During one of our regular check-ins with a health system CEO this week, the conversation took a turn for the existential. Lamenting the difficult economic situation in the industry, the continued shift of care to ambulatory disruptors, and the mounting pressure to dial back money-losing services, he shared that he was starting to question the fundamental business model.
“Many years ago, we set out to become an integrated delivery system. But I’m not sure we’ve succeeded at any of those things: we’re not integrated enough, we don’t act like a system, and we don’t seem to be delivering the kind of care consumers want.” A stark admission, but one that could apply to many large health systems across the industry.
In theory, those three “legs of the stool” should create a virtuous flywheel: greater integration across the care continuum (perhaps in a risk-bearing model, but not necessarily) ought to allow systems to deliver quality care at the right place, right time. And a system-oriented approach ought to allow for efficiencies and cost-savings that enable care to be delivered at lower cost to patients.
Instead, the three components often create a vicious spiral: care that’s not coordinated across an integrated continuum, with little success at leveraging system-level efficiencies, resulting in unnecessary, duplicative, and variable-quality care delivery at excessive cost.
Capturing the value of integrated delivery systems will ultimately require hard work, and not just lip service, on all three pieces. Meanwhile, scaling a broken model will only exacerbate the problems of organizations that are neither integrated, nor systemic, nor delivering care that is high value.
The demise of Haven — a coalition of three big employers aiming to lower the cost of healthcare for their workers — was met with a surprising reaction from Jamie Dimon, CEO of JPMorgan Chase: “We want to do this again.”
A Dec. 6 report from Bloomberg details some of the aftermath of Haven’s end and also the origins of Morgan Health, the bank’s second go at lowering healthcare costs that was rolled out in spring 2021. While still in its early stages, one tenet of its strategy is a return to basics, including appointments between clinicians and patients that take at least 30 minutes if not an hour.
Haven was the healthcare partnership formed in 2018 by Amazon, JPMorgan Chase and Berkshire Hathaway with an aim to lower healthcare costs for their 1.2 million workers. It disbanded in 2021. As its end neared, Mr. Dimon set out to learn what had gone wrong.
When he asked the question of Bill Wulf, MD, CEO of Central Ohio Primary Care, the internist told the businessman the initiative had moved too slowly. A virtual care program drew in only 150 people in Ohio, for example, before it was scrapped.
Shortly after the debrief with Dr. Wulf, Mr. Dimon assigned a lieutenant to restart the work on lowering employer healthcare costs, this time focusing on JPMorgan Chase alone. That leader was Peter Scher, vice chairman with the bank, who had his doubts at first. “There are a lot of things we could be spending our time on,” he told Bloomberg. “I was perfectly prepared to go back to Jamie and the operating committee and say, ‘Listen, it was a good try.'”
Mr. Scher stuck with it and brought on Dan Mendelson, founder and former CEO of healthcare advisory group Avalere Health, to lay the groundwork for JPMorgan’s second healthcare attempt. Mr. Mendelson, who had been a skeptic of Haven, spent three months crafting a strategy and playbook that recognized where Haven had fallen short and avoided repeated mistakes. He signed on to lead the group, dubbed Morgan Health.
The group has made more headlines since its launch than its predecessor Haven, which premiered with much bravado but went nearly a year without releasing any news except for its name and a new website. In fall 2022, Morgan Health openedthree advanced primary care centers in Ohio for a total of five and formed a healthcare venture capital team targeting early- to later-stage healthcare companies with innovations in areas like genetic medicine, autoimmune diseases, cardiometabolic diseases and rare disorders. It also hired Cheryl Pegus, MD, Walmart’s executive vice president of health and wellness, as a managing director.
Morgan Health’s strategy is marked by what appears to be common sense and a return to basics, including the placement of clinics in office building atriums — “a full-service practice where employees can develop long-term relationships with primary-care providers, wellness coaches, mental health providers and care coordinators.”
All appointments are booked for at least 30 minutes with many going an hour, according to Bloomberg. Patients generally see the same practitioner for each visit to build long-term relationships. Clinicians’ payments are tied to goals like avoiding emergency room visits, providing cancer screenings and keeping high blood pressure in check. If it plays out as designed, JPMorgan says the investment in prevention and primary care will curb high-cost services and hospital stays, ultimately leading to meaningful savings.
The goal is to “identify high-risk patients and then bubble-wrap them,” Dr. Wulf told Ohio business leaders in an October meeting, Bloomberg reports. “How do we keep you out of the hospital?”
JPMorgan has opened five clinics in the area of Columbus, Ohio, which will also be open to other employers who want to sign on. The clinics and primary care centers are managed and staffed by Vera Whole Health and Central Ohio Primary Care. JPMorgan is seeking “like-minded” medical groups in markets like New York, Chicago and Dallas where it has hubs of workers, Bloomberg reports.
In an Oct. 5, 2022, commentary, Ken Kaufman offers a full-throated and heartfelt defense of non-profit healthcare during a time of significant financial hardship. Ken describes 2022 as “the worst financial year for hospitals in memory.” His concern is legitimate. The foundations of the nonprofit healthcare business model appear to be collapsing. I’ve known and worked with Ken Kaufman for decades. He is the life force behind Kaufman Hall, a premier financial and strategic advisor to nonprofit hospitals and health systems. The American Hospital Association uses Kaufman Hall’s analysis of hospitals’ underlying financial trends to support its plea for Congressional funding. Beyond the red ink, Ken laments the “media free-for-all challenging the tax-exempt status, financial practices, and ostensible market power of not-for-profit hospitals and health systems.” He is referring to three recent investigative reports on nonprofits’ skimpy levels of charity care (Wall Street Journal), aggressive collection tactics (New York Times) and 340B drug purchasing program abuses (New York Times). Ken has never been timid about expressing his opinions. He’s passionate, partisan and proud. His defense of nonprofit healthcare chronicles their selfless care of critically ill patients, the 24/7 demands on their resources and their commitment to treating the uninsured. These “must have clinical services…don’t just magically appear.” Nonprofit healthcare needs “our support and validation in the face of extreme economic conditions and organizational headwinds. ”Given his personality, it’s not surprising that Ken’s strident rhetoric in defending nonprofit healthcare reminds me of the famous “You can’t handle the truth” exchange between Lieutenant Kaffee (Tom Cruise) and Colonel Jessup (Jack Nicholson) from the 1992 movie “A Few Good Men.” Kaffee presses Jessup on whether he ordered a “code red” that led to the death of a soldier under his command. When Kaffee declares he’s entitled to the truth, Jessup erupts,… I have neither the time nor the inclination to explain myself to a man that rises and sleeps under the blanket of the very freedom I provide and then questions the manner in which I provide it. I would rather you say, “thank you” and be on your way. Should American society just say “thank you” to nonprofit healthcare and provide the massive incremental funding required to sustain their current operations?
Truth and Consequences (Download PDF here)The social theorist Thomas Sowell astutely observed, “If you want to help someone, tell them the truth. If you want to help yourself, tell them what they want to hear.” In this commentary, Ken Kaufman is telling nonprofit healthcare exactly what they want to hear. The truth is more nuanced, troubling and inconvenient. Healthcare now consumes 20 percent of the national economy and the American people are sicker than ever. Despite the high healthcare funding levels, the CDC recently reported in U.S. life expectancy dropped almost a full year in 2021. Other wealthy nations experienced increases in life expectancy. Combining 2020 and 2021, the 2.7-year drop in U.S. life expectancy is the largest since the early 1920s. During an interview regarding the September 28, 2022, White House Conference on Hunger, Nutrition and Health, Senator Cory Booker highlighted two facts that capture America’s healthcare dilemma. One in three government dollars funds healthcare expenditure. Half of Americans suffer from diabetes or pre-diabetes.As a nation, we’re chasing our tail by prioritizing treatment over prevention. Particularly in low-income rural and urban communities, there is a breathtaking lack of vital primary care, disease management and mental health services. Instead of preventing disease, our healthcare system has become adept at keeping sick people alive with a diminished life quality. There is plenty of money in the system to amputate a foot but little to manage the diabetes that necessitates the amputation. Despite mission statements to the contrary, nonprofit healthcare follows the money. The only meaningful difference between nonprofit and for-profit healthcare is tax status. Each seeks to maximize treatment revenues by manipulating complex payment formularies and using market leverage to negotiate higher commercial payment rates. According to Grandview Research, the market for revenue cycle management in 2022 is $140.4 billion and forecasted to grow at a 10% annual rate through 2030. By contrast, Ibis World forecasts the U.S. automobile market to grow 2.6% in 2022 to reach $100.9 billion. Unbelievably, in today’s America, processing medical claims is far more lucrative than manufacturing and selling cars and trucks. According to CMS’s National Expenditure Report for 2020, hospitals (31%) and physicians and clinical services (20%) accounted for over half of national healthcare expenditures. This included $175 billion allocated to providers through the CARES Act. Despite the massive waste embedded within healthcare delivery, the CARES Act funding gave providers the illusion that America would continue to fund its profligate and often ineffective operations. It’s not at all surprising that healthcare providers now want, even expect, more emergency funding. Change is hard. Not even during COVID did providers give up their insistence on volume-based payment. Providers did not embrace proven virtual care and hospital-at-home business practices until CMS guaranteed equivalent payment to existing in-hospital/clinic service provision. Even with parity payment and the massive CARES Act funding, there was uneven care access for COVID patients. Particularly in low-income communities, tens of thousands died because they did not receive appropriate care. More of the same approach to healthcare delivery will yield more of the same dismal results. Healthcare providers have had over a decade to advance value-based care (VBC). I define VBC as the right care at the right time in the right place at the right price. Instead of pursuing VBC, providers have doubled-down on volume-driven business models that attract higher-paying commercially-insured patients. Despite the relative ease of migrating service provision to lower-cost settings, providers insist on operating high-cost, centralized delivery models (think hospitals). They want society, writ large, to continue paying premium prices for routine care. It’s time to stop. As a country, we need less healthcare and more health.
When I give speeches to healthcare audiences, I typically begin with three yes-or-no questions about U.S. healthcare to establish the foundation for my subsequent observations. Here they are. Question #1: The U.S. spends 20% of its economy on healthcare. The big country with the next highest percentage spend is France at 12%. How many believe we need to spend more than 20% of our economy to provide great healthcare to everyone in the country? No one ever raises their hand. Question #2: The CDC estimates that 90% of healthcare expenditure goes to treat individuals with chronic disease and mental health conditions. How many believe we’re winning the war against chronic disease and mental health conditions? No one ever raises their hand. Question #3: Given the answer to the previous two questions, how many believe the system needs to shift resources from acute and specialty care into health promotion, primary care, chronic disease management and behavioral health? Everyone raises their hands. This short exercise is quite revealing. It demonstrates that healthcare doesn’t have a funding problem. It has a distribution problem. It also demonstrates that providers aren’t adequately addressing our most critical healthcare challenge, exploding chronic disease and mental health conditions. Finally, the industry needs major restructuring.
The real questions about reforming healthcare are less about what to reform and more about how to undertake reform. The increasing media scrutiny that Ken Kaufman references as well as growing consumer frustrations with healthcare service provision, demonstrate that healthcare is losing the battle for America’s hearts and minds.
Markets are unforgiving. The operating losses most nonprofit providers are experiencing reflect a harsh reality. Their current business models are not sustainable. An economic reckoning is underway. The long arc of economics points toward value. As healthcare deconstructs, the nation’s acute care footprint will shrink, hospitals will close and value-based care delivery will advance. The process will be messy.
The devolving healthcare marketplace led me to ask a fourth question recently in Nashville during a keynote speech to the Council of Pharmacy Executives and Suppliers. Here it is. Question #4: As the healthcare system reforms, will that process be evolutionary (reflecting incremental change) or revolutionary (reflecting fundamental change). Two-thirds voted that the change would be revolutionary. That response is just one data point but it reflects why post-COVID healthcare reform is different than the reform efforts that have preceded it. The costs of maintaining status-quo healthcare are simply too high. From a policy perspective, either market-driven healthcare reforms will drive better outcomes at lower costs (that’s my hope) or America will shift to a government-managed healthcare system like those in Germany, France and Japan.
Like Ken Kaufman, I admire frontline healthcare workers and believe we need to make their vital work less burdensome. I also sympathize with health system executives who are struggling to overcome legacy business practices and massive operating deficits. Unfortunately, most are relying on revenue-maximizing playbooks rather than reconfiguring their operations to advance consumerism and value-based care delivery.
Unlike Ken Kaufman, I believe it’s time for some tough love with nonprofit healthcare providers. Payers must tie new incremental funding to concrete movement into value-based care delivery. This was the argument Zeke Emanuel, Merrill Goozner and I made in a two-part commentary (part 1; part 2) in Health Affairs earlier this year. It’s also why the HFMA, where I serve on the Board, has made “cost effectiveness of health (CEoH)” its new operating mantra.
While this truth may be hard, it also is liberating. Freeing nonprofit organizations from their attachment to perverse payment incentives can create the impetus to embrace consumerism and value. Kinder, smarter and affordable care for all Americans will follow.
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.
COVID fueled a record year for digital healthcare venture funding in 2021, which included 85 digital health startups achieving “unicorn” status with $1B+ valuations. But 2022 has been marked by cooling expectations amid inflation concerns and recession fears.
In the graphic above, we’ve tracked the stock market performances of six recent healthcare IPOs across their opening, peak, and latest months. While not all of them are pure digital health plays, each of these companies promotes its digital solutions or tech-enabled patient platforms as key parts of their value propositions.
Since going public, each company has lost between 50 and 90 percent of its initial value, more than double the S&P 500’s roughly 20 percent drop from its January 2022 peak to today’s level. The bear market has influenced the venture funding world as well, as H1 2022 fundraising totals for digital health have dropped from last year’s record-setting pace, though they may still surpass 2020 levels by year end.
After the initial fervor, this market correction among “healthtech” companies is not surprising, and acquisitions—like Amazon’s purchase of One Medical—are likely to continue, as long as these market trends hold.
The questions every investor should now be asking: does this start-up have a viable path to profitability in the US healthcare market, and does it deliver meaningful value to consumers?
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.
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.
The Mark Cuban Cost Plus Drug Co. launched its online pharmacy in January, offering low-cost versions of high-cost generic drugs. And it all started with a cold email.
Alex Oshmyansky, MD, PhD, fired off an email to Mr. Cuban with a simple subject line: “Cold pitch.” The then 33-year-old radiologist told Mr. Cuban about work he was doing in Denver with a compounding pharmacy and the business plan behind a company he founded in 2018, Osh’s Affordable Pharmaceuticals.
“I asked him a simple question, because this was when the whole pharma bro thing was going down,” Mr. Cuban said on NPR podcast The Limits, referring to convicted felon Martin Shkreli. “I was like, ‘Look, if this guy can jack up the prices 750 percent for lifesaving medicines, can we go the opposite direction? Can we cut the pricing? Are there inefficiencies in this industry that really allow us to do it and really make a difference?'”
Dr. Oshmyansky answered yes. Their weekly email correspondence continued for months. The Mark Cuban Cost Plus Drug Co. was quietly founded in May 2020, and Dr. Oshmyansky now serves as its CEO. The company is organized as a public-benefit corporation, meaning it is for-profit but claims its social mission of improving public health is just as important as the bottom line.
“We basically created a vertically integrated manufacturing company that will start with generic drugs,” Mr. Cuban told NPR. A major component of the strategy is to bypass pharmacy benefit managers, which Mr. Cuban likens to bouncers at a club.
“They’re the ones who say, ‘Hey, I’m controlling access to all the big insurance companies. If you want this insurance company to sell your drug, you’ve got to pay the cover charge. All these drugs pay the cover charge to these PBMs through rebates, and because they’re paying the cover charges, the prices are jacked up,” Mr. Cuban told NPR. “We said we’re going to create our own PBM, we’re going to work directly with the manufacturers, and we’re not going to charge the cover charge.”
The Mark Cuban Cost Plus Drug Co. marks the prices of its drugs up 15 percent, charges a $3 pharmacy fee to pay the pharmacists it works with, and a fee for shipping. “That’s it,” Mr. Cuban said on NPR. “There’s no other added costs. The manufacturers love what we’re doing for that reason.”
Others have set out before to disrupt pharma the way Mr. Cuban and Dr. Oshmyansky intend, but their downfall is cooperating or giving in to the PBMs, the entrepreneur noted.
“People always ask, well why didn’t somebody do this before? The reality is there’s so much money there, it’s hard not to be greedy,” Mr. Cuban said on the podcast. “If you get to any scale at all, those PBMs will start throwing money at you and saying, ‘Look, just play the game.’”
Mr. Cuban has indicated he has no intention to play the game.
“I could make a fortune from this,” Mr. Cuban told Texas Monthlylast fall. “But I won’t. I’ve got enough money. I’d rather f— up the drug industry in every way possible.”