|THIS WEEK IN HEALTHCARE
What happened in healthcare this week—and what we think about it.
Medicare gets tough with upside-only ACOs
This week, the Centers for Medicare & Medicaid Services (CMS) released a proposal to revamp the Medicare Shared Savings Program (MSSP), its six-year old program to encourage collaborative efforts among caregivers to generate savings for the Medicare program through the creation of accountable care organizations (ACOs). In a blog post on the Health Affairs website, CMS Administrator Seema Verma laid out the rationale for the new proposal, which is aimed at encouraging ACOs to shift into more aggressive, downside-risk contracts to care for Medicare beneficiaries. The new proposal, dubbed “Pathways to Success”, narrows the number of participation “tracks” to two, effectively eliminating the upside-only Track 1 option. Verma expressed frustration with the lack of savings from Track 1 ACOs, which account for over 80 percent of all MSSP organizations, echoing a growing concern among policy analysts that program participants—especially higher-cost hospital systems—were using the program as a pretext for physician consolidation without delivering reduced costs of care. “Medicare cannot afford to support programs with weak incentives that do not drive toward savings,” Verma wrote.
The new rule proposes creation of two ACO tracks, “BASIC” and “ENHANCED”, each with a five-year contract term, and both requiring participants to take on downside risk. BASIC track participants would be required to assume downside risk after the first two years of participation, while ENHANCED participants would take on downside risk immediately. The proposal further distinguishes between “high-revenue” ACOs, hospital-based organizations which typically have greater combined spend across Medicare Parts A and B, and “low-revenue” ACOs, most made up solely of physician practices. CMS proposes to force high-revenue ACOs into the ENHANCED track more quickly, thus discouraging them from “squatting” in upside-only arrangements—Verma’s principal frustration with the program’s current structure. After one stint in the BASIC track, new hospital-based participants would be required to move along into the more advanced version or exit the program entirely. Both tracks would qualify as “advanced alternative payment models”—a key milestone related to physician payment in Medicare’s Quality Payment Program (QPP)—as long as the participating organization is taking downside risk. Other proposed changes are intended to address long-standing criticisms of MSSP, including a shift toward regional benchmarks designed to more accurately capture geographic variability in cost of care, and a more flexible beneficiary attribution approach, intended to give participants better visibility into the patient population for which they will be held accountable.
Hospital groups and the main lobbying organization for ACOs voiced their opposition to the more aggressive approach, citing the complexity of managing downside risk and warning that many program participants would simply drop out of the program altogether (CMS’s own prediction is that 107 of the program’s 649 ACOs would likely exit the program). As we work our way through the 607-page proposal, we’ll share our own detailed analysis on the Gist Blog, but we’re not surprised to see CMS taking a tougher line with the ACO program. Accountable care has largely been a disappointment thus far—an overly-complex payment reform that has lacked sufficient incentives to engender real change in care delivery. While the more robust versions of Medicare ACOs (such as the Next Generation ACO Model being tested by Medicare’s Innovation Center) have produced meaningful results, most MSSP participants have treated the ACO program as an interesting experiment that has provided a pretense for creating closer linkages with referring physicians and an opportunity to gain access to previously-unavailable data on patient utilization patterns. Meanwhile, the juice has not been worth the squeeze, with many organizations spending millions on legal and consulting fees to set up ACOs, and little Medicare savings to show for it. Even the revamped version is expected to yield only $2.2B in savings over the next decade, against a total Medicare spend of $9.6T over the same period. We continue to expect the ongoing shift to private, Medicare Advantage (MA) coverage to provide the bulk of the opportunity to reduce spending growth in the Medicare program, with the ACO program providing little more than a transition path to enable providers to shift into the MA business.
General Motors turns to Henry Ford for healthcare help
General Motors (GM) and Henry Ford Health System (HFHS) announced they have joined forces to create a new narrow-network health benefits offering for GM’s southeast Michigan employees. The “ConnectedCare” plan will be available to 24,000 salaried employees during GM’s October open enrollment—union employees are not yet eligible. ConnectedCare members will carry a $1,500 deductible and have access to a two-tiered network. Using the Henry Ford provider network reduces an employee’s co-insurance to 10 percent, compared to 30 percent for out-of-network care. GM estimates that plan premiums will be $300 to $1,980 cheaper than the other two traditional, high-deductible PPO plans on offer. Henry Ford will receive a shared-savings bonus should spending fall below a determined benchmark, and quality goals are met; the health system will also share downside risk for losses. Blue Cross Blue Shield of Michigan (BCBS-MI) will serve as the plan’s third-party administrator and will reconcile savings and quality data. (We were a little surprised that Henry Ford’s owned health plan, HAP, isn’t involved.) Of note, GM and HFHS will not be using BCBS-MI’s fee schedule and have negotiated their own rates.
After Intel and Boeing led the market with provider ACO arrangements over five years ago, the pace of direct-to-employer contracting has been slow to develop in many markets, with barriers emerging on several fronts. Few employers have the healthcare knowledge or bandwidth to comprehend, much less structure, these complex arrangements. And they found little support from brokers and insurers, who, sensing the threat to their traditional business models, preferred to steer clients toward employee cost-sharing as a means to control spending. Many health systems also lack the capabilities or network coverage to offer a compelling exclusive network. A recent survey from the National Business Group on Health suggests employer interest in direct contract may be growing, with 11 percent of employers interested in direct-to-provider arrangements, compared with only three percent last year. The survey also suggests that employers may be less willing to push high deductibles and other forms of employee cost-sharing—making them more willing to explore direct-to-provider contracts and exclusive networks that would have seemed prohibitively complex a few years ago. The GM-Henry Ford deal is one of a handful of recent employer-provider partnerships that signal a growing opportunity for health systems to approach employers with alternative solutions to manage rising benefit costs. There is an opportunity for providers to demonstrate their ability to rein in costs through coordinating care and cutting out middlemen. If these kinds of solutions don’t deliver timely results, it will only hasten employers’ interest in moving toward defined-contribution health benefits as the ultimate cost control lever.
Another week of drama in healthcare deal-making
The soap-opera world of healthcare mergers continued to generate new plot lines this week, as two giant couplings faced new challenges and a third took a big step closer to consummation. Lovelorn drugstore chain RiteAid was again abandoned at the altar, this time by the grocer Albertsons, which called off its plans to merge with the pharmacy retailer. Having only partially pulled off its proposed merger with rival Walgreens last year, RiteAid bowed to antitrust scrutiny and settled for a partial sell-off of 2,000 of its stores to the larger chain. But its subsequent tryst with privately-owned Albertsons came to an abrupt halt this week when proxy advisors urged RiteAid shareholders to reject the deal, leaving it with a reduced retail footprint and insufficient capital to pursue growth independently. Meanwhile the brewing romance between insurer Cigna and pharmacy benefit manager (PBM) Express Scripts was intruded upon by activist investor Carl Icahn, who called on Cigna’s shareholders to spurn the merger because, in his view, the PBM business is facing an existential threat from disruptors like Amazon, and from the risk that other competitors like Anthem will launch their own PBM businesses. At the same time, Cigna’s rival Aetna appeared ever-closer to its nuptials with suitor CVS Health, as Bloomberg reported that the Justice Department’s antitrust review of the merger had turned up no significant concerns. Will CVS and Aetna live together in wedded bliss? Will the swashbuckling corporate raider come between Cigna and Express Scripts? Will RiteAid ever find love? Tune in next week for As Healthcare Turns…
Painfully protracted metaphor aside, what we’re witnessing in the ongoing saga of healthcare mergers is a fundamental realignment of the industry, as companies position themselves for two massive disruptions. First, the entry of the Baby Boom generation into their Medicare years creates an enormous opportunity for insurers, providers and pharmacy chains to build new offerings to profit from the “silver tsunami”. Controlling rising drug spending, delivering services, and managing the care needs of a chronically multi-morbid generation will demand (and reward) the creation of healthcare platforms that can capture the long-term loyalty of seniors, and the (mostly Medicare Advantage) dollars that come with them. Second, the looming entry of Amazon, Apple, and Google into the booming healthcare industry has every incumbent questioning their existing business model and looking for new solutions to stave off the inevitable disruption those companies will bring. All the while, investors are looking to engineer the best deals possible to take advantage of these two megatrends. Expect even more drama in the months and years to come…with twists and turns rivaling even the craziest moments of General Hospital’s “Luke and Laura”.