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States in the Obamacare lawsuit are biting the hand that feeds them
Obamacare is precarious yet entrenched as 2019 approaches. Even many of the GOP-led states seeking to knock it down in court would be in a real bind should they succeed.
Of the 20 states involved in a high-profile Texas-led lawsuit arguing the Affordable Care Act is unconstitutional, nearly half have already accepted its extra dollars to expand their Medicaid programs or are moving that direction. States don’t have to expand Medicaid under a 2012 Supreme Court decision, but most have found it advantageous because the federal government foots most of the bill.
These states — nine in total — would suddenly be facing a much larger expense for hundreds of thousands of low-income earners newly enrolled in Medicaid under the ACA, should last week’s decision by U.S. District Judge Reed O’Connor rolling back the entire health-care law ultimately stand.
They include Louisiana, North Dakota and West Virginia, along with Arizona, Arkansas and Indiana, three states that expanded Medicaid but with some modifications. In three other states — Maine, Nebraska and Utah — voters approved ballot initiatives adopting expansion.
Yet these states are asking the courts to overthrow not just Obamacare’s protections for people with preexisting conditions – the part of the lawsuit that has gotten the most attention — but also the entire sweeping law, which is now firmly a part of the country’s health-care ecosystem eight years since its passage. More than 12 million people have become eligible for Medicaid since ACA passage, while another 11 million have enrolled in the ACA’s federally subsidized private marketplaces.
“God help us all, because the dark age is not that far from us again,” said Sen. Joe Manchin (D-W.Va.). “It will be worse than before because there won’t be the money to help rural clinics and hospitals.”
Developments in the past week — including the court ruling and slightly lagging marketplace enrollment figures released yesterday by the Trump administration — underscore the political divides dogging Obamacare even though Republicans in Congress and at the state level have embraced some of its major components.
Nearly 8.5 million people signed up for 2019 plans in the 39 states using the HealthCare.gov website (the other states run their own marketplaces), per figures from the Centers for Medicare and Medicaid Services. Enrollment was just 4 percent less than a year ago, due to a last-minute rush that suggests consumers were undeterred by the court ruling, our Washington Post colleague Amy Goldstein reports.
“After lagging by about 11 percent most of the six weeks of open enrollment — a shortened period adopted by the Trump administration a year ago — the more than 400,000 who selected coverage during the final week actually exceeded the year before,” Amy writes.
CMS Administrator Seema Verma seemed unperturbed by the reduced enrollment numbers, saying they merely show new GOP and administration policies to roll back some ACA requirements on insurers and consumers are working.
But if the entire law gets scrapped by the Supreme Court ( we should note, the case still has a long way to go in the legal system), it will quickly become clear the ACA — for whatever its faults — has extended benefits to Americans they’ve now come to expect. Despite their persistent rhetoric against the law, Republicans have found it politically necessary to embrace big parts of it, including its protections for people with preexisting conditions — and, in some states, its Medicaid expansion.
Case in point: West Virginia. Its Republican attorney general, Patrick Morrisey, has joined the lawsuit against Obamacare even though the state embraced its Medicaid expansion, growing its enrollment in the program by nearly one-third.The federal government covers more than 90 percent of the cost of the newly eligible enrollees.
When I asked Morrisey’s office about what striking the ACA would mean for Medicaid recipients, his office provided a statement praising O’Connor’s ruling and discussing premium hikes in the marketplaces — but didn’t mention Medicaid.
“Our nation must move beyond Obamacare, innovate, provide more choices to consumers, and attack the skyrocketing premiums that have caused such pain and hardship on West Virginian and American families,” the statement said.
In some cases, the decisions by state attorneys general to join the anti-ACA lawsuit has put them at odds with their governor. Louisiana’s Democratic governor, John Bel Edwards, moved quickly to expand Medicaid when he took office in 2016. Nearly half a million people have enrolled in Medicaid since then, growing the state’s program by 27 percent.
Edwards hasn’t hidden his disdain for Louisiana Attorney General Jeff Landry (R), who has called the law an “unconstitutional overreach.” Edwards issued a critical statement after last Friday’s decision.
“This was a short-sighted lawsuit, to say the least,” Edwards said in a statement. “I intend to vigorously pursue legislation to protect individuals with pre-existing conditions from losing their health insurance and ensuring the working people of our state aren’t penalized because of this decision.”
A Brief Look at Medicare Market Share for Six Major Metro Areas
Medicare Advantage plans continue to be an attractive option for the rapidly increasing senior population. As of November 2018, total Medicare Advantage (MA) membership stood at over 21.6 million, representing approximately 34% of the 63.7 million Americans eligible for Medicare. Health plan enrollment and market share data are important metrics for health insurers to assess in order to identify opportunities and make better business decisions about products and services. Companies not only look at their own market positions but also routinely analyze competitor membership to evaluate relative market share. Industry analysts often assess market share at the county or metropolitan statistical area (MSA) level in order to gain a more complete competitive picture of the market. This brief presents an overview of Medicare market demographics and market share data, with a focus on health plan market position for six major metropolitan statistical areas (MSAs) in the U.S.
Competition and Market Share
For the purposes of this brief, MFA first looked at the competitive mix in the Medicare and Medicare Advantage markets through analysis of enrollment figures from the Health Coverage Portal™ and Medicare Business Online™ by metropolitan areas in the United States.
- Seniors have a choice between coverage offered by original Medicare and Medicare Advantage (MA). While potential market size is an important metric, understanding the insurance preferences of seniors requires a closer look at enrollment within each area. How seniors are behaving as consumers varies greatly among the metropolitan areas. To shed more light on these differences, Mark Farrah Associates calculated the penetration rate for original Medicare & Medicare Advantage plans. Penetration rate is calculated by dividing the number of plan members by the number of those eligible for Medicare. The penetration rate provides the overall market share which can be used to analyze seniors’ choice between sticking with original Medicare and choosing a Medicare Advantage plan.
- There is a greater degree of variability across the top 6 MSAs when considering original Medicare vs. Medicare Advantage penetration rates, per the chart above. The Chicago MSA has the highest original Medicare rate at just over 70.9% with the lowest Medicare Advantage penetration rate (24.1%). Similarly, Philadelphia is well below the national average with a Medicare Advantage penetration rate of 28.1%. One reason for the lower Medicare Advantage penetration in both Chicago and Philadelphia is the popularity of Medicare Supplement plans in both Illinois and Pennsylvania. On the other hand, Miami is currently sitting with only 41.5% of those eligible enrolled in original Medicare with the highest penetration rate of the 6 MSAs in the Medicare Advantage market at 53.5%. Los Angeles also records above average Medicare Advantage popularity with almost a 48% penetration rate.
- Based on MFA’s county estimates, the above table provides the top Medicare Advantage companies and their corresponding market share in each of the top MSAs. UnitedHealth Group appears to have a strong foothold in 5 of the MSAs above, except for the Philadelphia MSA. Humana also has a large presence across the selected MSAs.
Conclusion
Eligibility, geographic location, income levels and overall health status of a population are just a few determinants of Medicare penetration in a particular area. While further demographic insight would be required to discern why Medicare and Medicare Advantage penetration is higher in some areas more than others, it is clear that the competitive mix among these MSAs indicates varying degrees of consumer choice. Nonetheless, the Medicare market continues to grow as more and more Americans of the Baby Boom generation enter retirement age. As always, Mark Farrah Associates will monitor enrollment trends and industry shifts in this highly competitive segment.
Healthcare as a zero-sum game: 7 key points
This article sets out seven thoughts on healthcare systems.
The article discusses:
- Types of Healthcare Systems
- Mergers and Key Questions to Assess Mergers
- Headwinds Facing Systems
- The Great Fear of Systems
- What has Worked the Last 10 Years
- What is Likely to Work the Next 10 Years
- A Few Other Issues
Before starting the core of the article, we note two thoughts. First, we view a core strategy of systems to spend a great percentage of their time on those things that currently work and bring in profits and revenues. As a general rule, we advise systems to spend 70 to 80 percent of their time doubling down on what works (i.e., their core strengths) and 20 to 30 percent of their time on new efforts.
Second, when we talk about healthcare as a zero-sum game, we mean the total increases in healthcare spend are slowing down and there are greater threats to the hospital portion of that spend. I.e., the pie is growing at a slower pace and profits in the hospital sector are decreasing.
I. Types of Healthcare Systems
We generally see six to eight types of healthcare systems. There is some overlap, with some organizations falling into several types.
1. Elite Systems. These systems generally make U.S. News & World Report’s annual “Best Hospitals” ranking. These are systems like Mayo Clinic, Cleveland Clinic, Johns Hopkins Hospital, NewYork-Presbyterian, Massachusetts General, UPMC and a number of others. These systems are often academic medical centers or teaching hospitals.
2. Regionally Dominant Systems. These systems are very strong in their geographic area. The core concept behind these systems has been to make them so good and so important that payers and patients can’t easily go around them. Generally, this market position allows systems to generate slightly higher prices, which are important to their longevity and profitability.
3. Kaiser Permanente. A third type of system is Oakland-based Kaiser Permanente itself. We view Kaiser as a type in and of itself since it is both so large and completely vertically integrated with Kaiser Foundation Health Plan, Kaiser Foundation Hospitals and Permanente Medical Groups. Kaiser was established as a company looking to control healthcare costs for construction, shipyard and steel mill workers for the Kaiser industrial companies in the late 1930s and 1940s. As companies like Amazon, Berkshire Hathaway and JPMorgan Chase try to reduce costs, it is worth noting that they are copying Kaiser’s purpose but not building hospitals. However, they are after the same goal that Kaiser originally sought. Making Kaiser even more interesting is its ability to take advantage of remote and virtual care as a mechanism to lower costs and expand access to care.
4. Community Hospitals. Community hospitals is an umbrella term for smaller hospital systems or hospitals. They can be suburban, rural or urban. Community hospitals are often associated with rural or suburban markets, but large cities can contain community hospitals if they serve a market segment distinct from a major tertiary care center. Community hospitals are typically one- to three-hospital systems often characterized by relatively limited resources. For purposes of this article, community hospitals are not classified as teaching hospitals — meaning they have minimal intern- and resident-per-bed ratios and involvement in GME programs.
5. Safety-Net Hospitals. When we think of safety-net hospitals, we typically recall hospitals that truly function as safety nets in their communities by treating the most medically vulnerable populations, including Medicaid enrollees and the uninsured. These organizations receive a great percentage of revenue from Medicaid, supplemental government payments and self-paying patients. Overall, they have very little commercial business. Safety-net hospitals exist in different areas, urban or rural. Many of the other types of systems noted in this article may also be considered safety-net systems.
6. National Chains. We divide national chains largely based on how their market position has developed. National chains that have developed markets and are dominant in them tend to be more successful. Chains tend to be less successful when they are largely developed out of disparate health systems and don’t possess a lot of market clout in certain areas.
7. Specialty Hospitals. These are typically orthopedic hospitals, psychiatric hospitals, women’s hospitals, children’s hospital or other types of hospitals that specialize in a field of medicine or have a very specific purpose.
II. Mergers and Acquisitions
There have seen several large mergers over the last few years, including those of Aurora-Advocate, Baylor Scott & White-Memorial Hermann, CHI-Dignity and Mercy-Bon Secours, among others.
In evaluating a merger, the No. 1 question we ask is, “Is there a clear and compelling reason or purpose for the merger?” This is the quintessential discussion piece around a merger. The types of compelling reasons often come in one of several varieties. First: Is the merger intended to double down and create greater market strength? In other words, will the merger make a system regionally dominant or more dominant?
Second: Does the merger make the system better capitalized and able to make more investments that it otherwise could not make? For example, a large number of community hospitals don’t have the finances to invest in the health IT they need, the business and practices they need, the labor they need or other initiatives.
Third: Does the merger allow the amortization of central costs? Due to a variety of political reasons, many systems have a hard time taking advantage of the amortization of costs that would otherwise come from either reducing numbers of locations or reducing some of the administrative leadership.
Finally, fourth: Does the merger make the system less fragile?
Each of these four questions tie back to the core query: Does the merger have a compelling reason or not?
III. Headwinds
Hospitals face many different headwinds. This goes into the concept of healthcare as a zero-sum game. There is only so much pie to be shared, and the hospital slice of pie is being attacked or threatened in various areas. Certain headwinds include:
1. Pharma Costs. The increasing cost of pharmaceuticals and the inability to control this cost particularly in the non-generic area. Here, increasingly the one cost area that payers are trying to merge with relates to pharma/PBM the one cost that hospitals can’t seem to control is pharma costs. There is little wonder there is so much attention paid to pharma costs in D.C.
2. Labor Costs. Notwithstanding all the discussions of technology and saving healthcare through technology, healthcare is often a labor-intensive business. Human care, especially as the population ages, requires lots of people — and people are expensive.
3. Bricks and Mortar. Most systems have extensive real estate costs. Hospitals that have tried to win the competitive game by owning more sites on the map find it is very expensive to maintain lots of sites.
4. Slowing Rises in Reimbursement – Federal and Commercial. Increasingly, due to federal and state financial issues, governments (and interest by employers) have less ability to keep raising healthcare prices. Instead, there is greater movement toward softer increases or reduced reimbursement.
5. Lower Commercial Mix. Most hospitals and health systems do better when their payer mix contains a higher percentage of commercial business versus Medicare or Medicaid. In essence, the greater percentage of commercial business, the better a health system does. Hospital executives have traditionally talked about their commercial business subsidizing the Medicare/Medicaid business. As the population ages and as companies get more aggressive about managing their own healthcare costs, you see a shift — even if just a few percentage points — to a higher percentage of Medicare/Medicaid business. There is serious potential for this to impact the long-term profitability of hospitals and health systems. Big companies like JPMorgan, Amazon, Berkshire Hathaway and some other giants like Google and Apple are first and foremost seeking to control their own healthcare costs. This often means steering certain types of business toward narrow networks, which can translate to less commercial business for hospitals.
6. Cybersecurity and Health IT Costs. Most systems could spend their entire budgets on cybersecurity if they wanted to. That’s impossible, of course, but the potential costs of a security breach or incident loom large and there are only so many dollars to cover these costs.
7. The Loss of Ancillary Income. Health systems traditionally relied on a handful of key specialties —cardiology, orthopedics, spine and oncology, for example — and ancillaries like imaging, labs, radiation therapy and others to make a good deal of their profits. Now ancillaries are increasingly shifted away from systems toward for-profits and other providers. For example, Quest Diagnostics and Laboratory Corporation of America have aggressively expanded their market share in the diagnostic lab industry by acquiring labs from health systems or striking management partnerships for diagnostic services.
8. Payers Less Reliant on Systems. Payers have signaled less reliance on hospitals and health systems. This headwind is indicated in a couple of trends. One is payers increasingly buying outpatient providers and investing in many other types of providers. Another is payers looking to merge with pharmaceutical providers or pharmacy and benefit managers.
9. Supergroups. Increasingly in certain specialties and multispecialty groups, especially orthopedics and a couple other specialties, there is an effort to develop strong “super groups.” The idea of some of these super groups is to work toward managing the top line of costs, then dole out and subcontract the other costs. Again, this could potentially move hospitals further and further downstream as cost centers instead of leaders.
IV. The Great Fear
The great fear of health systems is really twofold. First: that more and more systems end up in bankruptcy because they just can’t make the margins they need. We usually see this unfold with smaller hospitals, but over the last 20 years, we have seen bankruptcies periodically affect big hospital systems as well. (Here are 14 hospitals that have filed for bankruptcy in 2018 to date. According to data compiled by Bloomberg, at least 26 nonprofit hospitals across the nation are already in default or distress.)
Second, and more likely, is that hospitals in general become more like mid-level safety net systems for certain types of care — with the best business moving away. I.e., as margins slide, hospitals will handle more and more of the essential types of care. This is problematic, in that many hospitals and health systems have infrastructures that were built to provide care for a wide range of patient needs. The counterpoint to these two great fears is that there is a massive need for healthcare and healthcare is expensive. In essence, there are 325,700,000 people in the United States, and it’s not easy to provide care for an aging population.
V. The Last 10 Years – What Worked
What has worked over the last five to 10 years is some mix of the following:
- Being an elite system has remained a recipe for financial success.
- Being regionally dominant has been a recipe for success.
- Being very special at something or being very great at something has been a recipe for success.
- Being great in high paying specialties like orthopedics, oncology, and spine has been a recipe for success.
- Systems have benefited where they provide extensive ancillaries to make great profits.
VI. The Next 10 Years
Over the next 10 years, we advise systems to consider the following.
- Double down on what works.
- Do not give up dominance where they have it. Although it may be politically unpopular and expensive to maintain, dominance remains important.
- Systems will need a new level of cost control. For years hospitals focused on expanding patient volume, expanding revenue and enlarging their footprint. Now cost control has surpassed revenue growth as the top priority for hospital and health system CEOs in 2018.
- Systems will have to be great at remote and virtual care. More and more patients want care where and when they want it.
- Because there will be so much change, systems must continue to have great leadership and great teams to adjust and remain successful.
- As systems become more consumer-centric, hospitals will have to lead with great patient experience and great patient navigation. These two competencies have to become systemwide strengths for organizations to excel over the next decade.
VII. Other Issues
Other issues we find fascinating today are as follows.
1. First, payers are more likely to look at pharma and pharma benefit companies as merger partners than health systems. We think this is a fascinating change that reflects a few things, including the role and costs of pharmaceuticals in our country, the slowly lessening importance of health systems, and payers’ disinterest in carrying the costs of hospitals.
2. Second, for many years everyone wanted to be Kaiser. What’s fascinating today is how Kaiser now worries about Amazon, Apple and other companies that are doing what Kaiser did 50 to 100 years ago. In essence, large companies’ strategies to design their own health systems, networks or clinics to reduce healthcare costs and provide better care is a force that once created legacy systems like Kaiser and now threatens those same systems.
3. Third, we find politicians are largely tone deaf. On one side of the table is a call for a national single payer system, which at least in other countries of large size has not been a great answer and is very expensive. On the other hand, you still have politicians on the right saying just “let the free market work.” This reminds me of people who held up posters saying, “Get the government out of my Medicare.” We seem to be past a true and pure free market in healthcare. There is some place between these two extremes that probably works, and there is probably a need for some sort of public option.
4. Fourth, care navigation in many elite systems is still a debacle. There is still a lot of room for improvement in this area, but unfortunately, it is not an area that payers directly tend to pay for.
5. Fifth, we periodically hear speakers say “this app is the answer” to every problem. I contrast that by watching care given to elderly patients, and I think the app is unlikely to solve that much. It is not that there is not room for lots of apps and changes in healthcare — because there is. However, healthcare remains as a great mix of technology and a labor- and care-intensive business.
