The US Healthcare Bubble and The Age of Disruption

Maureen M. SwanPresident

MedTrend IncMinneapolis, MN

May you live in interesting times…Chinese proverb

Total US Expenditures – The Healthcare Bubble1960-2017: Population has grown 1.8X, inflation adjusted healthcare expenditures 8.7X

$1,245

$2,285

$3,320

$5,412

$7,037

$9,725

$10,739

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1960 1970 1980 1990 2000 2010 2017

Inflation adjusted per capita costs

Inflation adjustedPer Capita Costs Grew3X between 1980 and 2010

Source: Statista, inflation adjuster

“Hospital Services” Price Changes Tops All Other Areas of US Economy

1998-2018

Far Above the Change in Average Hourly Wages

The Nation is Moving to 58% Medicare, 73% Government Payer Mix by 2022

42%58%

19%

15%

33%25%

6% 2%

0%

20%

40%

60%

80%

100%

120%

2012 2022

Self Pay

Commercial

Medicaid

Medicare

61% 73%

Source: CMS 2013 Annual Report; Kaiser Family Foundation 2016

5Source: CMS, MN Dept of Health

How Does Government Pay For Healthcare?U.S .Strategy is Debt. Can Government Just Add More Debt?

Source: St Louis Federal Reserve

Increasing Prices – Not Utilization-Drive Health Care Spending Growth

Source: Health Care Cost Institute Study 2018.

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

% C

han

ge S

ince

20

12

Cumulative Change in Price and Utilization, 2012-2016

24.9%

24.3%

17.7%

14.6%

1.8%

-.5%

-2.9%

-12.9%%

Price

Utilization

DrugsInpatient

OutpatientProfessional

DrugsOutpatientProfessional

Inpatient

Why Healthcare is Different

1. Not a discretionary/ elective spend

2. “One” product solution:– Housing: rent an apartment to buy a McMansion

– College: community college to Harvard

– Heart attack: cath lab/ surgery. Period.

3. It’s paid by “someone else”– Reducing my consumption doesn’t improve my economic position

– Reverse incentive: maximize consumption because I already “paid”

But A New Day is Emerging…

How are we Doing as a Country with Healthcare?

10Source: Health Care Spending in the United States and Other High-Income Countries, Irene Papanicolas, PhD; Liana

R.Woskie, MSc; Ashish K. Jha, MD, MPH. JAMA | Special Communication, JAMA. 2018;319(10):1024-1039.

doi:10.1001/jama.2018.1150.

Measure United

States

Rest of

World

How does the

U.S. Compare

Percent of GDP 17.8% 9.6 to 12.4% Worst

Population > Age 65, Percent 14.5 % 18.2% Youngest

Smoking Percent 11.4% 16.6% Second Lowest

Overweight/Obese 70.1% 55.6% Worst

Life Expectancy (years) 78.8 81.7 Worst

Infant Mortality, deaths per

thousand live births

5.8 3.6 Worst

Administration cost as a percent

of total health costs

8% 1 – 3% Worst

Pharmaceutical Costs per capita $1,443 $466 - 939 Worst

Annual Salaries – Generalist

Physician

$218,173 $86,607 –

154,126

Highest

Countries: United States and ten other highest-income countries (United Kingdom, Canada, Germany, Australia,

Japan, Sweden, France, the Netherlands, Switzerland, and Denmark

2 in 3 Americans Stressed about the Cost of Health Insurance

• 66% of adults are stressed about the cost of health insurance.– Households with income > $50,000: 69%

– Households with income < $50,000: 64%

• Respondents from urban areas reported more stress than those living in suburban or rural areas

Source: Harris Poll,

June 2018 .

Employers Stressed:Premiums Keep Going Up

$11,192

$13,382

$15,609

$18,074

$20,718

$23,215

$25,826

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2004 2006 2008 2010 2012 2014 2016

Source: Milliman Medical Index

Employee portion: 42.5%Employer portion: 57.5%

46% of US Median Household Income

The Question for Healthcare

If there is a limit to US debt, what will fund our bubble?

• 55%+ of our funding= government

• 30% of 2017 government spending funded by DEBT

But A New Day is Emerging…

1. Alternatives are growing:– Retail clinics at $66

– International: surgery for $11K versus $90K

2. High deductibles/ co-insurance puts patient skin in the game

– Accelerating disruptive innovations

3. The public doesn’t see the value– Clinical outcomes studies may “reveal” where there is low value and

high cost (spine surgery)

– Seen as outrageous prices

Healthcare Leaders Expect Disruption

• 65% of healthcare leaders say hospitals and health systems are a sector most in need of disruptive innovation

• 36% say primary care needs disruption

• 54% say it will come from start-ups

Source: Insights Report, February 16, 2017

A Super-Sized Healthcare Industry

Pharma Companies

• Johnson and Johnson $70B

• Amgen $22B

• Merck $40B

• Pfizer $48B

Hospital Companies

• CVS $146B

• Walgreens $103B

• Walmart $485B

Retail Pharma Companies

• HCA $39B

• Tenet $18B

• Community Health $19.5B

Insurance Companies

• UHG $147B

• Anthem + Cigna $115B

• Aetna + Humana $115B

New Networks Without a HospitalMajor Vertical Integration Activity Completed, Proposed or Rumored

AETNA ANTHEM CIGNA HUMANA UHG

AMBULATORY CLINICS

Minute Clinic

Walgreens OptumCare/ MedExpress

HOSPITAL

POST ACUTE PROVIDER

Aspire Health

Kindred, Curo

DaVita

PBM Caremark IngenioRx Express Scripts

Humana Pharmacy Solutions

OptumRx

PHARMACY CVS Walgreens Genoa Healthcare

RETAILER CVS Walgreens

New Competitors, New Strategies

1. Go after low fixed cost, high volume segments

2. Create consumer friendly, highly convenient, integrated digital and in-person experience

3. Combine health promotion, non-acute care, and insurance to align care and payment and truly manage costs

Marginalize The Hospital

Source: Trustee Insights. “Surviving Disruption in Healthcare,”Ken Kaufman. July 2018.

Hospitals Today

• Offer digital tools and information to enable consumer engagement

• Offer a range of virtual or telehealth access points

• Offer messaging between patients and providers

14%

40%

<25%

Source: Trustee Insights. “Surviving Disruption in Healthcare,”Ken Kaufman. July 2018.

CVS/ Aetna

• CVS to acquire $69B Aetna = $240B company

• 9,700 CVS Stores –

– 1 every 10 miles for 50% of US population

• CVS already owns MinuteClinic

• CEO : “Retail clinics are the front door to the health system… we will expand them.”(JP Morgan

Healthcare Conference, 2019)

– Turn the retail stores into health centers and align incentives for care and cost

Driving value to consumers

UHG/ Optum$185B in Revenue

• Acquiring Clinics/ Outpatient Only• Over 47,000 physicians employed

• DaVita $4.9B acquisition: 280 clinics

• MedExpress Urgent Care

• Surgical Care Affiliates $2.3B, 190 surgical centers

• $2.2B physician staffing firm

• Polyclinic (Seattle)

New Competitor?Outsiders Salivating at the Opportunity in Healthcare

• 59% of healthcare leaders see Amazon as “most likely to disrupt healthcare.” Apple was 2cd at 14%. (HCAB Survey, 2018)

• Amazon invading the traditional medical supply chain business to squeeze out waste

• “Our balance sheet is so strong, there is low risk to Amazon to try lots of disruptive services in healthcare. If even one idea sticks, the upside opportunity is enormous.” Former Amazon Executive at a Health System Retreat

What 'Amazon health care' could look like in 5 years

1. Employer Aggregator (JP Morgan & Berkshire Hathaway)

2. NexGen Retail Pharmacy (PillPack & Basic Care)

3. Global Healthcare Logistics Co. (Summit Pacific Medical Center)

4. Consumer-Focused Technologies (Alexa, EHR, transparency tool, health insurer)

5. Primary Care Operator (PCP Pilot Underway, Whole Foods)

Domestic Medical Tourism

Telehealth Booming

Source: CMS; Carenet Healthcare Services, 2017; Healthcare Financial Management Association;American Hospital Association.

Year-over-year Medicare Reimbursement for Telehealth Services

0

5

10

15

20

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

$2.5

$17.6

• 78% of consumers say they are interested in virtual health care (some or most of the time.)

• 35% of employers offer telemedicine services on site; moving to 50% by 2020.

• Remote home monitoring a future required competency.

2020 Estimate: 26.9M virtual doctor visits

Apple

• Former Apple CEO, John Sculley told CNBC:

– “If you zoom out into the future, and you look back, and you ask the question, 'What was Apple's greatest contribution to mankind?' It will be about health. ... We are democratizing it. We are taking what has been with the institutions and empowering the individual to manage their health.“ (January 10, 2019)

Mobile Centric CareConsumers Increasingly Use Devices for Healthcare Tasks

Percentage of consumers who used a computer, smart phone, or other device in 2017:

Managing Healthcare– Find a provider 24%

– Track charges and costs 34%

Communicating with Providers– Email or via internet 35%

– Text 29%

Doing health-related tasks– Paperwork online 41%

– Schedule doctors appt 40%

Source: Office of the National Coordinator for Health IT;Health IT Quickstat #57, April 2018

Growing Digitization of Care

Expanding Network of Options AvailableProviders Competing to Draw Patients Upstream

Ambulatory Care Options

Primary Care Office

WorksiteClinic

FQHC1

Freestanding Emergency

Department

Retail Clinic

High Acuity Low AcuityEmergency

Department

Urgent Care Center

Primary Care Network

Virtual Visits

Mobile Apps

In-store Kiosk

Remote Monitoring

Email

Source: HCAB 2017

Source: HCAB

1990’s He who has the doctors wins

(with bricks)

2020+He who has the doctors and data wins

(with or without bricks)

How Will You Respond?What Business Will You Be In?

Hospital Expenses Outpace Revenue Growth2013-2017 Hospital Medians

5.30%

4.30%

6.50%

7.50%

5.80%

4.50% 4.30%

7.60%

6.80%

4.60%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2013 2014 2015 2016 2017

1.6%Median operating margin for non-profit hospitals,

2017

An all time low

Source: Moody’s Investor Service.

Payment Reality: All Roads Lead to Less

Strategies to Survive: Change the Care/ Model

– Radically reduce cost structure- Break-even on Medicare• Labor and supply costs

• Minimize unnecessary clinical variation

• Fixed cost re-structuring and alignment, especially inpatient

• Consolidate programs

– Consolidate to get scale

– Partner with providers to design an optimal network

Louisiana: High Opportunity to Improve Value

Source: Commonwealth Fund, 2016

Accountable Care Organization (ACO) Development and Implementation Still Growing

Source: Muhlestein D. “Growth And Dispersion Of Accountable Care Organizations In 2017”, June 28, 2017 Update, Leavitt Partners, Health

Affairs Blog. https://www.healthaffairs.org/do/10.1377/hblog20170628.060719/full/ Last accessed March 31, 2018.

38

Most Providers in ACO’s: Still No Real Risk16% of Medicare Enrollees in an ACO

Source: CMS, Becker’s Hospital Review ; National Associationof ACOs Survey*A subset category so doesn’t add to 100%

Medicare Risk Models

MSSP Track 1 MSSP Track 1+ MSSP Track 2 MSSP Track 3 Next Gen ACO

• Option to renew for second three-year team

• Savings rate kept at 50% for second term

• Envisioned as new on-ramp on Tracks 2 and 3

• Offers limited downside risk

• Shared savings, loss rate remains at 60% based on quality performance

• Shared savings up to 75% shared losses from 40% - 75% based on quality performance

• Risk arrangements include 80%-85% sharing rate or full performance risk

• Prospective Assignment

Upside Risk Only Downside Risk

439 Participants Coming in 2018 6 Participants 36 Participants 45 Participants

91% 1% 8% 9%*

MACRA accelerating participation:117% in downside risk ACOs 2016-2017

ACO Performance Improving With TimeBut Net Negative for CMS

Source: CMS.

Performance Year 2014 2015 2016 Percent Change

(2014 - 2016)

Total Participating ACO’s 353 404 484 + 37%

Net Savings Relative to Benchmark

$411M $466M $761M + 85%

Total Bonuses Paid $423M $684M $796M + 88%

Net Result to CMSIncludes provider bonuses/penalties

($2.6M) ($216M) ($5.2M) -100%

Total ACO Participation and Performance, 2014-2016

ACO’s Version 3.0Pathways to Success 2019-2023

• Goals• Force downside risk

• Reduce gaming

• Encourage use of tele-health and EHR

• Allow Medicare to save money

• Replaces the Three MSSP Tracks to Two

– Basic -- Must assume risk by 2020

– Enhanced– 5 Years (not 3); Financial risk sharing phase in after two years

– Savings 25% (was 50%)

CMS Priorities:Drive Provider Performance

(1) Advance Value Based Care

• New ACOs force down side risk

• Interoperability promoted

• Bundle payments coming back

(2) Promote Role of Independent MDs

• New ACO tracks allow greater flexibility

• MACRA rollout slowdown

• Site neutral payments would benefit independent MDs

(3) Encourage greater transparency

• New price transparency tool: Outpatient Procedure Price Look-Up

• Hospitals required to publish chargemaster rates

Source: Azar, A, “Remarks on Value Based Transformation to the Federation of American Hospitals,” HHS, March 5, 2018.

Minnesota Payment Experiment Learnings

1. It’s all about having enough “lives” = primary care

– Hospital consolidation driven by lives, not beds

– Which markets bring maximum “lives” potential

– Owning primary care

– New success metric= lives/ beds

Minnesota Payment Experiment Learnings

2. Data integration : access and measurement across the system

– Enormous challenge and MD pet peeve

– Ultimately access to claims data

– Strategic risk– health plans have our data and know more than we do

Minnesota Payment Experiment Learnings

3. Clinical pathways/ best practices required

– MD driven or nothing sticks

– Specialists don’t want things they shouldn’t see (knee pain)

– MD resistance on any revenue impact

• Example: spine surgery

Minnesota Payment Experiment Learnings

4. Specialty and hospital capacity: +10-20%

– MN efficient, but models still suggest significant over capacity

– Everyone believes they can steal share and not downsize

– Significant “feed the beast” challenges

Minnesota Payment Experiment Learnings

5. The culture won’t change without economic, clinical, and governance alignment

– Physicians must be involved, engaged, leading… probably the #1, #2, #3 success factor

6. Go too fast and you’ll get burned $

7. Data / pricing transparency is compressing price spreads

8. Who makes the investments and who accrues the savings? (healthplan fights)

9. Limit to ACOs and their savings– capitation or bundles

Winners will have:

• A relentless focus in all areas of their Health System to reduce cost – the new normal

• The creation of value – clinical outcomes, experience and total cost of care leaders

• An ability to accept and manage risk

• Engaged physicians and employees

Despite All This Change, There Will Be Winners

48

May you live in interesting times…Chinese proverb