Category Archives: Value Creation

Debating the best way to Chase Commercial Market Share

Posted on by • Posted in Health System, Hospital, Hospital Industry, Leadership, Leadership Alignment, Leadership Vision, Market Share, Market Trends, Marketing, Strategy, Value Creation, Value Proposition, Value-Based Contracting, Value-Based Healthcare • Leave a comment

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Cross-subsidy economics are increasingly challenged for America’s hospitals. Aging Baby Boomers are moving from commercial insurance to Medicare, decreasing the share of patients with lucrative private coverage, and insurers are increasingly reticent to provide the rate increases providers need to make up for the worsening mix.

At a recent executive retreat, one health system debated the best strategies to increase their capture of commercial volume. Most of the conversation focused on traditional market-based tactics to increase access and awareness in fast-growing, higher income areas of their service region.

For instance, the system’s chief marketing officer was pushing to increase advertising in the rapidly expanding suburbs, and advocated building ambulatory surgery centers in a wealthy area of town with a boom of new home construction. 
 
The chief strategy officer shared a different perspective, supporting an employer-focused strategy. His logic: “In most businesses, the CEO and the janitor have the same benefit plans. If we only focus on the wealthy parts of town, we’re missing a big portion of the workers with good insurance.” He advocated for a new round of direct-to-employer contracting outreach, hoping to steer workers to high-value primary and specialty care solutions.

In reality, any system looking to move commercial share will need to do both—but even the best playbook for building commercial volume is unlikely to close the growing cross-subsidy gap. To maintain profitability in the long term, health systems must reduce costs for managing Medicare patients by delivering lower-cost care in lower-cost settings, with lower-cost staff.    

Value-based care isn’t yielding much “value.”

Posted on by • Posted in Accountable Care Organization (ACO), Financial Incentives, Health Policy, High Drug Prices, High Premiums, High Prices, Ill-Defined Goals, Quality Measures, Value Chain, Value Creation, Value-Based Healthcare • Leave a comment

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Despite the hype, accountable care organizations (ACOs) and other Medicare-driven payment reform programs intended to improve quality and lower healthcare spending haven’t bent the cost curve to the extent many had hoped.

A recent and provocative opinion piece in STAT News, from health policy researcher Kip Sullivan and two single-payer healthcare advocates, calls for pressing pause on value-based payment experimentation. The authors argue that current attempts to pay for value have ill-defined goals and hard-to-measure quality metrics that incentivize reducing care and upcoding, rather than improving outcomes. 

The Gist: We agree with the authors that current value-based care experiments have been disappointing.

The intention is good, but the execution has been bogged down by entrenched industry dynamics and slow-to-move incumbents. One fair criticism: ACOs and other “total cost management” reforms largely focus on the wrong problem. They address utilization, rather than excessive price. 

But we’re having a price problem in the US, not a utilization problem. Europeans, for example, have more physician visits each year than Americans, yet spend less per-person on healthcare. It’s our high prices—for everything from physician visits to hospital stays to prescription drugs—that drive high healthcare spending. 

The root cause: our third-party payer structure actively discourages real efforts to lower price—every player in the value chain, including providers, brokers, and insurers, does better economically as prices increase. That’s why price control measures like reference pricing or price caps have been nonstarters among industry participants. 

Recent reforms that increase price transparency, while not the entire solution, at least shine a light on the real challenges our healthcare system faces.

How other industry players are expanding their healthcare platforms  

Posted on by • Posted in Access, Accessible Care, Care Ecosystem, Care Supplier, Consumer Engagement, Consumer Loyalty, Consumer Needs, Consumer Preferences, Consumer-Centric, Consumerism, Healthcare Platform, Managing Health Spending, Managing the Total Cost of Care, Platform of Choice, Population Management Platform, Population Manager, Premium Owner, Promote Health, Strategic High Ground, Strategy, Strategy Framework, Value Creation, Value Proposition, Value-Based Healthcare • Leave a comment

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Last week, we introduced our framework for value delivery as a “healthcare platform”, in which an organization’s proximity to both the consumer and to the premium dollar determines how it competes as a “care supplier,” a “care ecosystem,” a “premium owner,” or a “population manager.” Traditionally, different healthcare companies have operated primarily in one of these four domains. However, as shown in the graphic below, we’ve recently seen many shift their business into one or more additional quadrants, as they seek to expand their value propositions. UnitedHealth Group is an obvious example: it has moved well beyond the traditional insurance business, via numerous provider and care delivery acquisitions across the continuum.

Other players have shifted from their own “pure play” positions toward more comprehensive “platform” strategies as well: One Medical adding Iora Health to enhance population health capabilities; Walmart moving beyond retail and pharmacy services, partnering with Oak Street Health to expand its ability to manage Medicare patients; Amazon getting into the employer health business. 

There’s a clear pattern emerging—value propositions are converging on a “strategic high ground” that encompasses all four dimensions of platform value, creating a comprehensive set of solutions to deliver accessible care, promote health, and grow consumer loyalty, with an aligned financial model centered on managing the total cost of care. Health systems looking to build platform strategies will find many of these competitors also vying for pride of place as the “platform of choice” for healthcare consumers and purchasers.

Payer contracts, physician pay still anchored in fee-for-service

Posted on by • Posted in Fee for Service Reimbursement, Healthcare Reform, Payment Models, Payor Contracting, Performance Metrics, Performance-Based Incentives, Physician, Physician Compensation, Quality Incentives, Quality Measures, Quality Reporting, Risk-Based Compensation, Value Chain, Value Creation, Value-Based Contracting, Value-Based Healthcare • Leave a comment
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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. While the 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.  

Even the largest health systems dwarfed by industry giants

Posted on by • Posted in Competition, Consumer-Centered Care Pathway, Consumer-Centric, Consumerism, Disruption, Disruptive Technology, Health System, Hospital, Hospital Industry, Market Consolidation, Market Outlook, Market Share, Market Trends, Market Uncertainty, Net Income, Operating Expense Reduction, Operating Expenses, Operating Income, Operating Margin, Operating Metrics, Operating Performance, Operating Revenue, Retail Clinic, Retail Healthcare, Retail Pharmacy, Strategic Advantage, Strategic Change, Strategic Leadership, Strategy, Value Creation, Value Proposition, Value-Based Healthcare, Vertical Integration • Leave a comment

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Insurers, retailers, and other healthcare companies vastly exceed health system scale, dwarfing even the largest hospital systems. The graphic above illustrates how the largest “mega-systems” lag other healthcare industry giants, in terms of gross annual revenue. 

Amazon and Walmart, retail behemoths that continue to elbow into the healthcare space, posted 2021 revenue that more than quintuples that of the largest health system, Kaiser Permanente. The largest health systems reported increased year-over-year revenue in 2021, largely driven by higher volumes, as elective procedures recovered from the previous year’s dip.

However, according to a recent Kaufman Hall report, while health systems, on average, grew topline revenue by 15 percent year-over-year, they face rising expenses, and have yet to return to pre-pandemic operating margins. 

Meanwhile, the larger companies depicted above, including Walmart, Amazon, CVS Health, and UnitedHealth Group, are emerging from the pandemic in a position of financial strength, and continue to double down on vertical integration strategies, configuring an array of healthcare assets into platform businesses focused on delivering value directly to consumers.

What is an insurance company in 2022?

Posted on by • Posted in Antitrust, Dept of Justice (DOJ), Health Insurance Industry, Market Consolidation, Market Power, Market Trends, Mergers & Acquisitions, Value Creation, Value-Based Healthcare, Vertical Integration • Leave a comment

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The largest health insurers are quickly becoming vertically integrated healthcare organizations that span the care and coverage continuum. While 2021 was a mixed year for these companies as healthcare volumes bounced back, their diversified portfolios helped cushion losses from higher claims.

The graphic above analyzes revenue growth by segment for the five largest insurers across the last two years. On average the insurance and pharmacy benefit management components of the companies grew at nine percent, while care delivery and integrated health services grew at much higher rates. UnitedHealth Group (UHG) and Anthem boasted the highest year-over-year revenue growth, driven by UHG’s Optum subsidiary and Anthem’s integrated health services.

Cigna and CVS Health each earned less than a quarter of their total revenue from their insurance arms last year. While Humana lags the others in topline revenue, it has assembled a robust portfolio of care delivery investments and partnerships, surpassed only by UHG. 

As antitrust scrutiny on vertical integration increases (case in point: the DOJ is now challenging UHG’s acquisition of Change Healthcare), insurers will face the hard task of integrating their portfolio of service—and demonstrating that they deliver value to consumers and patients.

Hastening the demise of independent physician practice

Posted on by • Posted in Disruption, Investment Banking, Investor Owned, Market Consolidation, Physician, Physician Acquisition, Physician Compensation, Physician Employment, Physician Independence, Private Equity, Value Creation, Value Proposition, Value-Based Healthcare • Leave a comment

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Physician Practice Sales to Private Equity Doubled in 3 Years

A new report from consulting firm Avalere Health and the nonprofit Physicians Advocacy Institute finds that the pandemic accelerated the rise in physician employment, with nearly 70 percent of doctors now employed by a hospital, insurer or investor-owned entity.

Researchers evaluated shifts to employment in the two-year period between January 2019 and January 2021, finding that 48,400 additional doctors left independent practice to join a health system or other company, with the majority of the change occurring during the pandemic. While 38 percent chose employment by a hospital or health system, the majority of newly employed doctors are now employed by a “corporate entity”, including insurers, disruptors and investor-owned companies.

(Researchers said they were unable to accurately break down corporate employers by entity, and that the study likely undercounts the number of physician practices owned by private equity firms, given the lack of transparency in that segment.) Growth rates in the corporate sector dwarfed health system employment, increasing a whopping 38 percent over the past two years, in comparison to a 5 percent increase for hospitals.

We expect this pace will continue throughout this year and beyond, as practices seek ongoing stability and look to manage the exit of retiring partners, enticed by the outsized offers put on the table by investors and payers.

Private equity accelerates its push into physician practice

Posted on by • Posted in Market Consolidation, Physician, Physician Acquisition, Private Equity, Specialty Care, Value, Value Architect, Value Creation, Value Proposition, Value-Based Healthcare • Leave a comment

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As we reported recently, healthcare M&A hit record highs in the first quarter of 2021—with deal activity in the physician practice space surging 87 percent. The graphic above highlights private equity firms’ increasing investment in the sector over the last five years. Both the number and size of PE-backed healthcare deals have increased substantially from 2015 to 2020, up 39 and 45 percent respectively.

In 2020, physician practices and services comprised nearly a fifth of all transactions, with PE firms driving the majority. One in five physician transactions involved primary care practices—a signal that investors are banking on profits to be made in the shift to value-based care models. 

Meanwhile, PE firms are still rolling up high-margin specialty practices, with ophthalmology, orthopedics, dermatology, and anesthesiology groups all receiving significant funding in 2020. PE investment in physician practices will likely continue to accelerate, as investors view healthcare as a promising place to deploy readily available capital.

But we remain convinced that private equity investors have little interest in being long-term owners of practices, and will ultimately look for an exit by selling “rolled-up” physician entities to health systems or insurers.