CMS Medicare Advantage Final Rules: Why 2025 will be Significantly Different for Plans, Enrollees and Providers

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CMS Medicare Advantage Final Rules: Why 2025 will be Significantly Different for Plans, Enrollees and Providers

Last Monday, CMS announced the base payment rate it will pay Medicare Advantage plans in 2025: plans will see an average 3.7%, or $16 billion, increase in payments once risk scores are factored in but a cut to base payments of 0.16% since 2025 risk scores were expected to be 3.86%. That’s the math.

It came as a surprise to insurers and investors who had imagined CMS would modify its November proposed rule to increase payments as has been the precedent in prior years. Per Bloomberg:

“Only once in the past 10 years have final rates not improved from regulators’ initial proposals…The tougher stance in the face of lobbying signals another hurdle for insurers that already face faster-than-expected increases in medical costs. Humana Inc., which is the most exposed to Medicare among large insurance companies, fell 9.2% in premarket trading. UnitedHealth Group Inc., the largest US health insurer, dropped 4.3%, while CVS Health Corp. declined 5.2%. Stocks including Elevance Health Inc. and Centene Corp. retreated in post-market trading after the announcement.”

Then on Wednesday, CMS released a 1327-page final rule with sweeping directives about how Medicare Advantage plans should operate starting next year: 

“This final rule will revise the Medicare Advantage (Part C), Medicare Prescription Drug Benefit (Part D), Medicare cost plan, and Programs of All-Inclusive Care for the Elderly (PACE) regulations to implement changes related to Star Ratings, marketing and communications, agent/broker compensation, health equity, dual eligible special needs plans (D-SNPs), utilization management, network adequacy, and other programmatic areas. This final rule also codifies existing sub-regulatory guidance in the Part C and Part D programs.”

When first proposed in November, insurers pushed back. In response, most of the 3463 comment letters received by CMS said they needed more time to modify their plans. CMS replied: “We appreciate the commenter’s concern regarding the plans having enough time to understand the impact of finalized regulations. We will take their recommendation into consideration for future rulemaking.” P20). Accordingly, all MA plans must get approvals from CMS reflecting these changes on or before June 3, 2024.

Arguably, CMS took this hardline approach because bona fide studies by MedPAC, USC Shaeffer and others found widespread risk-score upcoding by Medicare Advantage plans that resulted in 6%-20% annual overpayments by Medicare.

Recent high-profile missteps by two of the biggest and most profitable MA players no doubt reinforced CMS’ get tougher posture: UnitedHealth Group’s Change Healthcare cybersecurity breech and Cigna’s $172 million Fraud and Abuse penalty for inflating its MA risk coding.

So, the transition from Medicare Advantage circa 2024 to Medicare Advantage 2025 will be its most significant since Medicare Choice was included in the Balanced Budget Act of 1997. In 2024, Medicare Advantage experienced enrollment growth and profitability to which its players were accustomed despite a late-year spike in utilization:

  • 33.8 million Medicare enrollees (or 51% of total Medicare enrollment) get their coverage from Medicare Advantage plans—up 6.4% from 2023.
  • The average Medicare beneficiary has access to 43 Medicare Advantage plans in 2024, the same as in 2023, but more than double the number of plans offered in 2018. The majority of options do not require an extra payment above what Medicare pays private issuers on their behalf and the majority offer supplemental benefits including dental, eyecare, wellness et al.
  • And Medicare Advantage insurers entered the year on solid financial footing: the biggest issuers posted strong profits in 2023 i.e. UnitedHealth Group: $22.4 billion, CVS (Aetna) Health: $8.3 billion, Elevance Health: $6 billion, Cigna Group: $5.2 billion, Centene: $2.7 billion, Humana: $2.5 billion
  • In 4Q 2023, pent-up demand for services by Medicare Advantage enrollees pushed utilization of doctors, hospitals and other providers up 8.1% above prior year levels including 4Q 2023 increases for outpatient surgery 14.4%, outpatient visits excluding ER and surgery 8.7%, physician visits 6.0%, inpatient adult care 5.3%, Part B drugs 5% and ER visits 4%.

But 2025 will be different. The 4Q spike in utilization and impact of the new rules will have profound impact on Medicare Advantage: the biggest players like United and Humana will adapt and be OK, but others downstream will be disrupted or impaired:

  • Smaller MA plan sponsors and their lobbyists: AHIP, ACHP, BCBSA, Better Medicare Alliance and the army of lobbyists deployed to defeat these rules took a hit. Members pay dues for results. These rules were disappointing (though it could have been worse).
  • MA brokers, agents and marketing organizations: The limits on compensation, constraints on MA marketing tactics and enrollee protections around transparency may reduce revenues for many third-party marketing organizations that sell their services to the plans. A shakeout is likely.
  • Supplemental services providers: lower payments by CMS will force some to reduce/eliminate supplemental benefits that are valued less by enrollees. Dental and prescription drug benefits appear safe but others (i.e. fitness programs) might be cut by some.
  • Hospitals and physicians: Cuts by CMS to MA plans will trickle-down as reimbursement cuts to direct providers of care. Hardest hit will be smaller and rural providers in communities with large MA enrollment.
  • MA enrollees: Though the rule adds behavioral health benefits, data privacy protections and equity considerations in utilization management decisions by the plans, the likely impact of the rate cut is fewer plan options for enrollees and higher premiums. Margin compression for MA plans will hurt bigger plans who will adapt but incapacitate smaller plans unable to survive.
  • The Presidential campaigns: MA sponsors must submit their proposed 2025 plans to CMS on or before June 3, 2024—in the midst of Campaign 2024. And open enrollment will begin in October as MA plans launch marketing for their newly-revised offerings. No doubt, the Campaigns will opine to Medicare security in their closing rhetoric recognizing MA covers more than half its enrollees.

My take:

These rules are a big deal. CMS appears poised to challenge the industry’s formidable strengths and force changes.

Together, these rules will disrupt day to day operations in every MA plan, intensify friction with providers over network design, coverage and reimbursement negotiations and confuse enrollees who might have to pay more or change plans.

Medicare Advantage remains a work-in-process.  Stay tuned.

Is Private Equity the Solution or the Problem in Healthcare?

Posted on by • Posted in Affordability, Cherry Picking, Health Policy, Lobbyist, Market Consolidation, Market Power, Mergers & Acquisitions, Price Transparency, Pricing Leverage, Private Equity, Public Good, Public Health, Public Opinion, Public Perception • Leave a comment
Is Private Equity the Solution or the Problem in Healthcare?

Of late, private equity investors in healthcare services have faced intense criticism that their business practices have compromised patient safety and raised costs for consumers. March 5, the FTC, DOJ and HHS announced the launch of an investigation into the inner workings of PE in healthcare. It comes on the heels of U.S. Senate investigations in their Finance, HELP and Budget Committees to explore legislative levers they might pull to address their growing concerns about affordability, competition and accountability in the industry.

PE funds don’t welcome the spotlight. 

Their business model lends to misinformation and disinformation: company takeovers by new owners are rarely treated as good news unless the circumstance under prior ownership was dire. Even then, attention shifts quickly to the fairness of the PE business model playbook: acquire the asset on favorable terms, replace management, reduce operating costs, grow and the sell in 5-7 years at a profit using debt to finance the deal along the way. In exchange, the PE fund’s General Partner gets an annual management fee of 2% plus 20% of the value they create when they sell the company or take it public, and favorable tax treatment (carried interest) on their gain.

Concern about PE in healthcare services comes at a particularly delicate time: hospitals. nursing homes, outpatient care, medical practices, clinics et al) are still feeling the after-effects of the pandemic, proposed reimbursement bumps by Medicare for hospitals and physicians do not offset medical inflation and the Change Healthcare cybersecurity breach February 21 has created cash flow issues for all.

Concern about PE ownership was high already.

Innovations funded through PE-backed organizations have been drowned out by the steady drip of peer reviewed and industry-sponsored studies a causal relationship between PE ownership decreased quality and patient safety and increased prices and worker discontent. Nonetheless, PE-owns 4% of hospitals (among 36% that are investor-owned, 13% of medical practices and 6% of nursing homes today and they’re increasing in all cohorts of health services.

Here are the facts:

Private equity enjoys significant influence in public policy including healthcare. Direct lobbying activity by PE funds in Congress and state legislatures is well-funded and effective, especially by the It is increasingly 20 global fund sponsors that control 46% of assets under management. Cash on hand and fund-raising by PE are strong and healthcare remains an important but non-exclusive target of PE investing.

2023 was a down year for PE, 2024 will be strong: the IPO market and sponsor- to sponsor transactions dipped, and deal values shrank. Even with interest rates remaining high, returns exceeded overall growth in the stock market for deals consummated. At the same time, PE raised $1.2 trillion last year and has $2.6 trillion of dry powder to invest. Healthcare services will be a target as PE deal activity increases in 2024.

In U.S. healthcare, PE investments are significant and increasing.  Technology-enabled services that lower unit costs and AI-based solutions that enable standardization and workforce efficiency will garner higher valuations and greater PE interest than traditional services. Valuations will recover from record 2023 lows and dry powder will be deployed for roll-ups despite antitrust concerns and government investigations. Congress will investigate the impact on PE on patient safety, prices and competition and, in tandem with FTC and DOJ issue guidance: compliance will be mandated and financial penalties added. But displacement of PE in health services is unlikely.

Some notable data:

  • Private equity funds have $2.49 trillion of cash on hand to invest—up 7% from 2022. They raised $1.2 trillion globally in 2023. 26% of its global dry powder is more than 4 years old—undeployed.
  • Private equity groups globally are sitting on a record 28,000 unsold companies worth more than $3tn. 40% of the companies waiting to be sold are at least four years old. Last year, the combined value of companies that the industry sold privately or on public markets fell 44% and the value of companies sold to other buyout groups fell 47%.
  • Private equity investments in almost every sector in healthcare are significant, and until lately, increasing. Last year, deals were down 16.2% (from 940 to 788) cutting across every sector. In some sectors, like physician services, PE deals were tuck-in’s to their previous platform investments increasing from 75 deals in 2012 to 484 deals in 2021.
  • PE investments in US healthcare exceeded $1 trillion in the last 10 years. Investments in healthcare services i.e. acute, long-term, ambulatory and physician services– have been less profitable to investors than PE investments in technology, devices and therapeutics (based on the ratio of Enterprise Value to EBITDA) but exceed equity-market returns overall.
  • Peer reviewed studies have shown causal relationships between private equity ownership of hospitals, nursing homes and medical practices with lower operating costs, higher staff turnover, high prices and higher profits.

My take:

Like it or not, private equity investment in healthcare is here to stay. The likelihood of higher taxes paid by employers and individuals to fund the health system is nil. The majority (69%) of the public think it wasteful and inefficient (See Polling below). The majority believe it puts its profits above all else. The majority think it needs major change. That’s not new, but it’s felt more intensely and more widely than ever.

That means accommodation for private capital, including private equity, is not a major concern to voters: the prices they pay matters more than who owns the organization.

Tighter regulation of private equity, including more rights given to the Limited Partners who invest in the PE funds and limitations on public officials who become fund advisors, are likely. Bad actors will be vilified by regulators and elected officials. Media scrutiny of specific PE funds and their GPs will intensify as PE public reporting regulations commence. And investments made by not-for-profit multi-hospital systems and independent hospitals will be critical elements in upcoming Congressional and regulatory policy setting about their community benefit accountability and tax exemptions.

The public’s major concern about its healthcare industry is affordability. To the extent PE-backed solutions offer lower-cost, higher-value alternatives on a playing field that’s level with respect to equitable access and demand-management, they will be at the table.

To the extent PE-backed solutions cherry-pick the system’s low-hanging fruit at the expense of patient safety and affordability sans any regulatory restriction, they’ll breed public discontent from those they choose to ignore.

So, the reality is this: PE’s focus is generating profits for its GP and their LPs. Doing business in a socially responsible way is a fund’s prerogative. Some do it better than others.

PE is part of healthcare’s solution to its poorly structured, perpetually inadequate and mal-distributed funding. But creating a level playing field through meaningful regulatory reform is necessary first.

PS Among the stickier issues facing hospitals is site-neutral payments. Hospitals oppose the proposal reasoning the overhead structure for their outpatient services (HOPD) include indirect & direct costs for services provided those unable to pay i.e. emergency services. Proponents of the change argue that what’s done is the key, not where it’s done, and uniform pricing is common sense. Leavitt Partners has advanced a compromise: a Unified Ambulatory Payment System for HOPDs, ASCs and physician clinics that would be applied to 66 services starting

New reports detail UnitedHealth’s latest acquisitions under shady pretenses

Posted on by • Posted in Ambulatory Surgery Centers (ASC), Change Healthcare, Financial Transparency, Health Insurance Industry, Market Consolidation, Market Power, Mergers & Acquisitions, Questionable Business Practices, UnitedHealth Group, UnitedHealthcare • Leave a comment
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Two newly published investigative reports, by the intrepid reporters at STAT News and The American Prospect, pull the curtains back a little more on the astonishing number of recent acquisitions UnitedHealth has made as it moves deeper and deeper into health care delivery, enabling it to grab ever-increasing chunks of our premium and tax dollars to reward its shareholders. 

As STAT’s Bob Herman points out this morning, United has been on a clinic-buying spree in recent months, targeting areas of the country where it has significant enrollment in its Medicare Advantage plans.

That’s a strategic move that allows the company to steer more seniors to facilities it owns, boosting revenues it gets from the government and padding its bottom line. 

The bigger a company gets, the less it has to disclose about the acquisitions it makes in any easily obtainable way. That’s because publicly-traded companies are only required to immediately inform investors of individual deals that are “material to earnings.”

A material amount, as Investopedia explains, “can signify any sum or figure worth mentioning, as in account balances, financial statements, shareholder reports, or conference calls. If something is not a material amount, it is considered too insignificant or trivial to mention.”

UnitedHealth’s long string of acquisitions in recent years has catapulted the company to the #5 spot on the Fortune 500 list of American companies, based on revenue. Only Walmart, Exxon Mobile, Amazon and Apple are bigger.

That rapid growth means that fewer and fewer of UnitedHealth’s acquisitions reach the threshold of requiring prominent disclosure to shareholders.

It was only through a close review of UnitedHealth’s latest annual report to investors and other financial documents that STAT was able to see what the company hides from most of us. As Herman noted:

UnitedHealth Group is so big that it doesn’t have to publicly announce a vast majority of its acquisitions. But a STAT analysis of company financial documents shows the health care conglomerate quietly acquired dozens of outpatient facilities in 2023, with a particular focus on surgery centers. 

And it’s not adding random surgery centers, either. There seems to be an explicit strategy: Many of UnitedHealth’s new centers sit in geographic areas where the company is the biggest Medicare Advantage player, based on the latest insurance market share data. That overlap reinforces how UnitedHealth is looking to funnel more of its insurance members toward providers that it owns, with the overarching goal of capturing more profit.

As an example, STAT said it stumbled upon an entry–”buried within UnitedHealth’s annual report”–that revealed the company’s previously undisclosed December acquisition of National Cardiovascular Partners, which operates 21 cardiac cath and vascular labs. Not coincidentally, NCP’s facilities are “in places like Phoenix and large metro areas in Texas where UnitedHealth has the biggest MA market share.”

Separately, at The American Prospect, reporter Maureen Tkacik, reported yesterday how UnitedHealth is exploiting the crisis created for physician groups and hospitals when one of its other recently acquired companies, Change Healthcare, was hacked last month. 

Tkacik wrote that last Thursday, UnitedHealthcare applied for an emergency exemption that would fast-track its takeover of a medical practice in Corvallis, Oregon, which is facing the prospect of closing its doors because of the financial crunch caused by the hack. As Tkacik explained, the hack interrupted the flow of information from Change Healthcare’s claims processing systems that enables physicians, hospitals, and other health care providers to get paid. 

Perversely, UnitedHealth is telling Oregon regulators that the best solution is to allow the company’s proposed acquisition of the medical practice to go forward. 

Tkacik reported that: 

Although the specific reason for the exemption request is redacted from the publicly posted version of the application, a clinic insider says the “emergency” is the same one that has plunged thousands of other health providers across the nation into a terrifying cash crunch… 

The situation underscores the perverse state of affairs in which UnitedHealth, which comprises some 2,642 separate companies that collectively raked in $371.6 billion last year, has arguably profited from the desperation that the hacking of its Change computer systems in late February has inflicted upon the health care system.

An estimated half of all health care transactions are processed or somehow otherwise touched by Change, a rollup of dozens of health care technology firms that provide 137 software applications that have been affected by the outage. 

Tkacid added that “Every dollar in revenue that has disappeared from hospitals, medical practices, and pharmacies in the aftermath of the outage corresponds to an extra dollar sitting in the coffers of the nation’s health insurers, so UnitedHealth, which pays out roughly $662 million in medical claims each day, is presumably sitting on a mountain of unexpected cash.” 

Trauma center hospitals charged above-market prices for non-trauma care

Posted on by • Posted in Emergency Care, Emergency Care Acuity, Emergency Care High Intensity, Health System, Hospital, Hospital Industry, Market Consolidation, Market Power, Monopoly Behavior, No Surprises Act, Out of Network, Rev Cycle Management, Revenue Cycle, Trauma Center • Leave a comment
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Prices for non-trauma inpatient admissions were 4.4 percent higher at trauma center hospitals than at hospitals without a trauma designation.

Hospitals designated as trauma centers charged higher prices for non-trauma inpatient admissions and emergency department visits compared to non-trauma center hospitals, a Health Affairs study found.

Hospital prices are the largest driver of rising healthcare spending in the commercial market and are often influenced by the structure of hospital markets. Trauma centers are a critical aspect of the hospital market as they are highly regulated and endowed by regulators with monopoly power over trauma patients in their service areas.

In most states, regulations are designed to encourage the entry of new trauma centers in areas that do not already have one and restrict new entry into areas that already have a trauma center. Additional regulations often require all trauma patients within an area to be transported or transferred to the designated hospital serving the area.

These restrictions create local monopolies for hospitals that are designated as trauma centers. Those in favor of the regulations argue that the monopolies are necessary to ensure each trauma center has sufficient volume to support high-quality and low-cost care. However, this structure could allow hospitals with market power over trauma services to raise prices for non-trauma services.

Researchers used claims data from 2011 to 2018 to assess whether hospitals designated as trauma centers use their market power for trauma services to receive above-market rates for non-trauma services. The sample included 2,000 hospitals with more than two million inpatient admissions and ten million emergency department visits over the study period.

The share of hospitals included in the sample serving as trauma centers increased from 21 percent in 2012 to 28 percent in 2018, resulting in a net addition of 138 trauma centers. The share of non-trauma inpatient admissions and emergency department visits at hospitals serving as trauma centers also increased between 2012 and 2018.

Hospitals serving as trauma centers every year from 2012 to 2018 were categorized as an always trauma center. Opened trauma centers were those not serving as a trauma center in 2012 but serving as one by 2018. Hospitals serving as a trauma center in 2012 but not in 2018 were closed trauma centers, and hospitals that did not serve as a trauma center at all during the study period were called “never trauma centers.”

The average price for non-trauma inpatient admissions among all hospitals was $21,112. Always trauma center hospitals had a higher average price of $22,568 per inpatient admission. The average price per admission was $22,097 at opened centers, $20,589 at closed centers, and $19,769 at never centers. Emergency department prices were similar, with always and opened center hospitals having higher prices than closed and never trauma center facilities.

Always trauma center hospitals were generally larger compared to the other hospital types and were more likely to be in more concentrated hospital markets. The average new injury severity score among emergency department visits in never trauma center hospitals was smaller compared to scores at other hospitals. The average MS-DRG weight for always trauma center hospitals was 1.61 compared to 1.54 for opened and never trauma center hospitals.

Holding these patient and hospital characteristics constant, prices for non-trauma inpatient admissions were 4.4 percent higher in hospitals with trauma center designation than at non-trauma center hospitals. Prices for non-trauma emergency department visits were 5.2 percent higher in trauma center hospitals.

“The results presented here provide an example of an important challenge: How to ensure access to specialized services and protect public health while also accounting for and possibly managing the effects of concomitant market failure,” researchers wrote.

“Our findings provide empirical support for the notion that provider market power in one area can be leveraged to affect prices in other areas.”

The No Surprises Act limits the amounts that hospitals can charge to out-of-network patients for emergency services, including trauma services. This may help limit trauma emergency cross-service leverage pricing, researchers said.

Justice Department conducting antitrust probe against UnitedHealth Group

Posted on by • Posted in Antitrust, Competition, Dept of Justice (DOJ), Federal Trade Commission, Federal Trade Commission (FTC), Investigation, Market Consolidation, Market Power, Monopoly, Monopoly Behavior, UnitedHealth Group, UnitedHealthcare • Leave a comment

https://mailchi.mp/fc76f0b48924/gist-weekly-march-1-2024?e=d1e747d2d8

The Department of Justice (DOJ) has been investigating UHG for anticompetitive behavior since last October, as first revealed by the Examiner News earlier this week and subsequently confirmed by the Wall Street Journal. 

The DOJ is reportedly interested in Optum’s acquisitions of physician groups and how their relationships with UHG’s health plans affects competition.

The probe appears to be wide-ranging, but there are no indications of if or when the DOJ plans to file charges. UHG is no stranger to antitrust attention: the DOJ failed to block its purchase of Change Healthcare in 2022, and its planned acquisition of home healthcare company Amedisys is still subject to a federal probe. 

The Gist: The Biden administration has made antitrust scrutiny a key plank of its policy platform, having recently launched high-profile investigations into several large companies including Apple, Amazon, and Google. 

Although these probes span major sectors of the US economy, healthcare consolidation has been a particular focus for the White House. 

As the nation’s both largest employer of physicians and largest health insurance company, UHG is an unsurprising target within the healthcare industry. Recently finalized federal merger guidelines have changed how the DOJ and Federal Trade Commission (FTC) gather M&A information, but not the laws or legal precedent upon which cases are ruled, so it remains to be seen if regulators’ new approach will translate into stronger enforcement.

US Anesthesia Partners settles with Colorado regulators

Posted on by • Posted in Anesthesia, Antitrust, Attorney General, Competition, Federal Trade Commission, Federal Trade Commission (FTC), Lawsuit, Lawsuit Settlement, Monopoly, Monopoly Behavior, Private Equity • Leave a comment

https://mailchi.mp/fc76f0b48924/gist-weekly-march-1-2024?e=d1e747d2d8

Dallas, TX-based US Anesthesia Partners (USAP), one of the nation’s largest providers of anesthesia services, reached a settlement with the Colorado Attorney General’s Office, which had alleged that USAP engaged in anticompetitive behavior in the state.

Although it denies any wrongdoing, USAP agreed to relinquish exclusive contracts with five Colorado hospitals and revise its practice of adding noncompete agreements to its physician contracts.

This settlement is separate from the similar FTC suit against USAP and its creator-turned-minority owner, private-equity (PE) firm Welsh, Carson, Anderson, and Stowe. That suit, filed in federal district court in Texas in September 2023, alleges that USAP monopolized the Texas anesthesiology market in order to drive up prices unlawfully. 

The Gist: USAP isn’t the only large anesthesia group in the news this week for allegations of anticompetitive behavior—hospitals in New York and Florida are suing North American Partners in Anesthesia, claiming it stifles competition by forcing its physicians to sign noncompete agreements. 

Health systems and regulators are increasingly dissatisfied with the highly concentrated anesthesia provider market, which has become dominated by large, PE-backed groups. 

Because the Colorado case was settled out of court, no precedent has been established for antitrust enforcement, but the result of the ongoing FTC suit against USAP may have significant ramifications for other large, PE-backed physician organizations.

Nurse practitioners fueling primary care workforce growth

Posted on by • Posted in Advanced Practice Providers (APP), Cost Management, Cost Reduction, Health System, Hospital, Hospital Industry, Labor Spend Management, Nurse Practitioners, Primary Care, Primary Care Delivery Model, Primary Care Strategy, Team-Based Care, Team-Based Care Models • Leave a comment

https://mailchi.mp/fc76f0b48924/gist-weekly-march-1-2024?e=d1e747d2d8

In this week’s graphic, we highlight how the primary care provider workforce has evolved over the past decade in both the pursuit of team-based care models and value-based care, as well as in response to rising labor costs and physician shortages.

In 2010, physicians made up more than 70 percent of the primary care workforce. But over the next 12 years, the number of primary care providers nearly doubled, largely driven by immense growth of nurse practitioners in the workforce. 

As of 2022, more than half of primary care providers were advanced practice providers (APPs), who continue to have a strong job outlook across the next decade (especially nurse practitioners).This shift has been beneficial to many provider organizations.

In a study from the Mayo Clinic, the return on investment was positive across a variety of APP practice models, especially in procedural-based specialties but across both independent practice models and full care team models as well. 

APPs also receive similar patient experience scores as their physician counterparts. 

Continued integration of APPs in team-based care models remains a key strategy for health systems seeking to improve access while lowering costs, especially in primary care.

Chasing downstream margin over downstream revenue

Posted on by • Posted in Health System, Hospital, Hospital Industry, Labor Spend Management, Operating Expenses, Operating Margin, Operating Margin Drivers, Physician Compensation, Physician Downstream Margins, Physician Employment, Physician Incentives, Physician Productivity, Physician Reimbursement • Leave a comment

https://mailchi.mp/fc76f0b48924/gist-weekly-march-1-2024?e=d1e747d2d8

A recent engagement with a health system executive team to discuss an underperforming service line uncovered a serious issue that’s becoming more common across the industry. 

“Our providers are more productive than ever,” the CFO informed our team, “and yet we keep losing money on the service line.” 

After digging into their physician compensation model, we came upon one source of the system’s issue. Because it was incentivizing physician RVUs equally across all payers, its providers responded, quite rationally, by picking up market share where growth was easiest: Medicaid patients, who weren’t generating any margin. 

“We recognize that we’ve been employing these physicians as loss leaders in order to generate downstream revenue,” the CFO shared, “but what’s the point of that revenue if there’s no longer any downstream margin?”
 


The economics of physician employment becomes a tough conversation very quickly; it’s a sensitive topic to many, and one with myriad facets. 

But the loss leader physician employment model obviously only works when it produces positive downstream margins. 

We’re in a critical window of time, where hospital margins are just beginning to recover as volumes return—but those volumes are not necessarily in the same places as before. 

The opportunity is ripe for systems to work closely with their aligned physicians to reexamine the post-pandemic margin picture for individual service lines and ensure incentives are aligning all parties to hit operating margin goals. 

Are these kinds of conversations taking place at your health system?

Has U.S. Healthcare reached its Tipping Point?

Posted on by • Posted in Affordability, Cost Management, Dept of Justice (DOJ), Disruption, Disruptive Technology, Federal Trade Commission, Federal Trade Commission (FTC), Health Insurance Industry, Health Policy, Health System, Healthcare Industry, Healthcare Reform, High Drug Prices, Inflation, Innovation, Innovative Care Models, Integrated Delivery System, Meaningful, Price Transparency, Private Equity, Tipping Point, Transformation, Transformational Change • Leave a comment
Has U.S. Healthcare reached its Tipping Point?

Last week was significant for healthcare:

  • Tuesday, the, FTC, and DOJ announced creation of a task force focused on tackling “unfair and illegal pricing” in healthcare. The same day, HHS joined FTC and DOJ regulators in launching an investigation with the DOJ and FTC probing private equity’ investments in healthcare expressing concern these deals may generate profits for corporate investors at the expense of patients’ health, workers’ safety and affordable care.
  • Thursday’s State of the Union address by President Biden (SOTU) and the Republican response by Alabama Senator Katey Britt put the spotlight on women’s reproductive health, drug prices and healthcare affordability.
  • Friday, the Senate passed a $468 billion spending bill (75-22) that had passed in the House Wednesday (339-85) averting a government shutdown. The bill postpones an $8 billion reduction in Medicaid disproportionate share hospital payments for a year, allocates $4.27 billion to federally qualified health centers through the end of the year and rolls back a significant portion of a Medicare physician pay cut that kicked in on Jan. 1. Next, Congress must pass appropriations for HHS and other agencies before the March 22 shutdown.
  • And all week, the cyberattack on Optum’s Change Healthcare discovered February 21 hovered as hospitals, clinics, pharmacies and others scrambled to manage gaps in transaction processing. Notably, the American Hospital Association and others have amplified criticism of UnitedHealth Group’s handling of the disruption, having, bought Change for $13 billion in October, 2022 after a lengthy Department of Justice anti-trust review. This week, UHG indicates partial service of CH support will be restored. Stay tuned.

Just another week for healthcare: Congressional infighting about healthcare spending. Regulator announcements of new rules to stimulate competition and protect consumers in the healthcare market.  Lobbying by leading trade groups to protect funding and disable threats from rivals. And so on.

At the macro level, it’s understandable: healthcare is an attractive market, especially in its services sectors. Since the pandemic, prices for services (i.e. physicians, hospitals et al) have steadily increased and remain elevated despite the pressures of transparency mandates and insurer pushback. By contrast, prices for most products (drugs, disposables, technologies et al) have followed the broader market pricing trends where prices for some escalated fast and then dipped.

While some branded prescription medicines are exceptions, it is health services that have driven the majority of health cost inflation since the pandemic.

UnitedHealth Group’s financial success is illustrative: 

it’s big, high profile and vertically integrated across all major services sectors. In its year end 2023 financial report (January 12, 2024) it reported revenues of $371.6 Billion (up 15% Year-Over-Year), earnings from operations up 14%, cash flows from operations of $29.1 Billion (1.3x Net Income), medical care ratio at 83.2% up from 82% last year, net earnings of $23.86/share and adjusted net earnings of $25.12/share and guidance its 2024 revenues of $400-403 billion. They buy products using their scale and scope leverage to  pay less for services they don’t own less and products needed to support them. It’s a big business in a buyer’s market and that’s unsettling to many.

Big business is not new to healthcare:

it’s been dominant in every sector but of late more a focus of unflattering regulator and media attention. Coupled with growing public discontent about the system’s effectiveness and affordability, it seems it’s near a tipping point.

David Johnson, one of the most thoughtful analysts of the health industry, reminded his readers last week that the current state of affairs in U.S. healthcare is not new citing the January 1970 Fortune cover story “Our Ailing Medical System”

 “American medicine, the pride of the nation for many years, stands now on the brink of chaos. To be sure, our medical practitioners have their great moments of drama and triumph. But much of U.S. medical care, particularly the everyday business of preventing and treating routine illnesses, is inferior in quality, wastefully dispensed, and inequitably financed…

Whether poor or not, most Americans are badly served by the obsolete, overstrained medical system that has grown up around them helter-skelter. … The time has come for radical change.”

Johnson added: “The healthcare industry, however, cannot fight gravity forever. Consumerism, technological advances and pro-market regulatory reforms are so powerful and coming so fast that status-quo healthcare cannot forestall their ascendance. Properly harnessed, these disruptive forces have the collective power necessary for U.S. healthcare to finally achieve the 1970 Fortune magazine goal of delivering “good care to every American with little increase in cost.”

He’s right.

I believe the U.S. health system as we know it has reached its tipping point. The big-name organizations in every sector see it and have nominal contingency plans in place; the smaller players are buying time until the shoe drops. But I am worried.

I am worried the system’s future is in the hands of hyper-partisanship by both parties seeking political advantage in election cycles over meaningful creation of a health system that functions for the greater good.

I am worried that the industry’s aversion to price transparency, meaningful discussion about affordability and consistency in defining quality, safety and value will precipitate short-term gamesmanship for reputational advantage and nullify systemness and interoperability requisite to its transformation.

I am worried that understandably frustrated employers will drop employee health benefits to force the system to needed accountability.

I am worried that the growing armies of under-served and dissatisfied populations will revolt.

I am worried that its workforce is ill-prepared for a future that’s technology-enabled and consumer centric.

I am worried that the industry’s most prominent trade groups are concentrating more on “warfare” against their rivals and less about the long-term future of the system.

I am worried that transformational change is all talk.

It’s time to start an adult conversation about the future of the system. The starting point: acknowledging that it’s not about bad people; it’s about systemic flaws in its design and functioning. Fixing it requires balancing lag indicators about its use, costs and demand with assumptions about innovations that hold promise to shift its trajectory long-term. It requires employers to actively participate: in 2009-2010, Big Business mistakenly chose to sit out deliberations about the Affordable Care Act. And it requires independent, visionary facilitation free from bias and input beyond the DC talking heads that have dominated reform thought leadership for 6 decades.

Or, collectively, we can watch events like last week’s roll by and witness the emergence of a large public utility serving most and a smaller private option for those that afford it. Or something worse.

P.S. Today, thousands will make the pilgrimage to Orlando for HIMSS24 kicking off with a keynote by Robert Garrett, CEO of Hackensack Meridian Health tomorrow about ‘transformational change’ and closing Friday with a keynote by Nick Saban, legendary Alabama football coach on leadership. In between, the meeting’s 24 premier supporters and hundreds of exhibitors will push their latest solutions to prospects and customers keenly aware healthcare’s future is not a repeat of its past primarily due to technology. Information-driven healthcare is dependent on technologies that enable cost-effective, customized evidence-based care that’s readily accessible to individuals where and when they want it and with whom.

And many will be anticipating HCA Mission Health’s (Asheville NC) Plan of Action response due to CMS this Wednesday addressing deficiencies in 6 areas including CMS Deficiency 482.12 “which ensures that hospitals have a responsible governing body overseeing critical aspects of patient care and medical staff appointments.” Interest is high outside the region as the nation’s largest investor-owned system was put in “immediate jeopardy” of losing its Medicare participation status last year at Mission. FYI: HCA reported operating income of $7.7 billion (11.8% operating margin) on revenues of $65 billion in 2023.