Thursday, April 16, 2015

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Experts say legislation to reform health care could mean a new era of consumer power.

By Jim Stinson

The business of health care has perhaps never been so scrutinized in the history of the nation.

And for the first time in US history, a comprehensive federal program oversees all such health care delivery in the country—health care delivery to the young and old, to the rich and poor, and to the insured and uninsured. A new law mandates health insurance coverage for individuals, using increasing financial penalties to encourage enrollment in some kind of minimal health insurance program.

While the Patient Protection and Affordable Care Act of 2010 (ACA) is not a single-payer insurance program, and not as comprehensive as systems in Canada and the United Kingdom, its regulations and reach are far and wide within America’s predominantly private system of health care business.

Health care observers affiliated with the Simon Business School do not believe this law has hobbled the nation’s dynamic health care sector. What some see are bigger, market-related changes driven both by consumers and market forces, pushing the ACA’s influence to a second-place finish in shaping the present and future state of the health care business in the United States.

Who comes in first in the influence game? The consumer will, the experts say. The changes will ultimately make the business of US health care stronger and more efficient, these observers believe.

University of Rochester professor and retired
Excellus CEO David Klein says consumers will
do their best to maximize health care value.
“The sea change is the ‘Walmartization’ of health care,” says David H. Klein, a special adviser to the senior vice president and CEO of the University of Rochester Medical Center and a faculty member in the Department of Public Health Sciences and at Simon. “Consumers will do their best to maximize value,” he says.

That means consumers—facing new health care rules, new costs, new medicines, and new technology—will have to make choices, as they do in other consumer areas. It means health care consumers will also more aggressively decide how much coverage they need, and how much health care they should apply to each health situation they find themselves in. It sounds like every other consumer sector, but health care business has often shoved costs onto third-party payees, with little discussion of costs and benefits.

That is changing, industry analysts say. Such “consumerization” of health care is perhaps not what President Obama envisioned when the landmark health care law passed in 2010. But it was not something discouraged by the law, either—consumers taking control of their health costs. And the drivers of the US health care sector—which constitutes about 17.9 percent of the US economy, according to the World Bank—are accelerating, says Gerard J. Wedig, an associate professor of business administration at Simon Business School.

Consumers are going to notice changes in how their health care is delivered and how they pay for it. One such change, Klein and Wedig note, is the rise in deductibles for consumers.

It means some health care consumers, for example, have to spend $1,000 or $5,000 annually before their insurance providers kick in with their share. Deductibles, which began their rise before the seal of the ACA was placed upon the health care sector, are bound to get consumers asking more pointed questions about what procedures they need. It means consumers will have more “skin in the game,” with third-party payers responsible for fewer medical bills. That will make consumers take note of their services and costs, moving the health care sector toward a consumer-based model. “That was going on without Obamacare,” says Klein.

It also means that people who didn’t think they were getting the proper amount of value given the cost will now demand the value because payment is coming out of at least two pockets. Such changes in the health care system are often obscured by the ongoing political debate on the effectiveness of the ACA, says Wedig. Larger, market-based changes are happening. And regardless of the political debate and legal challenges to the ACA, changes were needed to the US health care business, according to industry observers. Those changes are now being applied, especially in the form of higher deductibles.

“Long term, most will agree that with or without the ACA, changes were needed, and not only because of a public policy or social need, but rather a financial need to ensure that health care costs do not continue to rise faster than the gross domestic product and, more important, faster than consumers’ earning power,” says Walter Olshanski ’05S (MBA), the director of Healthcare Investment Banking at KeyBanc Capital Markets. “Something had to be done about costs,” Olshanski says.

Statistics from the World Bank justify that concern. In 2012, the United States was ranked as the third-highest spender on health care per capita at $8,895; only Norway ($9,055) and Switzerland ($8,980) spent more. Yet, no nation outspends the United States on health care when expenditures are divided by gross domestic product.

The United States spent 17.9 percent of its GDP on health care in 2012, up from 17.7 percent in 2010 and 2011. The only large, developed nation that comes close is the Netherlands, at 12.4 percent in 2012. The per capita costs are also out of sync with most developed nations, even those with single-payer health insurance. Canada, with its single-payer system, spent $5,741 per capita. Japan, whose citizens have an average life span that is four years longer than those in the United States, spent $4,752 per capita in 2012. The trend of US costs is not stabilizing: 2012 US per capita expenditures were up 7.8 percent since 2010.

“The future expected costs would appear to be unsustainable in the current status quo,” says Olshanski. “The rise of the high-deductible health plan offerings by employers is one data point supporting this claim. It is not atypical for a high-deductible health plan to have a deductible of $5,000 for family coverage—and is often higher for a silver plan on a health care exchange. Higher deductibles tend to decrease utilization.”

The long-term financial need for changing the way health care is delivered is likely to affirm a reforming of the health care system, Olshanski says. Consumers, employers, and government health officials are demanding more for each dollar spent, he says. Meanwhile, the health care business is seeing a challenge in recruiting talent. A possible shortage of doctors and nurses appears to be solving itself, and signs are emerging now that medical labor supply is healthy, says Klein, adding that more physicians and even nurses are graduating. That is an important development. Nurses in particular have been in demand, and hospitals recruit aggressively, even from each other.

The US Bureau of Labor Statistics (BLS) found the workforce of registered nurses could grow from 2.71 million in 2012 to 3.24 million in 2022, an increase of 19 percent. And because of replacement needs, the total need for nurses will be 1.05 million by 2022, according to the bureau and the American Association of Colleges of Nursing.

Klein said there are clearly doctors leaving the industry, but more students are going to medical school than ever before. It’s a classic case of supply and demand, he notes. It’s not surprising that the health care industry continues to draw workers, despite its challenges. The BLS reported that average annual pay for registered nurses in 2012 was $65,470 in 2012; for general internists, average annual pay was $191,520. Wedig notes the health care industry was one of the few sectors to sail fairly smoothly through the Great Recession of 2007–2009. Health care is often called a recession-proof industry, he says.

The Affordable Care Act’s legal hurdles

But a big question mark in the future of US health care is the legal status of the ACA.

The law cleared a major hurdle in 2012, when the Supreme Court of the United States ruled, in a 5-to-4 decision, that the act did not violate the Constitution.

Its individual mandate, which fines individuals for not having health insurance, was ruled by the court to be a tax, not a fine. The federal government was therefore reasoned to have not forced consumers to have to purchase a product. But new legal challenges await, and they are substantial. Paul Shanahan, a Rochester attorney and longtime Simon School lecturer, believes the big legal hurdle is a challenge to the Internal Revenue Service regulation that allows tax subsidies for those enrolled in the federal health exchanges. Some state governments have opted to not set up exchanges. Providing an exchange was supposed to be a slam-dunk for states, even those whose lawmakers opposed the Affordable Care Act, because of subsidies or tax credits.

But the text of the ACA provides for subsidies only for those enrolled through “an exchange established by the state,” Shanahan explains. Nonetheless, 37 states opted out of setting up exchanges, and the federal government stepped in to operate them. Yet that fact reveals a thread that could be pulled to unravel President Obama’s signature law. The US Supreme Court has agreed to hear King v. Burwell, which exposes this possibility. Shanahan believes the case could be heard in April and decided by June. The Miami Herald reported in November that if successful, the lawsuit would pull tax credits from 4.7 million people in the 37 states. That consequence could “implode” the law, in the minds of its critics.

“There are numerous other lawsuits challenging the ACA based on infringement of religious freedom and separation of powers, but the King case seems to be a straightforward challenge that would torpedo the Affordable Care Act,” says Shanahan. “Simply stated, without the federal exchanges, the Affordable Care Act is gutted since a substantial majority of states operate the ACA through the federal exchange.” Still, few want to bet that the federal government, which has already expanded Medicare and Medicaid substantially since 2002, will retreat in any large measure from the sector, even if the federal government loses a few rounds in court over the ACA.

Olshanski says some health insurers are behaving not only as if the ACA is sticking around, but also that single-payer insurance could be coming for all Americans, which would be a huge change for the US business of health care. “A sub-sector casualty could be the traditional health insurance underwriting business,” he says. “It is quite obvious that most large health insurance companies are acting threatened by the potential of a single-payer system. One only has to look at the diversification of companies like United Healthcare Services Inc. and Aetna to see that the recent strategy is to acquire capabilities away from the underwriting book of business.”

Investments in the range of billions of dollars have been spent to achieve this diversification, Olshanski says. It was all spurred on by the discussion of health care reform, and then accelerated after the passage of the ACA. “I [remember] one of my economics professors at the Simon School commenting that managed care has failed to produce value in the continuum of health care,” Olshanski says, “that costs have not been managed, but rather simply just more efficiently adjudicated in a pass-through manner.”

And yet, opportunity for investors and innovators

Regardless of the fate of the ACA, the market forces and demands of the US health care sector march on. The graying of the US population will cause a greater need for elder care and the maladies that occur in old age. And while demand for medical and nursing services will rise as more baby boomers retire, health care businesses such as technology and pharmaceutical companies will be forced to innovate. The “blank check” for any treatment, device, or pill—once paid with few questions by a third party—is gone, says Wedig.

Olshanski says investors are seeking opportunities to create a more efficient health care business marketplace. One tactic they could use is “disruption”—the introduction of new and perhaps unorthodox methods to deliver goods and services, usually in a manner that substantially alters the future game for an industry. “Lots of industrious brainpower and investor funds are trying to figure out how to create a more consumer-oriented health care system,” he says. “And given the opportunity cost for searching out investment vehicles for achieving returns, the focus of investors on health care should show us that it is ripe for disruption.”

Olshanski says the issue of innovation and disruption in health care can be complex. It requires looking at how health care is delivered from medical practitioner to patient. It requires looking at the professional medical and health care guilds that exist; it requires examining the fact that health care exists as mainly a local delivery service, with limited competition; and it requires working with a substantial amount of regulatory oversight as well as the potential for sustaining large liabilities.

All of these factors help to prolong an inefficient business model for health care, Olshanski says. It’s a model where the challenges to capitalists, innovators, disruptors, and others are clear. “One very poignant explanation that health care operates in an inefficient way was provided in an article recently published by Modern Healthcare, where it is mentioned that in the middle of a heart attack, no one yells, ‘Let’s go shopping!’” Olshanski notes.

But in non-emergency situations, the potential for game-changing innovation appears to exist.

Simon faculty member Klein said a future investment area could be analytics. That would entail looking at a diagnosis and a plan of treatment differently, and applying corresponding changes in care.

For example, if a patient needs a new hip, it may be better to keep the patient in the hospital longer, rather than send the patient to rehab services. Data is emerging to show that conventional wisdom about hospital stays in such cases is changing.

It was thought discharging patients quickly could save money. But, Klein notes, if patients are discharged too quickly, they may come back. He calls this “serial admission.” There will be more at-home care, Klein says, and a higher level of quality of this kind of care; care providers are likely to engage in more telemonitoring of patients. And there will also be better discharge management—made possible by better data and analysis.

Data analysis will also mean some tough choices. Doctors can create more demand for services when they ask for a physician’s assistant or an advanced practice registered nurse (APRN). “Well, you know, not everybody has those, and not everybody gets those,” says Fred Borrelli ’94S (MBA), ’07S (MS), chief operating officer of Yale Medical Group, a New Haven, Connecticut-based academic group practice, who received his MBA and his master’s in Medical Management from Simon. “But everybody asks for them. So, what happens typically is people start making business plans, they start making assumptions—and what typically derails that is they’re not fact-based or data-based.”

Without proper analysis, Borrelli says, an inefficient allocation of resources can happen.

“Institutions are much more apt to make decisions based on good, sophisticated, thought-through data,” he says. “You don’t want to just allocate [resources] inefficiently, and then realize that you’re allocating to the wrong service for the wrong reasons.”

Wedig calls this “allocation efficiency.”

But analysis and allocation choices need information and data. There has been some hesitancy in the industry in sharing data, even if the goal is improving care or reducing costs. “An important factor to managing care and cost effectively while achieving quality is to combine clinical data with financial data to allow for outcomes-based data analyses relative to costs,” says Olshanski. “The great challenge has been to get providers and payers to supply complete and consistent data to an independent third-party organization, such as an information exchange, and then use that data to standardize care protocols and cost metrics.”

How doctors and health care providers assess

The business of health care has long been based on doctors being advocates for their patients.

While that generally won’t change, a deeper look at what outcome is expected will come to play as market forces shape the new business of medicine, says Wedig.

One of the factors driving this change will be the pressure on taxpayers to honor the very large promises made to baby boomers. Twenty percent of the population was born between 1946 and 1964, and they are retiring, putting pressure on Medicare. There are only so many dollars in the economy to treat the nation’s population, so there are more questions about undertaking care, research, innovation, and improvements. The United States has normally been a health care market that would gladly pay for almost any improvement in the delivery of health care, even small ones, says Wedig. Health care officials and businesspeople believed these improvements would have some payoff.

Now, there is going to be a greater cost-benefit analysis, Wedig says. That means even technological innovations won’t get a check as easily as they did in the past.

The doctor-patient model could also see some change. Wedig says the industry could go from almost complete patient advocacy to asking more consumer-based questions, such as, “What value will we add and how will it benefit the patient?” Costs will be scrutinized, moving away from an expectation that a health insurance provider will pay 100 percent of the costs. Costs are still not questioned too much today because of the third-party payer. “We see the health care system moving in that direction,” says Wedig.

Olshanski believes the future state of the health care business is one where the nation moves away from sick care to a new definition of health care. “Think pre-emptive care and ‘right care at the right time,’ which has become a buzz phrase,” says Olshanski. “Wellness initiatives are making great headway, especially at employer groups that are trying to find ways to reduce costs.”

Already, some disruption is going on in the health care business, especially where patient interaction is involved. Olshanski says one insurer provides a monetary incentive for employees to volunteer health-related information, as well as signing up for certain wellness initiatives. And the concept of “creating value” instead of “offering service” is being seen in hospitals, in their discussions and lexicons.

“The phraseology nowadays at most hospitals is to move away from the traditional fee-for-service model to a fee-for-value model,” says Olshanski. 

The industry is also asking for more technology. Hospitals are first being provided incentives for simply installing electronic medical records and using apps, or computer applications. Again, this makes analysis easier. But information in general is always valuable in any industry. “Information will be key,” says Olshanski. “Many experts would agree that the success of health care reform hinges on obtaining and measuring information.

But investors shouldn’t worry too much. There is still tremendous promise in the health care business, says Wedig, ranging from biotechnology to information technology. And educational institutions such as the Simon Business School are rising to the task of training managers for the 21st century. Yale Medical Group’s Borrelli notes that Simon has prepared him for the health care business, “to be able to basically meet with very, very high-powered people at a hospital health system who were going to make financial decisions about investing in new recruits, investing in new programs, new technology, or even staffing, small- to large-scale. You have to have that ability to go into an environment where you really weren’t known and establish instant credibility that, hey, this person understands the whole picture.”

KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC, and KeyBank National Association ("KeyBank N.A.") are marketed.


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