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UnitedHealth expects higher medical costs in Q2 as delayed care makes comeback
Dive Brief:
- Pent-up demand for delayed healthcare during the COVID-19 pandemic is pressuring medical costs for health insurers that had a financial windfall during the pandemic amid low utilization.
- UnitedHealth, the parent company of the largest private payer in the U.S., expects its medical loss ratio — the share of premiums spent on member’s healthcare costs — to be higher than previously expected in the second quarter of 2023, due to a surge in outpatient care utilization among seniors, CFO John Rex said Tuesday during Goldman Sachs’ investor conference.
- The news sent UnitedHealth’s stock down 7% in morning trade Wednesday, and affected other Medicare-focused health insurers as well. Humana, CVS and Centene — the three largest MA insurers by enrollee after UnitedHealth — dropped 13%, 6% and 8%, respectively.
Dive Insight:
The early days of COVID saw widespread halts in nonessential services, causing visits to plunge with an estimated one-third of U.S. adults delaying or foregoing medical care in the pandemic’s first year. By 2022, the sizable rebound in deferred care that many predicted had yet to materialize.
Instead, patient volumes increased, but didn’t return to normal levels, threatening the financial health of hospitals, which rely on utilization for revenue. However, the trend helped payers, which reaped some of their highest profits in history during the pandemic on low medical spend.
Now, early signs suggest utilization may again be increasing, with the cost of rebounding care coming around to hit payers. UnitedHealth now expects its MLR for the second quarter to reach or exceed its full-year target of 82.1% to 83.1%.
“As you look at a Q2, you would expect Q2 medical care ratio to be somewhere in the zone of probably the upper bound or moderately above the upper bound of our full-year outlook,” Rex said. “I would expect at this distance that the full year would probably settle in in the upper half of the existing range we set up.”
In comparison, the insurer reported an MLR of 82.2% in the first quarter of 2023. UnitedHealth’s MLR was 82% in 2022.
UnitedHealth said the MLR increase is because medical activity is normalizing after COVID kept seniors away from non-essential care.
“We’re seeing as behaviors kind of normalize across the country in a lot of different ways and mask mandates are dropped, especially in physician offices, we’re seeing that more seniors are just more comfortable accessing services for things that they might have pushed off a bit like knees and hips,” said Tim Noel, UnitedHealth’s chief executive for Medicare and retirement.
The Minnetonka, Minnesota-based insurer has seen strong outpatient demand through April, May and June, particularly in hips and knees with high volumes at its owned ambulatory surgical centers and within its Medicare business, executives said.
Inpatient volumes have remained consistent, and while outpatient utilization has increased, patient acuity has remained the same. Optum Health’s behavioral businesses are also seeing higher utilization in the second quarter, said Patrick Conway, CEO of Care Solutions at Optum, UnitedHealth’s health services division.
UnitedHealth doesn’t expect this higher activity to let up anytime soon. As a result, the payer incorporated higher outpatient utilization into its Medicare Advantage plan bids for 2024, which were placed in early June. The move attests to the longer duration of the trend, SVB Securities analyst Whit Mayo wrote in a note.
“Assuming it is going to end quickly wouldn’t be prudent on our part,” Rex said. “We’ll see how this progresses here.”
Physicians beyond ‘breaking point’ want Medicare pay reform
Physicians at the American Medical Association Annual Meeting called for an overhaul of the Medicare payment system, arguing that it is outdated and threatens the survival of independent practices and patients’ access to care.
“This cannot wait; we are past the breaking point. Congress must urgently address physician concerns about Medicare to account for inflation and the post-pandemic economic reality facing practices nationwide,” AMA President Jack Resneck Jr., MD, said in a June 12 news release. “Our patients are counting on us to deliver the message that access to health care is jeopardized by Medicare’s payment system. Being mad isn’t enough. We will develop a campaign — targeted and grass roots — that will drive home our message.”
Inflation, the pandemic, declining reimbursements and rising cost are making it more challenging for independent physicians to maintain their autonomy and are jeopardizing access to care, according to the AMA, which argues that CMS physician payments have declined 26 percent from 2001 to 2023 after accounting for inflation.
In January, the Medicare Payment Advisory Commission called for a physician payment update tied to the Medicare Economic Index for the first time, and, in April, a group of House members introduced a bill that would provide annual inflation updates to the Medicare fee schedule based on the index.
“Duct-taping the widening cracks of a dilapidated payment system has put us in this precarious situation,” Dr. Resneck said. “Physicians are united in our determination to build a solid foundation rather than further jury-rigging the system.”
‘It’s all about leverage’: The driving factor behind health system mergers
Many health system mergers today are “all about leverage” when negotiating with payers, rather than significant cost savings or increasing market share, Charlie Shields, CEO of Kansas City, Mo.-based University Health, told the Kansas City Business Journal.
Mr. Shields’ comments came after Kansas City-based St. Luke’s Health System and St. Louis-based BJC HealthCare signed a letter of intent to form an integrated academic health system.
The proposed merger is not about reducing costs — since the two systems have been part of a buying collective for a decade —- and is not about a rapid gain in market share, since St. Luke’s and BJC will largely stick to their respective areas, Mr. Shields told the Journal in a June 1 article. Instead, he argues, the merger, and similar ones like it, aims to leverage a better seat at the table when negotiating care rates with payers.
BJC and St. Luke’s operate the three top hospitals in Missouri, according to U.S. News & World Report. Together, they would pool $10 billion in revenue to serve more than 6 million residents across Missouri, Illinois and Kansas.
The transaction is expected to close by the end of 2023, pending regulatory review.
Is the Traditional Hospital Strategy Aging Out?
https://www.kaufmanhall.com/insights/thoughts-ken-kaufman/traditional-hospital-strategy-aging-out
On October 1, 1908, Ford produced the first Model T automobile. More than 60 years later, this affordable, mass produced, gasoline-powered car was still the top-selling automobile of all time. The Model T was geared to the broadest possible market, produced with the most efficient methods, and used the most modern technology—core elements of Ford’s business strategy and corporate DNA.
On April 25, 2018, almost 100 years later, Ford announced that it would stop making all U.S. internal-combustion sedans except the Mustang.
The world had changed. The Taurus, Fusion, and Fiesta were hardly exciting the imaginations of car-buyers. Ford no longer produced its U.S. cars efficiently enough to return a suitable profit. And the internal combustion technology was far from modern, with electronic vehicles widely seen as the future of automobiles.
Ford’s core strategy, and many of its accompanying products, had aged out. But not all was doom and gloom; Ford was doing big and profitable business in its line of pickups, SUVs, and -utility vehicles, led by the popular F-150.
It’s hard to imagine the level of strategic soul-searching and cultural angst that went into making the decision to stop producing the cars that had been the basis of Ford’s history. Yet, change was necessary for survival. At the time, Ford’s then-CEO Jim Hackett said, “We’re going to feed the healthy parts of our business and deal decisively with the areas that destroy value.”
So Ford took several bold steps designed to update—and in many ways upend—its strategy. The company got rid of large chunks of the portfolio that would not be relevant going forward, particularly internal combustion sedans. Ford also reorganized the company into separate divisions for electric and internal combustion vehicles. And Ford pivoted to the future by electrifying its fleet.
Ford did not fully abandon its existing strategies. Rather, it took what was relevant and successful, and added that to the future-focused pivot, placing the F-150 as the lead vehicle in its new electric fleet.
This need for strategic change happens to all large organizations. All organizations, including America’s hospitals and health systems, need to confront the fact that no strategic plan lasts forever.
Over the past 25-30 years, America’s hospitals and health systems based their strategies on the provision of a high-quality clinical care, largely in inpatient settings. Over time, physicians and clinics were brought into the fold to strengthen referral channels, but the strategic focus remained on driving volume to higher-acuity services.
More recently, the longstanding traditional patient-physician-referral relationship began to change. A smarter, internet-savvy, and self-interested patient population was looking for different aspects of service in different situations. In some cases, patients’ priority was convenience. In other cases, their priority was affordability. In other cases, patients began going to great lengths to find the best doctors for high-end care regardless of geographic location. In other cases, patients wanted care as close as their phone.
Around the country, hospitals and health systems have seen these environmental changes and adjusted their strategies, but for the most part only incrementally. The strategic focus remains centered on clinical quality delivered on campus, while convenience, access, value, affordability, efficiency, and many virtual innovations remain on the strategic periphery.
Health system leaders need to ask themselves whether their long-time, traditional strategy is beginning to age out. And if so, what is the “Ford strategy” for America’s health systems?
The questions asked and answered by Ford in the past five years are highly relevant to health system strategic planning at a time of changing demand, economic and clinical uncertainty, and rapid innovation. For example, as you view your organization in its entirety, what must be preserved from the existing structure and operations, and what operations, costs, and strategies must leave? And which competencies and capabilities must be woven into a going-forward structure?
America’s hospitals and health systems have an extremely long history—in some cases, longer than Ford’s. With that history comes a natural tendency to stick with deeply entrenched strategies. Now is the time for health systems to ask themselves, what is our Ford F150? And how do we “electrify” our strategic plan going forward?
America’s Hospitals Need a Makeover
A couple of months ago, I got a call from a CEO of a regional health system—a long-time client and one of the smartest and most committed executives I know. This health system lost tens of millions of dollars in fiscal year 2022 and the CEO told me that he had come to the conclusion that he could not solve a problem of this magnitude with the usual and traditional solutions. Pushing the pre-Covid managerial buttons was just not getting the job done.
This organization is fiercely independent. It has been very successful in almost every respect for many years. It has had an effective and stable board and management team over the past 30 to 40 years.
But when the CEO looked at the current situation—economic, social, financial, operational, clinical—he saw that everything has changed and he knew that his healthcare organization needed to change as well. The system would not be able to return to profitability just by doing the same things it would have done five years or 10 years ago. Instead of looking at a small number of factors and making incremental improvements, he wanted to look across the total enterprise all at once. And to look at all aspects of the enterprise with an eye toward organizational renovation.
I said, “So, you want a makeover.”
The CEO is right. In an environment unlike anything any of us have experienced, and in an industry of complex interdependencies, the only way to get back to financial equilibrium is to take a comprehensive, holistic view of our organizations and environments, and to be open to an outcome in which we do things very differently.
In other words, a makeover.
Consider just a few areas that the hospital makeover could and should address:
There’s the REVENUE SIDE: Getting paid for what you are doing and the severity of the patient you are treating—which requires a focus on clinical documentation improvement and core revenue cycle delivery—and looking for any material revenue diversification opportunities.
There is the relationship with payers: Involving a mix of growth, disruption, and optimization strategies to increase payments, grow share of wallet, or develop new revenue streams.
There’s the EXPENSE SIDE: Optimizing workforce performance, focusing on care management and patient throughput, rethinking the shared services infrastructure, and realizing opportunities for savings in administrative services, purchased services, and the supply chain. While these have been historic areas of focus, organizations must move from an episodic to a constant, ongoing approach.
There’s the BALANCE SHEET: Establishing a parallel balance sheet strategy that will create the bridge across the operational makeover by reconfiguring invested assets and capital structure, repositioning the real estate portfolio, and optimizing liquidity management and treasury operations.
There is NETWORK REDESIGN: Ensuring that the services offered across the network are delivered efficiently and that each market and asset is optimized; reducing redundancy, increasing quality, and improving financial performance.
There is a whole concept around PORTFOLIO OPTIMIZATION: Developing a deep understanding of how the various components of your business perform, and how to optimize, scale back, or partner to drive further value and operational performance.
Incrementalism is a long-held business approach in healthcare, and for good reason. Any prominent change has the potential to affect the health of communities and those changes must be considered carefully to ensure that any outcome of those changes is a positive one. Any ill-considered action could have unintended consequences for any of a hospital’s many constituencies.
But today, incrementalism is both unrealistic and insufficient.
Just for starters, healthcare executive teams must recognize that back-office expenses are having a significant and negative impact on the ability of hospitals to make a sufficient operating margin. And also, healthcare executive teams must further realize that the old concept of “all things to all people” is literally bringing parts of the hospital industry toward bankruptcy.
As I described in a previous blog post, healthcare comprises some of the most wicked problems in our society—problems that are complex, that have no clear solution, and for which a solution intended to fix one aspect of a problem may well make other aspects worse.
The very nature of wicked problems argues for the kind of comprehensive approach that the CEO of this organization is taking—not tackling one issue at a time in linear fashion but making a sophisticated assessment of multiple solutions and studying their potential interdependencies, interactions, and intertwined effects.
My colleague Eric Jordahl has noted that “reverting to a 2019 world is not going to happen, which means that restructuring is the only option. . . . Where we are is not sustainable and waiting for a reversion is a rapidly decaying option.”
The very nature of the socioeconomic environment makes doing nothing or taking an incremental approach untenable. It is clearly beyond time for the hospital industry makeover.
“Be careful what you wish for.”
https://mailchi.mp/3ed7bdd7f54b/the-weekly-gist-june-2-2023?e=d1e747d2d8
A recent chat with a former physician entrepreneur who recently sold his practice to a large health system highlighted the fact that “hospital-physician integration” can sometimes be a misnomer. “I feel like we were sold a bill of goods,” he told us, referring to his ten-person primary care group.
“We worked hard to build this practice, and the health system CEO made a lot of promises about the value of bringing us in, and the investments they’d make in our growth.” Instead, the group has experienced a different reality: little meaningful integration, an unclear bureaucracy to navigate, zero transparency into the finances of the medical group or system, leadership turnover, and a lack of strategic vision.
“We would never sign this deal again,” he said, “and we’re not the only ones—they might not realize it, but this system is on the precipice of a full-on physician mutiny.”
Of course, there are two sides to every story, but the anecdote reinforced in our minds the importance of careful planning and attention to integration following practice acquisitions. There needs to be a plan, it needs to be clear, and it needs to be resourced.
Otherwise, systems risk ending up with unhappy, disengaged doctors—a situation to be avoided at all costs.
Reviewing post-pandemic changes to hospital volumes
https://mailchi.mp/3ed7bdd7f54b/the-weekly-gist-june-2-2023?e=d1e747d2d8
In the graphic above, we use the most recent data from software and analytics firm Strata Decision Technology to compare 2023 year-to-date (YTD) hospital volumes by admission type to both 2019 and 2022 volumes.
Compared to 2019, outpatient volumes in 2023 have increased by 14 percent, while inpatient, observation, and emergency (ED) admissions are all down. However, compared to 2022, the reverse trend is true, with inpatient, observation, and ED volumes up from last year while outpatient volumes have dropped slightly.
This suggests that the net increase in outpatient volume and net loss in inpatient and ED volume over the past few years appears to be locked in. While the COVID-accelerated outpatient shift is here to stay, hospitals can take solace in the recent uptick in inpatient, observation, and ED volumes, which helps those still struggling to return to positive operating margins.
Importantly, there is significant regional variability among these volume data, suggesting that health system recovery will not be uniform.
Minnesota passes path to public option
https://mailchi.mp/3ed7bdd7f54b/the-weekly-gist-june-2-2023?e=d1e747d2d8
Last week the Minnesota legislature passed a bill to initiate the creation of a public option health insurance plan available to state residents of all incomes. The bill funds an actuarial analysis of the policy and requires the state to apply for a Centers for Medicare and Medicaid Services (CMS) waiver to begin implementation by 2027. The public option plan will build upon MinnesotaCare, a state health plan currently covering residents with incomes below 200 percent of the federal poverty line.
The Gist: Minnesota joins Washington, Colorado, and Nevada as the fourth state to authorize a public option health plan. But unlike these other three states, whose public option programs rely on private payers to manage risk and administration with tighter price controls, Minnesota intends to create a “true” public option in which the government competes directly with private payers.
Analysis funded by a hospital and insurance trade group found that a public option could reduce Minnesota hospital revenues by more than $2B over 10 years, while only lowering the uninsured rate by half a percentage point.
Though Minnesota lawmakers were more concerned with lowering healthcare spending and improving health insurance affordability for state residents, the success of the program will depend in part on how it negotiates with providers, who justifiably fear a worsening payer mix that further threatens margins.
Why the Pentagon is concerned about our generic drug supply
https://mailchi.mp/a93cd0b56a21/the-weekly-gist-june-9-2023?e=d1e747d2d8
Published this week in Bloomberg, this article explores the Department of Defense (DOD)’s rationale for reportedly piloting a partnership with Valisure, an independent laboratory, to test the quality of the generic drugs it purchases for military members, veterans, and their families.
The DOD’s current plan is to follow the example of Kaiser Permanente, which contracted with the same drug testing company to ensure quality standards for generic drugs that exceed Food and Drug Administration (FDA) requirements. While the FDA has discouraged the use of third-party testing programs, recent stories of toothless enforcement for troubled manufacturing facilities have weakened the agency’s credibility.
The Gist: Amid the current backdrop of drug shortages and cost concerns, this article shines a light on the lesser-known issue of quality oversight of generic drugs. This is especially important as generic medications make up around 90 percent of all prescriptions dispensed in the US.
With generic drug production, largely a low-margin business, moving overseas, the FDA has increasingly struggled to perform oversight and quality control—though Valisure’s scientific methods have been criticized both in court and by the FDA itself.
While Pentagon officials have labeled the vulnerabilities in our drug supply chain a threat to national security, the problems the DOD is hoping to resolve are the same ones faced by all purchasers of generic drugs in the US.
HENRY KOTULA 