|WHAT WE’RE READING
Stuff we read this week that made us think.
A rural hospital wants to send patients to Walmart
Most of the discussion of rural healthcare has focused on the crisis of access created by hospital closures, with little attention to finding viable solutions. We were struck by an article in North Carolina Health News describing one rural hospital’s answer: divert patients from the hospital ED to an urgent care clinic located in the local Walmart. Testifying to state legislators, Joann Anderson, CEO of Southeastern Health in Lumberton, NC, described a patient access crisis leading to ED overuse for non-emergent conditions that is negatively impacting the hospital’s margin, and long-term viability. As an alternative, Southeastern has established a full-service urgent care clinic inside a local Walmart, described as a busy “treat and street” clinic, serving uninsured patients for a cash price of $25 to $65. The Walmart clinic is supplemented by a nearby “urgent care mall”, which includes imaging and more advanced services.
Walmart’s deepening moves into healthcare point to insurance business aspirations, and an intent to own, rather than partner for, the delivery a broader array of clinical services. The Southeastern collaboration suggests that more traditional provider partnerships may not be off the table. Most discussions of addressing rural healthcare needs, especially in policy circles, focus on propping up rural hospitals rather than rethinking rural healthcare altogether. Any solution must engage organizations like Walmart who have found a way to create—and profit from—a broad presence in rural communities.
Nowhere to hide from healthcare margin pressures
The always-insightful industry pundit Jeff Goldsmith and his colleagues at Navigant Consulting released a new research report this week that revealed “broad and significant” margin deterioration across a wide swath of US health systems over the last three years. Based on a sample of 104 health systems accounting for 47 percent of US hospitals, the Navigant study found that two-thirds of systems had seen operating margins decline by a total of 44 percent, or about $6.8B, from 2015 to 2017. Of note, the study found that operating expense growth slowed over the period, but that revenue growth slowed even faster. The finding appears to hold true even for very large health systems, and even for health systems in fast-growing parts of the country. Goldsmith and his colleagues point to the data to argue that systems have failed to sufficiently pursue cost savings, and to castigate large systems for not delivering on the promise that scale and integration would produce “synergies” that lower expenses.
The study is helpful in highlighting the significant headwinds faced by providers in the current operating environment, although coverage of the study in the trade press seems to have buried the lede (or missed the point altogether). While it’s true that expenses are growing faster than revenues, that’s no surprise—as the study suggests, expenses are being driven higher by complex IT implementations, rising nursing costs, increases in specialty drug costs, and the increasing cost of employing physicians. But the real story is revenue slowdown. What’s really going on is a combination of mix shift (each Boomer that turns 65 represents a switch from commercial price to Medicare price) and price cut (significant reductions in Medicare payment to providers put in place by the Affordable Care Act). Large systems—no matter how oligopolistic—have zero leverage over Medicare pricing…you can’t negotiate prices with Uncle Sam. And you’d naturally expect these Medicare-related effects to be more pronounced in “high-growth” areas like the Southwest—that’s where the Boomers are going to retire. The challenge for providers of every size is to figure out how to survive given these once-a-generation pressures. And as the Navigant study correctly asserts, that will require even more aggressive cost cutting by health systems. We’d add: providers will need to pursue an entirely different model of care delivery to weather the magnitude of revenue pressures ahead.
Here’s how PBMs make so much money
We highly recommend taking five minutes to read Bloomberg’s well-researched piece on pharmacy benefits managers (PBMs), which provides the best simple explanation we’ve seen (with great graphics) on how PBMs make money—often at the expense of independent pharmacies and the employers they purport to serve. PBMs say they provide a service to employers by creating consistency in drug pricing through “managing the spread”, or the difference between the cost to a drug to employers or payers and the price paid to pharmacies.
Focusing on data from Medicaid plans who use PBMs, Bloomberg identified a PBM profit-maximizing sweet spot: newly-generic medications. The prices of these drugs often fall fast in the few years after a generic is introduced, but PBMs only pass along a small portion of the price cut, widening the spread. Customers tracking the numbers see a small reduction in their costs, while the PBM pockets the widening spread as profits—undermining the whole point of generic drugs, which is to deliver a markedly cheaper alternative to the market. PBMs assert that they make money on some drugs and lose it on others and would fail to get the best rates if they revealed their contracting methodologies. However, the Bloomberg piece highlights the power of data and transparency. We’d bet that putting more information in the hands of employers, states and payers, rather than blindly placing trust in the hands of opaque middlemen, would result in better pricing and outcomes for consumers.
Checking in with the descendants of Betsy Wetsy
We recently read a piece in Wired that reminded us—maybe a little too much—of Westworld, HBO’s dystopian sci-fi series that tells the story of a futuristic theme park populated with life-like robots, where things get a bit out of hand. The article describes Hal, a $48,000 robot boy developed by Gaumard Scientific for use in medical training. Hal is one of a family of animatronic robots made by Gaumard, which has been building medical simulators since the 1940s. Hal is chock-full of hydraulic systems and servo motors that allow him to breathe, bleed, cry, and urinate, and allow for special effects like swelling throat and lips to simulate anaphylactic shock, for example. Hal, whose full name is Pediatric Hal S2225, is part of an extended family that includes Victoria S2200, a robotic mother that gives birth to a robotic baby, and the charmingly-named Super Tory S2220, a robotic newborn. As the article describes, these robotic patients are so disturbingly life-like—complete with vocalizations and facial expressions—that trainees can get rattled. And that’s part of the point, adding an emotional dimension to training scenarios that previously only included lifeless rubber dummies. These futuristic training robots introduce an element of interactivity that challenges trainees to stay focused on the medical tasks at hand. They also enable a constant stream of monitoring data to be collected and analyzed, which gives real-time feedback on how the trainees are performing.
It’s interesting to wonder how far this technology will go. Will we one day be able to simulate medical situations at a biological level, allowing surgeons to train on robotic organs, for example? Should this advanced technology be incorporated into training curricula, and where could it adequately substitute for real-world practice with living patients? Given the high price tag, defining the places where the Hal and his family provide an advantage over current training is essential. While there is a place for methods that teach complex skills without jeopardizing patient safety, we are skeptical that a new class of robotic patients will better teach empathy than observing and delivering care to real patients in need.