the system to needed accountability.
I am worried that the growing armies of under-served and dissatisfied populations will revolt.
I am worried that its workforce is ill-prepared for a future that’s technology-enabled and consumer centric.
I am worried that the industry’s most prominent trade groups are concentrating more on “warfare” against their rivals and less about the long-term future of the system.
I am worried that transformational change is all talk.
It’s time to start an adult conversation about the future of the system. The starting point: acknowledging that it’s not about bad people; it’s about systemic flaws in its design and functioning. Fixing it requires balancing lag indicators about its use, costs and demand with assumptions about innovations that hold promise to shift its trajectory long-term. It requires employers to actively participate: in 2009-2010, Big Business mistakenly chose to sit out deliberations about the Affordable Care Act. And it requires independent, visionary facilitation free from bias and input beyond the DC talking heads that have dominated reform thought leadership for 6 decades.
Or, collectively, we can watch events like last week’s roll by and witness the emergence of a large public utility serving most and a smaller private option for those that afford it. Or something worse.
P.S. Today, thousands will make the pilgrimage to Orlando for HIMSS24 kicking off with a keynote by Robert Garrett, CEO of Hackensack Meridian Health tomorrow about ‘transformational change’ and closing Friday with a keynote by Nick Saban, legendary Alabama football coach on leadership. In between, the meeting’s 24 premier supporters and hundreds of exhibitors will push their latest solutions to prospects and customers keenly aware healthcare’s future is not a repeat of its past primarily due to technology. Information-driven healthcare is dependent on technologies that enable cost-effective, customized evidence-based care that’s readily accessible to individuals where and when they want it and with whom.
And many will be anticipating HCA Mission Health’s (Asheville NC) Plan of Action response due to CMS this Wednesday addressing deficiencies in 6 areas including CMS Deficiency 482.12 “which ensures that hospitals have a responsible governing body overseeing critical aspects of patient care and medical staff appointments.” Interest is high outside the region as the nation’s largest investor-owned system was put in “immediate jeopardy” of losing its Medicare participation status last year at Mission. FYI: HCA reported operating income of $7.7 billion (11.8% operating margin) on revenues of $65 billion in 2023.
With the South Carolina Republican primary results in over the weekend, it seems a Biden-Trump re-match is inevitable. Given the legacies associated with Presidencies of the two and the healthcare platforms espoused by their political parties, the landscape for healthcare politics seems clear:
Healthcare Issue
Biden Policy
Trump Policy
Access to Abortion
‘It’s a basic right for women protected by the Federal Government’
‘It’s up to the states and should be safe and rare. A 16-week ban should be the national standard.’
Ageism
‘President Biden is alert and capable. It’s a non-issue.’
‘President Biden is senile and unlikely to finish a second term is elected. President Trump is active and prepared.’
Access to IVF Treatments
‘It’s a basic right and should be universally accessible in every state and protected’
‘It’s a complex issue that should be considered in every state.’
Affordability
‘The system is unaffordable because it’s dominated by profit-focused corporations. It needs increased regulation including price controls.’
‘The system is unaffordable to some because it’s overly regulated and lacks competition and price transparency.’
Access to Health Insurance Coverage
‘It’s necessary for access to needed services & should be universally accessible and affordable.’
‘It’s a personal choice. Government should play a limited role.’
Public health
‘Underfunded and increasingly important.’
‘Fragmented and suboptimal. States should take the lead.’
Drug prices
‘Drug companies take advantage of the system to keep prices high. Price controls are necessary to lower costs.’
‘Drug prices are too high. Allowing importation and increased price transparency are keys to reducing costs.’
Medicare
‘It’s foundational to seniors’ wellbeing & should be protected. But demand is growing requiring modernization (aka the value agenda) and additional revenues (taxes + appropriations).’
‘It’s foundational to senior health & in need of modernization thru privatization. Waste and fraud are problematic to its future.’
Medicaid
‘Medicaid Managed Care is its future with increased enrollment and standardization of eligibility & benefits across states.’
‘Medicaid is a state program allowing modernization & innovation. The federal role should be subordinate to the states.’
Competition
‘The federal government (FTC, DOJ) should enhance protections against vertical and horizontal consolidation that reduce choices and increase prices in every sector of healthcare.’
‘Current anti-trust and consumer protections are adequate to address consolidation in healthcare.’
Price Transparency
‘Necessary and essential to protect consumers. Needs expansion.’
‘Necessary to drive competition in markets. Needs more attention.’
The Affordable Care Act
‘A necessary foundation for health system modernization that appropriately balances public and private responsibilities. Fix and Repair’
‘An unnecessary government takeover of the health system that’s harmful and wasteful. Repeal and Replace.’
Role of federal government
‘The federal government should enable equitable access and affordability. The private sector is focused more on profit than the public good.’
‘Market forces will drive better value. States should play a bigger role’
My take:
Polls indicate Campaign 2024 will be decided based on economic conditions in the fall 2024 as voters zero in on their choice. Per KFF’s latest poll, 74% of adults say an unexpected healthcare bill is their number-one financial concern—above their fears about food, energy and housing. So, if you’re handicapping healthcare in Campaign 2024, bet on its emergence as an economic issue, especially in the swing states (Michigan, Florida, North Carolina, Georgia and Arizona) where there are sharp health policy differences and the healthcare systems in these states are dominated by consolidated hospitals and national insurers.
Three issues will be the primary focus of both campaigns: women’s health and access to abortion, affordability and competition. On women’s health, there are sharp differences; on affordability and competition, the distinctions between the campaigns will be less clear to voters. Both will opine support for policy changes without offering details on what, when and how.
The Affordable Care Act will surface in rhetoric contrasting a ‘government run system’ to a ‘market driven system.’ In reality, both campaigns will favor changes to the ACA rather than repeal.
Both campaigns will voice support for state leadership in resolving abortion, drug pricing and consolidation. State cost containment laws and actions taken by state attorneys general to limit hospital consolidation and private equity ownership will get support from both campaigns.
Neither campaign will propose transformative policy changes: they’re too risky. integrating health & social services, capping total spending, reforms of drug patient laws, restricting tax exemptions for ‘not for profit’ hospitals, federalizing Medicaid, and others will not be on the table. There’s safety in promoting populist themes (price transparency, competition) and steering away from anything more.
As the primary season wears on (in Michigan tomorrow and 23 others on/before March 5), how the health system is positioned in the court of public opinion will come into focus.
Abortion rights will garner votes; affordability, price transparency, Medicare solvency and system consolidation will emerge as wedge issues alongside.
PS: Re: federal budgeting for key healthcare agencies, two deadlines are eminent: March 1 for funding for the FDA and the VA and March 8 for HHS funding.
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.
Last Monday, two lawsuits were filed that strike at a fundamental challenge facing the U.S. health system:
In the District Court of NJ, a class action lawsuit (ANN LEWANDOWSKI v THE PENSION & BENEFITS COMMITTEE OF JOHNSON AND JOHNSON) was filed against J&J alleging the company had mismanaged health benefits in violation of the Employee Retirement Income Security Act (“ERISA”). As noted in the 74-page filing “This case principally involves mismanagement of prescription-drug benefits. “Over the past several years, defendants breached their fiduciary duties and mismanaged Johnson and Johnson’s prescription-drug benefits program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth… Defendants’ mismanagement is most evident in (but not limited to) the prices it agreed to pay one of its vendors—its Pharmacy Benefits Manager (“PBM”)—for many generic drugs that are widely available at drastically lower prices.”
The issue is this: what liability risk does a self-insured employer have in providing health benefits to their employees?
Is the structure of the plan, the selection of providers and vendors, and costs and prices experienced by employees subject to litigation? What’s the role of the employer in protecting employees against unnecessary costs?
On the same day, in the District Court of Eastern Wisconsin, an 85-page class action lawsuit was filed against Advocate-Aurora Health (AAH) claiming it “uses its market power to raise prices, limit competition and harm consumers in Wisconsin:
Forces commercial health plans to include all its “overpriced facilities” in-network even when they would prefer to include only some facilities.
Goes to “extreme efforts to drive out innovative insurance products that save commercial health plans and their members money.”
Suppresses competition through “secret and restrictive contract terms that have been the subject of bipartisan criticism.”
Acquires new facilities, which then allows it to raise prices due to reduced competition
… without intervention, the health system will continue to use “anticompetitive contracting and negotiating tactics to raise prices on Wisconsin commercial health plans and their members and use those funds for aggressive acquisitions and executive compensation.”
The issue is this: is a health system’s liable when its consolidation activities result in higher prices for services provided communities and employers in communities where they operate?
Is there a direct causal relationship between a system’s consolidation activities and their prices, and how should alleged harm be measured and remedied?
Two complicated issues for two reputable mega-players in the U.S. health system. Both lawsuits were brought as class actions which guarantees widespread media attention and a protracted legal process. And each contributes directly to the gradual erosion of public trust in the health system since the plaintiffs essentially claim the business practices of J&J and Advocate-Aurora willfully harm the individuals they pledge to serve.
In the November 2023 Keckley Poll, I asked the sample of 817 U.S. adults to assess the health system overall. The results were clear:
69% think the system is fundamentally flawed and in need of major change vs. 7% who think otherwise.
60% believe it puts its profits above patient care vs. 13% who disagree.
74% think price controls are needed vs. 7% who disagree.
83% believe having health insurance that’s ‘affordable and comprehensive’ is essential to financial security vs 3% who disagree.
52% feel confident in their ability to navigate the U.S. system “when I have a problem” vs. 32% who have mixed feelings and 16% who aren’t.
And 76% think politicians avoid dealing with healthcare issues because they’re complex and politically risky vs/ 6% who think they tackle them head-on.
The poll also asked their level of trust and confidence in five major institutions “to develop a plan for the U.S. health system that maximizes what it has done well and corrects its major flaws.”
Clearly, trust and confidence in the health system is low, and expectations about solutions fall primarily on hospitals and doctors. Lawsuits like these widen suspicion that the industry’s dominated first and foremost by Big Businesses focused on their own profitability before all else. And they pose particular problems for sectors in healthcare dominated by not-for-profit and public ownership i.e. hospitals, home care, public health agencies and others.
My take
These lawsuits address two distinct issues: the roles of employers in designing their health benefits for employees including the use of PBMs, and the justification for consolidation of hospital and ancillary services in markets.
But each lawsuit s predicated on a legal theory that prices set by organizations are geared more to corporate profits than public good and justifiable costs.
Pricing is the Achilles of the health system. Pushback against price transparency by some, however justified, has amplified exposure to litigation risk like these two and contributed to the public’s loss of trust in the system.
It is unlikely greater price transparency and business practice disclosures by J&J and Advocate-Aurora could have avoided these lawsuits, but it’s clearly a message that needs consideration in every organization.
Healthcare organizations and their trade groups can no longer defend against lack of transparency by defaulting to the complexity of our supply chains and payment systems. They’re excuses. The realities of generative AI and interoperability assure information driven healthcare that’s publicly accessible and inclusive of prices, costs, outcomes and business practices. In the process, the public’s interest will heighten and lawsuits will increase.
Three critical healthcare struggles will define the year to come with cutthroat competition and intense disputes being played out in public:
1. A Nation Divided Over Abortion Rights
2. The Generative AI Revolution In Medicine
3. The Tug-Of-War Over Healthcare Pricing American healthcare, much like any battlefield, is fraught with conflict and turmoil. As we navigate 2024, the wars ahead seem destined to intensify before any semblance of peace can be attained. Let me know your thoughts once you read mine.
Modern medicine, for most of its history, has operated within a collegial environment—an industry of civility where physicians, hospitals, pharmaceutical companies and others stayed in their lanes and out of each other’s business.
It used to be that clinicians made patient-centric decisions, drugmakers and hospitals calculated care/treatment costs and added a modest profit, while insurers set rates based on those figures. Businesses and the government, hoping to save a little money, negotiated coverage rates but not at the expense of a favored doctor or hospital. Disputes, if any, were resolved quietly and behind the scenes.
Times have changed as healthcare has taken a 180-degree turn. This year will be characterized by cutthroat competition and intense disputes played out in public. And as the once harmonious world of healthcare braces for battle, three critical struggles take centerstage. Each one promises controversy and profound implications for the future of medicine:
1. A Nation Divided Over Abortion Rights
For nearly 50 years, from the landmark Roe v. Wade decision in 1973 to its overruling by the 2022 Dobbs case, abortion decisions were the province of women and their doctors. This dynamic has changed in nearly half the states.
This spring, the Supreme Court is set to hear another pivotal case, this one on mifepristone, an important drug for medical abortions. The ruling, expected in June, will significantly impact women’s rights and federal regulatory bodies like the FDA.
Traditionally, abortions were surgical procedures. Today, over half of all terminations aremedically induced, primarily using a two-drug combination, including mifepristone. Since its approval in 2000, mifepristone has been prescribed to over 5 million women, and it boasts an excellent safety record. But anti-abortion groups, now challenging this method, have proposed stringent legal restrictions: reducing the administration window from 10 to seven weeks post-conception, banning distribution of the drug by mail, and mandating three in-person doctor visits, a burdensome requirement for many. While physicians could still prescribe misoprostol, the second drug in the regimen, its effectiveness alone pales in comparison to the two-drug combo.
Should the Supreme Court overrule and overturn the FDA’s clinical expertise on these matters, abortion activists fear the floodgates will open, inviting new challenges against other established medications like birth control.
In response, several states have fortified abortion rights through ballot initiatives, a trend expected to gain momentum in the November elections. This legislative action underscores a significant public-opinion divide from the Supreme Court’s stance. In fact, a survey published in Nature Human Behavior reveals that 60% of Americans support legal abortion.
Path to resolution: Uncertain. Traditionally, SCOTUS rulings have mirrored public opinion on key social issues, but its deviation on abortion rights has failed to shift public sentiment, setting the stage for an even fiercer clash in years to come. A Supreme Court ruling that renders abortion unconstitutional would contradict the principles outlined in the Dobbs decision, but not all states will enact protective measures. As a result, America’s divide on abortion rights is poised to deepen.
2. The Generative AI Revolution In Medicine
A year after ChatGPT’s release, an arms race in generative AI is reshaping industries from finance to healthcare. Organizations are investing billions to get a technological leg up on the competition, but this budding revolution has sparked widespread concern.
In Hollywood, screenwriters recently emerged victorious from a 150-day strike, partially focused on the threat of AI as a replacement for human workers. In the media realm, prominent organizations like The New York Times, along with a bevy of celebs and influencers, have initiated copyright infringement lawsuits against OpenAI, the developer of ChatGPT.
The healthcare sector faces its own unique battles. Insurers are leveraging AI to speed up and intensify claim denials, prompting providers to counter with AI-assisted appeals.
But beyond corporate skirmishes, the most profound conflict involves the doctor-patient relationship. Physicians, already vexed by patients who self-diagnose with “Dr. Google,” find themselves unsure whether generative AI will be friend or foe. Unlike traditional search engines, GenAI doesn’t just spit out information. It provides nuanced medical insights based on extensive, up-to-date research. Studies suggest that AI can already diagnose and recommend treatments with remarkable accuracy and empathy, surpassing human doctors in ever-more ways.
Path to resolution: Unfolding. While doctors are already taking advantage of AI’s administrative benefits (billing, notetaking and data entry), they’re apprehensive that ChatGPT will lead to errors if used for patient care. In this case, time will heal most concerns and eliminate most fears. Five years from now, with ChatGPT predicted to be 30 times more powerful, generative AI systems will become integral to medical care. Advanced tools, interfacing with wearables and electronic health records, will aid in disease management, diagnosis and chronic-condition monitoring, enhancing clinical outcomes and overall health.
3. The Tug-Of-War Over Healthcare Pricing
From routine doctor visits to complex hospital stays and drug prescriptions, every aspect of U.S. healthcare is getting more expensive. That’s not news to most Americans, half of whom say it is very or somewhat difficult to afford healthcare costs.
But people may be surprised to learn how the pricing wars will play out this year—and how the winners will affect the overall cost of healthcare.
Throughout U.S. healthcare, nurses are striking as doctors are unionizing. After a year of soaring inflation, healthcare supply-chain costs and wage expectations are through the roof. A notable example emerged in California, where a proposed $25 hourly minimum wage for healthcare workers was later retracted by Governor Newsom amid budget constraints.
Financial pressures are increasing. In response, thousands of doctors have sold their medical practices to private equity firms. This trend will continue in 2024 and likely drive up prices, as much as 30% higher for many specialties.
Meanwhile, drug spending will soar in 2024 as weight-loss drugs (costing roughly $12,000 a year) become increasingly available. A groundbreaking sickle cell disease treatment, which uses the controversial CRISPR technology, is projected to cost nearly $3 million upon release.
To help tame runaway prices, the Centers for Medicare & Medicaid Services will reduce out-of-pocket costs for dozens of Part B medications “by $1 to as much as $2,786 per average dose,” according to White House officials. However, the move, one of many price-busting measures under the Inflation Reduction Act, has ignited a series of legal challenges from the pharmaceutical industry.
Big Pharma seeks to delay or overturn legislation that would allow CMS to negotiate prices for 10 of the most expensive outpatient drugs starting in 2026.
Path to resolution: Up to voters. With national healthcare spending expected to leap from $4 trillion to $7 trillion by 2031, the pricing debate will only intensify. The upcoming election will be pivotal in steering the financial strategy for healthcare. A Republican surge could mean tighter controls on Medicare and Medicaid and relaxed insurance regulations, whereas a Democratic sweep could lead to increased taxes, especially on the wealthy. A divided government, however, would stall significant reforms, exacerbating the crisis of unaffordability into 2025.
Is Peace Possible?
American healthcare, much like any battlefield, is fraught with conflict and turmoil. As we navigate 2024, the wars ahead seem destined to intensify before any semblance of peace can be attained.
Yet, amidst the strife, hope glimmers: The rise of ChatGPT and other generative AI technologies holds promise for revolutionizing patient empowerment and systemic efficiency, making healthcare more accessible while mitigating the burden of chronic diseases. The debate over abortion rights, while deeply polarizing, might eventually find resolution in a legislative middle ground that echoes Roe’s protections with some restrictions on how late in pregnancy procedures can be performed.
Unfortunately, some problems need to get worse before they can get better. I predict the affordability of healthcare will be one of them this year. My New Year’s request is not to shoot the messenger.
This week, Express Scripts, the nation’s second-largest pharmacy benefit manager (PBM), which is owned by health insurer Cigna, announced a new pricing model.
It is giving employers and health plans the option to pay pharmacies up to 15 percent over acquisition costs, plus a dispensing fee, for covered drugs. This payment structure was popularized by the Mark Cuban Cost Plus Drugs Company, founded by the billionaire businessman in reaction to the opaque pricing and complicated discounts and rebates common among PBMs.
While Cigna is not promising that this new pricing model will result in lower prices, it says it will improve transparency and should benefit retail pharmacies, who will split the markup with Express Scripts.
Cigna projects that only some employers will lower their healthcare spending through the cost-plus model, and that patient cost-sharing should be similar under both approaches.
The Gist:Between disruptive competitors like Cuban’s venture and increasing scrutiny from Congress, PBMs are facing new pressures to improve transparency and account for their role in rising drug costs.
This move by Cigna is an attempt to address at least one of those concerns, possibly intended to preempt regulatory and legislative action.
After years of complaints surrounding their business practices, it appears that the Congressional tide may be turning toward PBM industry reform. However,patients—who by and large are unaware of what PBMs are or do—won’t be satisfied till they see their out-of-pocket prescription drug costs go down.
Next up on this front: seeing which provisions targeting PBMs, many which have bipartisan support, make it into the Senate’s broad healthcare legislation planned for the end of this year, and in what form that bill ultimately passes.
In Las Vegas this week, 10,000 healthcare entrepreneurs, investors, purchasers and industry onlookers are gathered to celebrate the business of U.S. healthcare. It follows the inaugural Nashville Healthcare Sessions last month that drew a crowd to Music City touting “the premier healthcare conference set in the most relevant, exciting, and welcoming city in the south.“
Besides their locations and exceptional marketing, three notable themes are prominent that speak volumes about where this industry is:
1- The focus is systemness—integrated, connected, data-driven and scalable. Traditional divides that separate health and social services, hospitals and insurers, biotherapeutics and companion diagnostics are obsolete and access to private capital and swift execution vitals. And embedded in systemness is an expanded role of human resources that create workforces that are right-sized, diverse, AI-enabled and productive. 2-Technologies focused on end user value are gaining traction. Solutions that enable better, quicker, more accurate and affordable transactions with consumers are prominent. While traditional providers—hospitals, physicians, long-term care providers and public health programs– see HIT and AI investments as ways to make their work more efficient and satisfying, disruptors are focused on the untapped consumer market that’s dissatisfied with the status quo. 3-Access to smart capital is key. The venture capital and private equity markets in healthcare services are weathering corrections that have deflated returns and forced many to pullback or exit. The possibility of regulatory reforms involving greater transparency, carried interest restrictions and minimum hold periods means stronger funds with experienced operating partners and stable LP funding will be advantaged. In Vegas, they’ll be working the hallways to find tuck-ins for their platform bets and courting not-for-profit hospitals needing non-operating income to fund their growth and diversification efforts.
Those attending recognize the U.S. health industry faces unprecedented challenges:
Growing employer activism against lack of price transparency and inexplicably high unit costs for hospital care, prescription drugs, insurer overhead and mal-effect of consolidation in each sector.
Medical inflation that’s persistent but disproportionately absorbed by fewer and fewer employers and individuals who lack bargaining power.
Value-based purchasing activities that have failed to achieve desired cost containment goals.
Public dissatisfaction with the “system” and growing receptivity to alternatives.
Growing hostility in media coverage about hospitals, especially large not-for-profit hospitals, deemed to be profitable and wasteful.
Increased tension between providers (hospitals, medical groups) and insurers.
Increased regulation in states and court rulings that change (or have the potential to alter) how care is defined, provided, funded and legally authorized.
HLTH and Session attendees recognize the uncertainties of the political, economic and global markets in which healthcare operates. Israel will be front of mind to all as the fast-paced HLTH proceedings continue this week.
The root causes of the system’s poor performance are understood and considered: they’re daunting. But that does not impede the willingness of private investors to make bets presuming the future of the U.S. healthcare is not a repeat of its past.
Contrary to pop culture, what happens in Vegas this week will not stay in Vegas: that’s the point. The health system is not working well. While some HLTH and Sessions attendees are no doubt focused on incremental innovations to improve the performance of their legacy organizations, others are looking beyond. And, if industries akin to healthcare like financial services and higher education are instructive, the latter are better prepared to respond than the former.
PS: Nearly 50 years to the day after the Yom Kippur War in 1973, Israel was again taken by surprise by a sudden attack. Unlike the series of clashes with Palestinian forces in Gaza over the past few years, this appears to be a full-scale conflict mounted by Hamas and its allies including Iran.
Thousands are dead, more are injured and the health systems in both will be overwhelmed by the need. Health systems matter!
Last Tuesday, the Center for Medicare and Medicaid Services (CMS) announced the first 10 medicines that will be subject to price negotiations with Medicare starting in 2026 per authorization in the Inflation Reduction Act (2022). It’s a big deal but far from a done deal.
Here are the 10:
Eliquis, for preventing strokes and blood clots, from Bristol Myers Squibb and Pfizer
Jardiance, for Type 2 diabetes and heart failure, from Boehringer Ingelheim and Eli Lilly
Xarelto, for preventing strokes and blood clots, from Johnson & Johnson
Januvia, for Type 2 diabetes, from Merck
Farxiga, for chronic kidney disease, from AstraZeneca
Entresto, for heart failure, from Novartis
Enbrel, for arthritis and other autoimmune conditions, from Amgen
Imbruvica, for blood cancers, from AbbVie and Johnson & Johnson
Stelara, for Crohn’s disease, from Johnson & Johnson
Fiasp and NovoLog insulin products, for diabetes, from Novo Nordisk
Notably, they include products from 10 of the biggest drug manufacturers that operate in the U.S. including 4 headquartered here (Johnson and Johnson, Merck, Lilly, Amgen) and the list covers a wide range of medical conditions that benefit from daily medications.
But only one cancer medicine was included (Johnson & Johnson and AbbVie’s Imbruvica for lymphoma) leaving cancer drugs alongside therapeutics for weight loss, Crohn’s and others to prepare for listing in 2027 or later.
And CMS included long-acting insulins in the inaugural list naming six products manufactured by the Danish pharmaceutical giant Novo Nordisk while leaving the competing products made by J&J and others off. So, there were surprises.
To date, 8 lawsuits have been filed against the U.S. Department of Health and Human Services by drug manufacturers and the likelihood litigation will end up in the Supreme Court is high.
These cases are being brought because drug manufacturers believe government-imposed price controls are illegal. The arguments will be closely watched because they hit at a more fundamental question:
what’s the role of the federal government in making healthcare in the U.S. more affordable to more people?
Every major sector in healthcare– hospitals, health insurers, medical device manufacturers, physician organizations, information technology companies, consultancies, advisors et al may be impacted as the $4.6 trillion industry is scrutinized more closely . All depend on its regulatory complexity to keep prices high, outsiders out and growth predictable. The pharmaceutical industry just happens to be its most visible.
The Pharmaceutical Industry
The facts are these:
66% of American’s take one or more prescriptions: There were 4.73 billion prescriptions dispensed in the U.S. in 2022
Americans spent $633.5 billion on their medicines in 2022 and will spend $605-$635 billion in 2025.
This year (2023), the U.S. pharmaceutical market will account for 43.7% of the global pharmaceutical market and more than 70% of the industry’s profits.
41% of Americans say they have a fair amount or a great deal of trust in pharmaceutical companies to look out for their best interests and 83% favor allowing Medicare to negotiate pricing directly with drug manufacturers (the same as Veteran’s Health does).
There were 1,106 COVID-19 vaccines and drugs in development as of March 18, 2023.
The U.S. industry employs 811,000 directly and 3.2 million indirectly including the 325,000 pharmacists who earn an average of $129,000/year and 447,000 pharm techs who earn $38,000.
And, in the U.S., drug companies spent $100 billion last year for R&D.
It’s a big, high-profile industry that claims 7 of the Top 10 highest paid CEOs in healthcare in its ranks, a persistent presence in social media and paid advertising for its brands and inexplicably strong influence in politics and physician treatment decisions.
The industry is not well liked by consumers, regulators and trading partners but uses every legal lever including patents, couponing, PBM distortion, pay-to-delay tactics, biosimilar roadblocks et al to protect its shareholders’ interests. And it has been effective for its members and advisors.
My take:
It’s easy to pile-on to criticism of the industry’s opaque pricing, lack of operational transparency, inadequate capture of drug efficacy and effectiveness data and impotent punishment against its bad actors and their enablers.
It’s clear U.S. pharma consumers fund the majority of the global industry’s profits while the rest of the world benefits.
And it’s obvious U.S. consumers think it appropriate for the federal government to step in. The tricky part is not just government-imposed price controls for a handful of drugs; it’s how far the federal government should play in other sectors prone to neglect of affordability and equitable access.
There will be lessons learned as this Inflation Reduction Act program is enacted alongside others in the bill– insulin price caps at $35/month per covered prescription, access to adult vaccines without cost-sharing, a yearly cap ($2,000 in 2025) on out-of-pocket prescription drug costs in Medicare and expansion of the low-income subsidy program under Medicare Part D to 150% of the federal poverty level starting in 2024. And since implementation of these price caps isn’t until 2026, plenty of time for all parties to negotiate, spin and adapt.
But the bigger impact of this program will be in other sectors where pricing is opaque, the public’s suspicious and valid and reliable data is readily available to challenge widely-accepted but flawed assertions about quality, value, access and outcomes. It’s highly likely hospitals will be next.
HENRY KOTULA 