Tag Archives: Integrated Delivery System
Reforming Stark/Anti-Kickback Policies
An event from the USC-Brookings Schaeffer Initiative for Health Policy
In recent years, the health care system has accelerated experimentation into new payment and delivery models that reward care coordination, integration, and value. However, observers and market participants have expressed concerns that long-standing anti-fraud rules in Medicare and Medicaid prevent innovation and hold back potentially promising new arrangements. In 2018, the Trump administration sought stakeholder feedback on how the regulations implementing those laws might be modified to promote value-based, coordinated, integrated care delivery while protecting taxpayers and beneficiaries from fraud.
On January 30, 2019 the USC-Brookings Schaeffer Initiative for Health Policy will host Eric Hargan, the Deputy Secretary of Health and Human Services, for a discussion about this effort. Following his presentation, experts in health care payment and delivery system reform will discuss the issue and the path forward.
Report: There were fewer, but larger, hospital mergers and acquisitions in 2018
The number of hospital mergers last year dipped about 22% in 2018 but grew in overall size as part of a broader trend toward megamergers, according to a new report.
In all, hospitals announced a total of 90 transactions in 2018, down from 115 in 2017, according to a report (PDF) from Kaufman Hall. The firm began monitoring hospital M&A in 2000. About 20% of the acquisition deals were considered distressed transactions.
The value of those deals is increasing, with the average size of a seller by revenue has grown at a CAGR of almost 14% per year since 2008 and reached a new high of $409 million in 2018.
“That so many of 2018’s mega-mergers involve the combination of systems from different—though often contiguous—geographies signals the desire of health system leaders to expand their organizations into new markets, or to bring in a partner from an outside market,” Kaufman Hall said in the report. “For health system leaders looking for an acquisition partner from outside of their organization’s home market, considerations may include the desire to improve operations within the home market, or a need for additional capital to better compete within the home market.”
Texas led the nation for M&A last year, clocking eight hospital deals with a total value of deals estimated to be about $6.8 billion. Most notably, the report points to Baylor, Scott & White’s planned merger with Memorial Hermann will bring together two Texas-based systems and combine Dallas/Fort Worth and central Texas markets with the Houston market.
Florida had seven announced deals worth about $3.6 billion, and Pennsylvania had six deals worth about $2.2 billion.
Kaufman Hall also cited the “slow but steady movement toward population health” as a factor in the desire to increase market presence and penetration.
“Effective risk management depends on a health system’s ability to improve cost efficiencies, care efficacy, and care management across the continuum, which may require both horizontal and vertical integration to achieve,” they said.
Kaufman Hall said as new combinations and competitors appear in the healthcare market, hospitals and health systems should double down on their consumer strategy and the fight to control healthcare’s “front door.”
They should also seek opportunities to deepen growth across the spectrum of healthcare services through combinations or partnerships with other healthcare organizations.
Envisioning the “asset-light” hospital of the future
Across December we have been sharing our framework for helping health systems rethink their approach to investment in delivery assets, built around a functional view of the enterprise. We’ve encouraged our clients to take a consumer-oriented approach to planning, starting by asking what consumers need and working backward to what services, programs and facilities are required to meet those needs. That led us to break the enterprise into component parts that perform different “jobs” for the people they serve. We think of each of those parts as a “business”, located at either the market, regional or national level depending on where the best returns to scale are found (and on the geographic scale of any particular system). First we shared our view of the “access business”, pushing systems to create a broad web of access points across their market, with the goal of building consumer loyalty over time. Last week we described our vision for the “senior care” business, where an array of assets traditionally providing postacute care, including rehabilitation and skilled nursing facilities (SNFs), home health, and even hospital-at-home programs, could expand their capabilities to manage chronic disease exacerbations in elderly patients in lower-acuity, lower-cost settings. This week we’ll describe how the changes in these outpatient care settings will affect the profile of the traditional acute care hospital.
Shifting demographics will dramatically change the patient mix of American hospitals across the next decade. As Baby Boomers age into their Medicare years, ED and hospital beds will fill with elderly patients admitted for exacerbations of chronic diseases like congestive heart failure and diabetes, their care reimbursed at public-payer rates. Over time it’s easy to imagine hospitals starting to look like giant SNFs, filled with elderly patients receiving nursing care and drugs. With current cost and labor structures, this shift will be financially unsustainable for hospitals, as Medicare payment for many medical admissions does not cover the cost of the inpatient admission, forcing hospitals to pursue alternative care settings for these patients. As we described last week, as many as half of chronic disease admissions could be managed by an expanded “senior care” platform. Adding to this potential shift of medical admissions to an outpatient setting, we anticipate that an expanded postacute and home care platform could also accelerate the shift of inpatient surgeries to an ambulatory setting. If surgery centers could manage patients for 24- to 48-hour stays, and hospital-at-home capabilities supported recovery at home, some experts believe that a majority of non-emergent inpatient surgeries—including many orthopedic and general surgery cases—could shift away from the hospital. If this shift to alternative settings bears out, demand for traditional “med-surg” beds could decline significantly, even in the face of demographic shifts.
The graphic below describes an alternative vision for the future acute-care hospital that takes into account these changes. This “hospital of the future” will be asset-light, focused on providing higher levels of emergency, medical and surgical care, with capacity weighted toward more intensive patient management. The acute care facility will be supported by a network of connected and expanded ambulatory resources, including outpatient surgery, postacute services, home care and access services, all enabled by remote monitoring technology. While payment changes covering expanded outpatient care will accelerate this movement, we believe that payer and patient mix shifts alone will provide motivation for hospitals to pursue these strategies. The cost of adding a new med-surg bed now tops $2M in most markets—trimming even a few beds that may not be needed will provide capital that can go a long way in expanding outpatient capabilities to support lower-acuity care.
Healthcare as a zero-sum game: 7 key points
This article sets out seven thoughts on healthcare systems.
The article discusses:
- Types of Healthcare Systems
- Mergers and Key Questions to Assess Mergers
- Headwinds Facing Systems
- The Great Fear of Systems
- What has Worked the Last 10 Years
- What is Likely to Work the Next 10 Years
- A Few Other Issues
Before starting the core of the article, we note two thoughts. First, we view a core strategy of systems to spend a great percentage of their time on those things that currently work and bring in profits and revenues. As a general rule, we advise systems to spend 70 to 80 percent of their time doubling down on what works (i.e., their core strengths) and 20 to 30 percent of their time on new efforts.
Second, when we talk about healthcare as a zero-sum game, we mean the total increases in healthcare spend are slowing down and there are greater threats to the hospital portion of that spend. I.e., the pie is growing at a slower pace and profits in the hospital sector are decreasing.
I. Types of Healthcare Systems
We generally see six to eight types of healthcare systems. There is some overlap, with some organizations falling into several types.
1. Elite Systems. These systems generally make U.S. News & World Report’s annual “Best Hospitals” ranking. These are systems like Mayo Clinic, Cleveland Clinic, Johns Hopkins Hospital, NewYork-Presbyterian, Massachusetts General, UPMC and a number of others. These systems are often academic medical centers or teaching hospitals.
2. Regionally Dominant Systems. These systems are very strong in their geographic area. The core concept behind these systems has been to make them so good and so important that payers and patients can’t easily go around them. Generally, this market position allows systems to generate slightly higher prices, which are important to their longevity and profitability.
3. Kaiser Permanente. A third type of system is Oakland-based Kaiser Permanente itself. We view Kaiser as a type in and of itself since it is both so large and completely vertically integrated with Kaiser Foundation Health Plan, Kaiser Foundation Hospitals and Permanente Medical Groups. Kaiser was established as a company looking to control healthcare costs for construction, shipyard and steel mill workers for the Kaiser industrial companies in the late 1930s and 1940s. As companies like Amazon, Berkshire Hathaway and JPMorgan Chase try to reduce costs, it is worth noting that they are copying Kaiser’s purpose but not building hospitals. However, they are after the same goal that Kaiser originally sought. Making Kaiser even more interesting is its ability to take advantage of remote and virtual care as a mechanism to lower costs and expand access to care.
4. Community Hospitals. Community hospitals is an umbrella term for smaller hospital systems or hospitals. They can be suburban, rural or urban. Community hospitals are often associated with rural or suburban markets, but large cities can contain community hospitals if they serve a market segment distinct from a major tertiary care center. Community hospitals are typically one- to three-hospital systems often characterized by relatively limited resources. For purposes of this article, community hospitals are not classified as teaching hospitals — meaning they have minimal intern- and resident-per-bed ratios and involvement in GME programs.
5. Safety-Net Hospitals. When we think of safety-net hospitals, we typically recall hospitals that truly function as safety nets in their communities by treating the most medically vulnerable populations, including Medicaid enrollees and the uninsured. These organizations receive a great percentage of revenue from Medicaid, supplemental government payments and self-paying patients. Overall, they have very little commercial business. Safety-net hospitals exist in different areas, urban or rural. Many of the other types of systems noted in this article may also be considered safety-net systems.
6. National Chains. We divide national chains largely based on how their market position has developed. National chains that have developed markets and are dominant in them tend to be more successful. Chains tend to be less successful when they are largely developed out of disparate health systems and don’t possess a lot of market clout in certain areas.
7. Specialty Hospitals. These are typically orthopedic hospitals, psychiatric hospitals, women’s hospitals, children’s hospital or other types of hospitals that specialize in a field of medicine or have a very specific purpose.
II. Mergers and Acquisitions
There have seen several large mergers over the last few years, including those of Aurora-Advocate, Baylor Scott & White-Memorial Hermann, CHI-Dignity and Mercy-Bon Secours, among others.
In evaluating a merger, the No. 1 question we ask is, “Is there a clear and compelling reason or purpose for the merger?” This is the quintessential discussion piece around a merger. The types of compelling reasons often come in one of several varieties. First: Is the merger intended to double down and create greater market strength? In other words, will the merger make a system regionally dominant or more dominant?
Second: Does the merger make the system better capitalized and able to make more investments that it otherwise could not make? For example, a large number of community hospitals don’t have the finances to invest in the health IT they need, the business and practices they need, the labor they need or other initiatives.
Third: Does the merger allow the amortization of central costs? Due to a variety of political reasons, many systems have a hard time taking advantage of the amortization of costs that would otherwise come from either reducing numbers of locations or reducing some of the administrative leadership.
Finally, fourth: Does the merger make the system less fragile?
Each of these four questions tie back to the core query: Does the merger have a compelling reason or not?
III. Headwinds
Hospitals face many different headwinds. This goes into the concept of healthcare as a zero-sum game. There is only so much pie to be shared, and the hospital slice of pie is being attacked or threatened in various areas. Certain headwinds include:
1. Pharma Costs. The increasing cost of pharmaceuticals and the inability to control this cost particularly in the non-generic area. Here, increasingly the one cost area that payers are trying to merge with relates to pharma/PBM the one cost that hospitals can’t seem to control is pharma costs. There is little wonder there is so much attention paid to pharma costs in D.C.
2. Labor Costs. Notwithstanding all the discussions of technology and saving healthcare through technology, healthcare is often a labor-intensive business. Human care, especially as the population ages, requires lots of people — and people are expensive.
3. Bricks and Mortar. Most systems have extensive real estate costs. Hospitals that have tried to win the competitive game by owning more sites on the map find it is very expensive to maintain lots of sites.
4. Slowing Rises in Reimbursement – Federal and Commercial. Increasingly, due to federal and state financial issues, governments (and interest by employers) have less ability to keep raising healthcare prices. Instead, there is greater movement toward softer increases or reduced reimbursement.
5. Lower Commercial Mix. Most hospitals and health systems do better when their payer mix contains a higher percentage of commercial business versus Medicare or Medicaid. In essence, the greater percentage of commercial business, the better a health system does. Hospital executives have traditionally talked about their commercial business subsidizing the Medicare/Medicaid business. As the population ages and as companies get more aggressive about managing their own healthcare costs, you see a shift — even if just a few percentage points — to a higher percentage of Medicare/Medicaid business. There is serious potential for this to impact the long-term profitability of hospitals and health systems. Big companies like JPMorgan, Amazon, Berkshire Hathaway and some other giants like Google and Apple are first and foremost seeking to control their own healthcare costs. This often means steering certain types of business toward narrow networks, which can translate to less commercial business for hospitals.
6. Cybersecurity and Health IT Costs. Most systems could spend their entire budgets on cybersecurity if they wanted to. That’s impossible, of course, but the potential costs of a security breach or incident loom large and there are only so many dollars to cover these costs.
7. The Loss of Ancillary Income. Health systems traditionally relied on a handful of key specialties —cardiology, orthopedics, spine and oncology, for example — and ancillaries like imaging, labs, radiation therapy and others to make a good deal of their profits. Now ancillaries are increasingly shifted away from systems toward for-profits and other providers. For example, Quest Diagnostics and Laboratory Corporation of America have aggressively expanded their market share in the diagnostic lab industry by acquiring labs from health systems or striking management partnerships for diagnostic services.
8. Payers Less Reliant on Systems. Payers have signaled less reliance on hospitals and health systems. This headwind is indicated in a couple of trends. One is payers increasingly buying outpatient providers and investing in many other types of providers. Another is payers looking to merge with pharmaceutical providers or pharmacy and benefit managers.
9. Supergroups. Increasingly in certain specialties and multispecialty groups, especially orthopedics and a couple other specialties, there is an effort to develop strong “super groups.” The idea of some of these super groups is to work toward managing the top line of costs, then dole out and subcontract the other costs. Again, this could potentially move hospitals further and further downstream as cost centers instead of leaders.
IV. The Great Fear
The great fear of health systems is really twofold. First: that more and more systems end up in bankruptcy because they just can’t make the margins they need. We usually see this unfold with smaller hospitals, but over the last 20 years, we have seen bankruptcies periodically affect big hospital systems as well. (Here are 14 hospitals that have filed for bankruptcy in 2018 to date. According to data compiled by Bloomberg, at least 26 nonprofit hospitals across the nation are already in default or distress.)
Second, and more likely, is that hospitals in general become more like mid-level safety net systems for certain types of care — with the best business moving away. I.e., as margins slide, hospitals will handle more and more of the essential types of care. This is problematic, in that many hospitals and health systems have infrastructures that were built to provide care for a wide range of patient needs. The counterpoint to these two great fears is that there is a massive need for healthcare and healthcare is expensive. In essence, there are 325,700,000 people in the United States, and it’s not easy to provide care for an aging population.
V. The Last 10 Years – What Worked
What has worked over the last five to 10 years is some mix of the following:
- Being an elite system has remained a recipe for financial success.
- Being regionally dominant has been a recipe for success.
- Being very special at something or being very great at something has been a recipe for success.
- Being great in high paying specialties like orthopedics, oncology, and spine has been a recipe for success.
- Systems have benefited where they provide extensive ancillaries to make great profits.
VI. The Next 10 Years
Over the next 10 years, we advise systems to consider the following.
- Double down on what works.
- Do not give up dominance where they have it. Although it may be politically unpopular and expensive to maintain, dominance remains important.
- Systems will need a new level of cost control. For years hospitals focused on expanding patient volume, expanding revenue and enlarging their footprint. Now cost control has surpassed revenue growth as the top priority for hospital and health system CEOs in 2018.
- Systems will have to be great at remote and virtual care. More and more patients want care where and when they want it.
- Because there will be so much change, systems must continue to have great leadership and great teams to adjust and remain successful.
- As systems become more consumer-centric, hospitals will have to lead with great patient experience and great patient navigation. These two competencies have to become systemwide strengths for organizations to excel over the next decade.
VII. Other Issues
Other issues we find fascinating today are as follows.
1. First, payers are more likely to look at pharma and pharma benefit companies as merger partners than health systems. We think this is a fascinating change that reflects a few things, including the role and costs of pharmaceuticals in our country, the slowly lessening importance of health systems, and payers’ disinterest in carrying the costs of hospitals.
2. Second, for many years everyone wanted to be Kaiser. What’s fascinating today is how Kaiser now worries about Amazon, Apple and other companies that are doing what Kaiser did 50 to 100 years ago. In essence, large companies’ strategies to design their own health systems, networks or clinics to reduce healthcare costs and provide better care is a force that once created legacy systems like Kaiser and now threatens those same systems.
3. Third, we find politicians are largely tone deaf. On one side of the table is a call for a national single payer system, which at least in other countries of large size has not been a great answer and is very expensive. On the other hand, you still have politicians on the right saying just “let the free market work.” This reminds me of people who held up posters saying, “Get the government out of my Medicare.” We seem to be past a true and pure free market in healthcare. There is some place between these two extremes that probably works, and there is probably a need for some sort of public option.
4. Fourth, care navigation in many elite systems is still a debacle. There is still a lot of room for improvement in this area, but unfortunately, it is not an area that payers directly tend to pay for.
5. Fifth, we periodically hear speakers say “this app is the answer” to every problem. I contrast that by watching care given to elderly patients, and I think the app is unlikely to solve that much. It is not that there is not room for lots of apps and changes in healthcare — because there is. However, healthcare remains as a great mix of technology and a labor- and care-intensive business.
Should My Health System Launch a Health Insurance Plan?
Here are a few things providers whose vision and strategy include launching a health plan should consider
In 1929 the stock market crashed and the US collapsed into the Great Depression. Coincidentally, it was also in 1929 that Baylor Hospital in Dallas Texas devised a plan that would provide access to health care services to patients and give patients the ability to pay for their care so the hospital could remain viable.
In the nine decades since Baylor Hospital helped create what is known today as Blue Cross, hospitals, physicians and other providers of health care services have regularly asked themselves the questions: Should we develop and own a health insurance plan? Should we take financial risk for care we provide? Should we partner with physicians and/or with a health insurer?
Since the passage of the Affordable Care Act (ACA) in 2010, hospital and physician executives have considered these questions with new motivation. Several have jumped in, but only a few health system-sponsored plans launched in the ACA era are nearing profitability. Others have deferred, waiting to see what develops, wanting to digest lessons from Medicare’s ACO program, direct contracts with employers, and ACO arrangements with commercial payers. The latter has been difficult to achieve even for risk-motivated providers, as many dominant commercial plans are reticent to enable providers to manage risk—and in the long run, create a direct competitor. This has provided new motivation for health systems and large physician groups to evaluate a provider-owned plan.
Today’s mantra is “we are moving from volume to value!” Though the words are fresh, the concepts and concerns are much the same, as are the risks and rewards. Having served in executive roles in provider owned health plans for nearly 40 years, 19 years at Kaiser Permanente, and 21 years at Sentara Health Care, I have observed multiple cycles of providers rushing into the health plan business followed by the rapid exit of providers who fail in managing risk. Here are a few “Be’s…” providers whose vision and strategy include launching a health plan should consider:
Be cautious, but not cowardly
Be courageous, but not careless
Be cognizant, but not cocky
These “Be’s…” need some explanation.
Commentary:
A five-year business plan that anticipates start-up costs, operating losses and regulatorily required “risk-based capital” will give executives an “eyes-wide-open” going-in perspective. A Board-approved business plan that is both conservative and credible will plan on operating losses for several years.
When the first members are enrolled in the new health insurance plan, the operating losses will begin. Yes, every start-up health plan will experience losses for a period of time. Detailed preparation and thoughtful execution will not eliminate losses in the early years, but they will hasten the march to profitability.
Commentary:
Getting the right people, and the right number of people on this bus is imperative. Expert people are available, but they are probably not current members of your team. Inexperienced talent and under staffing this strategic initiative will result in disaster.
The total value of your health insurance plan includes much more than bottom line performance. Provider sponsored plans can lead the market in customer satisfaction, quality of care metrics and “total cost of care.” Table stakes for operating a health plan include enrollment, billing, claims processing and financial systems. These systems can be purchased or partnered. However, to maximize value, wise investment in population health IT should be implemented as soon as possible. State of the art population health tools will enable providers to close gaps in care and improve both health outcomes and financial performance. Later on, investing in consumer-centric digital health applications will optimize the customer experience and offer value a provider sponsored plan can bring to the market in a unique manner.
Growing the membership as fast as possible is vital. Without substantial membership, providers will have little reason to focus on changing the model of care. Rapid membership growth can occur in a variety of ways, but the best way is to win contracts for large populations. Securing a Medicaid contract, enrolling the provider’s employees and winning two or three large group commercial accounts, and Medicare Advantage/CMS ACO depending on the players in the MA space in a given market are all good strategies for rapid growth. The sequencing of membership type is less important than the rate of growth.
Commentary:
Given the losses suffered by providers who took risk in 1990’s, and the spotty performance of provider sponsored health plans in today’s CMS ACOs and commercial offerings, you are probably thinking, why do I think we can do better? Being aware of other’s failures and successes will embolden Boards and CEOs to accept the risk because they recognize the rewards.
A few lessons to be learned from Kaiser include:
- The imperative of physician leadership and commitment
- The efficiency of integrated services
- The clarity of the connection between quality of care and the cost of care
Lessons to be learned from provider sponsored health plans, both those that have succeeded and those that have failed, include:
- The tolerance and patience for early losses
- The balance between integration and separation of the health plan and the providers
- The clarity of purpose and mission. Having a health plan to fill hospital beds is not a sustainable mission
Additional Considerations:
Beyond financial results, most provider sponsored health plans tout other benefits that speak to both the mission of the organization and the financial performance of the enterprise in total. Such benefits include, but are not limited to:
- Improved performance in quality, service and total cost of care
- Enhanced understanding of the consumer/customer
- Control of the premium dollar
Of these added benefits, perhaps the benefit derived from the control of the premium dollar is least intuitive and most important. Here is a simple way to think about this issue:
If XYZ Health Insurer brings in $100 of premium, they will pay a hospital about $40 for inpatient and outpatient services. If the hospital is well run, it will make 4% or $1.20 on the $40 of revenue.
However, if the hospital owns the health insurance plan, and the insurance plan is making a 2% margin on the premium of $100 ($2.00), then the enterprise will earn $3.20, 2% on the premium and 4% on the “inter-company” transfer between the owned health insurance company and the hospital. (NOTE: this is a simple example. The actual arrangements between the hospital, its owned health insurance plan, and the contract with the non-owned health insurance companies will determine the actual results, but the principle is demonstrated with the simple example.)
To be sure, the challenges in owning and operating a health insurance plan are both daunting and different from operating a hospital system. However, the rewards can be worth the effort.
One provider sponsor health insurance plan generated enough net income over a five-year period that the “dividend” to the sponsoring health care system was deployed by the system to build not just one new hospital, but three!
Nearly 90 years after Baylor created the first Blue Cross health insurance company, it merged with Scott & White Clinic, which owns a health insurance plan. Baylor Scott & White is well-positioned to thrive as a fully integrated delivery system. If your system is asking “Should we launch a health plan?” please reach out. I’d be happy to share more of the lessons I’ve learned in my decades as CEO of provider sponsored health plans and discuss your system’s opportunity.
INSURANCE CONSOLIDATION MAY SOON INCLUDE HOSPITALS, CREATE POWERHOUSES
Recent moves to consolidate insurance customers under one corporate structure could lead next to carriers acquiring hospital networks.
The continued market consolidation and efforts to create an “all-in-one” approach to healthcare insurance customers may lead to carriers acquiring large hospital networks, particularly if the CVS-Aetna transaction proves to be successful and profitable, one analyst says.
The mergers and acquisitions in the insurance industry over the last year is the preamble for what will happen over the next two years, says CEO of Tom Borzilleri of InteliSys Health, a company aimed at bringing greater transparency to prescription drug prices, and the former founder and CEO of a pharmacy benefit manager (PBM).
The effort will ramp up to include hospitals if health plans start seeing financial rewards from the recent moves, he says.
“We are seeing carriers acquiring PBMs, as with Cigna/Express Scripts, and pharmacy chains/PBMs acquiring carriers, like CVS/Aetna, in search of cost efficiencies to increase earnings,” he says. “One may view these mergers and acquisitions as a favorable strategy to delivering both cost savings and patient convenience, but this strategy also has the potential to produce a serious negative effect on other critical stakeholders like doctors, hospitals, clinics, and others.”
In the past, many carriers managed their pharmacy benefits internally and found that it would be more cost-efficient to outsource that function to third-party PBMs, Borzilleri notes.
“As the PBM industry grew significantly over the last decade, allowing PBMs to gain market share and buying power for the millions of lives they managed, it opened the door for PBMs to methodically profiteer at the expense of both the carriers and their insured through the vague and complicated contracts for services the carriers were forced to sign,” he says.
Borzilleri continues, “In essence, the carriers really didn’t know what they were paying for at the end of the day for these services. As the market began to change with the onset of a movement and demand within the industry for more price transparency, carriers began to realize that they would be better served to bring the PBM function back in-house to reduce costs and increase earnings.”
CREATING A CLOSED LOOP
Borzilleri explains that a merger like the CVS-Aetna acquisition provides the insurer the ability to:
- Control drug costs by eliminating the profits that the PBM formerly enjoyed
- Realize cost efficiencies to dispense medications at the pharmacy level
- Directly employ the providers that can treat their members at a cost much lower than the reimbursement rates they currently pay their network doctors
- Create a brand-new revenue stream from the retail products sold in these stores
That brings a ton of reward to CVS-Aetna, but not to anyone else, Borzilleri says.
“This type of closed-loop network will limit patient options to everything from who will be treating them, where they will be treated, and how much they will be forced to pay for services and their prescriptions,” he says.
“Based on the millions of patient lives that both CVS-Caremark and Aetna manage, patients will be herded into their own locations to be treated by their own doctors/providers and the independent physician or practice will be significantly impacted. So in essence, both the patients and doctors who treat them will lose,” Borzilleri says.
RETURNING TO CLASSIC DESIGN
Hospital acquisition also could be driven by consumers, says Bill Shea, vice president of Cognizant, a company providing digital, consulting, and other services to healthcare providers. As consumers select health services on demand, they will create their own systems of care instead of relying on a third party to do so, he says.
“The impact of these changes likely means integrated delivery systems must focus on providing on-demand healthcare and do so on a large scale. These systems can point to the proven value of offering a vetted and curated set of cost-effective providers and coordinating care to deliver better cost and quality outcomes,” Shea says.
Health plans also may consider returning to their pre-managed care origins to purse a classic insurance model of benefit design, risk management, and underwriting, he says. Some organizations could become a one-stop shop for every insurance need.
“These diversified insurance players will have the economies of scale to better manage profit and loss across multiple lines of business and to take creative approaches to health-related insurance, such as offering personalized policies targeted to specific market segments,” Shea says.
MORE STATE, REGIONAL MOVES
Consolidation is likely to increase at the state and regional level, says Suzanne Delbanco, PhD, executive director of Catalyst for Payment Reform.
“As providers with market dominance command higher prices, insurers will need to amass greater market power to push back. This means fewer choices of insurers for employers, other healthcare purchasers and consumers,” Delbanco says.
She says, “Fewer choices means less competition and less pressure to innovate. It’s possible we’ll see more of the integrated delivery systems and accountable care organizations beginning to offer insurance products where state laws and regulations allow them to as new entrants into the market.”
Those changes will make it more and more difficult to thrive as a small insurer or a small provider, she says.
Also, while rising prices and a continuation of uneven quality will motivate employers and other healthcare purchasers to demand greater transparency into provider performance and prices, larger players may more easily resist that call, she says.
“Increasingly it will be a seller’s game, not a buyer’s,” Delbanco says. “While quality measurement, provider payment reforms, and healthcare delivery reforms increasingly move toward putting the patient at the center, this may be more lip service than reality. Even if consumers end up with more information to make smarter decisions, their options may have dwindled to ones that are largely unaffordable.”
The Pennsylvania health care battle
https://www.axios.com/the-pennsylvania-health-care-battle-2519142732.html
The details: Highmark and Penn State Health are investing $1 billion to build out a network of doctors and health care facilities, but the organizations aren’t disclosing how much each side is contributing. Penn State Health CEO Craig Hillemeier said the deal is a strategic partnership, not a merger of assets. Here’s a condensed version of the conversation:
You all are talking a lot about “value-based care.” But what will you do specifically to fulfill the promise that this deal will lower health care costs for people in your region?
Highmark CEO David Holmberg: “This is about making sure that we design insurance products so that when a member has to make a decision, they have access to care near where they live. (Penn State’s academic medical center) is also more affordable and more effective than many of the other academic systems.”
So how much did UPMC play into this? UPMC has bought a lot of hospitals this year, and I have to imagine that name came up multiple times in discussions.
Penn State Health CFO Steve Massini: “We’ve had a strategy for a number of years to build out this community-based network and support the academic center. We felt that having an insurance partner like Highmark was a very valuable piece of that strategy … what others do is not what we tend to get hung up on.”
Holmberg: “We’re in this for the long term. We’re not going to worry about what the other guys do.”
Will you create health plans that, for example, have cheaper premiums but limited networks where people can only go to Penn State doctors and hospitals?
Highmark President Deborah Rice-Johnson: “We have those in the market today. It’s not new to the industry. We’ll still have broad-network products … but we have absolutely seen premiums and care costs moderate very differently (in limited-network plans) than the broad-network products.”
Can you guarantee that premiums for those types of narrow plans won’t rise faster than the rate of inflation?
Rice-Johnson: “We have done that, yes.” But employers need to sign multiyear agreements with Highmark to get those capped rates.
Is M&A the Cure for a Failing Health Care System?
https://hbr.org/2017/12/is-ma-the-cure-for-a-failing-health-care-system
The U.S. health care system is begging for disruption. It costs way too much ($3.3 trillion last year) and delivers too little value. Hundreds of millions of Germans, French, English, Scandinavians, Dutch, Danish, Swiss, Canadians, New Zealanders, and Australians get comparable or better health services for half of what we pay. For most Americans, care is not only expensive but is also fragmented, inconvenient, and physically inaccessible, especially to the sickest and frailest among us.
It should come as no surprise, then, that when titans of our private, for-profit health care sector — like Aetna, CVS, UnitedHealth Group (UHG), and DaVita — strike out in new directions, stakeholders react with fascination and excitement. Could this be it? Is free-market magic finally bringing Amazon-style convenience, quality, and efficiency to health care? Are old-guard institutions, like hospitals and nursing homes, on the verge of extinction?
The answer, frustratingly, is that it depends. It depends above all on the results. To be the change that many desire, these new mergers and acquisitions, and the others that will likely follow, must produce a higher-quality product for consumers (and satisfy physicians and other health professionals) at an affordable price. The details are crucial, and the details in health care — as our political leaders have recently learned — are complicated.
Even a high level look at two apparently similar deals suggests the importance of getting under the hoods of these arrangements. Both CVS’s planned $69 billion acquisition of Aetna and UnitedHealth’s $4.9 billion deal to buy DaVita Medical Group, bring together a very large national insurer and a large provider of health care services. Combining an insurance function with a delivery system has ample precedent in health care. Some of the nation’s most innovative, high-performing non-profit health care organizations use this formula. These include the Kaiser Health Plans, Intermountain Healthcare in Utah and Idaho, the Geisinger System in Pennsylvania, the Henry Ford Health System in Detroit, and HealthPartners in Minnesota and Wisconsin, among others.
The reason this formula works is that when care-delivery systems also act as insurers, they assume financial responsibility for the care they provide. This tends to focus doctors, nurses, and other health professionals on the value of what they do — finding the most cost-effective approach to managing their patients’ problems. The result can be a culture of economy and quality that is very hard to replicate in the prevailing fee-for-service environment, where health professionals get rewarded for the volume rather than the value of services.
So the big question is whether these bold new combinations of insurer and provider can generate promising partnerships similar to a Kaiser or an Intermountain, or find some other equally powerful formula for disruption. The answer is far from certain, and the uncertainties differ for the two mergers.
In the CVS-Aetna case, the care provider, a pharmaceutical retailer and pharmaceutical benefit manager, provides a very limited set of health services: drugs, drug purchasing, and selected, basic, routinized primary care at more than 1,100 local Minute Clinics located in communities around the United States. To become a Geisinger or an Intermountain equivalent, Aetna-CVS would have to acquire — or develop — seamless relationships with legions of primary care and specialty physicians and hospitals. It would have to turn its stores into medical clinics, with exam rooms, diagnostic laboratories, and x-ray suites. And it would have to install and link electronic health records with other providers in its communities. Having done all this, CVS would have to excel at the very challenging task of managing physicians and other health professionals — something that daily confounds even the most experienced, long-time, care-delivery systems. The challenge would be unprecedented, the expense considerable, and the outcome uncertain.
The CVS-Aetna partnership seems likely, instead, to set off in a very different, and intriguing, direction: offering an augmented suite of preventive and population health services for high-cost chronically-ill patients through its convenient, community-based outlets. CVS staff will serve as local case managers and coordinators for patients who might otherwise skip needed preventive services, have trouble getting to their primary care physicians’ offices, or just need help taking their medicines. The hope is that this will reduce patients’ use of more expensive emergency, hospital, and specialty services, thereby reducing Aetna’s bills and making its product more competitive. Aetna would incent its clients to use CVS services by exempting these from the normal deductibles and copays that most insurers charge, thus incidentally, increasing CVS’s business more generally. This strategy could attract customers to both CVS and Aetna, add health care value, and even drive up profits.
But uncertainties remain. In addition to those I’ve mentioned, one of the biggest challenges will be coordinating with traditional care providers, both primary care and specialists. Seamless teamwork is critical to effective care of complex, high-cost patients. And by adding another player to our already-fragmented health care system, the CVS-Aetna project could actually undermine coordination of services. And while better care for complex patients is clearly part of the solution to our cost and quality problems, it may not be the systemic disruption that some are hoping for.
The UnitedHealth-DaVita deal, in contrast, seems more likely at first glance to accomplish the insurer-provider partnership that has characterized Kaiser-style organizations in the past. The DaVita Medical group employs 2,000 primary care and specialist physicians in nearly 300 medical clinics, 35 urgent-care centers, and six outpatient surgery centers in six states. Among the group’s divisions is the formerly independent HealthCare Partners, which, as this Commonwealth Fund case study makes clear, has a long history of accepting and managing financial risk, using advanced information systems, and promoting quality-improvement programs.
That said, no one should underestimate the challenge of growing the UnitedHealth acquisition of dispersed physician groups into a national system capable of disrupting our floundering health system. Health care is a very local affair, and the organizations providing it tend to be creatures of their localities and histories. It can take generations for a provider-insurer partnership to develop a culture of trust, collaboration, and value orientation that has made existing examples of these combinations so uniquely effective. If the new entity seeks to grow, it will find that recruiting and training physicians who can leave the fee-for-service mentality behind is a challenge, as is finding leadership that can gain and keep health professionals’ trust. Kaiser has failed in several attempts to spread to new locations. And though UnitedHealth’s Optum division, which will run the partnership, has some limited experience managing selected specialty health services, making this new enterprise work could prove daunting.
Even if the Aetna-CVS and UnitedHealth-DaVita ventures contain the seeds of transformative health system change, it will take time for those seeds to germinate. But Wall Street is not a patient audience. The involved companies will face short-term pressure to prove the profitability of the new arrangements. From this standpoint, it does not bode well that DaVita was anxious to sell its medical groups because they were not performing financially.
The excitement about these two bold new health care arrangements says as much about the desperation with our current health care systems as it does about the promise of the mergers themselves. They may have compelling short-term business value to shareholders — though that, too, remains to be proven. As fundamental health care disrupters, however, they face challenging and uncertain futures.
Why Major Hospitals Are Losing Money By The Millions
https://www.forbes.com/sites/robertpearl/2017/11/07/hospitals-losing-millions/#67f501c67b50
A strange thing happened last year in some the nation’s most established hospitals and health systems. Hundreds of millions of dollars in income suddenly disappeared.
This article, part two of a series that began with a look at primary care disruption, examines the economic struggles of inpatient facilities, the even harsher realities in front of them, and why hospitals are likely to aggravate, not address, healthcare’s rising cost issues.
According to the Harvard Business Review, several big-name hospitals reported significant declines and, in some cases, net losses to their FY 2016 operating margins. Among them, Partners HealthCare, New England’s largest hospital network, lost $108 million; the Cleveland Clinic witnessed a 71% decline in operating income; and MD Anderson, the nation’s largest cancer center, dropped $266 million.
How did some of the biggest brands in care delivery lose this much money? The problem isn’t declining revenue. Since 2009, hospitals have accounted for half of the $240 billion spending increase among private U.S. insurers. It’s not that increased competition is driving price wars, either. On the contrary, 1,412 hospitals have merged since 1998, primarily to increase their clout with insurers and raise prices. Nor is it a consequence of people needing less medical care. The prevalence of chronic illness continues to escalate, accounting for 75% of U.S. healthcare costs, according to the CDC.
Part Of The Problem Is Rooted In The Past
From the late 19th century to the early 20th, hospitals were places the sick went to die. For practically everyone else, healthcare was delivered by house call. With the introduction of general anesthesia and the discovery of powerful antibiotics, medical care began moving from people’s homes to inpatient facilities. And by the 1950s, some 6,000 hospitals had sprouted throughout the country. For all that expansion, hospital costs remained relatively low. By the time Medicare rolled out in 1965, healthcare consumed just 5% of the Gross Domestic Product (GDP). Today, that number is 18%.
Hospitals have contributed to the cost hike in recent decades by: (1) purchasing redundant, expensive medical equipment and generating excess demand, (2) hiring highly paid specialists to perform ever-more complex procedures with diminishing value, rather than right-sizing their work forces, and (3) tolerating massive inefficiencies in care delivery (see “the weekend effect”).
How Hospital CEOs See It
Most hospital leaders acknowledge the need to course correct, but very few have been able to deliver care that’s significantly more efficient or cost-effective than before. Instead, hospitals in most communities have focused on reducing and eliminating competition. As a result, a recent study found that 90% of large U.S. cities were “highly concentrated for hospitals,” allowing those that remain to increase their market power and prices.
Historically, such consolidation (and price escalation) has enabled hospitals to offset higher expenses. As of late, however, this strategy is proving difficult. Here’s how some leaders explain their recent financial struggles:
“Our expenses continue to rise, while constraints by government and payers are keeping our revenues flat.”
Brigham Health president Dr. Betsy Nabel offered this explanation in a letter to employees this May, adding that the hospital will “need to work differently in order to sustain our mission for the future.”
A founding member of Partners HealthCare in Boston, Brigham & Women’s Hospital (BWH) is the second-largest research hospital in the nation, with over $640 million in funding. Its storied history dates back more than a century. But after a difficult FY 2016, BWH offered retirement buyouts to 1,600 employees, nearly 10% of its workforce.
Three factors contributed to the need for layoffs: (1) reduced reimbursements from payers, including the Massachusetts government, which limits annual growth in healthcare spending to 3.6%, a number that will drop to 3.1% next year, (2) high capital costs, both for new buildings and for the hospital’s electronic health record (EHR) system, and (3) high labor expenses among its largely unionized workforce.
“The patients are older, they’re sicker … and it’s more expensive to look after them.”
That, along with higher labor and drug costs, explained the Cleveland Clinic’s economic headwinds, according to outgoing CEO Dr. Toby Cosgrove. And though he did not specifically reference Medicare, years of flat reimbursement levels have resulted in the program paying only 90% of hospital costs for the “older,” “sicker” and “more expensive” patients.
Of note, these operating losses occurred despite the Clinic’s increase in year-over-year revenue. Operating income is on the upswing in 2017, but it remains to be seen whether the health system’s new CEO can continue to make the same assurances to employees as his predecessor that, “We have no plans for workforce reduction.”
“Salaries and wages and … and increased consulting expenses primarily related to the Epic EHR project.”
Leaders at MD Anderson, the largest of three comprehensive cancer centers in the United States, blamed these three factors for the institution’s operational losses. In a statement, executives attributed a 77% drop in adjusted income last August to “a decrease in patient revenues as a result of the implementation of the new Epic Electronic Health Record system.”
Following a reduction of nearly 1,000 jobs (5% of its workforce) in January 2017, and the resignation of MD Anderson’s president this March, a glimmer of hope emerged. The institution’s operating margins were in the black in the first quarter of 2017, according to the Houston Chronicle.
Making Sense Of Hospital Struggles
The challenges confronting these hospital giants mirror the difficulties nearly all community hospitals face. Relatively flat Medicare payments are constraining revenues. The payer mix is shifting to lower-priced patients, including those on Medicaid. Many once-profitable services are moving to outpatient venues, including physician-owned “surgicenters” and diagnostic facilities. And as one of the most unionized industries, hospitals continue to increase wages while drug companies continue raising prices – at three times the rate of healthcare inflation.
Though these factors should inspire hospital leaders to exercise caution when investing, many are spending millions in capital to expand their buildings and infrastructure with hopes of attracting more business from competitors. And despite a $44,000 federal nudge to install EHRs, hospitals are finding it difficult to justify the investment. Digital records are proven to improve patient outcomes, but they also slow down doctors and nurses. According to the annual Deloitte “Survey of US Physicians,” 7 out of 10 physicians report that EHRs reduce productivity, thereby raising costs.
Harsh Realities Ahead For Hospitals
Although nearly every hospital talks about becoming leaner and more efficient, few are fulfilling that vision. Given the opportunity to start over, our nation would build fewer hospitals, eliminate the redundancy of high-priced machines, and consolidate operating volume to achieve superior quality and lower costs.
Instead, hospitals are pursuing strategies of market concentration. As part of that approach, they’re purchasing physician practices at record rates, hoping to ensure continued referral volume, regardless of the cost.
Today, commercial payers bear the financial brunt of hospital inefficiencies and high costs but, at some point, large purchasers will say “no more.” These insurers may soon get help from the nation’s largest purchaser, the federal government. Last month, President Donald Trump issued an executive order with language suggesting the administration and federal agencies may seek to limit provider consolidation, lower barriers to entry and prevent “abuses of market power.”
With pressure mounting, hospital administrators find themselves wedged deeper between a rock and a hard place. They know doctors, nurses, and staff will fight the changes required to boost efficiency, especially those that involve increasing productivity or lowering headcount. But at the same time, their bargaining power is diminishing as health-plan consolidation continues. The four largest insurance companies now own 83% of the national market.
What’s more, the Centers for Medicare & Medicaid Services (CMS) announced last week a $1.6 billion cut to certain Medicare Part B drug payments along with reduced reimbursements for off-campus hospital outpatient departments in 2018. CMS said these moves will “provide a more level playing field for competition between hospitals and physician practices by promoting greater payment alignment.”
The American healthcare system is stuck with investments that made sense decades ago but that now result in hundreds of billions of dollars wasted each year. Hospitals are a prime example. That’s why we shouldn’t count on hospital administrators to solve America’s cost challenges.
Change will need to come from outside the traditional healthcare system. The final part of this series explores three potential solutions and highlights the innovative companies leading the effort.
HENRY KOTULA 
