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By David Gruber, MD, MBA* |
Healthcare spending is forecast to increase from US$3 trillion in 2014 to US$5.2 trillion in 2023, reflecting a compound annual growth rate of 5.9 percent. US healthcare expenditures on a per capita basis are 1.9-2.6 times the amount spent by other developed nations despite having a much younger population. An Institute of Medicine workshop from 2010 suggested that 30 percent of spending results from unnecessary or inefficiently delivered services, price variation, excess administration costs, missed prevention opportunities and fraud.
Among the contributors to the disparity in per capita spending are a fee-for-service payment system encouraging volume (not value), a focus on acute intervention rather than chronic care management, excessive specialization, fragmentation of care delivery, oligopolistic competition (in most major markets and product segments) and an unwillingness by the federal government to mandate pharmaceutical price controls.
U.S. competitiveness is being affected. Healthcare, Social Security and interest payments are forecast to account for 85 percent of incremental federal government outlays in the next decade. As a result, the Center for Medicare and Medicaid Services (CMS) has initiated a series of payment reforms that are likely to transform healthcare delivery within the next three to ten years. Payment reform involving shared risk or a fixed fee for “bundled” or annual services is becoming a reality for many health systems.
Healthcare sectors such as post-acute care that are most dependent upon federal, state and local government payments are most likely to be transformed, while winners and losers will emerge.
MEDICARE LEADING, COMMERCIAL PAYERS LAGGING IN PAYMENT TRANSFORMATION
On January 26, 2015, the US Department of Health and Human Services Secretary, Sylvia Burwell, established a clear timeline for alternative “volume to value” payment models (2016: 30 percent of all Medicare payments; 2018: 50 percent); and for Medicare fee-for-service payments to be tied to quality and value (2016: 85 percent; 2018: 90 percent). The announcement followed a multi-year effort by the CMS at incremental payment reform, as well as pilot testing. The growth of Medicare Advantage plans offered by insurance companies (receiving a monthly payment from CMS) has also resulted in changes to the process of care. In 2014, Medicare accounted for US$616 billion in expenditures (US$11,638 per enrollee), 20.4 percent of national healthcare expenditures of US$3.057 billion.
In contrast, the employer-sponsored commercial payer segment has been unable to generate a cohesive, national model of healthcare transformation. Cost shifting from government payers (Medicare, Medicaid) to commercial payers has accelerated during the past few years. In 2014, employer sponsored coverage accounted for US$937 billion in expenditures (US$5,531 per enrollee), 30.7 percent of national health expenditures. Spending per enrollee in employer sponsored plans has increased at nearly 5 times the rate: 3.4 percent vs. 0.7 percent of those receiving Medicare.
MEDICARE AS THE DRIVER OF POST-ACUTE CARE TRANSFORMATION
Post-acute care service providers – skilled nursing facilities, home health, inpatient rehabilitation facilities and long-term acute care hospitals – are currently in flux, given the CMS reimbursement cuts, the growth of Medicare Advantage, payment reforms such as Accountable Care Organizations, bundling and re-admission penalties, hospital consolidation and narrowing provider networks. The IMPACT Act, will further catalyze change during the 2016-20 period by creating a standardized assessment tool across all settings, by increasing the use of Big Data and the potential implementation of site neutral payment schema.
A recent publication from the Institute of Medicine suggests that 73 percent of patient variation in spending among Medicare beneficiaries is driven by differential use of post-acute care services. This is not surprising given the difference in Medicare costs per day range by site of service: intensive home care (US$193), Medicare Part A nursing home care (US$377), inpatient rehab (US$750) and LTACHs (US$1,500).
The post-acute care (PAC) industry, largely owned by for-profit entities, is highly fragmented and primarily comprised of small- to medium-sized facilities and/or agencies. Medicare accounts for more than 40 percent of revenues of most PAC entities including home health (41 percent), nursing homes (42 percent) and long-term assisted care facilities (63 percent). The range of operating margins among providers is surprisingly large, suggesting that execution capabilities are exceedingly important. Larger providers tend to be more efficient and profitable
EMPLOYER-DRIVEN INITIATIVES LAGGING, THOUGH INCREASINGLY FOCUSED ON PRICE VARIATION AMONG SITES OF CARE
Employer-sponsored insurance plans provide coverage to 170 million Americans; 59 percent of workers are in self-insured plans typically sponsored by companies with more than 1,000 employees. During the past few years, many employers have shifted costs to employees and introduced high deductible benefit plans. An unintended consequence for providers has been the rise in bad debt from low-to-moderate income employees.
Many employers have also become aware of the wide variation in local market prices among providers, and between hospital outpatient departments and free-standing facilities. Transparency tools are being disseminated to employees to facilitate medical shopping, especially for imaging diagnostics and other ancillary services. Narrow networks are also being considered, along with Centers of Excellence for high cost cardiac, spinal and transplant procedures.
Insurers are increasingly offering ACO products to employers. Unlike for Medicare, insurer ACOs are not legal entities and thus are not required to meet federal regulations. They do, however, offer the promise of lower cost, narrow networks to employers capable of affecting local market dynamics based on the shifting the use of specific providers among their covered lives.
Double-digit price increase in branded drugs, partially masked by the generic cliff, combined with the introduction of costly new specialty drugs, have raised the ire of corporate executives. By 2018, the cost of drugs is expected to exceed that of physician services.
Health care coalitions are trying to address these issues, but their activities still remain somewhat disjointed.
WHEN THE TRANSFORMATION HAPPENS, IT WILL BE MARKET BY MARKET
Investors and restructuring personnel should focus their efforts on local market dynamics. All healthcare is local, and sustainable profitability will depend on a myriad of factors including market share and execution capabilities. Provider efficiency and effectiveness will become paramount, and lead to shifting sites of service. Healthcare, for once, may actually begin to act like most non-healthcare businesses and compete on the creation of value.
As with most investment opportunities, timing will be paramount in an increasing complex healthcare ecosystem that is subject to cross-currents of reimbursement change.
*David Gruber, MD, MBA, is a managing director with Alvarez & Marsal Healthcare Industry Group. You may reach him here.
Published by DLA Piper LLP (US) Copyright © 2015 DLA Piper LLP (US) All Rights Reserved This bulletin is intended as a general overview and discussion of the subjects dealt with. It is not intended, and should not be used, as a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising. Circular 230 Notice: In compliance with US Treasury Regulations, please be advised that any tax advice given herein (or in any attachment) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another person any transaction or matter addressed herein. DLA Piper LLP (US) is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. Further details of these entities can be found at www.dlapiper.com. All rights reserved.
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