June 8, 2018

The Weekly Gist: The ALL CAPS Edition

by Chas Roades and Lisa Bielamowicz MD

A bleary-eyed hello from our nation’s CAPital, where we were up late last night celebrating the events of the past 24 hours. Probably not for the first time in DC history, what happened in Vegas last night has shocked the city, and for a moment shaken us out of our eternal sports doldrums. Yes, it’s America’s fourth sport (maybe) but we’ll take what we can get! (One of us went to his first Caps game at the tender age of six, during the club’s inaugural 1974 season. It’s been a long wait.)

We’ve resisted the temptation to deliver this week’s update in #ALLCAPS—so let’s get right to it.


THIS WEEK IN HEALTHCARE

What happened in healthcare this week—and what we think about it.

The forever war over healthcare reform continues

In closely-watched primary elections in California this week, Democrats avoided their nightmare scenario of being “locked out” of this fall’s general election, in which a number of key races could help determine control of the House of Representatives. Contending with the same “top-two” system, Republicans avoided their lock-out fears in the California gubernatorial race. The results of Tuesday’s primaries set up the Golden State as a key battleground for the future of healthcare reform in the US—offering Democrats the opportunity to create a firewall against further erosion of the Affordable Care Act (ACA) in Washington, and the possibility of pushing further toward a vision of single-payer healthcare in the country’s most populous state. Gavin Newsom, the former mayor of San Francisco, has been a vocal advocate for state-run, single-payer healthcare, in a state that has charged forward with full implementation of the ACA even as the fortunes of the health reform law have faltered in other states. Newsom will face John Cox, a Republican businessman who has won the praise of President Trump for his conservative views.

Even as Democrats in California and elsewhere are digging in on their defense of the ACA—with many likely Democratic contenders for President in 2020 advancing their own single-payer versions of “Medicare for All”—conservatives in Washington are pressuring Republican lawmakers to return to the healthcare fray and continue to fight for full repeal of Obamacare. And while some observers view it as folly for the Republicans to take up the cause of repeal and replace yet again, viewing healthcare as a rallying point for Democrats in the upcoming midterms, the Trump administration stunned the legal world this week by refusing to defend the ACA in an ongoing lawsuit in the Texas courts. In a break with the traditional view that the executive branch has a duty to enforce existing law, and despite having repealed the hated “individual mandate”, the Administration signaled that it wants to continue its aggressive efforts to undercut the ACA. It’s becoming increasingly clear that our protracted national debate over healthcare is far from over. Rather, healthcare promises to be a centerpiece issue in the coming midterm elections and will likely be at the center of the next election as well. Indeed, given the continued growth of health spending and the burden it places on government and household budgets, healthcare is becoming a “forever war” in the US: one of the most critical and divisive issues of our time.

More deals for doctor practices

Continuing its string of aggressive moves into the provider arena, UnitedHealth Group’s Optum division was revealed this week to be one of the acquirers of  hospitalist staffing firm Sound Inpatient Physician Holdings. Along with Boston-based private equity firm Summit Partners, Optum is part of a $2.2B purchase of the Tacoma, WA firm from its previous owner, dialysis provider Fresenius. Sound Physicians works with hospitals to provide staffing of hospitalists, intensivists and emergency physicians, and has annual revenues of around $1.3B. OptumHealth, the care delivery arm of Optum, employs or has contractual arrangements with more than 30,000 physicians already, and stands to increase that total significantly when it completes the acquisition of DaVita Medical Group, making it the nation’s largest physician organization. OptumHealth also operates leading ambulatory surgery and urgent care chains, and its participation in the Sound Physicians deal gives it yet more visibility and control over key hospital drivers of healthcare cost.

Meanwhile, dialysis company DaVita continued its retrenchment into its core business by selling its direct primary care business Paladina Health to venture capital firm New Enterprise Associates for a reported $100M. Paladina contracts directly with employers for concierge-level primary care services, bypassing the traditional insurance billing model. The company operates 53 clinics in 10 states and has plans to expand, at a time when direct primary care is attracting more attention given Medicare’s interest in the model. Both deals signal that the physician practice space continues to be red-hot, both for private equity and venture capital backers, and for insurers looking to inch further into the provider business. We’re in the midst of a huge national roll-up of doctors, with big bets being made on leveraging the central role of the physician to control healthcare spending and drive consumer loyalty to lower-cost models of care. But acquiring practices is one thing; integrating physicians into a sustainable model is an altogether more difficult proposition. It remains to be seen whether the current flurry of deals results in real care transformation, or just higher multiples being paid.

A change in leadership amid an ownership struggle

Jonathan Bush, the iconic co-founder and CEO of Boston-based electronic health record provider Athenahealthstepped down this week in the midst of an ongoing takeover battle for the company. Bush, who has recently faced allegations of personal misconduct, was a vocal opponent of the attempt by activist investors Elliott Management to force the firm into a public sale. Citing mismanagement and underperformance, Elliott is engaged in a takeover bid for Athenahealth, which has had difficulty generating growth outside its core physician practice market. Athenahealth’s CFO will serve as interim CEO after Bush’s departure, with former General Electric CEO Jeff Immelt overseeing the transition from his new perch as Athenahealth’s executive chairman. The firm has lost more than $1.5B in market capitalization over the past four years, and even Bush’s firebrand public persona could not generate enough enthusiasm for the firm among investors, with many holding short positions in Athenahealth stock.

It remains to be seen whether Elliott follows through on its attempt to acquire the firm, or whether it will be satisfied with the gains it stands to make from a sale. The firm’s practice-based, cloud-powered EHR platform benefitted greatly from Obama-era incentives for providers to “meaningfully use” electronic records, but Athenahealth has been challenged to break into the “enterprise” market—competing for larger hospital and health system contracts against EHR giants Epic and Cerner. Rumored buyers range from Oracle to Microsoft, with some even guessing that Apple might be interested in acquiring the firmGiven all of the activity in (and money washing around) the physician practice space these days, we’d expect any strategic buyer to focus on using Athenahealth’s platform as a chassis around which to integrate a broader strategic position in the ambulatory arena. We wouldn’t be surprised to see one of the large national insurers take a run at the firm, although the nearly-$7B price tag will make any potential buyer think twice about making a bid.


GRAPHIC OF THE WEEK

A key insight or teaching point from our work with clients, illustrated in infographic form.

Headed toward 401(k) healthcare

We are firm believers that the healthcare industry is in the midst of a fundamental shift away from its current business-to-business orientation, in which wholesale buyers (government, payers, employers) make purchase decisions on behalf of consumers. In the future healthcare will be much more grounded in a business-to-consumer model—with individuals making their own choices about which network to buy and where to receive care.

As we’ve discussed before, we foresee a continued shift to Medicare Advantage in the over-65 population, which puts consumers in the position of choosing their own coverage networks. And on the commercial side, we believe that employers are poised to pull the trigger on a shift toward defined contribution (DC) health benefits for their employees. Much like the shift from pensions to DC for retirement benefits, this shift will take time—and while only a small percentage of employers have moved toward DC at this point, we believe that the only thing holding them back is the current tight labor market. We’ve heard from many mid- to large-sized employers that they’re viewing their current high deductible plans as a bed-warmer for an eventual shift to DC (getting employees accustomed to making trade-offs). As soon as the labor market loosens with the next economic down-cycle, employers will seize the opportunity to restructure their health benefits entirely. The below graphic highlights current data on this trend—still more evaluation than actual activity on the DC front…but more to come soon. The implications for “consumerism” in healthcare will be enormous.


THIS WEEK AT GIST—ON THE ROAD

What we learned this week from our work in the real world.

Building a consumer-driven service line strategy

Lisa:
I was asked by senior leaders at a regional health system to share our guidance on service line integration. For this group, the idea of creating integrated system service lines has multiple layers of complexity. Local leaders are charged with coordinating service line operations and finances with their large employed medical group. Add to that the additional challenge of the local hospital’s recent merger with a large, pre-eminent academic health system, with the over-arching goal of creating a regional service line model that spans primary care to quaternary, AMC-delivered specialized services.

In thinking through this set of questions, it’s easy to get bogged down in the complexity of incentive models, governance structures, and purview of local leaders versus academic chairs. To set a foundation for the discussion, we asked two questions. What solutions do patients need from specialty care? And how would a service line organization help solve those problems? Patients need efficient episodes that deliver accessible, affordable and reliable care. Using this as a lens clarifies the goals for regional service lines: system standards for quality, experience and coordination, effective governance to make decisions, and a low-cost operating and asset model. While the hard work of building the service line model lies ahead, I’d bet on a system that weighs every decision against the measure of consumer value delivered.

Questioning the value of independence

Chas:
Over the past two weeks, I’ve heard the same question raised by three executives at three very different organizations: How much longer can we remain independent? One version came from the CEO of a 400-bed hospital in the Northeast, another from the head of an independent primary care practice in the Midwest, and the third from the chief strategy officer of a multibillion-dollar system. Clearly, M&A is in the air, and there’s a palpable sense of inevitability on the topic. For many the question is not if, but when they’ll be approached with an offer they can’t refuse.

In the case of the stand-alone hospital, the decision is looming: their market has consolidated rapidly between two large regional health systems, and their attempt to play “Switzerland” is leaving them struggling to generate the referral flow needed to maintain finances. For the physician group, it’s a question of being spoiled for choice, with a nearly-constant barrage of offers from suitors ranging from venture-backed roll-up firms to national insurance giants. All the while the most tenured docs in the practice are lobbying hard for a consummation—they see a way to cash out and head into retirement with a big check. And as for the multibillion-dollar system? Their CEO’s dance card was full at a recent leadership retreat—with a Who’s Who list of other CEOs looking to discuss combinations that would create a national powerhouse.

In each instance, the instinct of the executives is to defend their independence as long as possible. No surprise, they have devoted careers to making their organizations strong and successful. And the pull of local interests continues to be toward independence—community boards, local business groups, and employees all express concern about their “crown jewel” being swallowed by a larger, out-of-town player. But lately, and in the case of all three of these leaders, I’m hearing something different than I did even a couple of years ago. The premium on remaining independent as a goal unto itself is waning. A combination of bigger, more attractive deals, the worrisome economic outlook for the industry, and the changing nature of care delivery is beginning to shift the consensus view on independence and is fueling a heightened interest in M&A activity. We’re still in the early innings of a major round of consolidation in our industry.


ON THE GIST TURNTABLE

Give this a spin, you might like it.

With the World Cup kicking off next week, it’s not surprising to see all sorts of marketing tie-ins to the beautiful game popping up, but here’s one we didn’t see coming. In a recent interview in the (now sadly online-only) NME, the Texas-turned-NYC band Parquet Courts cites a footie influence for their excellent new releaseWide Awake! It’s their sixth full-length and opens with a track called “Total Football”, which soccer-heads will immediately recognize as a reference to the 1970s-era Dutch style of play, in which every player on the field plays an equal part in orchestrating ball movement. And that’s exactly how the Courts play it on the new album—free-flowing, loose, but driving forward.

You’ll know instantly if Parquet Courts (who sometimes also perform as Parkay Quarts) are for you. Their minimalist, art-rock sound borrows from early 80s-era punks like the Minutemen, with a dash of Devo and the Fall thrown in for good measure. It’s a pretty standard two-guitars/bass/drum set, but the sound they produce is anything but straight-ahead garage—there’s a funk element here as well (check out the title track), and on this release there’s a little Afropop to boot (“Violence”). You could imagine the Velvets cutting some of these tracks in earlier days—an unexpected throwback given that production work was led by Danger Mouse. At a quick 38 minutes—less than a half of play in next week’s tournament—you could do worse than to check out the Courts.


WHAT WE’RE READING

Stuff we read this week that made us think.

Would every patient benefit from care at a teaching hospital? 

Teaching hospitals and academic medical centers are assumed to have higher costs than their nonteaching counterparts. This has led to efforts to triage the sickest patients to teaching centers, reserving this expensive capacity for those who may benefit the most. A study in this month’s Health Affairs challenges this assumption, and suggests teaching hospitals may have a much broader impact on patient outcomes. Using Medicare claims data from over 11M hospitalizations, the authors (who include well-known health policy and economics researchers Ashish Jha and Austin Frakt) found that medical and surgical patients receiving care at teaching hospitals had significantly lower mortality rates—and contrary to common belief, many groups of low- and medium-severity patients also benefitted from teaching hospital care. In fact, low-severity medical patients showed one of the greatest deltas, with a whopping 17 percent lower chance of mortality in teaching versus community hospital settings.

A deeper look at the analysis, however, suggests that other factors beyond teaching status—such as hospital size or sophistication—may also explain the outcome disparities. Size of hospitals in the cohorts varied dramatically (41 percent of nonteaching hospitals had fewer than 100 beds, versus less than 1 percent of teaching hospitals). Incorporation of a “technology index” measuring the sophistication of clinical programs and technology attenuated or eliminated the teaching hospital advantage for many groups measured. Regardless of the size of advantage, the article just begins to scratch the surface of the most important question—why are outcomes better in teaching hospitals? Understanding the drivers (which may include better practice standards, improved provider oversight, and a larger care team bolstered by trainees, in addition to size and sophistication) is critical to creating policies that favor the highest-value care sites, irrespective of academic affiliation.

Worrisome shenanigans in rural healthcare

A few weeks ago in the Weekly Gist, we highlighted growing concerns over the questionable motives of lab testing companies holding themselves out as acquirers-of-last-resort for struggling rural hospitals. These companies use the favorable billing terms of rural hospitals to charge higher rates for lab tests—even those performed for patients far away from the hospital itself. This week, we read a great piece in the Atlantic, written by Kaiser Health News reporter Barbara Feder Ostrov, that tells the story of one such rural facility that was burned once by one of these outfits, just to turn around and enter into discussions with another. The hospital in question is Surprise Valley Community Hospital, a 26-bed facility that serves several tiny farming and ranching communities in far northeastern California. The communities rely on the hospital for critical services, with the next nearest emergency room a 25-mile drive away, over a mountain pass. The hospital is in dire financial shape, and has been plagued by poor management and unsophisticated governance—not an uncommon situation for rural hospitals to find themselves in.

Surprise Valley has been in discussions with a Colorado-based lab testing entrepreneur, who promised them a financial turnaround based on his plan to bill for telemedicine and remote lab at the relatively-rich reimbursement rates available to rural providers. And even though locals have seen this movie before—having entered into a similar deal last year with a Kansas City-based company that then simply vanished into thin air—they still voted by an overwhelming majority this week to approve the new deal. The story underscores the parlous state of rural healthcare in the US, and the bizarre loopholes in our third-party reimbursement system that make this kind of questionable activity legally possible. With rural facilities beginning to close at an alarming rate, it’s well past time for lawmakers to step in and demand change, as Sen. Claire McCaskill (D-MO) has done in her state.

Closely watching a payer-provider antitrust case

fascinating new blog post on the University of Chicago’s Booth School of Business website caught our attention this week. The post, written by Cleveland State University antitrust scholar Chris Sagers, unpacks the implications of a recent federal court ruling in Rhode Island, with broad implications for how health plans and hospitals negotiate with one another for contract terms. The case was brought by Steward Health System, the growing for-profit hospital operator with operations in the Northeast and other parts of the country, against Blue Cross Blue Shield of Rhode Island (BCBS-RI). In it, Steward alleges that BCBS-RI conspired with Providence, RI-based health system Lifespan and Woonsocket, RI-based physician group Thundermist Health Center to keep Steward from acquiring Landmark Medical Center, also in Woonsocket. In particular, Steward alleges that BCBS-RI violated section 2 of the Sherman Act, by threatening to exclude Landmark from its networks if Steward acquired it. (Steward ultimately abandoned its takeover bid, and Landmark was eventually acquired by for-profit operator Prime Healthcare in 2013.)

The Sherman Act—which protects markets from monopolization—is one of the cornerstones of US antitrust policy, but section 2 cases rarely make it to trial because violations are notoriously difficult to prove. In this instance, the federal judge decided to send the case to trial, to test whether BCBS-RI’s actions constituted “refusal to deal” under the definition of monopoly practices in section 2. As the blog post points out, the kind of negotiating tactic used by BCBS-RI—network exclusion, a common payer tactic in provider negotiations—may just be part of normal rough-and-tumble of marketplace competition. Indeed, BCBS-RI’s own internal documents, revealed in the case, will sound very familiar to those on the front lines of payer-provider strategy. According to attorneys at Manatt Phelps, “Internal BCBS documents revealed that BCBS executives had expressed concern about accountable care organizations (ACOs) and risk-based contracting, which they believed could strip some or all of an insurance company’s traditional functions, and the profits associated with insurance companies bearing risk. BCBS referred to these issues as ‘disintermediation’ and the process of ‘providers becoming payers,’ and viewed them as existential threats. BCBS executives involved in this strategic planning also were directly involved in negotiations with Steward concerning the Landmark contract [emphasis added].”

It’ll be worth watching the upcoming trial closely, along with the inevitable appeals on both sides—this is a case that could make its way to the Supreme Court. The lines between payers and providers are increasingly blurred, yet the exercise of scale-based leverage on both sides to extract favorable terms is still the order of the day in most markets. As both health systems and health plans aggregate share and continue to consolidate, leaders will need to be closely attuned to the antitrust implications of their strategies. The Steward/BCBS-RI case might turn out to be a pivotal moment.


That’s it for this week’s edition—thanks for reading, sharing with colleagues, and subscribing! The World’s Proudest Dad is now headed to watch two of his incredible children walk across the graduation stage (#ALLCAPSandGOWNS). Special congratulations and much love to Helen Roades and Lila Roades!

We’ll be back next week with another look at happenings across healthcare, but in the meantime don’t hesitate to get in touch if there’s anything we can do to be of assistance. You’re making healthcare better—we want to help!

Best regards,

Chas Roades
Co-Founder and CEO
chas@gisthealthcare.com

Lisa Bielamowicz, MD
Co-Founder and President
lisa@gisthealthcare.com