July 19, 2019

The Weekly Gist: The One Giant Leap Edition

by Chas Roades and Lisa Bielamowicz MD

If we seem a little spacey this week, it’s because our minds have been on the moon. Tomorrow marks the 50th anniversary of Neil Armstrong and Buzz Aldrin touching down at Tranquility Base, and taking that one, giant leap for mankind. We’re both space nerds: one of us grew up in a NASA town, the other on Air Force bases. But more than the daring astronauts, brilliant scientists, and history-making exploration, what we remain most in awe of is the spirit of national unity that the first moon landing engendered. Especially in these turbulent times, we look back to that day a half-century ago and hope we’ll see another such moment in our lifetimes.

THIS WEEK IN HEALTHCARE

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

If you like your health care plan…you can keep it.” 

This week, Democratic presidential candidate and former Vice President Joe Biden revealed his campaign platform for healthcare, which is built on expanding the Affordable Care Act (ACA) rather than completely overhauling the system. Taking a more moderate approach than many of his competitors, who are calling for “Medicare for All”, Biden proposes to create a “public option” plan that consumers could purchase on the Obamacare exchanges, expand Medicaid coverage to 2.5M people in states that haven’t expanded coverage, and change how subsidies are calculated for middle class consumers who are in the highest cost plans. Biden says his plan will cost $750B over 10 years and that he’d pay for it by reversing the Trump administration’s 2017 tax cuts. It is notable that Biden’s plan, which would have been deemed radical a decade ago in the debates surrounding the passage of the ACA, is now considered a moderate option among Democratic candidates.

Meanwhile, Sen. Bernie Sanders (D-VT), who wants to eliminate private insurance and create a single payer system, sharply criticized Biden’s plan and called on his fellow Democratic candidates to refuse donations from insurance and pharmaceutical companies. Speaking at a rally in support of Hahnemann University Hospital in Philadelphia, which is on the brink of closure, Sanders said he plans to introduce a bill to create a $20B federal bailout program to allow local governments to buy struggling hospitals. That’s ironic, given that many more hospitals could find themselves in the red in the unlikely scenario that Sanders’s single payer plan becomes a reality. We expect the eventual Democratic nominee to land closer to Biden’s plan than Bernie’s, with hospital bailouts unlikely to be needed.

Bidding farewell to the Cadillac Tax

The House voted Wednesday to permanently eliminate the “Cadillac Tax”, the 40 percent excise tax on businesses who choose to offer employees the most generous and expensive health plans. The tax, scheduled to go into effect in 2022, was one of the key cost control mechanisms in the Affordable Care Act (ACA), designed to pay for much of the spending in the legislation, and to encourage businesses to offer lower-cost health plans. Implementation of the tax was delayed several times, with opposition coming from Republicans, unions and business groups. Wednesday’s vote was nearly unanimous, reflecting bipartisan consensus on axing the long-controversial provision. Similar repeal legislation in the Senate is almost certain to pass. Repeal of the tax will grow Federal budget deficits by nearly $200B over ten years, according to the Congressional Budget Office.

With the demise of the tax and the 2018 repeal of the Independent Payment Advisory Board (IPAB), tasked to develop solutions to reduce Medicare spending should it exceed target growth rates, Congress will have dismantled the two major cost control measures written into the ACA.Moreover, the about-face on the Cadillac Tax shows that as the 2020 elections approachneither party is expressing much concern about controlling national healthcare spending. Expect campaign rhetoric on healthcare costs to center instead on the pocketbook issue of rising out-of-pocket spending, rather than on healthcare’s impact on the federal budget.

CVS partners with Segway inventor to test novel home dialysis device

It’s been speculated for years that CVS Health would become a provider of dialysis services. This week the company made that move, but in an unexpected way, announcing the launch a clinical trial of a novel device for home-based dialysis. The trial will initially enroll 70 patients to evaluate the efficacy of the device when dialysis is administered by a nurse versus conducted by the patient alone. The dialysis machine was created by Deka Research & Development Corp., founded by inventor and entrepreneur Dean Kamen. Kamen is best known for inventing the Segway, but his other inventions have included an insulin pump, soda dispenser and water purification system. With this device, Kamen is bringing his experience in microfluidics and filters to bear on a consumer-focused design for a home dialysis system that is smaller and more user-friendly than current platforms. CVS announced that it has no plans to perform dialysis in its stores or other healthcare facilities—a signal of the company’s strategy of providing lower-cost, consumer-focused care. While most patients in other countries receive dialysis at home, 88 percent of American patients with end-stage renal disease undergo dialysis in a facility. Combined with the executive order issued by the Trump Administration last week overhauling dialysis payment, CVS’s entry into home-based dialysis could massively disrupt the dialysis services market—and the oligopoly that runs it today—with a solution that is both beneficial for patients and saves the healthcare system millions of dollars.


GRAPHIC OF THE WEEK

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

Charting the consolidation of US healthcare

As much discussion as there’s been about consolidation in the hospital industry recently, there are surprisingly few good sources of data on the scope and scale of multi-hospital systems in the US. One very helpful resource is the Compendium of US Health Systems, a project sponsored by the Agency for Healthcare Quality and Research (AHRQ), which is part of the Department of Health and Human Services (HHS). First launched in 2016, the compendium includes downloadable data on 626 health systems, with information about location, number of beds, number of discharges, and other key characteristics. This spring, AHRQ supplemented the data set with new information about participation in payment reform pilots and provider-sponsored health plan activity. Drawing on this information, we constructed the interactive graphic below—click on the chart or follow this link to explore the data. A few highlights indicate how consolidated the hospital sector has become. Health systems account for more than 90 percent of all discharges in the US, with the largest 11 systems accounting for a quarter of discharges, and the largest 67 accounting for half. Nonprofit systems dominate the landscape, and many of those are multi-state enterprises. And the trend toward consolidation continues apace. When AHRQ first released the data set in 2016, there were 626 systems on the list; the last two years have seen that number decrease to 591, with several large systems merging together. We’ll continue to mine this rich resource for more insights in the weeks to come.


THIS WEEK AT GIST—ON THE ROAD

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

A health system sets its sights on a 10,000-patient PCP panel

Lisa:
This week I spoke with a health system CEO who reached out in response to our recent piece on primary care innovation. I’d struggled to come up with an example of a health system that was building scaled “direct primary care” (DPC), a model in which patients or employers pay a monthly fee for an expanded array of primary care services and access. This CEO wanted to share his system’s work to launch and scale exactly that model. Our discussion provided insight on what is necessary to make the model work within a traditional, risk-averse health system culture. The program started small, with just a few practices—but those initial physicians were recognized system leaders who brought credibility to the model through their choice to participate. The team recognized that DPC models that take a concierge-like approach with the physician positioned as the sole caregiver would not be financially sustainable. Creating scale to increase patient panel size was a strategy from the beginning, leading to a care model that maximizes access and service by incorporating non-physician care team members and a technology partner to provide telemedicine and asynchronous visits. While still early, he hopes over time this model could allow patient panel sizes to expand to 10,000-15,000 patients per doctor—a goal that primary care innovators have discussed for a decade but has yet to be achieved. Perhaps the greatest key to the system’s early success: a CEO who believes in and deeply understands the model, and is willing to make disruptive changes to support it. We’ll be watching this work closely to understand how this model is evolving—and whether it reaches the lofty target of a 10,000-patient panel.

Winter is coming, healthcare edition

Chas:
I had an interesting conversation about growth strategy with a health system CEO recently, one that made me realize we’re in a Game of Thrones moment in healthcare. At the helm of a regional health system, this CEO was bemoaning the limited opportunities for geographic expansion in his state. Just a few years ago, expansion was a matter of choosing attractive target markets, finding undervalued or otherwise attractive delivery assets to acquire in those markets, and engaging in an M&A process. But now, with each adjacent part of the state dominated by a neighboring health system, and most of the stand-alone acquisition targets already scooped up by competitors, he was feeling more boxed in than ever. (He’s right: see our graphic this week for evidence that most hospital discharges are now controlled by hospital systems.) Expansion today, he said, has become an exercise in identifying partnership or alliance opportunities with next-door systems, not in acquiring smaller organizations. The emergence of regional super-systems has resulted in a landscape populated with fiefdoms of owned and affiliated facilities—thus the analogy to Westeros and its kingdoms, great houses, and loyal bannermen. When I pointed this out, the CEO aptly replied that not only does he worry about a War of the Roses-style battle with regional competitors, but the even more worrisome invasion of healthcare’s White Walkers—the non-traditional disruptors (CVS, Optum, Walmart and others) who are poised to change the nature of competition entirely. An amusing parallel, but one with real-world implications for how systems think about strategy in the current environment.


BINGE WATCH ALERT

We would’ve worked harder, but we watched this instead.

People don’t read beloved classics anymore, so the only way to make sure books remain relevant is to turn them into TV miniseries. But TV miniseries never do an adequate job of capturing what made the classics beloved in the first place, so they ultimately seem like stories that weren’t good enough to be televised. If only there was a name for that kind of paradox… Catch-22, the new, six-part Hulu adaptation of Joseph Heller’s 1961 hilarious satire of WWII, only narrowly avoids the famous trap of its title. Still, it’s a worthy effort, and a must-watch show for fans of the book. The portrayals of the novel’s iconic characters are delightful: Christopher Abbott as the vexed bomber pilot Yossarian, Kyle Chandler as the maniacal, mission-happy Colonel Cathcart, George Clooney (who also produced the series) as Lieutenant-cum-General Schiesskopf, and Hugh Laurie as retired-on-active-duty Major de Coverley. While much of the nuance and experimental structure of Heller’s book is lost in translation to the small screen, the series gets the futility and absurdity of war exactly right and gives us a fully-realized backdrop (shot on location in Italy) for the outlandish story it tells. It’s worth watching for the war profiteering antics of Milo Minderbinder alone, and the goats-for-dates-for-tomatoes-for-cheese trade syndicate he builds. Good fun, and a great reminder to dust off that old copy of Heller’s book and reacquaint yourself with these iconic characters.


SPECIAL SECTION—SPOTLIGHT ON THE NEWS

We take a deeper look at one of the key stories of the week.

UnitedHealth Group strikes a new health system partnership

This week, Walnut Creek, CA-based John Muir Health announced a first-of-its-kind partnership with Optum, the services arm of insurance giant UnitedHealth Group (UHG). Under terms of the agreement, Optum will assume control of the revenue cycle, information technology, and certain care management operations of the two-hospital integrated health system. Beyond simply selling its tools and consulting services to the system, Optum will take over employment of more than 500 of John Muir’s back-office staff. According to an Optum spokesman, the insurer views the deal as a “third option” for other small health systems looking to remain independent but seeking the cost advantages of greater scale and access to new capabilities. The partnership will be worth watching closely, particularly as UnitedHealth Group’s other activities in Northern California continue to evolve. With a significant share of the insurance market today, it remains to be seen whether UHG plans to extend its OptumCare delivery operations into the region, a move that could put it in direct competition with health systems like John Muir.

We have had the pleasure of working with the executive team at John Muir Health for some time (and have our own history with Optum, which acquired our former employer), so we were particularly interested to hear their perspective on the deal. After the announcement, we spoke with John Muir’s Chief Strategy Officer, George Sauter, to get his thoughts. Here are the highlights of our conversation:

Gist HealthcareWhat convinced you and the team that this was the right step?

George Sauter (Chief Strategy Officer, John Muir Health): We’re actually looking for ways to be more effective and more competitive in an increasingly competitive market. We have the dual challenge of delivering at an overall price level with an overall cost level that will enable us to price competitively against the likes of Kaiser and others. And, at the same time, increasing our capabilities in technology, analytics, care management to support…care delivery in a more effective way.

GistFrom what we’ve read, one of the big considerations for John Muir was the ability to remain independent. How much did that weigh on the decision?

GS: Well, it weighed a lot. Getting back to those overriding goals of increasing our level of capabilities and reducing our costs…One obvious option was to consider joining forces with another health system …[But] those large mega-mergers have not really delivered on scale as hoped and we’re unclear whether they would have really enabled us to gain more sophistication ….We feel that being locally governed and locally managed enables us to have a relationship with our community, and ultimately with our patients that is unique.

Gist: What has the reaction been like? How has the news been received by the board and your doctors?

GS: The board was quite deeply involved in endorsing the recommendation from senior management to do this. I think all of the board members actually made trips to Optum headquarters as part of the due diligence process…I think about 40 percent of the board is physicians. They viewed it as ‘what’s in the best interests of John Muir Health’, and also what’s in the best interests of the community itself. They ultimately came around to wholeheartedly endorsing this decision. The physicians have been very interested in the rationale and understanding why we made this decision.

GistUnitedHealth Group is also in the care delivery business, in addition to being in the services business. Any tensions or thoughts about potential competitive positioning in the future relative to Optum?

GS: Yes, that was that was a big factor in our discussions and negotiations with Optum. At the end of the day, if we did not have a relationship with Optum…there would certainly be a risk of Optum entering the market and effectively competing directly against us. While ‘they’re under the tent’…we think there’s somewhat less of that chance. It’s not necessarily the reason we did the deal, but it was a factor we considered.

Gist: George, what is the term of the agreement? 

GS: It’s ten years.

Gist: That’s a long time! So how will you measure success for this 10-year relationship? 

GS: Before I answer that, let me tell you about the scope of the deal at this point. We’ll be transferring the employment of roughly 540 employees from John Muir Health to Optum at the end of September. The scope of the arrangement includes virtually all of information technology services, revenue cycle…and some of our delegated managed care functions, including some case management… In each of those areas, we will have pretty detailed service level agreements….The contracts will be governed by these contract and service level agreements. And each of those areas will have measures for success.

Second, we do have some expectations on overall cost…we have some things baked into the relationship around pretty significant cost savings. Optum actually kind of fast-forwarded them up-front so we can realize that sooner rather than later. Third, we have some increased capabilities that we’re looking to develop: first, in our performance in managed care and particularly our MA performance. And we have some expectations of improved performance on some other things like RAF [risk adjustment factor] scoring. And, we are looking to fast track the development of our customer engagement center, a modern term for a call center. Optum will be able to help stand that up a lot quicker.

Gist: Are you going at risk with Optum on this? Are they sharing in the upside?

GS: Not directly. There are performance expectations and some financial incentives around performance. But I would characterize them as relatively modest.

Gist: If everything goes well, what do you think this will look like in 10 years?

GS: My personal opinion is, ultimately, in the Bay Area market there will be two to four health networks providing the majority of care and covering the majority of folks. Kaiser is going to be one of them. The Sutter Health Network is likely to be another one…My sense is that some combination of Canopy [Health] with John Muir Health with Optum and with UnitedHealthcare will play a pretty big role in the future of that network in years to come.

Gist: What advice would you give to another health system leader who is wondering whether a deal like this would be right for them? 

GS: I think they need to paint a picture of the future and see what capabilities and what kind of cost structure is needed to be successful in the future. And use that as the framework to actually evaluate potential solutions…We saw the potential of doing it with one party versus ‘smart sourcing’ with a half dozen organizations…We thought there might be ‘best of breed’ solutions that could individually be better than what Optum offered…but nobody else could do all the pieces of that and we thought there’s significant potential value there. I think Optum did, too. Frankly, Optum hasn’t had a track record of pulling it all together seamlessly for other clients, but I think that’s what they’re really shooting to do here.

While the decision of Optum was a bit out of the blue, when we described it, the rationale and how we are moving forward, virtually everybody got it…this is a big change for people’s lives, and they understood why we’re doing it.


That brings us to the end of another week’s edition. Thanks for reading, and a special thank you as always to those who reached out to share your feedback, suggestions, and comments, and those who passed our work along to others and encouraged them to subscribe. We’re so grateful for your engagement and support.

As we continue to expand our membership ranks and our team of outstanding colleagues, we hope you’ll let us know if there’s anything we can do to be of assistance in your work. 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