September 21, 2018

The Weekly Gist: The Leaves Are Falling Edition

by Chas Roades and Lisa Bielamowicz MD

It’s Friday! Tomorrow marks the official start of autumn, and with that comes baseball playoffs, cooler temperatures, and falling leaves galore. Here’s a new revenue idea for healthcare providers: spine surgery centers should merge with garden equipment manufacturers and hearing centers should acquire leaf-blower companies. Then they could make the equipment even more back-breaking and noisy—and generate loads of downstream revenue. Dumb idea? Maybe, but we’ve heard worse.

Let’s take a look at the week that was.


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

Senators introduce legislation to prevent “surprise” medical bills 

A bipartisan group of senators led by Senator Bill Cassidy (R-LA) unveiled draft legislation to protect consumers from “surprise” medical bills incurred when receiving care outside their insurer’s contracted network. The bill is designed to prohibit “balance billing”, the practice of billing patients for the balance of a bill not paid by an insurer when patients receive emergency care from an out-of-network facility or provider, or when patients are treated by an out-of-network doctor practicing at a hospital that is in-network. The bill also mandates that emergency room patients be notified of potential excess charges once they are stabilized, so they may seek treatment elsewhere for follow-up, non-emergency care.

Recent media coverage has drawn attention to surprise medical bills by publicizing individual patient stories (remember the Texas teacher who received a $100K bill after treatment for a heart attack at an out-of-network hospital?), and the practice is widespread, with a recent Kaiser Family Foundation study revealing that 18 percent of commercially-insured patients receive an out-of-network bill following an inpatient stay. While states such as California and New York have passed legislation to mitigate the practice, self-funded plans—which now cover over 60 percent of all commercially-insured Americans—are often exempt from state regulation. This new legislation is a significant move to close that gap, and consumer protection has proven to be an area of bipartisan collaboration. Cassidy stated that it’s unlikely that the legislation will be introduced to the floor of the Senate before 2019. In the meantime, health systems who want to increase consumer value should see this as a part of their mandate; ensuring in-network coverage of all hospital-based providers will be a critical part of “curating” the provider network and delivering a consumer-focused patient financial experience.

Cigna and Express Scripts draw closer to merging

Health insurer Cigna’s plan to merge with the pharmacy benefit manager (PBM) Express Scripts cleared another hurdle this week, gaining approval from the Department of Justice under the Hart-Scott-Rodino Act. The merger, first announced last year, would not substantially lessen competition among PBMs or result in higher prices for PBM services for Cigna’s rivals, according to a DOJ statement clearing the deal. Cigna is pursuing the merger to improve its ability to manage rapidly-rising drug costs for its insurance clients, and to enhance its ability to compete in the Medicare Advantage market, where pharmacy benefit plans are a key competitive asset. The deal is expected to close by the end of 2018, although it must still pass regulatory reviews in 16 states. Cigna announced plans to merge with Express Scripts after a previously-planned merger between the PBM and insurer Anthem fell apart last year, leaving Express Scripts without a deal and without its largest client. PBMs have faced increasing scrutiny for their lackluster ability to control drug spending, and the potential conflicts inherent in their business models.

The DOJ’s green light for the Cigna-Express Scripts deal signals the government’s easing concern about vertical mergers, which bring together firms from different segments of the same industry. Having failed to successfully challenge the vertical mega-merger between AT&T and Time Warner earlier this year, DOJ lawyers may be softening their approach to such cross-sector deals. However, healthcare’s other noteworthy vertical merger, between CVS and Aetna, has been held up in review by the DOJ, as both firms divest overlapping parts of their businesses. As we’ve discussed, these big mergers amount to an effort by major industry players to put together the pieces necessary to manage the cost of care for Medicare beneficiaries, who are enrolling in private Medicare coverage in increasing numbers. The deals also reflect a growing concern among traditional healthcare incumbents that disruptive entrants like Amazon could be poised to make a major play to capture spend in healthcare, speculation that has been bolstered by the steady stream of news about Amazon’s new healthcare venture with Berkshire Hathaway and JP Morgan Chase. Once the dust settles and the deals are completed, the real test will be whether these mergers result in lower prices and more consumer value, or just lock in oligopolistic pricing by incumbents.

A new startup promises to transform healthcare payment

San Francisco, CA-based tech startup OODA Health announced this week that it completed a $40.5M Series A funding round, receiving investments from Oak HC/FT and DFJ, and that it has formed strategic partnerships with a range of payer and provider organizations, including Blue Shield of California, Blue Cross Blue Shield of Arizona (BCBS-AZ), Hill Physicians, the largest independent physician association in northern California, and San Francisco, CA-based Dignity Health, a 39-hospital system poised to become the largest nonprofit health system in the US after its proposed merger with Denver, CO-based Catholic Health Initiatives. OODA Health was started by Giovanni Colella, the physician who previously co-founded Castlight Health, a healthcare price transparency company, and RelayHealth, a secure messaging provider subsequently acquired by McKesson. The startup is building a new payment tool that will give consumers real-time transparency into their financial obligation for care, while enabling instantaneous payment of hospitals and doctors directly by insurers, without the complexity of pre-authorization and other administrative processes. Based on a risk-sharing arrangement with the payer, OODA’s tool will allow providers to be paid immediately, based on clinical data in the electronic health record (EHR), rather than on traditional claims. Dignity Health plans to deploy the tool in test markets in California and Arizona.

Importantly, the new tool will eliminate the need for patients to pay bills from providers, instead shifting the patient’s entire financial transaction to the payer. This would be a major satisfier for consumers and providers, who will no longer have to engage in a complex back-and-forth over billing. Meanwhilethe appeal to providers is obvious, eliminating the delay in payment for services rendered while claims are reconciled and processed. What’s less clear is the appeal to payers, beyond the reduction in administrative complexity associated with the current three-way transaction common to healthcare. Notably, the tool does nothing to reduce the actual price of care (unless savings generated from administrative simplification are passed along to consumers: doubtful). And, by taking providers out of the collections business, the tool would seem to reduce pressure on hospitals and doctors to provide consumer-friendly prices for care. Much remains to be clarified in the tool’s development and rollout but given the pedigree of OODA Health’s founders and funders, and the scale and reach of their strategic partners, this new entrant will surely be worth watching. (As an aside, OODA Health only sought funding from venture firms with female partners—shining a welcome light on the still male-dominated VC world.)


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

Envisioning new roles for the health system (cont’d)

This week we continue to lay out our framework for thinking through the path forward for traditional health systems, as they look to drive value for consumers. Having described today’s typical health system as “Event Health”, built around a fee-for-service model of delivering discrete, single-serve interactions with patients, we suggested a new evolution, “Episode Health”. This broader conception of the health system would move past today’s piecemeal, fragmented care delivery, which often leads to gaps in care, poor transitions, excess cost, and a confusing care journey for the patient. Instead, to address consumer needs that involve multiple interactions, “Episode Health” would have the health system play a coordinating role, curating and managing a range of care interactions to address broader episodic needs.

To round out the framework, the graphic below suggests an even more significant evolution for health systems, as they move away from the status quo economics of fee-for-service. By taking up the mantle of “Member Health”, the system re-orients around the goal of building long-term, loyalty-based relationships with consumers, with the goal of helping them manage health over time. To address the condition-related needs of consumers as they move across life stages (for instance, working with diabetics to manage their disease), the “Member Health” organization curates a network of providers of episodes, and events within those episodes, and ensures that the consumer (and their information) moves seamlessly across a panoply of care interactions over time. Importantly, the primary relationship is between the consumer and the “Member Health” system, which may or may not be built around a membership-based financial arrangement.

While an obvious example of this model is Kaiser Permanente, we don’t believe that health systems need to close their curated networks or own all of the pieces of Event and Episode Health in order to play this role. Many will choose to own those elements that most clearly drive consumer loyalty and shape the consumer’s experience (digital health, primary care, convenient access points), and most will look to continue to own the Event Health assets that are core to their current systems (hospitals, key specialty service lines, and so forth). Some may choose to play this role by fully entering the insurance business and turning Member Health into an integrated payer-provider system. But there are clearly models that don’t require plan ownership to succeed. To our minds, the best way to think of this frontier evolution is as a kind of Amazon Prime for healthcare, in which consumers truly feel like members, and systems behave like membership-based organizations.

Next week, we’ll bring the three pieces together, discuss what lies beyond the models, and begin to share some of the major strategic and operational implications of moving from Event Health to Episode Health, and then to Member Health.


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

Is true payer-provider partnership possible? 

Across this year we’ve had a front-row seat to a number of nascent “value-based partnerships” between commercial insurers and providers, both health systems and large physician groups. A handful are in negotiations, others are just beginning to operate, and a growing number are tenured relationships, now looking to evolve terms as contracts are renegotiated. I’m usually an optimist about the promise of partnership, but I’ll admit that I have become more cynical the deeper we dig into these arrangements. Many are just window-dressing on the same old fee-for-service negotiations: a portion of rate increases tied to quality metrics, or provider risk offered on a small sub-segment of covered lives. I understand that change is incremental, and both sides need to develop capabilities and mutual trust—but the potential impact is often over-hyped to the market and internal stakeholders.

What are the signs of a true partnership? The presence of a common enemy can unite payer and provider: physicians and an insurer looking to extract savings from hospitals, or a health system and payer united to move share from a dominant Blues plan. As an outside observer, it’s easy to judge which partnerships are real collaborations, with shared goals of reducing cost and improving consumer value. How many lives are covered? How much data is shared, and how do both sides work together to address clinical and social needs? Do both partners approach employers together around their joint product? Will plans change processes designed for fee-for-service that make no sense for providers taking total cost risk, as we discussed in a recent blog post?

As partnerships mature, the issues involved have begun to change. Early value-based contracting was all about the economic model, changing incentives to enable provider collaboration to lower the cost of care. Now payers and providers are negotiating ownership of services like telemedicine, high-risk care management, and billing solutions. Both want to own the services that provide value directly to the consumer and drive loyalty to brand and platform. Ultimately, the question of “Whose customer is it?” may define the boundaries of how far payers and providers can move together.

Time to break into the war chest?

This week I spent time with the board of a strong regional health system, sharing our thoughts on the future direction of the industry and discussing key priorities for their future strategy. As we were talking through strategic options, the Chief Financial Officer asserted that their 400 days’ cash on hand would allow them some breathing room in the midst of mounting financial pressures. “400 days cash?” I asked, tongue-in-cheek. “Are you running a bank?” In truth, building this kind of fortress balance sheet has been the goal of many health systems since the Great Recession. Indeed, keeping a close eye on the system’s bond rating, and managing toward the highest rating possible, is a frequent topic of discussion at board meetings of not-for-profit systems. As for the organization I was with this week, they proudly maintain an AA rating, and have the conservative financing structure to show for it (including all that cash).

I know just enough about corporate finance to be dangerous (and probably not enough to be helpful), but I often raise the question of the sanctity of bond ratings with health system boards. I certainly understand the pride that comes with a solid rating, and the value of low-cost access to capital that comes with it. But it seems to me that systems have over-valued the bond rating, particularly in the midst of a low-interest rate environment (and relatively-small resultant spreads). I pushed this board to think about whether maintaining 400 days’ cash might be constraining them strategically, and whether there weren’t strategic moves they were overlooking because of the importance they place on the AA rating. This turned into a rich discussion among the board members (and a potentially dismaying one for the CFO). As big strategic decisions loom (shifting the business model, taking on risk, responding to disruptive competitors), it’s worth at least asking whether we’ve passed the time for “keeping dry powder”, and whether systems are being held back by conservative financial management. Bondholders hate risk, of course—but risk seems increasingly unavoidable in our turbulent industry.


Give this a spin, you might like it.

This week brings the release of “iridescence”, the major-label debut from self-described rap “boy band” BROCKHAMPTON. The all-caps/lower-case styling is part of their carefully-crafted image, but it’s hardly their only standout feature in today’s crowded field of solo hip-hop megastars. Bursting onto the scene last year with a trio of critically-acclaimedbedroom-produced albums, the sprawling collective (whose 13-or-so members first came together via a popular online message board) has quickly become a factory for new ideas and sonic innovation in rap. Led by vocalist Kevin Abstract, and featuring a raft of über-talented lyricists, musicians, technologists, and assorted others, BROCKHAMPTON are operating in the anti-tradition of Odd Future (whose Tyler, the Creator can claim credit for blazing the trail for Abstract’s frank incorporation of his gay identity into the work).

Their new release comes on the heels of a turbulent few months for the group, which expelled one of their key members after allegations of sexual harassment. Tracks like “TONYA” see Abstract and his mates grappling with the pressures of their newfound celebrity (“I deleted Facebook, I’ll trade fame any day/For a quiet Texas place and a barbecue plate.”), while on “SAN MARCOS” the group continues to push the boundaries of genre and subject (Dom McLennon raps over acoustic guitar, swelling orchestra, and full boys’ chorus that he “Could be stronger than vibranium/Don’t mean that I ain’t fragile”). BROCKHAMPTON prove that “rap band” doesn’t have to be an oxymoron, and they’re putting the pieces together on this new album in ways that will only fuel their rocket-ship ride to stardom. Get on board now.


Stuff we read this week that made us think.

Taking aim at anti-competitive hospital contracting

An article in the Wall Street Journal this week by the paper’s health plan beat reporter Anna Mathews caught our attention—as her excellent work usually does—and sparked widespread reaction from healthcare industry pundits. The piece focuses on the impact of secretive clauses in payer contracts with hospitals that restrict the ability of insurers to offer narrow network plans in some markets. Relying on interviews with insurance and hospital industry officials, and a review of data and contracts from several markets, the piece pins the blame squarely on rapidly-consolidating health systems for forcing health plans to agree to all-or-nothing contracts (which require all of a health system’s facilities to be included in a payer’s network) and anti-steering clauses that prevent the insurer from giving patients financial incentives to seek care from lower-cost providers. According to the article, these secret contract terms have often prevented health plans from crafting customized, “high-performance” networks for employers, thwarting efforts to lower health care spending even for larger plan clients like Walmart and Home Depot.

There’s no question that these kinds of restrictive contract terms are a result of large health systems flexing their market power to gain favorable terms from payers. But market power is a two-way street, and health plans enjoy oligopoly positions in many markets as well. Our work with provider systems over the years has taught us that the much more common reason for “gag clauses” in payer-provider contracts is that payers don’t want to reveal the discounts that they negotiate with hospitals, fearing having to provide the same discount to others, and risking employers asking difficult questions about why they’re not getting a better deal. The most obvious evidence that Walmart’s ability to construct narrow networks with high-value providers isn’t being hindered by “secret provisions” put in place by hospitals is that the retail giant has in fact constructed those networks on their own—without the “assistance” of a health plan. Further, it’s worth noting that health plans have good reason to want to drag their feet on constructing networks that lower employer costs—lower premiums mean lower profits for insurers. There’s plenty of blame to go around for our high healthcare spending, to be sure. But we were surprised by the one-sided, pro-insurer bias of the WSJ article.

What if all physician services were paid at Medicare rates?  

Much research has looked at the impact of the changing payer mix on hospital economics, but a new analysis from researchers at the Urban Institute and the Medical Group Management Association (MGMA) may be the first to evaluate the potential impact on physician income. The study, led by Urban Institute fellow Dr. Bob Berenson, used MGMA physician compensation survey data to estimate the impact on doctors’ take-home pay of reimbursing all physician services at Medicare Physician Fee Schedule (PFS) rates.

Researchers found that mean physician income would decline by 12 percent if doctors were paid by Medicare for everything they do. Differences across specialties were noticeable. Primary care physicians would see income decline an average of nine percent, while non-procedural medical specialties like pulmonologists and nephrologists would only see a three percent income drop. Surgical specialists and radiologists would suffer a decline over 20 percent. What wouldn’t change? Relative physician compensation, with the highest-paid specialists, including cardiologists, radiologists and surgeons, still earning double the average pay of primary care physicians.

Physician practices are subject to the same shifts in market demographics as hospitals, although some may see a slower impact—older, sicker patients covered by public payment will make up more of their patient panels. Some doctors might attempt to stem the tide by closing practices to Medicare and Medicaid patients or “going concierge”, but the vast majority will have to adapt to a changing payer mix. We predict these pressures will only increase the rate of physician practice consolidation, leaving the health systems and payers who employ them to either absorb a growing “practice subsidy” or take on the difficult challenge of aligning physician compensation with new market realities.

Memorial Sloan Kettering faces another ethical challenge  

Still reeling from the resignation of one of its star cancer researchers for failure to disclose conflicts of interest, Memorial Sloan Kettering (MSK), one of the nation’s leading cancer research hospitals, faces a second controversy that concerns the organization’s use of patient data and nonprofit status. Reporters from the New York Times and ProPublica examined MSK’s support and financial stake in Paige.AI, a start-up venture launched by two leading physician researchers, including the hospital’s chair of pathology. Paige.AI, formally launched in February with $25M in venture capital funding, uses artificial intelligence (AI) algorithms, fueled by the vast MSK database of patient tissue images, pathology reports and clinical notes, to improve cancer diagnosis. The company has an exclusive deal to access the center’s tissue archive. Along with two physicians and three MSK board members, the cancer center has an equity stake in the start-up. The arrangement has led to concerns over whether the physician founders enjoyed unfair advantages, given that the archive draws from the work of many clinicians over decades, leading to strong objections from the hospital’s pathologists. Some physicians also question whether patient data is being used inappropriately in a for-profit venture, versus for a traditional research study. Legal experts warn the deal could lead to challenges to the hospital’s nonprofit status, as Paige.AI’s insider-owners and investors may have been given access to a valuable data asset for well below fair market value.

The MSK-Paige.AI relationship raises red flags for nonprofit academic centers who have long looked to commercialize clinical research, as well as for the growing number of community-based health systems launching venture funds and other investment vehicles. MSK leaders approached board members to invest in Paige.AI as the company faced funding difficulties—but did not seek an independent valuation of its data asset. As health system boards increasingly include members of the investment community, processes to manage conflicts of interest must be more rigorous, and systems should be careful not to bow to pressure for rapid commercialization. Moreover, new products that create profits from using the tissue, genetics and clinical information of a large number of patients will require a review of the traditional consent and research approval processes—and will inevitably raise the question of whether patients deserve to share in financial returns generated using “their” data.

That brings us to the end of another edition of the Weekly Gist. Thanks so much for taking time to read our work, and for sharing your thoughts and feedback with us—we love hearing from you! And do share this with a friend or colleague if you’ve found this interesting. Please subscribe—it’s free and easy to do…as long as you can prove you’re not a robot!

Most importantly, please let us know if there’s anything we can do to be helpful in your daily work. You’re making healthcare better—we want to help!

Best regards,

Chas Roades
Co-Founder and CEO

Lisa Bielamowicz, MD
Co-Founder and President