Earlier this week, the Centers for Medicare and Medicaid Services (CMS) issued a proposal to remedy its four years of payment cuts to the more than 1,600 hospitals participating in the 340B Drug Pricing Program through one-time, lump-sum payments that will total roughly $9B.
In 2018, CMS reduced drug reimbursement to 340B covered-entity hospitals by nearly 30 percent, in an attempt to align reimbursement with hospitals’ actual drug acquisition costs. The Supreme Court overturned those cuts in 2022, ruling that the Department of Health and Human Services (HHS) had violated rulemaking procedure. As CMS rulemaking on Medicare payment must be budget-neutral, the agency will offset the remedy payments with a 0.5 percent cut to all hospitals for non-drug items and services covered under the Hospital Outpatient Prospective Payment System (OPPS) over the next 16 years. Stakeholders have until September 5th to comment on the proposed rule. Once the final rule is published later this year, CMS plans to repay 340B participant hospitals within 60 days of their application for remedy.
The Gist: After worries about how last year’s Supreme Court ruling would be implemented, 340B participant hospitals will be relieved to receive their payment corrections up front instead of over time, especially given current margin challenges.
But while this issue is now set to be resolved, other critical decisions about the 340B program’s fate are pending before courts. Earlier this year, Bayer and EMD Serono became the 20th and 21st drugmakers to restrict discounts to contract pharmacies, following an appellate court decision in January that sided with the pharmaceutical manufacturers.
Meanwhile, appellate courts in other jurisdictions are set to hear at least two more cases on the issue, amid conflicting rulings about whether HHS can enforce contract pharmacy discounts.
Pay attention to the media coverage around artificial intelligence, and it’s easy to get the sense that technologies such as chatbots pose an “existential crisis” to everything from the economy to democracy.
These threats are real, and proactive regulation is crucial. But it’s also important to highlight AI’s many positive applications, especially in health care.
Consider the Mayo Clinic, the largest integrated, nonprofit medical practice in the world, which has created more than 160 AI algorithms in cardiology, neurology, radiology and other specialties. Forty of those have already been deployed in patient care.
To better understand how AI is used in medicine, I spoke with John Halamka, a physician trained in medical informatics who is president of Mayo Clinic Platform. As he explained to me, “AI is just the simulation of human intelligence via machines.”
Halamka distinguished between predictive and generative AI. The former involves mathematical models that use patterns from the past to predict the future; the latter uses text or images to generate a sort of human-like interaction.
It’s that first type that’s most valuable to medicine today. As Halamka described, predictive AI can look at the experiences of millions of patients and their illnesses to help answer a simple question: “What can we do to ensure that you have the best journey possible with the fewest potholes along the way?”
For instance, let’s say someone is diagnosed with Type 2 diabetes. Instead of giving generic recommendations for anyone with the condition, an algorithm can predict the best care plan for that patient using their age, geography, racial and ethnic background, existing medical conditions and nutritional habits.
This kind of patient-centered treatment isn’t new; physicians have long been individualizing recommendations. So in this sense, predictive AI is just one more tool to aid in clinical decision-making.
The quality of the algorithm depends on the quantity and diversity of data. I was astounded to learn that the Mayo Clinic team has signed data-partnering agreements with clinical systems across the United States and globally, including in Canada, Brazil and Israel. By the end of 2023, Halamka expects the network of organizations to encompass more than 100 million patients whose medical records, with identifying information removed, will be used to improve care for others.
Predictive AI can also augment diagnoses. For example, to detect colon cancer, standard practice is for gastroenterologists to perform a colonoscopy and manually identify and remove precancerous polyps. But some studies estimate that 1 in 4 cancerous lesions are missed during screening colonoscopies.
Predictive AI can dramatically improve detection. The software has been “trained” to identify polyps by looking at many pictures of them, and when it detects one during the colonoscopy, it alerts the physician to take a closer look. One randomized controlled trial at eight centers in the United States, Britain and Italy found that using such AI reduced the miss rate of potentially cancerous lesions by more than half, from 32.4 percent to 15.5 percent.
Halamka made a provocative statement that within the next five years, it could be considered malpractice not to use AI in colorectal cancer screening.
But he was also careful to point out that “it’s not AI replacing a doctor, but AI augmenting a doctor to provide additional insight.” There is so much unmet need that technology won’t reduce the need for health-care providers; instead, he argued, “we’ll be able to see more patients and across more geographies.”
Generative AI, on the other hand, is a “completely different kind of animal,” Halamka said. Some tools, such as ChatGPT, are trained on un-curated materials found on the internet. Because the inputs themselves contain inaccurate information, the models can produce inappropriate and misleading text. Moreover, whereas the quality of predictive AI can be measured, generative AI models produce different answers to the same question each time, making validation more challenging.
At the moment, there are too many concerns over quality and accuracy for generative AI to direct clinical care. Still, it holds tremendous potential as a method to reduce administrative burden. Some clinics are already using apps that automatically transcribe a patient’s visit. Instead of creating the medical record from scratch, physicians would edit the transcript, saving them valuable time.
Though Halamka is clearly a proponent of AI’s use in medicine, he urges federal oversight. Just as the Food and Drug Administration vets new medications, there should be a process to independently validate algorithms and share results publicly. Moreover, Halamka is championing efforts to prevent the perpetuation of existing biases in health care in AI applications.
This is a cautious and thoughtful approach. Just like any tool, AI must be studied rigorously and deployed carefully, while heeding the warning to “first, do no harm.”
Nevertheless, AI holds incredible promise to make health care safer, more accessible and more equitable.
Here is a summary of recent credit downgrades and outlook revisions for hospitals and health systems.
The downgrades and downward revisions reflect continued operating challenges many nonprofit systems are facing, with multiyear recovery processes expected.
Downgrades:
Yale New Haven (Conn.) Health: Operating weakness and elevated debt contributed to the downgrade of bonds held by Yale New Haven (Conn.) Health, Moody’s said May 5. The bond rating slipped from “Aa3” to “A1,” and the outlook was revised to stable from negative.
The system saw a second downgrade as its default rating and that on a series of bonds were revised one notch to “A+” from “AA-” amid continued operating woes, Fitch said June 28.
Not only have there been three straight years of such challenges, but the operating environment continues to cast a pall into the second quarter of the current fiscal year, Fitch said.
UC Health (Cincinnati): The system was downgraded on a series of bonds, Moody’s said May 10.
The move, which involved a lowering from a “Baa2” to “Baa3” grade, refers to such bonds with an overall value of $580 million.
In February, UC Health suffered a similar downgrade from “A” to “BBB+” on its overall rating and on some bonds because of what S&P Global termed “significantly escalating losses.”
UNC Southeastern (Lumberton, N.C.): The system, which is now part of the Chapel Hill, N.C.-based UNC Health network, saw its ratings on a series of bonds downgraded to “BB” amid operating losses and sustained weakness in its balance sheet, S&P Global said June 23.
While UNC Southeastern reported an operating loss of $74.8 million in fiscal 2022, such losses have continued into fiscal 2023 with a $15 million loss as of March 31, S&P Global said. The system had earlier been placed on CreditWatch but that was removed with this downgrade.
Butler (Pa.) Health: The system, now merged with Greensburg, Pa.-based Excela Health to form Independence Health System, saw its credit rating downgraded significantly, falling from “A” to “BBB.”
The move reflects continued operating challenges and low patient volumes, Fitch said June 26.
Such operating challenges, including low days of cash on hand, could result in potential default of debt covenants, Fitch warned.
Outlook revisions:
Redeemer Health (Meadowbrook, Pa.): The system had its outlook revised to negative amid “persistent operating losses,” Fitch Ratings said June 14. The health system, anchored by a 260-bed acute care hospital, reported a $37 million operating loss in the nine months ending March 31, Fitch said.
Thomas Jefferson University (Philadelphia): The June 9 downward revision of its outlook, which includes both the health system and the university’s academic sector, was due to sustained operating weakness, S&P Global said.
IU Health (Indianapolis): While it saw ratings affirmed at “AA,” the 16-hospital system had its outlook downgraded amid persistent inflationary pressures and large capital expense, Fitch said May 31.
UofL Health (Louisville, Ky.): Slumping operating income and low days of cash on hand (42.8 as of March 31) contributed to S&P Global revising its outlook for the six-hospital system to negative May 24.
The latest CPI was a crowd-pleaser: Inflation has plunged from its peak, helping provide relief for consumers.
Beyond the headline, an underlying measure closely watched by economists and the Fed finally began to cool.
Why it matters:
The worst of the inflation crisis looks to be firmly behind us. Price gains appear to be on a path to returning to normal, but there is huge uncertainty around how long that will take, with plenty of hurdles still ahead.
What they’re saying:
“After a punishing stretch of high inflation that eroded consumer’s purchasing power, the fever is breaking,” Bill Adams, chief economist at Comerica Bank, wrote in a note.
While the Fed appears to be on track to tighten by a quarter percentage point two weeks from today, the promising news lowers the odds of further hikes this year.
Details:
Headline CPI rose 3% (or 2.97%, unrounded) in the 12 months through June, the smallest increase since March 2021. That reflects milder price gains for a slew of goods, including food — and outright deflation for other items consumers buy, like airline fares, which fell 8% in June.
The intrigue:
At the same time last year, headline prices skyrocketed by 9%. Now we’re lapping that period, which makes the comparison much more favorable.
Then, commodity prices soared on disruptions from Russia’s invasion of Ukraine. Those prices are sharply lower now, helping the headline figure cool rapidly. Gasoline, for instance, is down nearly 27%.
Those favorable effects will fade in the year-on-year numbers, so don’t be surprised if the headline CPI figure rebounds some in the coming months.
The most encouraging aspect was the core figure, which strips out volatile food and energy costs and is closely followed by policymakers. That rose by just 0.2% in June, the slowest monthly pace since February 2021.
In the past three months, core inflation has risen at a 4.1% annualized pace — down almost a full percentage point from May.
Under the hood, there was notable disinflation across a key sector of the economy monitored by the Fed: core services, excluding shelter. Prices in that category were flat last month, compared to a 0.2% rise in May.
That cooling is happening alongside a still-healthy labor market and solid wage gains (more on this below), which officials worried could stoke inflation in this category.
The Biden administration is eager to tout the progress. “The economy is defying predictions that inflation would not fall absent significant job destruction,” top White House economic adviser Lael Brainard is expected to say this afternoon at the Economic Club of New York, according to prepared remarks.
“Annual inflation has now declined every month for 12 months in a row,” she will say, “and inflation in the United States is now the lowest among G-7 nations … even as our economic recovery from the pandemic has been the strongest.”
The bottom line:
We have been head-faked before by what appeared to be remarkable progress on inflation, notably in the summer of 2001.
With expected cooling in other areas (including shelter, which makes up a big chunk of the index), there is reason to be hopeful this progress could be here to stay.
Today marks the 63rd anniversary of Harper Lee‘s “To Kill a Mockingbird” (1960) — a novel containing truths so universal that they bear repeating in 2023.
“You never really understand a person until you consider things from his point of view … Until you climb inside of his skin and walk around in it.”
“I wanted you to see what real courage is … It’s when you know you’re licked before you begin but you begin anyway and you see it through no matter what. You rarely win, but sometimes you do.”
“People generally see what they look for, and hear what they listen for.”
“The one thing that doesn’t abide by majority rule is a person’s conscience.”
“Sometimes the Bible in the hand of one man is worse than a whisky bottle in the hand of another … There are just some kind of men who — who’re so busy worrying about the next world they’ve never learned to live in this one, and you can look down the street and see the results.”
As hospital leaders convene in Seattle this weekend for the American Hospital Association Leadership Summit, their future is uncertain.
Last week’s court decision in favor of hospitals shortchanged by the 340B drug program and 1st half 2023 improvement in operating margins notwithstanding, the deck is stacked against hospitals—some more than others. And they’re not alone: nursing homes and physician practices face the same storm clouds:
Decreased reimbursement from government payers (Medicare and Medicaid) coupled with heightened tension with national health insurers seeking bigger discounts and direct control of hospital patient care.
Persistent medical-inflation driving costs for facilities, supplies, wages, technologies, prescription drugs and professional services (legal, accounting, marketing, et al) higher than reimbursement increases by payers.
Increased competition across the delivery spectrum from strategic aggregators, private equity and health insurers diversifying into outpatient, physician services et al.
Increased discontent and burnout among doctors, nurses and care teams who feel unappreciated, underpaid and overworked.
Escalating media criticism of not-for-profit hospitals/health system profitability, debt collection policies, lack of price transparency, consolidation, executive compensation, charity care, community benefits and more.
Declining trust in the system across the board.
Most hospitals soldier on: they’re aware of these and responding as best they can. But most are necessarily focused only on the near-term: bed needs, workforce recruitment and staffing, procurement costs for drugs and supplies and so on. Some operate in markets less problematic than others, but the trends hold true directionally in every one of America’s 290 HRR markets.
Planning for the long-term is paralyzed by the tyranny of the urgent:
survival and sustainability in 2023 and making guarded bets about 2024 dominate today’s plans. That’s reality. Though the healthcare pie is forecast to get bigger, it’s being carved up by upstarts pursuing profitable niches and mega-players with deep pockets and a take-no-prisoners approach to their growth strategies. The result is an industry nearing meltdown.
Each traditional sector thinks it’s moral virtue more honorable than others. Each blames the other for avoidable waste and inaction in weeding out its bad actors. Each is pays lip service to “value-based care” and “system transformation” while doubling-down on making sure changes are incremental and painless for the near-term. And each believes the long-term destination of the system will be different than the past but no two agree on what that is.
Hospitals control 31% of the spend directly and as much as 43% with their employed physicians included. So, they’re a logical focus of attention from outsiders. Whether not for profit, public or investor owned, all are thought to be expensive and non-transparent and increasingly many are seen as ‘Big Business’ with excessive profits. Complaints about heavy-handed insurer reimbursement and price-gauging by drug companies fall on death ears in most communities. That’s why most are focused on near-term survival and few have the luxury or tools to plan for the future.
As a start, answers to the questions below in the 3-5 (mid-term) and 8–10-year (long-term) time frames is imperative for every hospital leadership team and Board:
Is the status quo sustainable? With annual spending projected to increase at 5.4%/year through 2031– well above population and economic growth rates overall– will employers remain content to pay 224% of Medicare rates to produce profits for hospitals, doctors, drug and device makers and insurers? Will they continue to pass these costs through to their customers and employees while protecting their tax exemptions or will alternative strategies prompt activism? Might employers drive system transformation by addressing affordability, effectiveness, consumer self-care and systemness et al. with impunity toward discomfort created for insiders? Or, might voters reject the status quo in subsequent state/federal elections in favor of alternatives with promised improvement? And who will the winners and losers be?
Are social determinants a core strategy or distraction? 70% of costs in the health system are directly attributable to social needs unmet—food insecurity. loneliness et al. But in most communities, programs addressing SDOH and public health programs that serve less-privileged populations are step-children to better funded hospitals and retail services targeted to populations that can afford them. Is the destination incremental bridges built between local providers and public health programs to satisfy vocal special interest groups OR comprehensive integration of SDOH in every domain of operation? Private investors are wading into SDOH if they’re attached to a risk-based insurance programs like Medicare Advantage and others, but sparingly in other settings. Does the future necessitate re-definition of “community benefits” or new regulations prompting providers, drug companies and payers to fair-share performance. Is the future modest improvement in the “Health or Human Services” status quo OR is system of “Health and Social Services” that’s fully integrated? And might interoperability and connectivity in the entire population become “true north” for tech giants and EHR juggernauts seeking to evade anti-trust constraint and demonstrate their commitment to the greater good? There’s no debate that SDOH is central to community health and wellbeing but in most communities, it’s more talk than walk. Yesterday, SDOH was about risk factors; today, it’s about low-income populations who lack insurance; tomorrow, it’s everyone.
How should the health system of the future be funded? The current system of funding is a mess: In 2021, the federal government and households accounted for the largest shares of national health spending (34 % and 27%, respectively), followed by private businesses (17%), state and local governments (15%), and other private revenues (7%). It will spend $4.66 trillion, employ 19 million and impact every citizen (and non-citizen) directly. But 4 of 10 households have unpaid medical bills. Big employers in certain industries provide rich benefits while half of small businesses provide none. Medicare depends on employer payroll taxes for the lion’s share of its Part A (Hospital) funding exposing the “trust fund” to a shortfall in 2028 and insolvency fears…and so on. Increased public funding via taxes is problematic and debt is more costly as interest rates go up and the municipal bond market tightens. Voters and private employers don’t seem inclined to pay higher taxes for healthcare–:is it worth $13,998 per capita today? $20,426 in 2031? Will high-cost inpatient care and specialty drugs become regulated public utilities in which access and pricing is tightly controlled and directly funded by government? Will private investors and strategic aggregators be required to take invest in community benefits to offset the disproportionate costs borne by hospitals, public health clinics and others? Is there a better formula for funding U.S. healthcare? Other systems of the world spend more on social services and preventive health and less on specialty care. They spend a third less and get comparable if not better outcomes though each is stretched to deal with medical inflation. And in most, government funding is higher, private funding lower and privileged populations have access to private services they pay for directly. Where do we start, and who demands the question be answered?
How will innovations in therapeutics and information technology change how individuals engage with the system? Artificial intelligence will directly impact 60% of the traditional health delivery workforce, negating jobs for many/most. Non-allopathic therapies, technology-enabled self-care, precision medicines, non-invasive and minimally invasive surgical techniques are changing change how care is delivered, by whom and where. Thus, lag indicators based on visits, procedures, admissions and volume are increasingly useless. How will demand be defined in the future? Who will own the data and how will it be accessed? And how will the rights of patients (consumers) be protected in courts and in communities? In the future, information-driven healthcare will be much more than encounter data from medical records and claims-based analyses from payers. It will be sourced globally, housed centrally and accessed by innovators and consumers to know more about their health now and next. Within 10 years, generative AI coupled with therapeutic innovation will fundamentally change roles, payments and performance measurement in every domain of healthcare. Proficiency in leveraging the two will anchor system reputations and facilitate significant market share shifts to high value, high outcome, lower cost alternatives…whether local or not.
How will regulators and court decisions enact fair competition, consumer choices and antitrust protections? The current political environment is united around reforms that encourage price transparency and affordability. FTC and DOJ leaders are aligned on healthcare oversight with a decided bent toward heightened enforcement and tighter scrutiny of proposed deals (both vertical and horizontal integration). But their leaders’ terms are subject to political appointments and elections: that’s an unknown. And while recent rulings of the conservative leaning Supreme Court are problematic to many in healthcare, their rulings are perhaps more predictable than policies, rules and regulations directly impacted by election results.
For hospital leaders gathering in Seattle this week, and in local board meetings nationwide, necessary attention is being given the near-term issues all face. But longer-term issues lurk: the future does not appear a modernized version of the past for anyone in U.S. healthcare, especially hospitals. And among hospitals, fundamental precepts—like tax exemptions for “not-for-profit” hospitals, community benefits and charity care in exchange for tax exemption, EMTALA et al. regulations that require access without pre-condition are among many that will re-surface as the long-term view of the health system is re-considered.
To that end, the questions above deserve urgent discussion in every hospital board room and C suite. Trade-offs aren’t clear, potential future state hospital scenarios are not discreet and winners and losers unknown. But a fact-driven process recognizing a widening array of players with deep pockets and fresh approaches is necessary.
HENRY KOTULA 