The following is an excerpt from Navigant Healthcare’s Pulse Weekly. Click here for a complete copy of this week’s article.
Last week, the Supreme Court ruled 6-3 against the complaint filed by David King and his three Virginia co-plaintiffs. The SCOTUS majority opinion concluded that the intent of section 1321 of the Affordable Care Act’s (ACA) health exchange provision was to provide tax credits for all eligible enrollees whether the exchange is state-run or not. The court’s opinion had the immediate impact of sending hospital and health insurer stocks up and Presidential campaign 2016 aspirants out with statements lauding the decision or promising to undue the ACA altogether, if elected.
No doubt, other legal challenges to the ACA are forthcoming. The GOP-led House of Representatives has voted 54 times for its repeal. It remains highly divisive: Kaiser tracking polls have consistently shown the nation almost evenly divided for/against dating back at least three years. And ironically, many elements of the law, including more constraints in the ways insurers do business, remain popular.
In the near term, no doubt Medicaid expansion, questions about the individual and employer mandates, and repeals of industry excise taxes will be at the top of the list of ACA issues that get attention. Might the 22 states that didn’t expand join the 28 and D.C. in expanding? Will the individual penalty—this year $325 or 2% of applicable income for an individual—result in increased access to coverage or an IRS accounting nightmare? Will the threshold for the employer penalty increase from 50 to 100 full-time employees? And, is the 2.3% device tax killing jobs irreparably harming the $90 billion U.S. industry? There are others are on today’s punch list for ACA changes.
Looking ahead, the Patient Protection and Affordable Care Act is sure to be the top domestic issue in the 2016 campaign as these issues surface at the state and federal level. But in the industry, health reform is much more than the ACA. There are eight overarching issues to follow in coming weeks and months:
1 – Health cost acceleration: For the past five years, overall health spending has increased at 4% or less. For the next decade, it will increase closer to a 6% pace. For the healthcare industry, it’s good news: more money flowing into the system. But for households, employers, and states, it’s bad news. It means families that can’t afford co-pays and deductibles, or forego care altogether. It means employers reduce coverage or drop it altogether as almost half have done already. It means state budgets will be stretched thin to cover employees and pensioners, along with their Medicaid responsibilities. It means underpayments to hospitals and doctors by Medicare and Medicaid will be passed through in higher mark-ups and charges to those with commercial coverage. And, it means the ranks of the uninsured are certain to grow, with or without Medicaid expansion and exchange-based enrollment with tax credits, as health insurance coverage becomes more expensive.
2 – Industry consolidation: While the Anthem-Cigna, Aetna-Humana deals get most of the attention today, the fact is, accelerating consolidation is a matter of fact in every sector of healthcare. In some sectors, the impact is local—hospital-hospital, hospital-physician, hospital-post acute and so on. In others, it’s playing out nationally and regionally where a few strong players are buying out weaker, or opportunists see advantage in greater scale. In retail drug, private physical therapy, drug manufacturing, biotechnology, medical devices and others, scale is the driver. In renal dialysis, home care and others, regulatory headwinds make consolidation sensible.
3 – Overheated investment: Investments in healthcare are up 26% in the last 12 months. Betting on healthcare stocks and start-ups is a popular strategy for investors and financial planners who handle 401Ks. The industry is big, fragmented and capital intense. Demand is growing, capital is flowing and innovation flourishing. As a result, investments in healthcare have outperformed every sector other than telecomm in the past five years. Healthcare stocks now trade at 23.4 times average earnings versus 18 for the S&P 500. Is it sustainable? Is the healthcare market over-valued? Will the flow of capital into healthcare slow as other industries become better places to bet, or as other government programs command a bigger share of spending? It’s a theme to watch as lenders assess creditworthiness and investors measure the long-term viability of organizations in their portfolios.
4 – Sticker shock: In every sector of the system, price transparency is a tsunami resulting from either federal or state legislative requisites or entrepreneurs betting on apps to equip curious if not incensed consumers. At the top of the list is drug pricing, followed by hospital emergency and inpatient costs, physician fees and others. To be sure, every healthcare item’s list price—every test, procedure, visit, and purchase—is subject to the trend. The scheduled release of data from Medicare about physician business transactions and the investor-led frenetic pace of lending to start-ups promising heightened utility from their pricing gadgets means there’s more ahead. The online generation expects no less, employers demand it and the industry’s cloak of secrecy and incomprehensible costs make price transparency a goldmine for opportunity.
5 – The balancing act in the states: For states, health reform is ground zero. For the first time in 27 years, more than half (51%) of the state’s total revenue comes from the federal government for Medicaid. States are responsible for regulating premium increases by health insurers and how “essential health benefits” are defined and enrolling eligible uninsured through an exchange whether directly or through Healthcare.gov. In addition, states are responsible for settling licensing and scope or practice issues posing conflicts among physicians and allied health professionals, regulating retail pharmacies, and managing certificate of need programs in some states and broader competitive issues in others. States are obligated to balance their books. Most have recovered from the tepid economic times, but state coffers are thin. Healthcare costs linked to future obligations is key: it’s the largest element in state pension fund and employee benefits. Governors and legislators in blue and red states face voters who favor lower taxes and less government control, yet healthcare reform requires both. The road to a transformed health system runs through state capitals: in many states, it’s the number one issue.
6 – Healthier communities: Our system is one of the world’s best in accessing the latest technology to better diagnose and treat the toughest and sickest among us. But our ability to keep people well, reduce utilization of unnecessary tests, hospital admissions and pricey drugs, and bend the cost curve by reducing demand has been lacking. Social determinants of health—the air we breathe, the food we eat, the places we live and work—play a major role in our health, but our big money bets have been in bricks and sticks to take care of the sick rather than programs and strategies to address their root cause. Efforts like Paul Tang’s “LinkAges” and Dan Buettner’s “Blue Zones” are certain to gain traction as Millennials define health through their holistic value system and as employers act on the correlation between workforce effectiveness and health. But shifting money from a sick care system to a community-based care management construct is disruptive, especially to those that benefit most from the status quo.
7 – The future of the medical profession: More than 21,000 post baccalaureate students enter the U.S.’ 141 medical schools annually, most leaving four years later with an M.D. degree and $180,000 in medical debt. After their residency, they’ll enter the noble profession at an unprecedented time: unparalleled discovery is unlocking treatments for previously untreatable conditions. Advanced analytics is bringing personalized medicine within reach. Like-style behavior modification is demonstrating reversal of disease progression and large molecule therapeutics are proving themselves effective. But the world’s changing for physicians: transparency in their business relationships and conflicts of interest are now required public disclosure. Their accuracy in diagnosing and adherence to evidence-based best practices is an escalating focus of regulator attentiveness. And increasing accountability for patient outcomes necessitate the use of advanced information technologies and team-based care management techniques to simultaneously address patient outcomes and cost effectiveness. For some, the future of the profession is seen as dire. For others, it’s a natural evolution to a new world order in medicine that’s technology-enabled wherein physician leadership is no less valued but substantially changed.
8 – The quest for value: Perhaps the biggest and most complicated theme is value: do we get a dollar’s worth of good from the dollar spent in our healthcare system? Could dollars be spent more wisely with greater value? How should we define value? There’s no consensus in our system about how to calculate costs nor regulatory methodology for determining comparative effectiveness in what we provide. The ACA set in motion several demonstrations and pilots to nudge the system away from volume to value—bundled payments, accountable care organizations and others. In 2015, under the Hospital Value Based Purchasing program, 1,375 hospitals will get a payment reduction, and 1,714 will see an increase based on the quality of care provided, but are these programs getting to the root question of value? The algebra for calculating value has two important elements: inputs and outputs. Some simply say it’s dividing costs by quality, but in our system neither is easy. As a result, “value” is an abstract defined by users to include what they consider appropriate and exclude views of others.
The King v. Burwell resolution settled for the time being the status of the Affordable Care Act as the legislative framework for our health system’s immediate future. But health reform in the U.S. is bigger than the ACA and its transformation increasingly relevant to every employer and family. The eight themes above transcend the King v. Burwell decision’s impact.
Sources: Congressional Research Service, “In 2014, the annual penalty was the greater of $95 or 1% of applicable income; the penalty increased to the greater of $325 or 2% of applicable income in 2015. The penalty will increase again in 2016 and will be adjusted for inflation thereafter,” https://www.fas.org/sgp/crs/misc/R41331.pdf; CMS: ‘health spending grew just 3.6% in 2013, the fifth year of historically low rates of spending growth. But it will accelerate to 5.6% in 2014 and the average growth rate for 2015-2023 would be 6%. outpacing growth in the gross domestic product over the next decade. Health care’s share of GDP, which has remained fairly stable since 2009, will rise from 17% in 2012 to more than 19% in 2023.’http://www.webmd.com/health-insurance/20140903/health-care-spending-forecast-to-increase-modestly-in-next-decade; Kaiser Health Tracking Poll, June 2015; Matt Krantz, “Ruling Boosts Hospital Stocks,” Associated Press, June 26, 2015; “The Bonfire of the Biotechnology Vanities,” Wall Street Journal, June 25, 2015; Saumya Vaishampayan, “Mixed Prognosis for Health Stocks,” Wall Street Journal, June 22, 2015; Brian Sigritz, “Medicaid Represents a Majority of All Federal Funds to States for the First Time,” National Association of State Budget Officers State Expenditure Report, June 25, 2015; Dan Buettner, “The Blue Zones: Lessons for Living Longer from the People Who’ve Lived the Longest Mass,” Palo Alto Medical Foundation, October 2010;
The opinions expressed in this article are those of the author and do not necessarily represent the views of Navigant Consulting, Inc. The information contained in this article is a summary and reflects current impressions based on industry data and news available at the time of publication. Any predictions and expectations noted herein are inherently uncertain and actual results may differ materially from those contained in this article. Navigant undertakes no obligation to update any of the information contained in the article.
©2015 Navigant Consulting, Inc.