April 7, 2023

The Weekly Gist: The Detective Pikachu Edition

by Christy Davis

The spoon has been located. That was the good news from Arizona on Monday, after a giant, 15-foot-tall spoon was stolen from the signage in front of a Phoenix-area Dairy Queen last week. Unidentified perpetrators removed the spoon and absconded with it, for mysterious reasons. “I appeal to [the thieves],” said the restaurant owner. “The spoon is too big to eat anything. We want you to bring it back.” Justice came at the hands of an intrepid 52-year old…Pokémon hunter, in the course of making his usual collecting rounds near a local middle school. Engaged in a perfectly normal, not-creepy-at-all hunt for creatures while playing the augmented-reality iPhone game Pokémon Go, our hero promptly contacted police after coming upon the spoon in the school’s baseball field, ensuring that it was returned to its rightful owner. No word on which Pokémon was the culprit—Squirtle, known for his love of Pecan Mudslides, or Pikachu, who thrives on Oreo Blizzards. Gotta catch ’em all, or whatever.


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

  1. CMS softened proposed rate changes, but strengthened prior authorization rules for MA plans. Last Friday, the Centers for Medicare and Medicaid Services (CMS) announced that it will begin phasing in major Medicare Advantage (MA) risk-adjustment changes over a three-year period, slower than previously anticipated. Thanks to this delay in full implementation, MA plans will see an average 3.3 percent payment increase in 2024, up from the one percent projected in the earlier draft notice. CMS also finalized regulations this week that aim to limit MA prior authorizations and denials by requiring that coverage decisions align with traditional Medicare.

The Gist: After CMS began proposing changes to MA payment formulas last year, aimed at reining in pervasive abuses and fraud, the insurance industry responded with a $13M marketing blitz to oppose the changes. The ads, one of which aired during the Super Bowl, tied Medicare Advantage “cuts” to the time-tested “Hands Off My Medicare” messaging directed at seniors. With MA enrollment projected to overtake traditional Medicare this year, the federal government finds itself walking a tightrope in clamping down on overpayments to MA plans, given that any reductions will impact a growing number of seniors.

  1. States begin Medicaid redeterminations. April 1st marked the start date of a one-year window for state Medicaid offices to reassess their beneficiary rolls, as Medicaid’s continuous enrollment policy sunsets. Since the early days of the pandemic, the federal government has boosted state Medicaid funding by 6.2 percent, in exchange for a requirement that current Medicaid beneficiaries maintain eligibility, regardless of changes to their income or other qualifiers. This policy helped grow national Medicaid enrollment to a record 90M, but a projected 15M may now lose coverage through the redetermination process.

The Gist: After the US uninsured rate recently hit a record low, millions of Americans will now lose insurance coverage, at least temporarily. Of those no longer eligible for Medicaid, an estimated 2.7M will qualify for subsidized exchange plans, while around 400K in non-expansion states will have incomes too high for Medicaid and too low for exchange subsidies. The impact will vary in each state, both in terms of how quickly and how many Medicaid beneficiaries are disenrolled. But in over half of states, at least one-fifth of those who will lose Medicaid coverage are projected to remain uninsured—a significant step backward in the effort to ensure universal coverage. Communication from Medicaid offices and exchange plan navigators will be key to preventing as many people as possible from becoming uninsured.

  1. Mark Cuban’s drug company to sell name-brand diabetes drugs. On Monday, the Mark Cuban Cost Plus Drugs Company (MCCPDC) announced via Twitter that it will begin to offer two branded diabetes drugs, Invokana and Invokamet, produced by Janssen, a Johnson & Johnson subsidiary. A month’s supply of these drugs, the first non-generics it has offered, will cost patients around $244, over 60 percent less than average retail prices. Prescriptions for these diabetes drugs fell from nearly 2M in 2020 to under 1M in 2022, and a key Invokama patent will expire next year, both factors that may have influenced Janssen’s decision to partner with MCCPDC.

The Gist: MCCPDC estimates that as many as 1M people who use these or similar drugs could benefit from the lower prices—not only the uninsured but also those considered “underinsured” due to high deductibles. Even though the deal is for two drugs with declining revenues, selling brand-name drugs from a pharmaceutical heavyweight is a notable step for the company. As Congress continues to investigate PBMs for driving up drug spending through their pricing tactics, MCCPDC’s move offers a path to PBM disruption through direct competition. By cutting out the rebates retained by health plans and PBMs, MCCDPC can potentially offer better net payments to pharmaceutical companies, as well as reduced cost-sharing for patients—an arrangement that benefits both parties at the expense of traditional PBMs.

Pluswhat we’ve been reading.

  1. Eli Lilly sets its sights on the lucrative weight-loss drug category. A piece published this week in the Wall Street Journal describes how internal changes at pharmaceutical giant Ely Lilly paved the way for the development of Mounjaro, a weight-loss drug that could prove to be an even bigger blockbuster than Novo Nordisk’s Wegovy and Ozempic, and able to produce even greater weight loss in patients. During early research trials, some leaders at Lilly had opposed the development of Mounjaro, fearing that it would cannibalize sales of Trulicity, an older diabetes drug that had become a major profit center for Lilly. Eventually choosing to prioritize clinical innovation over protecting existing profit pools, Lilly green-lit the accelerated development of Mounjaro, streamlining internal review and cutting development times nearly in half, in order to speed the drug to market. Mounjaro is expected to produce annual sales of over $25B for Lilly, compared to last year’s $10B in sales for Novo Nordisk’s two drugs.

The Gist: Lilly’s willingness to embrace the potential for a costly cannibalization of one lucrative drug (Trulicity) to favor even quicker introduction of a more promising one (Mounjaro) demonstrates just how attractive the burgeoning weight-loss segment is for pharmaceutical companies. Given the size of the addressable market, and the seeming effectiveness of these new drugs (despite concerns about potential side-effects), employers, insurers, and the federal government will soon be grappling with a serious financing dilemma. Beyond the necessary debate of whether and how much to pay for these weight-loss therapies, they must also consider the societal cost-benefit analysis of a pharmaceutical-led approach to addressing the nation’s obesity problem.


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

UnitedHealth Group hits a milestone in vertical integration

Constrained by the Affordable Care Act’s medical loss ratio (MLR) requirement that health insurers must spend 80-85 percent of their revenue on medical services, payers have been pivoting to providing care, managing pharmacy benefits, and supporting other healthcare services, in order to fuel earnings growth. The graphic below shows why UnitedHealth Group (UHG) is seen as the health insurance industry’s most noteworthy model of this vertical integration strategy, thanks to its flourishing Optum division. Optum is now as big a profit driver for UHG as its UnitedHealthcare insurance arm, with each bringing in $14B of net earnings in 2022. Optum’s 7.7 percent operating margin is almost two points higher than UnitedHealthcare’s, which owes much of its revenue and earnings growth to its expanding Medicare Advantage (MA) business. As both sides of UHG’s business have grown, so too have intercompany eliminations, which have increased by over 80 percent in five years, reaching $108 billion in 2022These payments from one division of UHG to another—mostly from the insurance business to the provider arm—allow the company to shift profit-capped insurance revenues into other divisions, driving increased profitability for the overall enterprise. It will be worth watching the trend in intercompany eliminations at other vertically integrated insurance companies, with an eye for whether integration truly results in lower cost of care for patients or just higher margins for the insurers.


A recommendation from our weekly diet of music, movies, TV, and other good stuff.

Unstable (Netflix)—Imagine being Rob Lowe’s kid and growing up in Rob Lowe’s shadow. Now you don’t have to, because Rob Lowe’s kid made a show with Rob Lowe, about being Rob Lowe’s kid, starring…well, you get it. The man himself is actually funny (who knew?) in this lightweight, snappy sitcom about a brilliant father and his up-and-coming offspring. An unexpected treat.


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

How can health systems compete in the ambulatory pricing arena?

As the locus of care continues to shift from inpatient hospitals to outpatient centers, health system executives face a growing conundrum over pricing. The combination of “consumerism” and tougher reimbursement policies raises a question about how aggressively systems should discount services to compete in the ambulatory arena. Site-neutral payment remains a goal for Medicare, and consumers are increasingly voting with their pocketbooks when it comes to choosing where to have procedures and diagnostics performed. “We know we’re going to have to give on price,” one CEO recently shared with us. “The question is how much, and how soon.” Should hospitals proactively shift to match prices offered by freestanding centers, or should they try to defend their substantially higher “hospital outpatient department” (HOPD) pricing? The former choice could help win—or at least keep—business in the system, but at the risk of turning that business into a money-losing proposition. To compete successfully, hospitals will not only need to lower price, but also lower cost-to-serve—rethinking how operations are run, how overhead is allocated, and how services are staffed and delivered in ambulatory settings. “We’ve got to get our costs down,” the CEO admitted. “Trying to run an ambulatory business with our traditional hospital cost structure is a recipe for losing money.” And as a system CFO recently told us, “We can’t just trade good price for bad, for doing the same work. We have to be smart about where to discount services.” The future sustainability of many health systems will hinge on how they navigate this transition to an ambulatory-centric model.


All the headlines in healthcare policy, business, and more, in ten minutes or less every weekday morning.

Last Monday, we heard an encore airing of JC’s conversation with David Jarrard, Executive Chairman of strategic healthcare communications consulting firm Jarrard Inc., about the results of his company’s recent national consumer survey on public perception of hospitals and healthcare in the United States.

This Monday, JC will talk to Ken Kaufman, co-founder and Chair of Kaufman Hall. They’ll discuss his recent blog post examining Ford Motor Company’s decision to stop producing internal-combustion sedans, and explore parallels for health system leaders to ponder about whether their traditional strategies are beginning to “age out”.

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That’s all for now—time to go dye the eggs and hide them in the garden. Thanks for taking the time to read the Weekly Gist! We’d love to hear from you: let us know what you thought, and what you’re seeing out there. And don’t forget to share the Weekly Gist with friends and colleagues and encourage them to subscribe, and listen to our daily podcast. We appreciate it.

Most of all, please let us know how we can be of assistance in your work. You’re making healthcare better—we want to help!

Best regards,

Chas Roades
Co-President and Managing Director

Lisa Bielamowicz, MD
Co-President and Managing Director