This article submitted by Kendrick Jackson, SVP Continental Benefits
After Healthcare’s “Katrina”, Who Wins/Loses?
Published on November 27, 2016
Dave Chase– Executive Producer at The Big Heist (Super Size Me + The Big Short for healthcare)
PwC asked me to speak at their recent global healthcare event, PwC’s 180° Health Forum. As is often the case at events, the most interesting conversations occurred before and after the sessions. I was asked to share my perspective on trends and investing opportunities. I thought I’d share what I discussed with the people I spoke with at the PwC event. My selfish goal in this post is to have you pressure test my ideas and tell me where I’m off-base. My hope is that I’m more right than wrong and your input will increase the chances we’re making the right bets. Please weigh in via the comment box below.
What almost everyone failed to talk about during this presidential election was how long this slide towards stagnating and declining wages has been happening for 20 years — and at least 95% of that was caused by healthcare. Typical was NPR’s whiff after the Michigan primary despite a Dartmouth economist pointing out the connection between Bernie, Trump and out-of-control healthcare – Healthcare Drives Middle Class Economic Depression & Trump/Sanders Campaign Success.
If there is one thing we can take away from the recent election is that status quo was put on notice.
Healthcare stole the American Dream. Here’s how we take it back.
The previous statement is the title of my TED talk this week. The following is what I’m going to open up with:
Healthcare stole the American Dream. But I’m excited to tell you a story about how forward-looking citizens, nurses and doctors are taking it back by fixing healthcare. And it’s working.
Think the American economy has recovered? Well if you look at the middle class, think again. Middle class income has been declining for 20 years. Remember most of the middle class get their health benefits through their job. Healthcare is, by far, the biggest reason why 70% of households have less than $1000 saving. The problem isn’t that employers have been stingy over the last 20 years. Employers are spending far more on employees than ever before. The problem is every dollar and then some has gone to healthcare because for too long, employers have mismanaged the way they purchase health benefits.
The point of sharing this is to recognize that we have likely reached a tipping point where healthcare’s devastation of virtually every social determinant of health has come home to roost. Seeing data like the graph below and looking at the recent election paints the future quite clearly in my mind. My bet is modest, incremental change which has been the model (especially in the commercial side of healthcare) of the past won’t be what happens in the future.
2017 Prediction: For the middle class, an event more impactful than the ACA
Some wonder why a guy who has spent his entire career in technology has become focused on health benefits. The short answer is that every time I did a root cause analysis of some dysfunctional aspect of healthcare, it always came down to the fact that we purchase healthcare incredibly foolishly in this country (in both the public and private sector). The fact is more Americans get their health benefits through their job and when employers are smart, they demonstrate that the best way to slash healthcare costs is to improve benefits.
As I pointed out in the PPO Network Heist article, most employers haven’t been smart and wildly overpay for healthcare and enable massive overtreatment. Thus, much of the dysfunction (pricing failure, overtreatment, outdated technology, overbuilt infrastructure, unaccountable/unsafe care to name a few) is directly enabled by employers spending like drunken sailors at the expense of their employees’ pocketbooks. As I’ve spoken extensively with legal experts on ERISA, it’s simply a matter of when, not if, health benefits purchasing is held to the same high fiduciary standard as retirement benefits. Clearly that isn’t the case today as PwC’s Price of Excess (PDF) report pointed out. That is, more than half of healthcare spending adds no value. Imagine that in any area of a business, let alone the second biggest expense for most companies.
Class action attorneys have had a dramatic impact on ensuring employees’ 401-k investments are carefully stewarded including a unanimous victory for employees at the U.S. Supreme Court. A wide array of employers in all corners of the country have shown that they can spend 20-55% less on health benefits with superior benefits to the wildly under-performing status quo highlighting how poorly mainstream employers are fulfilling their fiduciary duty. You can see examples in Orlando, Kirkland, Milwaukee, Tulsa and Pittsburgh. I don’t think you can underestimate the magnitude of the impact of what happens when health benefits are held to the same standard as retirement (401-k) benefits. Sources have shared that the most feared class action and respected corporate law firms in the ERISA arena are readying major cases.
Healthcare’s Katrina
Whether you are an investor or you are thinking strategically about your organization’s future, I find it helpful to do thought experiments to think creatively beyond one’s current view of the market. As investors say, it’s how you turn a Black Swan white. Whether you think this scenario is 5% likely to happen or 95% likely to happen, you can use it to shake yourself out of status quo thinking.
Thought experiment: What happens after the BUCAs (Blues, United, Cigna & Aetna) are no longer the dominant force they are today in the healthcare industry?
The Blues are approaching 100 years of dominance. How many organizations dominate more than a century? I remember another dominant regional oligopoly/monopoly business (newspapers) that had a similar sense of entitlement and hubris that is present in most large healthcare incumbents. If a fraction of what healthcare fraud experts have shared materializes, they make the case that it is enabled by large claims administrators that are financially incented to allow fraud.
Remember that the same organizations who process claims for private employers also process claims for Medicaid and Medicare. In other words, the impact won’t be limited to the private sector. Despite enormous investments in lobbying, I don’t think you’ll find politicians lining up to go down with the ship of organizations who enabled fraud if the allegations prove to be true.
Time will tell whether these allegations prove to be true. If it does, the damages exceed the cash reserves of most of the large insurance companies. Even as a thought experiment, it’s hard to fathom the ramifications of that. For the sake of the thought experiment, it’s safe to say that some large incumbents would be severely wounded or worse.
As we saw after the tragedy of Katrina, schools were devastated and it gave education reformers an opportunity to put in place approaches that were inconceivable before Katrina. In healthcare, rising out of the ashes of World War II in places like the UK was a national health service. What would happen in a Trump administration with a GOP-dominated House and Senate if the biggest health insurers were severely wounded? At the state level, Democratic governors may pursue one course of action — perhaps even revisit a single-payer model. On the other hand, one can expect that Republicans will pursue a very different course of action. If Katrina is any indication, change would happen at a far faster clip than has ever been seen in healthcare.
Who wins? Who loses?
These events would certainly accelerate the work hundreds of us have been putting into the Health Rosetta that is meant to be a blueprint for smart healthcare purchasing. Further, it’s a set of guiding principles for how the industry should respond. Some of things outlined in the Health 3.0 vision would come to fruition much sooner than any of us could image. As we play out this thought experiment, the following is the start of a list of winners and losers:
Winners
- Spin-off units of BUCAs: Organizations such as what Guidewell and Cambia have created new business units that have given them freedom to innovate outside the scope of the mothership. Assuming their balance sheets are separate from their mothership, they would be free to be more innovative in pursuing opportunities that may have been off-limits before.
- Independent TPAs with the ability to scale: While many independent TPAs are “Mom & Pop” and have technology that is just as outdated as large insurers, a subset would see a dramatic growth opportunity. Specifically, those with modern and scalable technology investments would thrive such as Continental Benefits.
- Retirement account holders such as MassMutual and Fidelity: Once health benefits are held to the same standard as retirement benefits, I’d expect most employers will move the health benefits function into Finance/401-k administration where fiduciary duty is well-understood and carefully managed. The relationships that the Fidelitys of the world have with 401-k administrators will put them in a strong position to assume this additional role. With deep pockets, one could imagine them taking over wounded BUCAs.
- Technology enablers: Organizations such as Collective Health, Hint Health, Maxwell Health and others who help employers manage health benefits will see the demand for their services rise. Typically, they have a level of Internet and consumer savvy that traditional health benefits companies don’t possess. If, as many on both sides of the political spectrum would like, health benefits get more decoupled from a specific employer to the employee, this consumer marketing savvy grows in importance.
- Fraud-prevention vendors: One of the few areas one could see Republicans support increased regulation is requiring fraud prevention software that had been rejected by BUCAs so that fraudulently-acquired money doesn’t flow into nation-state adversaries.
- Cloud-based EHR vendors: To fill the void of health insurers who are wounded or worse, I would expect to see a rise in provider-sponsored plans. In particular, provider organizations that aren’t tethered to expensive, hosted software and the “boat anchor” of a large hospital infrastructure will be able to fill the void more ably. A company such as athenahealth that has both a large installed base and a cloud-based infrastructure would be well-positioned. All the more since they have a large number of primary care practices which leads to the next point.
- Newer provider organizations with modern technology infrastructure and are purpose-built to take on risk: Organizations such as Agilon Health, Iora Health, Privia, and others. In addition, an organization such as Alignment Healthcare who helps provider organizations responsibly take on risk would thrive even more.
- Modern Medicare Advantage and managed care plans: Organizations such as Clover Health, CareMore and others could see an opportunity to expand into the commercial arena.
- High quality, transparent PBMs: The PBM sector is rife with obfuscation and worse. Within that sector, high quality players that can operate successfully in transparent fee environment that will become the new standard.
- Established provider-sponsored plans: Beyond traditional integrated systems, health system and doctor-owned health plans have the benefit of local relationships and brands. Mid-sized doctor-owned health plans such as CDPHP would find a great opportunity to grow without the having to deal with conflicting objectives of filling hospital beds. Many provider-owned health plans already have substantial footprints in the ACA exchanges. Further, medical malpractice insurance players could build off their strong relationships with physician practices, strong balance sheets and begin offering plans.
- Upstart health plans: One could imagine re-insurers and stop-loss carriers extending into directly servicing employers. Organizations such as Oscar may find the opportunity to work with employers and/or the expansion of consumer-based health plans to put wind in their sails.
- Integrated health system such as Kaiser and Geisinger would see a major opportunity to grow their footprint.
Losers
- Fraudsters: Just as credit card companies dramatically reduced fraud to where it’s a relatively minor cost for banks, this will happen to healthcare fraudsters. They’ll have to work harder to perpetrate fraud compared to the walk-in-the-park it is today.
- Traditional health systems: While one could argue that they’d have a position of strength when insurance companies are wounded, there is a co-dependent relationship to drive up the cost of healthcare as high as possible. Healthcare is the only industry I know of that technology is used as an excuse for costs to go up and productivity to go down. That isn’t exactly a recipe for success in an era when there is prudence applied to health benefits purchasing. All of the high performing models I’ve seen reduce hospital and ED visits 30-50%. Further, ERISA requires that only reasonable expenses are to be paid. As outlined in the PPO network piece, hospitals have gotten away with charging 200% (and much more) of Medicare rates which are deemed “reasonable” by experts. BUCAs have been co-dependent partners in driving up costs as high as possible. It’s not the duty of employers using employees’ money to prop up organizations that still use outdated technologies such as faxes and client-server/mainframe software while producing mixed health outcomes.
- Expensive on-premise software: Just as there is a co-dependency between hospitals and insurance carriers to keep costs high, there is with expensive on-premise software vendors. These systems are both expensive to operate and difficult to change to new models. Anyone who has implemented one of the mainframe-type systems knows they are highly customizable during the setup but very rigid once decisions have made — a recipe for disaster in a changing environment.
- Sunk-cost thinkers: I’ve heard countless stories of CIOs who know that their megasystems they’ve overseen getting installed at the cost of $100’s of millions for their organization aren’t well-positioned for a changing environment. Some conflate the fact that Kaiser has an old-line system and that Kaiser operates in a model more suited for the future. The problem is most have implemented their version of Kaiser’s software to optimize for fee-for-service. While it’s understandable that a CIO wouldn’t be excited about telling their CEO that they invested in something that will impair them in the future, this will inevitably come back to bite them.
- BUCA partner ecosystem: Software vendors, benefit consultancies and other organizations that have gained a lion’s share of their revenue from the BUCAs will face a major retrenchment if a “Katrina” happened to the BUCAs. Though many of them are hired ostensibly to provide objective advice, hidden incentive systems provide a strong inducement to not move business even when a better alternative services. There are many examples of this. For example, by retaining over 90% of a BUCAs business in a particular region (i.e., keeping clients at the same BUCA), an individual office of a benefits consultancy can get $200,000-$500,000 per office kicked back to them as a quasi commission. When class action law firms go into discovery, these sorts of arrangements that are widely known within the industry but hidden to clients aren’t looked upon favorably.
Who am I missing as winners or losers? Please poke holes in my logic. This is intended to be a thought experiment so I look forward to your perspective.
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