What's Keeping Healthcare Execs Up at Night?

The behemoth that is the U.S. healthcare business 

The U.S healthcare business consumes 17.8% of the United States’ GDP (Gross Domestic Product). The Center for Medicare and Medicaid Services reported that in 2015, a mind-boggling $3.2 trillion was spent on healthcare, for an average spending of $9,990 per year, per person. Moreover, the same organization has projected spending to grow close to 6% per year. 

In any other industry, executives would be gleeful at the prospect of potential revenue and growth that is nearly 3 times the projected growth rate of domestic GDP. Not so much when it comes to healthcare. Indeed, this growth in spending actually creates problems as a cast of different players compete for dollars that are being shifted from other priorities.  

Six of the biggest issues that come up in conversation

1. A shift to value-based reimbursement and an increased focus on performance, not activity.

No doubt, the current fee-for-services model for delivering care has a lot of flaws. What we haven’t figured out, is how to pay for the outcomes we want, not just the services that are consumed. Relative to the heat and furor over the discussions surrounding the dismantling of the Affordable Care Act, some of the biggest changes in the U.S. healthcare system are getting very little attention.

One big change is called the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA. This act fundamentally changes the way the largest payer in our system, the Centers for Medicare & Medicaid Service (CMS), covers services. MACRA works by eliminating the payment calculations previously used for physicians and establishes two tracks that aim to reward physicians for higher quality outcomes: 1) Merit-based Incentive Payment System (MIPS), and 2) Advanced Alternative Payment Models (AAPMs).

The documents describing the new MACRA rules run into the thousands of pages and yet, the calculations underlying how physicians will be rewarded are not yet clear. Many players are fretting at what the cost will be to implement the reporting requirements, with some estimates that the implementation cost for care organizations could run into the millions of dollars. 

 Aside from MACRA, there are numerous initiatives to align incentives in the healthcare system to focus on patient outcomes, including the rise of accountable care systems.

The most significant barrier to the adoption of an outcome-based approach is that healthcare costs and benefits throughout the system are fragmented. A change that benefits the system as a whole, does not necessarily pay back the entity that paid for it. For instance, Gilead Sciences, Inc. discovered a curative set of tablet-based treatments for the devastating liver disease, hepatitis C. Because the treatments cure the disease, a lifetime of costly and inconvenient services can be avoided after an 8-12 week course of treatment. The catch? The drug costs between $63,000 and $94,500 per treatment, and that cost is borne either by insurance companies or patients themselves. Some players see the cost very clearly, but the benefits only diffusely.

2. The dog that caught the bus – what will the new administration do with the Affordable Care Act?

The Affordable Care Act (ACA), which, astonishingly one-third of the people surveyed in a recent poll did not know is the same thing as Obamacare, is a favorite target of Republican politicians. Somewhat surprisingly, given the bad reputation it had under the last administration, the ACA is more popular now than ever, as millions of people without coverage before have signed up. Despite issue such as rising premiums and insurers pulling out of certain markets, the ACA seems to have accomplished at least some of its ambitious goal of reducing the number of uninsured American people.

In the ‘no good deed goes unpunished’ category, the outcomes for those providing care are not necessarily all good. One hospital client of mine found that, as the ACA became more widely used, the patients who are now seeking treatment because they have coverage (good) are sicker, because they had not availed of preventive care, which tends to increase both hospital costs and the risk of re-admission (bad). The result was that they treated twice as many people as the previous year, but the payments remained exactly the same. This cannot last.

3. Cherry picking the lucrative segments of the market.

With all that money sloshing around the healthcare business, and physicians increasingly frustrated by the paperwork and bureaucracy of traditional practices, concierge medicine has started to appeal to many. In this model, patients pay a subscription or retainer fee for full access to a doctor’s services, sometimes going as far as getting 24/7 service. 

The risk for other care providers is that as the concierge idea spreads, they may be left with patients who are less able to afford care, resulting in concentrating costs while eliminating revenues.

4. A pox on both your houses – new business models that avoid the whole mess.

Similar to the concierge idea, but different in that insurance doesn’t factor into the equation at all, are flat-fee providers such as Seattle-based Qliance Medical Management, Inc. In this model, patients pay a subscription, but there is no interaction with insurance companies or reimbursement of any kind. The folks at places like Qliance argue that they can save 30% of their total budget by avoiding the administrative burden and paperwork of the conventional system. 

So far, it seems to be working pretty well. Independent surveys report 30% lower levels of cost, with higher patient satisfaction and better care.

5. New treatments, but at what cost?

The wonders of modern medicine are marvels, indeed, extending life-spans and quality of life for millions of people. But, many of the most advanced treatments also come at advanced cost, as providers seek to develop targeted therapies for niche markets. The debate is on as to whether it is legitimate for pharmaceutical companies to charge what they do for important new treatments, with courses of some drugs costing as much as a luxury car. 

When compared with other healthcare systems, people in the United States pay significantly more for the same therapies, with no noticeable difference in measurable health outcomes. Part of the reason is a mistake Congress made in voting itself a ‘most favored customer’ clause. This clause requires entities, such as pharmaceutical companies, to offer the federal government the best price offered to anyone. Counterintuitively, this undercuts the ability for any players in the system to strike a tough bargain, because the pharma companies would point to that clause and say they can’t afford to offer a better deal. This provision, however, is not the result of a natural law and it might be changed, if the legislature decided it was time.  

6. If something can’t be sustained, it probably won’t be – challenges to the “Big Pharma” model.

Which brings us to the tattered public image and real challenges facing major pharmaceutical firms. This lack of trust isn’t helped by the practice of some firms acquiring old drugs and jacking up their prices or using their monopoly power to raise prices for essential treatments (we’re looking at you, Mylan!). R&D productivity has dropped, which results in it taking more time and money to identify and market new treatments. And, unlike the rest of the world, U.S. pharmaceutical companies are allowed to market directly to consumers, to the tune of an astonishing $5.4 billion.

While major research-based pharmaceutical companies have been innovative in searching for cures for diseases that affect only portions of the population, the DNA of the huge margin, huge investment, hugely profitable blockbuster drug era remains. The real question is how long can the existing business model retain its legitimacy among critical stakeholder groups. 

A resource for those interested in a deeper dive on these topics is Columbia’s Healthcare and Pharmaceutical Management Program – their annual conference just took place on February 24, 2017.