While healthcare is delivered locally, the business of healthcare is regional, and the regions are only getting bigger. Hospital and health system mergers alike have continued to shift from local to regional, and the recently announced merger between Advocate Aurora Health and Atrium Health clearly highlights that the regions are only getting bigger.
Advocate Aurora, with a presence in Illinois and Wisconsin, and Atrium Health, with a presence in North Carolina, South Carolina, Georgia, and Alabama, will combine to create a $27 billion health system that will span six states and make it one of the leading healthcare delivery systems in the country. The combined organization, which will transition to a new brand, Advocate Health, will operate 67 hospitals and over 1,000 sites of care, employ nearly 150,000 teammates, and serve 5.5 million patients. Together, Advocate Health will become the 6th largest system in the country behind Kaiser Permanente, HCA Healthcare, CommonSpirit Health, Ascension, and Providence.
We have seen a number of large health systems come together recently, including Intermountain Healthcare + SCL Health to create a $15 billion revenue system, Spectrum Health + Beaumont ($14 billion), NorthShore University Health System + Edward-Elmhurst Healthcare ($5 billion), LifePoint Health + Kindred Healthcare ($14 billion), and Jefferson Health + Einstein Healthcare Network ($8 billion).
The exact reasoning for each merger differs slightly, but one of the common threads across all is scale. But not scale in the traditional M&A sense. Rather, scale in covered lives; scale in physician infrastructure and alignment; scale in clinical and operational capabilities; scale in technology, innovation, and partnerships with non-traditional players; scale for capital access; and scale for insurance risk to compete in a value-based world. It is no longer the strong acquiring the weak. Rather, strong players are coming together to gain scale to face the headwinds in a unified manner.
For Advocate Aurora and Atrium, coming together is about leveraging their combined clinical excellence, advancing data analytics capabilities and digital consumer infrastructure, improving affordability, driving health equity, creating a next-generation workforce, research, and environmental sustainability. Together, they have pledged $2 billion to disrupt the root causes of health inequities across underserved communities and create more than 20,000 new jobs.
Both Advocate Aurora and Atrium are no strangers to mergers. Advocate and Aurora came together in 2018, and prior to that Advocate was intending to merge with NorthShore before being blocked due to anti-trust. Atrium has grown over the years, merging with systems such as Navicent Health in Georgia in 2018, Wake Forest Baptist Health in North Carolina 2020, and Floyd Health System in Georgia in 2021. In the newly proposed merger, Advocate Aurora and Atrium are coming together via a joint operating arrangement where each entity will be responsible for their own liabilities and maintain ownership of their respective assets but operate together under the new parent entity and board. This may allow the combined entity more flexibility in local decision-making. The current CEOs, Jim Skogsbergh and Eugene Woods will serve as co-CEOs for the first 18 months, at which point Skogsbergh will retire, and Woods will take over as the sole CEO.
Mergers can come in various shapes and structures, but the driving forces behind consolidation are not unique. With the need to compete in value-based care, adequately manage risk, gain scale across covered lives, physicians, and points of access, successfully deliver affordable high-quality care, and the need to deal with the vertical and horizontal consolidation of the large-scale payers, the markets that health systems operate in must be large enough to be effective and relevant. We fully expect to see more of these larger scale health system mergers in the near term.
The physical delivery of healthcare is local, but, again, the business of healthcare is not; it is regional, and the regions are only getting bigger.
The healthcare industry has made some strides in the “journey to value” across the last decade, but in reality, most health systems and physician groups are still very much entrenched in fee-for-service incentives.
While many health plans report that significant portions of their contract dollars are tied to cost and quality performance, what plans refer to as “value” isn’t necessarily “risk-based.”
The left-hand side of the graphic below shows that, although a majority of payer contracts now include some link to quality or cost, over two-thirds of those lack any real downside risk for providers.
Data on the right show a similar parallel in physician compensation. Whilethe majority of physician groups have some quality incentives in their compensation models, less than a tenth of individual physician compensation is actually tied to quality performance.
Though myriad stakeholders, from the federal government to individual health systems and physician groups, have collectively invested billions of dollars in migrating to value-based payment over the last decade, we are still far from seeing true, performance-based incentives translate into transformation up and down the healthcare value chain.
The agency’s end goal for Medicare Advantage is to match CMS’ vision for its programs as a whole, with an emphasis on health equity.
On Wednesday, the Centers for Medicare and Medicaid Services released proposed payment policy changes for Medicare Advantage and Part D drug programs in 2023 that are meant to create more choices and provide affordable options for consumers.
The Calendar Year 2023 Advance Notice for Medicare Advantage and Part D plans is open to public comment for 30 days. This year, CMS is soliciting input through a health equity lens on the approach to some future potential changes.
The agency’s end goal for Medicare Advantage is to match CMS’ vision for its programs as a whole, which Administrator Chiquita Brooks-LaSure said is “to advance health equity; drive comprehensive, person-centered care; and promote affordability and the sustainability of the Medicare program.”
CMS is proposing an effective growth rate of 4.75% and an overall expected average change in revenue of 7.98%, following a 4.08% revenue increase planned for 2022.
WHAT’S THE IMPACT?
CMS is requesting input on a potential change to the MA and Part D Star Ratings that would take into account how well each plan advances health equity.
The agency is also requesting comment on including a quality measure in MA and Part D Star Ratings that would assess how often plans are screening for common health-related social needs, such as food insecurity, housing insecurity and transportation problems.
The Health Equity Index has been tasked with creating more transparency on how MA plans care for disadvantaged beneficiaries.
Additionally, CMS is requesting input on considerations for assessing the impact of using sub-state geographic levels of rate setting for enrollees with end-stage renal disease, particularly input regarding the impact of MA payment on care provided to rural and urban underserved populations and how such payment changes may impact health equity.
Other areas in which CMS is soliciting input include a variety of payment updates, a new measure concept to assess whether and how MA plans are transforming care by engaging in value-based models with providers’ and updates to risk-adjustment models to continue to pay appropriately for people enrolled in MA and Part D plans.
Public comments on the Advance Notice must be submitted by March 4. The Medicare Advantage and Part D payment policies for 2023 will be finalized in the 2023 Rate Announcement, which will be published no later than April 4.
The proposed rule has already elicited reaction from various organizations, including Better Medicare Alliance.
“As we continue to review the Advance Notice in further detail, we appreciate that CMS has offered a thoughtful proposal that will help ensure stability for the millions of diverse seniors and individuals with disabilities who count on Medicare Advantage,” Mary Beth Donahue, president and CEO of the Better Medicare Alliance, said, adding that the proposal furthers the shared goal of improving health equity.
“Medicare Advantage has proven its worth for seniors and taxpayers – providing lower costs, meaningful benefits that address social determinants of health, better outcomes and greater efficiencies for the Medicare dollar,” she said. “A stable rate for 2023 ensures this work can continue. On behalf of our 170 Ally organizations and over 600,000 beneficiary advocates, we applaud CMS for putting seniors first by issuing an Advance Notice that protects coverage choices, advances health equity and preserves affordability for beneficiaries.”
AHIP also responded, with President and CEO Matt Eyles pointing out that for 2022 the average Medicare Advantage monthly premium dropped to $19, down more than 10% since 2021.
“We agree that MA plans play an essential role in improving health equity and addressing the social determinants of health that impact millions of seniors and people with disabilities,” he said. “We support CMS soliciting input on ways to advance these important goals.
“Medicare Advantage enjoys strong bipartisan support because it provides America’s seniors and people with disabilities with access to affordable, high-quality healthcare services,” said Eyles. “We will continue to review the 2023 rate notice and look forward to providing constructive feedback to CMS during the comment period.”
THE LARGER TREND
CMS’ Advance Notice follows a recent congressional letter in which 346 bipartisan members of Congress declared support for Medicare Advantage and urged the agency “to provide a stable rate and policy environment” for the program in 2023.
A December 2021 Morning Consult poll showed that 94% of Medicare Advantage beneficiaries are satisfied with their coverage, while 93% believe that protecting MA should be a priority of the Biden administration.
Google-backed One Medical is acquiring Medicare-focused primary healthcare chain Iora Health for $2.1 billion in an all-stock trade deal, the companies announced Monday.
The buy will give One Medical presence in 28 markets, covering about 40% of the U.S. population and is expected to generateannual revenue at $350 million by 2025. The deal will add about $700 billion in total addressable market, according to an investor presentation.
Under the terms of the deal, which is expected to close in the late third quarter or fourth quarter of this year, Iora stockholders will own about 27% of the combined company. One person from Iora will join One Medical’s board and Iora co-founder and CEO Rushika Fernandopulle will become One Medical’s chief innovation officer.
The acquisition aligns two key players in part of the value-based care movement that eschews traditional payer-provider arrangements in favor of a concierge membership model. Iora’s concentration in the Medicare population and related participation in CMS’ direct contracting model could be key reasons for coming under One Medical’s sights.
Jefferies analysts said they viewed the transaction as positive, particularly considering both companies’ tech and data capabilities. “Given tech orientation and emphasis on outcomes, we expect substantial derivative value from combining data and developing better treatment programs with superior outcomes across [longitudinal] care. We see this as a clear clinical and applied advantage,” they wrote.
Both companies base their business on value-based models, which some in the industry worry have suffered during the COVID-19 pandemic as cash-strapped providers avoid the risk of models not based on fee-for-service. The Biden administration’s director at the Center for Medicare and Medicaid Innovation said recently the movement is at “a critical juncture” and that more mandatory models are likely forthcoming.
And on the Q1 call with investors, executives highlighted a membership increase of 31% year over year.
One Medical, founded in 2007, lead the pack of recent healthcare IPOs, going public in January 2020.
The company touts its direct-to-consumer model buts also contracts directly with employers and partners with several health systems. CFO Bjorn Thaler told Healthcare Dive at the time of the IPO its pitch to investors focused on highlighting a differentiated model.
“[W]e provide the member with a very, very valuable service. They don’t have to wait 29 days to get care. They can get care oftentimes in an instant, digitally,” he said.
Boston-based Iora, which was founded in 2011, has raised nearly $350 million over seven funding rounds, according to Crunchbase. It has contracts with major payers including UnitedHealthcare, Cigna and Humana.
The deal extends One Medical into full-risk Medicare reimbursement. Iora began the direct contracting model in April across all its markets. The program ties reimbursement to spending and quality for all Medicare fee-for-service beneficiaries across a geographic region.
About 60% of Iora’s members are in the fast-growing Medicare Advantage program, which has now reached about 40% of the Medicare population.
Iora had expected revenue this year to reach nearly $300 million and as of the first quarter had 38,000 members, compared to nearly 600,000 members at One Medical, according to the investor presentation.
One Medical stock was trending slightly down in early morning trading Monday.
Many of the Center for Medicare and Medicaid Innovation’s value-based care payment models are undergoing a review, according to the Centers for Medicare & Medicaid Services (CMS).
The statement to Fierce Healthcare comes after CMS quietly updated and delayed several payment models, including pulling a controversial model that ties payments to geographic health outcomes.
“CMS remains steadfast in its commitment to transforming the healthcare system into one that rewards value and care coordination,” the agency said. “The CMS Innovation Center and its alternative payment models help execute that commitment.”
The agency added it hopes to design models that support the adoption of value-based care.
“Many of the CMS Innovation Center’s models are currently under review, and we look forward to providing updates when available,” CMS said.
CMS did not return a request for comment on how many models are under review or which ones are being scrutinized.
The statement comes after CMS has quietly updated the webpages for two payment models to note major changes. The agency made an update to the webpage for the Geographic Direct Contracting Model that said it was currently under review.
A request for applications for the model was posted Jan. 1, and the first performance period was expected to start in 2022 and run through 2024.
The model was intended to improve quality and lower costs for Medicare beneficiaries across a region, and providers in that region can enter into value-based payment arrangements.
Providers can build integrated relationships and invest in population health to better coordinate care, the agency said when the model was released last December.
But the model has gotten pushback from some provider groups. The National Association of Accountable Care Organizations has criticized the model, saying it could confuse patients who may not know whether they are participating in a direct contracting entity.
CMS also quietly pushed back the first performance period for the Kidney Care Choices model, which aims to improve the quality of dialysis care.
The model had an implementation period for 2020 that enabled participants to create the necessary infrastructure for the model, which aims to bundle care from treatment of chronic kidney disease all the way through kidney transplantation and post-transplant care.
Starting Jan. 1, 2021, providers were supposed to start taking on financial accountability including capitated payments.
But CMS posted an update on the webpage for the model, saying the start of the financial performance period will now be Jan. 1, 2022. The agency did not give a reason for the delay.
CMS’ review comes on the heels of a separate analysis conducted under the Trump administration on the value generated by the payment models. The analysis found bundled payment models that gave providers an amount of money for an entire episode of care had mixed results, while global budget models, which give providers a fixed amount for the total number of services given over a certain period of time, were given a more positive review.
It remains unclear whether that analysis is playing any role into the review undertaken by the Biden administration.
This week Brookdale Senior Living, the nation’s largest operator of senior housing, with 726 communities across 43 states and annual revenues of about $3B, announced the sale of 80 percent of its hospice and home-based care division to hospital operator HCA Healthcare for $400M. The transaction gives HCA control of Brookdale’s 57 home health agencies, 22 hospice agencies, and 84 outpatient therapy locations across a 26-state footprint, marking its entry into new lines of business, and allowing it to expand revenue streams by continuing to treat patients post-discharge, in home-based settings.
Like other senior living providers, Brookdale has struggled economically during the COVID pandemic; its home and hospice care division, which serves 17,000 patients, saw revenue drop more than 16 percent last year. HCA, meanwhile, has recovered quickly from the COVID downturn, and has signaled its intention to focus on continued growth by acquisition across 2021.
In separate news, Optum, the services division of insurance giant UnitedHealth Group, was reported to have struck a deal to acquire Landmark Health, a fast-growing home care company whose services are aimed at Medicare Advantage-enrolled, frail elderly patients. Landmark, founded in 2014, also participates in Medicare’s Direct Contracting program.
The transaction is reportedly valued at $3.5B, although neither party would confirm or comment on the deal. The acquisition would greatlyexpand Optum’s home-based care delivery services, which today include physician home visits through its HouseCalls program, and remote monitoring through its Vivify Health unit.
The Brookdale and Landmark deals, along with earlier acquisitions by Humana and others, indicate that the home-based care space is heating up significantly,reflecting a broader shift in the nexus of care to patients’ homes—a growing preference among consumers spooked by the COVID pandemic.
Along with telemedicine, home-based care may represent a new front in the tug-of-war between providers and payers for the loyalty of increasingly empowered healthcare consumers.
Nearly a year after the first confirmed case of COVID-19 in the U.S., some of the nation’s largest health systems made a case for the need to accelerate toward value-based arrangements and potentially acquiring or partnering with health plans to become an integrated system.
Amid new records for deaths and cases from the novel coronavirus, executives gathered virtually for J.P. Morgan’s 39th annual healthcare conference, which typically draws prominent healthcare leaders to San Francisco at the start of each year.
The pandemic has been a heavily discussed topic during the digital gathering. One theme has been health systems either acknowledging they are on the hunt for health insurer acquisitions and partnerships or advocating for such arrangements as result of the challenges.
Anu Singh, managing director and the leader of the mergers, acquisitions and partnerships practice at consultancy Kaufman Hall, said it’s a natural migration for health systems, though it does come with some risk.
“If you want to move into the realm of being a population health manager, and take greater responsibility for your patient bases, you’re going to have to be thinking about maintaining their health,” Singh said. “And that’s typically something that, at least traditionally and historically, has been driven a little bit more by the health plan.”
For Utah’s Intermountain Healthcare, the lessons of the pandemic are clear: The industry needs to move away from a system that rewards volume. Intermountain is a fully integrated system that manages both providers and an insurance unit.
“It is becoming increasingly apparent that systems that are well integrated, especially systems that understand how to take risks, have prospered in the face of the terrible burden, caring for people in the midst of the first pandemic in 100 years,” Intermountain CEO Marc Harrison said Monday.
From his vantage point, Harrison said it has been interesting to watch the consternation around telehealth visits.
“Lots of folks who are really still caught in the volume-based system are actively switching patients back from tele- or distance to in-person visits so they can maximize revenue,” he said. “I understand that. But that’s a really great example of poorly aligned incentives.”
Intermountain has managed to stay in the black as many other systems have struggled financially as a result of the pandemic driving down patient volumes. It reported net income of $167 million through the first nine months of 2020, compared with $919 million the year prior.
Another integrated system, Baylor Scott and White Health, the largest nonprofit system in Texas, said such diversification has helped buoy its finances as hospital and clinic operations bottomed out in the spring due to the virus.
Baylor Scott and White illustrated this point by showing how operating income for its clinical segment took a nosedive in the spring while operating income for its health plan remained relatively steady.
The theme of integrated health systems also seemed to be on the minds of investors. CommonSpirit Health executives were asked during their presentation if buying or creating a health plan was on their radar as the system has a sizable footprint of 140 hospitals across the country.
“I think this is a interesting question, one that of course we’ve discussed many times strategically,” CFO Daniel Morissette said, noting the system does have a number of regional plans. “At this time, we have no plan of having a national CommonSpirit branded plan.” However, Morissette said the system would consider a partnership opportunity.
On the other hand, Midwest-based Advocate Aurora Health said it is actively on the hunt for a potential insurer deal as part of its long-term strategy.
“We do believe that having health plan capability, not necessarily having our own, but partnering for health plan capability, is going to be critical to our success, and we are taking steps to do that,” CEO Jim Skogsbergh said during the virtual conference.
Kaufman Hall said in its latest report that it expects more payer-provider partnerships as a result of the pandemic. “Limitations on fee-for-service payment structures exposed by the pandemic may increase the number of payer-provider partnerships around new payment and care delivery models,” according to the report.
Singh of Kaufman Hall said it’s not surprising that some may lean more toward a partnership due to the risks of starting a new venture, especially an insurance unit that can have “catastrophic loss”. Systems with less experience of moving toward implementing value-based initiatives may be more vulnerable to such risk.
It’s why he thinks partnerships may be a good fit, at least at first. Payers and providers can work together to improve the health of certain populations and then share in the cost savings.
Sitting in the dark before 6 am in my Los Angeles house with my face lit up by yet another Zoom screen, wearing a stylish combination of sweatpants, dress shirt and last year’s JPM conference badge dangling around my neck for old times’ sake, I wonder at the fact that it’s J.P. Morgan Annual Healthcare Conference week again and we are where we are. Quite a year for all of us – the pandemic, the healthcare system’s response to the public health emergency, the ongoing fight for racial justice, the elections, the storming of the Capital – and the subject of healthcare winds its way through all of it – public health, our healthcare system’s stability, strengths and weaknesses, the highly noticeable healthcare inequities, the Affordable Care Act, Medicaid and vaccines, healthcare politics and what the new administration will bring as healthcare initiatives.
I will miss seeing you all in person this year at the J.P. Morgan Annual Healthcare Conference and our annual Sheppard Mullin reception – previously referred to as “standing room only” events and now as “possible superspreader events.” What a difference a year makes. I admit that I will miss the feeling of excitement in the rooms and hallways of the Westin St. Francis and all of the many hotel lobbies and meeting rooms surrounding it. Somehow the virtual conference this year lacks that je ne sais quoi of being stampeded by rushing New York-style street traffic while in an antiquated San Francisco hotel hallway and watching the words spoken on stage transform immediately into sharp stock price increases and drops. There also is the excitement of sitting in the room listening to paradigm shifting ideas (teaser – read the last paragraph of this post for something truly fascinating). Perhaps next year, depending on the vaccine…
So, let’s start there. Today was vaccine day at the JPM Conference, with BioNTech, Moderna, Novovax and Johnson & Johnson all presenting. Lots of progress reported by all of the companies working on vaccines, but the best news of the day was the comment from BioNTech that the UK and South Africa coronavirus variants likely are still covered by the BioNTech/Pfizer vaccine. BioNTech’s CEO, Prof. Uğur Şahin, M.D., promised more data and analysis to be published shortly on that.
We also saw continued excitement for mRNA vaccines, not only for COVID-19 but also for other diseases. There is a growing focus (following COVID-19 of course) on vaccines for cancer through use of neoantigen targets, and for a long list of infectious disease targets.For cancer, though, there continues to be a growing debate over whether the best focus is on “personalized” vaccines or “off the shelf” vaccines – personalized vaccines can take longer to make and have much, much higher costs and infrastructure requirements. We expect, however, to see very exciting news on the use of mRNA and other novel technologies in the next year or two that, when approved and put into commercialization, could radically change the game, not only as to mortality, but also by eliminating or significantly reducing the cost of care with chronic conditions (which some cancers have become, thanks to technological advancement). We are fortunate to be in that gap now between “care” and “cure,” where we have been able with modern medical advances to convert many more disease states into manageable chronic care conditions. Together with today’s longer lifespans, that, however, carries a much higher price tag for our healthcare system. Now, with some of these recent announcements, we look forward to moving from “care” to “cure” and substantially dropping the cost of care to our healthcare system.
Continuing consolidation also was a steady drumbeat underlying the multiple presentations today on the healthcare services side of the conference – health plans, health systems, physician organizations, home health. The drive to scale continues, as we have seen from the accelerated pace of mergers and acquisitions in the second half of 2020, which continues unabated in January 2021. There was today’s announcement of the acquisition by Amerisource Bergen of Walgreens Boots Alliance’s Alliance Healthcare wholesale business (making Walgreens Boots Alliance the largest single shareholder of Amerisource Bergen at nearly 30% ownership), following the announcement last week of Centene’s acquisition of Magellan Health (coming fast on the heels of Molina Healthcare’s purchase of Magellan’s Complete Care line of business).
On the mental health side – a core focus area for Magellan Health – Centene’s Chief Executive Officer, Michael Neidorff, expressed the common theme that we have been seeing in the past year that mental health care should be integrated and coordinated with primary and specialty care. He also saw value in Magellan’s strong provider network, as access to mental health providers can be a challenge in some markets and populations. The behavioral/mental health sector likely will see increased attention and consolidation in the coming year, especially given its critical role during the COVID-19 crisis and also with the growing Medicaid and Medicare populations.There are not a lot of large assets left independent in the mental health sector (aside from inpatient providers, autism/developmental disorder treatment programs, and substance abuse residential and outpatient centers), so we may see more roll-up focus (such as we have seen recently with the autism/ABA therapy sector) and technology-focused solutions (text-based or virtual therapy).
There was strong agreement among the presenting health plans and capitated providers (Humana, Centene, Oak Street and multiple health systems) today that we will continue to see movement toward value-based care (VBC) and risk-based reimbursement systems, such as Medicare Advantage, Medicare direct contracting and other CMS Innovation Center (CMMI) programs and managed Medicaid. Humana’s Chief Executive Officer, Bruce Broussard, said that the size of the MA program has grown so much since 2010 that it now represents an important voting bloc and one of the few ways in which the federal government currently is addressing healthcare inequities – e.g., through Over-the-Counter (OTC) pharmacy benefits, benefits focused on social determinants of health (SDOH), and healthcare quality improvements driven by the STARS rating program. Broussard also didn’t think Medicare Advantage would be a negative target for the Biden administration and expected more foreseeable and ordinary-course regulatory adjustments, rather than wholesale legislative change for Medicare Advantage.
There also was agreement on the exciting possibility of direct contracting for Medicare lives at risk under the CMMI direct contracting initiative. Humana expressed possible interest in both this year’s DCE program models and in the GEO regional risk-based Medicare program model that will be rolling out in the next year. Humana sees this as both a learning experience and as a way to apply their chronic care management skills and proprietary groups and systems to a broader range of applicable populations and markets. There is, however, a need for greater clarity and transparency from CMMI on program details which can substantially affect success and profitability of these initiatives.
Humana, Centene and Oak Street all sang the praises of capitated medical groups for Medicare Advantage and, per Michael Neidorff, the possibility of utilizing traditional capitated provider models for Medicaid membership as well. The problem, as noted by the speakers, is that there is a scarcity of independent capitated medical groups and a lack of physician familiarity and training. We may see a more committed effort by health plans to move their network provider groups more effectively into VBC and risk, much like we have seen Optum do with their acquired fee for service groups. Privia Health also presented today and noted that, while the market focus and high valuations today are accorded to Medicare lives, attention needs to be paid to the “age in” pipeline, as commercial patients who enroll in original Medicare and Medicare Advantage still would like to keep their doctors who saw them under commercial insurance. Privia’s thesis in part is to align with patients early on and retain them and their physicians, so as to create a “farm system” for accelerated Medicare population growth. Privia’s Chief Executive Officer, Shawn Morris, also touted Privia’s rapid growth, in part attributable to partnering with health systems.
As written in our notes from prior JPM healthcare conferences, health systems are continuing to look outside to third parties to gain knowledge base, infrastructure and management skills for physician VBC and risk arrangements. Privia cited their recent opening of their Central Florida market in partnership with Health First and rapid growth in providers by more than 25% in their first year of operations.
That being said, the real market sizzle remains with Medicare Advantage and capitation, percent of premium arrangements and global risk. The problem for many buyers, though, is that there are very few assets of size in this line of business. The HealthCare Partners/DaVita Medical Group acquisition by Optum removed that from the market, creating a high level of strategic and private equity demand and a low level of supply for physician organizations with that expertise. That created a focus on groups growing rapidly in this risk paradigm and afforded them strong valuation, like with Oak Street Health this past year as it completed its August 2020 initial public offering. Oak Street takes on both professional and institutional (hospital) risk and receives a percent of premium from its contracting health plans. As Oak Street’s CEO Mike Pykosz noted, only about 3% of Medicare dollars are spent on primary care, while approximately two-thirds are spent on hospital services. If more intensive management occurs at the primary care level and, as a result, hospitalizations can be prevented or reduced, that’s an easy win that’s good for the patient and the entire healthcare system (other than a fee for service based hospital).Pykosz touted his model of building out new centers from scratch as allowing greater conformity, control and efficacy than buying existing groups and trying to conform them both physically and through practice approaches to the Oak Street model. He doesn’t rule out some acquisitions, but he noted as an example that Oak Street was able to swiftly role out COVID-19 protocols rapidly and effectively throughout his centers because they all have the same physical configuration, the same staffing ratio and the same staffing profiles. Think of it as a “franchise” model where each Subway store, for example, will have generally the same look, feel, size and staffing. He also noted that while telehealth was very helpful during the COVID-19 crisis in 2020 and will continue as long as the doctors and patients wish, Oak Street believes that an in-person care management model is much more effective and telehealth is better for quick follow-ups or when in-person visits can’t occur.
Oak Street also spoke to the topic of Medicare Advantage member acquisition, which has been one of the more difficult areas to master for many health plans and groups, resulting in many cases with mergers and acquisitions becoming a favored growth vehicle due to the difficulties of organic membership growth. Interestingly, both Oak Street and Humana reported improvements in membership acquisition during the COVID-19 crisis. Oak Street credited digital marketing and direct response television, among other factors. Humana found that online direct-to-consumer brokers became an effective pathway during the COVID-19 crisis and focused its energy on enhancing those relationships and improving hand-offs during the membership enrollment process. Humana also noted the importance of brand in Medicare Advantage membership marketing.
Staying with Medicare Advantage, there is an expectation of a decrease in Medicare risk adjustment revenue in 2021, in large part due to the lower healthcare utilization during the COVID crisis and the lesser number of in-person visits during which HCC-RAF Medicare risk adjustment coding typically occurs. That revenue drop however likely will not significantly decrease Medicare Advantage profitability though, given the concomitant drop in healthcare expenses due to lower utilization, and per conference reports, is supposed to return to normal trend in 2022 (unless we see utilization numbers fall back below 90% again). Other interesting economic notes from several presentations, when taken together, suggest that while many health systems have lost out on elective surgery revenue in 2020, their case mix index (CMI) in many cases has been much higher due to the COVID patient cases. We also saw a number of health systems with much lower cash days on hand numbers than other larger health systems (both in gross and after adjusting for federal one-time stimulus cash payments), as a direct result of COVID. This supports the thesis we are hearing that, with the second wave of COVID being higher than expected, in the absence of further federal government financial support to hospitals, we likely will see an acceleration of partnering and acquisition transactions in the hospital sector.
Zoetis, one of the largest animal health companies, gave an interesting presentation today on its products and service lines. In addition to some exciting developments re: monoclonal antibody treatments coming on line for dogs with pain from arthritis, Zoetis also discussed its growing laboratory and diagnostics line of business. The animal health market, sometime overshadowed by the human healthcare market, is seeing some interesting developments as new revenue opportunities and chronic care management paradigms (such as for renal care) are shifting in the animal health sector. This is definitely a sector worth watching.
We also saw continuing interest, even in the face of Congressional focus this past year, on growing pharmacy benefit management (PBM) companies, which are designed to help manage the pharmacy spend. Humana listed growth of its PBM and specialty pharmacy lines of business as a focus for 2021, along with at-home care. In its presentation today, SSM Health, a health system in Wisconsin, Oklahoma, Illinois, and Missouri, spotlighted Navitus, its PBM, which services 7 million covered lives in 50 states.
One of the most different, interesting and unexpected presentations of the day came from Paul Markovich, Chief Executive Officer of Blue Shield of California. He put forth the thesis that we need to address the flat or negative productivity in healthcare today in order to both reduce total cost of care, improve outcomes and to help physicians, as well as to rescue the United States from the overbearing economic burden of the current healthcare spending. Likening the transformation in healthcare to that which occurred in the last two decades with financial services (remember before ATMs and banking apps, there were banker’s hours and travelers cheques – remember those?), he described exciting pilot projects that reimagine healthcare today. One project is a real-time claims adjudication and payment program that uses smart watches to record physician/patient interactions, natural language processing (NLP) to populate the electronic medical record, transform the information concurrently into a claim, adjudicate it and authorize payment. That would massively speed up cash flow to physician practices, reduce paperwork and many hours of physician EMR and billing time and reduce the billing and collection overhead and burden. It also could substantially reduce healthcare fraud.
Paul Markovich also spoke to the need for real-time quality information that can result in real-time feedback and incentivization to physicians and other providers, rather than the costly and slow HEDIS pursuits we see today. One health plan noted that it spends about $500 million a year going into physician offices looking at medical records for HEDIS pursuits, but the information is totally “in the rearview mirror” as it is too old when finally received and digested to allow for real-time treatment changes, improvement or planning. Markovich suggested four initiatives (including the above, pay for value and shared decision making through better, more open data access) that he thought could save $100 billion per year for the country.Markovich stressed that all of these four initiatives required a digital ecosystem and asked for help and partnership in creating one. He also noted that the State of California is close to creating a digital mandate and statewide health information exchange that could be the launching point for this exciting vision of data sharing and a digital ecosystem where the electronic health record is the beginning, but not the end of the healthcare data journey.