|THE YEAR BEHIND—THE YEAR AHEAD
Five themes from the headlines of 2018, and what we expect for 2019.
The changing politics of healthcare
Last year’s midterm elections effectively brought down the curtain on the ongoing Republican attempt to “repeal and replace” the landmark 2010 Affordable Care Act (ACA). With Democrats in charge of the House, hopes for any legislative action to repeal the ACA have vanished. Meanwhile, state-level election results in 2018 were at least as important as the change of House control in securing the ACA’s future. In general, the popularity of the ACA has continued to increase since its passage, with 53 percent of Americans now saying they have a favorable opinion of the law. Given the midterm election results, the ACA’s survival now seems all but certain, barring an unexpected appeal ruling by the Supreme Court in the ongoing Texas court case challenging the law’s constitutionality. (Such a ruling might come smack in the middle of the 2020 primary season—which would create Hollywood-level drama.) The return to divided government will only increase acrimony and divisiveness in Washington; even keeping the government open seems an impossible task for sharply divided lawmakers. We’d expect little by way of bipartisan compromise on healthcare issues in the year ahead.
Further, with Democrats now in control of the budget-writing process, any talk of significant reforms to the healthcare entitlement programs will end. Now that former Speaker of the House Paul Ryan (R-WI) has retired from Congress, Republicans have lost a principal champion of major entitlement reform. He spearheaded efforts to use the “repeal and replace” initiative of the last Congress to enact a major transformation of the Medicaid program, shifting it to a block grant program that would have handed much more responsibility for spending control to the states. Further, Ryan was the main architect of “premium support”, which would have turned Medicare into a system of federally-subsidized vouchers for seniors, with beneficiaries spending their vouchers to purchase private Medicare coverage on exchange marketplaces. Both of these reforms, block-granting and premium support, were put forward in the name of deficit reduction—and were intended by Republican policy makers to pay for the nearly $1.5T of tax cuts they enacted in 2017. Both reforms now go back on the shelf as Democrats take charge of the House.
No sooner had the midterm elections ended than the 2020 Presidential campaign kicked into gear. For Democrats, that brings a debate over “Medicare for All” (M4A) which has become a rallying cry on the left, and has captured the imagination of voters. While the details of M4A are unclear, with several different approaches to universal coverage being put forward by a variety of Democratic lawmakers and policy advocates, it’s clear that Democrats have hit upon their own version of “repeal and replace”—a simple slogan that can mobilize their base. The policy details are less important, what matters is that Democrats now perceive (correctly) that the 2020 healthcare debate will happen on their “home court” (coverage expansion) rather than on Republican turf (fiscal discipline). The appeal of M4A for Democrats is that it addresses an immediate concern among a growing number of voters: the burden of out-of-pocket healthcare spending on household budgets. The details of how to pay for M4A are uninteresting to the average voter, it’s the vision that has appeal—especially to suburban, middle-class voters, whom Democrats will be heavily targeting in their bid to take back the White House.
The Gist: Divided government and 2020 Presidential politics will shift the focus in Washington away from “repeal and replace” and entitlement reform toward a debate over “Medicare for All” and cost of coverage.
Deregulation, privatization, and healthcare “federalism”
Although legislative action on healthcare is unlikely during the next two years, we expect the Trump administration to continue to push forward regulatory reforms aimed at reshaping the healthcare system around conservative policy principles. A key focus of these regulatory reforms will be deregulation to encourage market competition. The Trump team has already signaled willingness to take a look at the Stark regulations that prevent closer economic alignment between hospitals and physicians, and that it takes a favorable view of vertical consolidation. It has pulled back on regulations that prevent insurance companies from offering short-term, non-ACA compliant plans, and cleared the way for association health plans to offer lower-cost coverage to eligible consumers. Look for more of these kinds of changes, which lift restrictions on private market activity, moving forward.
Another area of regulatory activity will be the continued devolution of authority to states. Across 2018 we saw increased activity from the administration aimed at allowing states to take charge of their own healthcare markets and become “laboratories of reform”, using authority granted by waivers to existing Federal laws. In recent guidance on “1332 waivers”, the administration significantly widened the range of options states can deploy to skirt ACA requirements for their insurance markets. And it has encouraged states to apply for “1115 waivers” that allow them to redefine eligibility requirements for Medicaid coverage. As the Trump administration draws on regulatory authority to advance its healthcare agenda, expect the Democratic-controlled House to play a much stronger oversight role in examining the legality of some of these changes. In particular, it’s likely that the administration’s promised leeway for ACA-noncompliant health plans will come under intense scrutiny from the committees of jurisdiction in the House.
Finally, we expect the ongoing privatization of the entitlement programs to continue apace. For the past several years, and with a shocking lack of meaningful public debate, we’ve seen a steady shift of Medicare beneficiaries into Medicare Advantage plans—which now cover a third of enrollees, and are projected to reach half of all seniors within the next five years. At the same time, most states have embraced Medicaid managed care, contending with the program’s growing strain on state budgets by handing over accountability for cost control to private insurers. This de facto privatization isn’t necessarily a bad thing—indeed, some of the most interesting innovations of recent years have come in the private Medicare marketplace: ChenMed, Iora Health, CareMore Health and their ilk hold much promise in managing seniors and low-income populations. We wouldn’t be surprised if a variant of “Medicare Advantage for All” ended up being the bipartisan solution that wins over reflexive industry opposition to the current M4A push.
The Gist: Expect the Trump administration to continue its pursuit of market-oriented “deregulation”, administrative approaches to loosen the requirements of the ACA, and support for the ongoing “privatization” of Medicare and Medicaid.
More intense scrutiny on price
Expect much of the rhetoric and regulatory action of the Trump team to be couched in terms of “consumer affordability” over the coming year. In 2018, we saw proposals to increase price transparency around prescription drug costs by forcing drug companies to include list prices in their television ads. While it’s unclear how much impact this will have on actual pricing, the tactic will play well with consumers facing high out-of-pocket costs for drugs. The recent move to site-neutral payment for certain outpatient services also reflects a growing emphasis on consumer affordability, and was implemented over strenuous opposition from the provider lobby. We’ll see more of these “pocketbook-friendly” regulatory changes moving forward.
The push for price transparency was fueled by growing media scrutiny in 2018 of the pricing of healthcare services. Most notable was the work of Vox reporter Sarah Kliff, who scrutinized thousands of ED bills sent to her by consumers, and shared dozens of anecdotes of “surprise bills” sent to patients who unknowingly received hospital and ED care from out-of-network providers. Consumers have become increasingly sensitized to the byzantine pricing and contracting practices of hospitals and insurance companies. In the public blame game about high healthcare prices, hospitals and health systems are on the losing side. Pieces examining “hospital deals that squelch competition” and the “hidden system” driving referrals in hospital-owned medical groups cast health systems in a negative light and question the value of health system and physician consolidation. And rightly so, as there has been very little evidence that hospital mergers to date have delivered better outcomes or lower costs for consumers and purchasers.
Hoping to give patients more accurate feedback about out-of-pocket costs, the Centers for Medicare & Medicaid Services (CMS) will now require hospitals to publish an online list of their charges to make that data easier for third parties to aggregate. Despite good intentions, it’s likely that posting gross charges with no correlation to actual prices will confuse rather than inform consumers—but making the data public could motivate more providers to pursue real transparency efforts. Regardless, regulatory and consumer demand for rational, value-driven pricing will only grow, and business models built on cross subsidy, hospital-based billing, and market leverage are increasingly time-limited.
The Gist: Growing regulatory and public scrutiny, coupled with rising consumer cost accountability, will increase demand for price transparency, placing pressure on providers to rationalize prices and lower costs as a consumer market continues to develop in healthcare.
Backlash on employee cost-sharing
Average annual premiums for family coverage in employer-sponsored insurance rose to $19,616 in 2018—in other words, the average company is now buying each employee a new car’s worth of healthcare benefits every year. Employers have largely looked to employee cost-sharing as a means to control rising benefits spend, with the average worker shouldering a deductible of nearly $1,600, double the amount in 2008. Taken in full, these costs are clearly impacting wage growth, and creating a potentially unsustainable financial burden for consumers. There’s growing evidence that employers may be unwilling to push cost-sharing further—and are becoming more interventionist in an attempt to control costs. We’ve seen a spike in interest among employers in direct contracting with health systems, highlighted by General Motors’ deal with Henry Ford Health System last summer to create narrow-network offerings for employees. Comcast made the news for taking a different approach, aggregating a suite of services to help employees navigate the health system and access high-value care options. Companies far beyond the Fortune 100 are offering new solutions: three-quarters of employers cover telemedicine visits, and 70 percent offer wellness or care management solutions.
As employers reach the limit of their ability to shunt healthcare costs onto their employees, they will likely turn to restricting choice, narrowing the range of care options available for employees and putting mechanisms in place to steer them to “high-value” providers. We see a window of opportunity for providers to partner with employers to assemble “high-performance networks” that reduce costs through better managing care—cutting out middlemen in the process. Venture-funded start-ups like Bind and Centivo aim to create new kinds of insurance products with innovative network and benefit designs. Other employers are assembling networks themselves, along the lines of Walmart’s growing network of “centers of excellence” for high-cost procedures, or together through coalitions like the Health Transformation Alliance.
Even if these network redesign efforts prove effective, significant barriers remain. Many markets lack a provider with the capabilities and service footprint to field an exclusive network offering. Most employers lack the resources of a Comcast or Walmart to contract directly with providers or aggregate best-in-class healthcare solutions. And there’s a real question as to whether employers have the fortitude to engage employees in difficult conversations about narrowing choice. Many might rather delegate the decision about what benefits or providers to cut out to employees themselves—paving the way for a shift to defined-contribution healthcare. While employers have been slow to adopt defined-contribution benefits given a historically-strong labor market, interest has persisted. We’ve long predicted that most companies will need the cover of a recession to radically restructure benefits—given recent economic indicators, 2019 could provide employers the opportunity to make the move to defined-contribution healthcare.
The Gist: Employers are growing reticent to shift more health benefits costs onto employees and are beginning to explore restricting choice—either by narrowing provider networks directly, or by delegating that decision to employees via defined contribution.
From mega-merger to mega-integration
Last year marked a turning point for merger activity in the healthcare sector, with a shift from traditional horizontal consolidation aimed at boosting health system “relevance” (read: local market share and negotiating leverage) to cross-market and cross-sector deals. Notable deals among health systems looking to expand their reach across geographiesincluded the creation of CommonSpirit Health (the combination of Dignity Health and Catholic Health Initiatives, which will be the largest nonprofit health system upon closure), Advocate Aurora Health (bringing together two powerhouse systems in the Midwest), and Bon Secours Mercy Health(combining two regional Catholic systems into a 7-state mega-system). Health systems also continued their pursuit of vertical integration with physician groups, urgent care centers and postacute providers. Meanwhile, cross-sector deals stole the headlines this year, with the acquisition of insurer Aetna by pharmacy retailer CVS Health, the purchase of pharmacy benefit manager Express Scripts by insurer Cigna, and the continued acquisition of physician practices (including multi-state Davita Medical Group, Worcester, MA-based Reliant Medical Group, and Seattle, WA-based The Polyclinic) by Optum, a division of UnitedHealth Group.
More mega-mergers are probably on the cards for 2019, as more $5-10B health systems realize they’d rather be $15-30B systems (for reasons of scale, scope and hubris), and other non-provider players recognize the value of integrating their insurance, retail, pharmacy or other capabilities with hands-on care delivery in a bid to capture the loyalty of healthcare consumers. We’re also still in the throat-clearing stage of “disruptive innovation”, with Amazon, Apple and Google just tiptoeing up to what are sure to be major moves to become significant healthcare competitors.
But we’d expect much of 2019 to be focused on integration, not deal-making. For organizations involved in the mega-deals of the past year, the priority will be to actually make the pieces they’ve acquired work together to create new value. That’s more straightforward for those horizontal, cross-market health systems—surely there are hundreds of millions of dollars of “synergies” to be captured from reducing duplication and improving operational efficiency. (Though the cultural challenge of merging empires is not to be ignored: “co-CEOs” would do well to read the history of the Hundred Years’ War.) For the organizations creating new, vertically-integrated businesses, reassembling the piece-parts into a new, functioning system will require vision, creativity, and a tolerance for risk-taking and failure. (Here, we’d bet with the market-motivated, fast-fail ethos of organizations like CVS and Optum over the conservative, hide-bound nonprofit health systems.) What new approaches to healthcare will emerge from the new-breed entities? Their successes and missteps will surely set the agenda for the next round of deal-making.
The Gist: We’ll see more cross-market and cross-sector merger activity in the year ahead, and further incursions by “disruptive innovators”, but most critical will be efforts by newly-merged organizations to identify and capture the value of the combinations they’ve assembled.