Employers Trying to Fix Healthcare...Good Intent, Failed Execution
Published on June 3, 2021
The recent demise of Haven Healthcare, the joint venture started by Amazon, Berkshire Hathaway and JP Morgan Chase to attempt to improve healthcare and reduce costs, was disappointing but predictable. The fatal structural issues of the entity itself certainly contributed to its failure and it was difficult to see how Haven’s apparent strategy would do more than nip around the edges of fixing the prevailing problem.
We have seen other private sector attempts to tackle healthcare costs through regional and national business coalitions such as the Health Transformation Alliance (HTA). There have also been a few notable initiatives launched by individual corporations. For instance, Boeing has contracted directly with a single hospital-based provider network in select cities where they have large concentrations of employees (again, applying buyer-side leverage). To date, there have been no employer-based initiatives that have truly moved the needle in terms of long-lasting, replicable reforms.
Company-paid health insurance began in the 1930s and mushroomed in the early 1940s (during WWII) as a vehicle for employers to compete for employees after wage and price controls were enacted by Congress. Private healthcare companies proliferated and employees receiving company sponsored healthcare benefits grew by 700% from 1940 through 1950 (source: AMA Journal of Ethics). What began as a benefit to attract employees has since snowballed into an out-of-control burden on both employers and their employees. Advancements in healthcare technologies and the availability of advanced procedures and treatments have certainly extended, improved and saved lives. These advancements in medical science and technology have also fueled exponentially increasing costs. In the decades since the 1940s, employers’ response to runaway healthcare costs has led to the entrenchment of, and dependence on, today’s third-party payer industry.
In a functional open market scenario, the price for goods and services is determined by the intersection of supply and demand allowing buyers and sellers to conduct transactions at some mutually acceptable price. In the U.S. healthcare economy, we have providers (sellers), patients (buyers) and third-party payers. Each of these participants have competing priorities putting them at odds with the other two participants and, hence, the marketplace does not determine prices. In fact, this thwarts normal, direct interaction between buyers and sellers thereby inhibiting price elasticity and overall market function.
Conflicting objectives further complicate the economic conditions of healthcare delivery. For example, employers have a foot in both the patient and payor camps. They want their employees (and their families) to be kept healthy, on the job and productive. However, they are also payers, assuming the largest portion of the financial risks and placing them on both sides of the healthcare market divide.
The Kaiser Family Foundation’s 2020 annual survey of private and non-federal employers reported that the average annual premiums for employer-sponsored health insurance was $7,470 for single employee coverage and $21,342 for family coverage. These average employee premiums did not include deductibles, co-pays or other out-of-pocket employee paid expenses. Premiums have increased annually at a faster rate than wages and inflation. On average, large employers (over 200 employees) pay 71% of annual employee healthcare expenses. This employer portion translates to roughly 35% of average employee total compensation. These costs have increased at any annual rate of 5% for the past ten years and are not slowing down.
Even if the Haven Healthcare approach had managed to obtain some price concessions, constantly negotiating and renegotiating pricing with providers will never achieve real and lasting change. Redesigning how employers and their employees engage with providers at the local market level has thus far eluded these highly publicized, well-intended, employer initiatives. We do not need to view this task as akin to boiling the ocean, but we do need to stop repeating the same futile strategies.
Here are examples of strategies that have limited/short-term payoffs or have proven to not work at all:
Create home-grown imitations of health insurance companies and other third party middlemen
Contracting exclusively with a single hospital/physician network (i.e. hiring the fox to guard the hen house)
Squeezing PBMs and pharmaceutical companies to reduce drug prices
Looking for a national approach to reduce or contain the cost of healthcare services (remember: all healthcare is local).
Despite the false starts and outright failures thus far, we envision a technology-based model that is employee centered and achieves market-based, right pricing tied to measurable results (“outcomes” in healthcare vernacular). After analyzing and better understanding how not to create a workable private-sector healthcare delivery model, we now want to focus on how to build a technology-based model that would be welcomed by all the participants.
The next article will lay out tools and tactics for creating a private sector healthcare model that is driven by natural market force
The Author:
Kevin O’Donnell was the founder of Healthcare Resources of America and is currently CEO & Managing Director of HRA Partners, a Dallas-based firm that provides advisory services to healthcare companies and investors. In February 2018, he and his Senior Partner, Frank Gerome, published an article entitled: “Three Corporate Icons Set Out To Tame the Beast-But What Should a High-Tech Health Plan Look Like?”
www.healthcareresourcesofamerica.com
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Three Corporate Icons Set Out to Tame the Beast – But What Should a High-Tech Health Plan Look Like?
Published on February 22, 2018
Kevin O'Donnell
CEO & Managing Director- HRA Partners
The leaders of three of the nation’s most high-profile companies have announced that they are collaborating to take their employees’ healthcare into their own hands. Amazon, Berkshire Hathaway and JP Morgan Chase have decided to jointly create their own healthcare company, initially focusing on “technology solutions that will provide U.S. employees and their families with simplified, high quality and transparent healthcare at a reasonable cost.” To achieve anything close to their stated objective, these corporate giants will have to do much more than “build a better mousetrap.”
We can argue over how we got here and who or what are the main culprits, but the fundamental problem with the American healthcare system lies in the fact that it does not function like other truly competitive markets. While most markets consist of buyers and sellers, healthcare markets in the U.S. have three participants: (1) Providers (physicians, hospitals, etc.), (2) Consumers (in this case, employees and their dependents) and (3) Third Party Payers (health insurance companies). To further complicate things, employers are often a fourth party with a highly conflicted role (as the payer – eager to pay as little as possible and, at the same time, as the employer – eager to obtain the best healthcare possible to keep their employees on the job). These disconnects result in highly dysfunctional healthcare markets that do not behave like markets for most other products and services.
As the leaders of corporate powerhouses, Jeff Bezos, Warren Buffett and Jamie Dimon enjoy several advantages in attacking the healthcare problems that face every company across the country:
· A defined and limited objective They are not trying to change the Nation’s healthcare system, only the part in which they and their employees participate.
· Enormous buying power
· A critical mass and captive audience of consumers Not only do they have a sizable test bed, but their employees and their dependents represent a desirable healthcare demographic population, i.e. a relatively healthy, educated and financially stable group of employees/consumers.
· Considerable creative and technological resources
WHAT NEEDS TO BE DONE?
In order to achieve measurable and sustainable improvements, the new model will need to begin with several essential actions:
Eliminate the Middleman – Job One
Aside from monopolies, nothing drives up total cost and inhibits competitive market forces like the presence of third party payers. Originally, health insurance companies functioned as risk pools. Today, most large-scale employers are the financial risk holders facing of out-of-control healthcare costs for their active workforce. The healthcare insurance companies of today mostly provide administrative services (e.g. establishing a provider network with negotiated fee schedules and processing billing claims) to large employers as “third party administrators” or “TPAs.” These administrative functions could be replaced by a cloud-based platform thereby achieving a significant reduction in administrative costs borne by employers. This would provide greater price transparency and eliminate the middleman who is currently misaligned with both the consumers and the providers while providing dubious value to the employer/payer.
Provide tools enabling employees to become informed and proactive healthcare consumers
The good news is that the historical data for their own population of employees exists. Even better news is that the data required for predictive analytics also exists. The employee/consumer side of the new model must reduce current levels of total costs and can be facilitated with tools to significantly increase consumer accountability, information and decision-making. Employees/consumers need to have access to a dynamic, consumer friendly website that gives them a comprehensive array of information including pathways (choices) prompted by direct links to diagnoses/medical conditions. Information about (and links to) choosing the appropriate local providers with cost and quality measures would also be provided.
Put Employees in Charge
All employees could use Health Savings Accounts (HSAs) and the new tools developed to enable employees to be better consumers of healthcare. Financial participation by employees and their families should include choices that align their scope of financial responsibility with their scope of plan coverage parameters.
Create Buyer-Seller Markets
The new tools will facilitate the creation of online “marketplaces.” The newly empowered employees can shop for healthcare services based on fully transparent pricing coupled with quality and access to probable outcome/expectation information. This would allow employees to make informed decisions and for providers to compete based on price and quality. In other words, a healthcare market that looks and acts like markets for most goods and services.
WHAT SHOULD A NEWLY DESIGNED, FUNCTIONAL HEALTHCARE MODEL LOOK LIKE?
Of course, the devil is always in the details, but this is how a carefully designed, innovative, cloud-based model could immediately impact each of the participants:
Employees/Consumers
· No co-payments or deductibles
· No prior approvals for treatments or diagnostics
· No provider networks or limits on use of physicians, hospitals and other providers
· Use of Health Savings Account money to cover annual out-of-pocket costs
· Capped annual out-of-pocket costs
· Easy-to-use online information and decision-making tools
Providers (Physicians, Hospitals and others)
· No contracting with multiple insurance companies
· Charges based on price groups, not diagnostic codes (replacing CPT/ICD 10 codes)
· No prior authorization
· No co-payments, lost charge recovery, or bad debt
· Direct online billing and rapid payment
· Easily accessible and fully compatible Electronic Medical Records (EMRs)
· Payment received at time of service
Employers/Payers
· Employers aligned with employees to become better consumers of healthcare
· Annual shopping and contracting for employee healthcare eliminated
· Real time access to utilization and expense data (historical and predictive)
· Ongoing reduction of overall costs
CAN AMAZON, BERKSHIRE HATHAWAY AND JP MORGAN CHASE GET THIS RIGHT?
Measuring the success of a newly designed healthcare delivery model really comes down to answering this question: Does the new plan provide quality healthcare (based on employee/consumer perception and outcome metrics) at lower total costs (employers and employees) on a sustained basis?
Given the necessity and their available resources, Amazon, Berkshire Hathaway and JP Morgan Chase should be able to make this work. Certainly, the biggest pitfalls for these companies would be:
A) Do nothing by simply exerting their combined purchasing power to leverage better pricing, or
B) Fail to take a revolutionary, rather than an evolutionary, approach, for instance, building their own hybrid health insurance company, thereby forfeiting the opportunity to be the catalyst for truly competitive consumer-driven healthcare markets.
To tackle this conundrum, the designers of a new, functional healthcare plan will need to start with a clean slate and then go deep and wide in scope. They will also want to experiment without fear of failure. Above all else, they will need to create a model that stimulates true market behavior by both buyers and sellers. Of course, if they succeed, they will have a long list of corporate imitators throughout the country.
The Authors:
Kevin O’Donnell is the founder and former CEO of Healthcare Resources of America. He is currently the Managing Partner of HRA Partners, a Dallas-based firm that provides advisory services to healthcare companies and investors.
Frank Gerome has held senior leadership positions with several healthcare services and medical technology companies. He is also a Partner at HRA Partners.
www.healthcareresourcesofamerica.com
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Investing in Healthcare Businesses: Metrics that Matter Most*
Published on March 7, 2017
For companies providing healthcare services, the landscape is crowed, fragmented and messy. The financial data often hides more pertinent information than it reveals, rendering a rather murky due diligence process. The path to profitability can be distorted and volatile.
Nonetheless, healthcare businesses, large and small, continue to be attractive targets for investors as the demand for healthcare services grows with the demographics. Whether industry analysts or potential shareholders are considering for an acquisition or simply under review a healthcare company, financial metrics (those found in income statements, balance sheets, cash flow reports, etc.) are undisputedly accepted as a means of evaluating the performance of any business. These common metrics objectively reflect the results of things going well or not so much.
Financial metrics are the common scoreboard that provide the comparable and historical “what.” However, they provide neither the “why” nor the “how.” To get the story behind the financial performance metrics, we have to take a deeper dive into the metrics that reveal the strengths (advantages) and the weaknesses (vulnerabilities) of the company from an operating perspective.
So let’s start with culture. For healthcare services companies to grow and sustain their business model…culture is everything. Cultural stability is often viewed as “soft stuff” (`i.e. difficult to assess and to quantify) and therefore it usually eludes outside analysis by buyers/investors. As healthcare services are inherently more labor intensive than product generating businesses, cultural stability is a really big deal.
Are there metrics that can actually determine cultural stability? Yes indeed. The most obvious, high-level example is “employee turnover rate.” Even more revealing is “employee turnover rate within the first twelve months of employment.” Employee turnover metrics should be further segmented by location or functional areas to gain a more specific insight. These metrics are just a starting point that leads to other metrics pertaining to cultural issues both positive and concerning.
Top line revenue growth, as well as its vulnerability, is usually the focus of a “quality of earnings” analysis. Quality of earnings is derived from the “quality of revenues” (i.e. how sustainable are current and last year’s revenues?). Without stable and growing revenues, “quality of earnings” means nothing. The answer is not found on historical financial data, but it is obtainable and often the most valuable.
With healthcare companies, the indicators and drivers of sustainable revenues, and the resulting earnings, require an understanding of factors that do not apply to most other industries in which the customer and the payer are one and the same. In healthcare markets, the third party payer system dictates a multilevel insight prompting two basic, but essential, questions:
1) Where do the customers (patients) come from?
2) How do you get paid?
Once again, the answers to these two questions are clearly not available in the financial performance data, yet they determine quality of earnings, not to mention the overall viability and vulnerability of the business as an investment.
For question #1, we breakdown the actual sources (called “referral sources”) and their behavior pattern over a period of 12 months corresponding to the reporting periods reflected in the financial data. Referral sources vary from one local market to another. Some types of healthcare businesses have more narrowly defined referral sources than others and, as with any business, the more diverse, larger and consistent the numbers of referral sources, the less vulnerable are the revenues.
For question #2, we focus on the consistency and trending of the payment rates, which are usually negotiated annually with the various payer sources (insurance both commercial and governmental). In the past few years, we have seen a substantial “ forced sharing” of healthcare expenses vis-à-vis steeply increasing deductibles. This increase in what we call “first dollar coverage” placed on consumers has negatively impacted the revenue outlook for many healthcare businesses. This is why a company’s quality of earnings can rapidly fall off a cliff. The metric here is called “payer mix” and it is used by all providers of healthcare, from hospitals to outpatient businesses, to measure financial vulnerability.
With many service businesses that are local in nature, such as healthcare services with all of its niches, the focus needs to be on future performance revealed by those metrics that tell the story beneath the basic financials. It’s these metrics that provide insight as to how the company is positioned to sustain external changes in market conditions. Whether it is internal culture or referral sources or payer sources or other aspects of the business that usually escapes the due diligence process, there are metrics that can locate all of the skeletons (as well as exactly which closets to find them in). Managing risks is always part of the task, but you can’t manage risks unless know them. Whether you are identifying the most valuable employees or retaining the most valuable customers or targeting what needs to be fixed inside the operations, getting to the right metrics is what matters most.
Written by: Kevin O’Donnell, Managing Partner at HRA Partners LLC (www.healthcareresourcesofamerica.com)
*This article is republished with permission from D CEO Healthcare
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Prevailing Certainties in Healthcare
Published on January 19, 2017
Last week, over 30,000 people gathered in San Francisco to attend the 35th annual J. P. Morgan Healthcare Conference. The attendees represented all sectors of the healthcare industry including investors, medical device companies, pharmaceutical companies, health insurance companies, ambulatory care companies, hospitals and a host of others who are stake holders in healthcare delivery businesses.
Not surprisingly, this year’s conference was preoccupied with a wide spectrum of concerns over the imminent repeal, and possibly replacement, of the Affordable Care Act ("Obamacare") and how various change scenarios may impact their respective investments, both current and future. Various healthcare industry groups and publications have released their recaps and summaries of the key topics presented at the conference. One of these was written by Vince Panozzo, Head of Enterprise Health Solutions at Context Media: Health(Published by “Becker’s Hospital Review”), which listed what the author took away as the “Ten Top Themes” from this year’s conference. Without relisting these themes, it is accurate to say that they all shared one common thread: uncertainty.
Undoubtedly, 30,000+ people did not converge in San Francisco to learn to embrace uncertainty. Despite the strong possibility that absolute certainty is the enemy of real growth and opportunity, neither investors nor those operating their portfolio companies are big fans of uncertainty. In the healthcare world, a degree of short-term certainty in getting paid for your services/products is essential to the viability of existing and future business strategies.
We have been hearing a lot of Congressional chest pounding about “returning to a competitive healthcare marketplace.” Really? Since the start of our current third party payer system in the 1940–50s, the U.S. has never had a competitive marketplace for healthcare in the same sense that competition exists in other consumer markets. When the end user (consumer) is not the same as the payer, competition becomes thwarted and disassociated. This has changed over a rather short period of time. Escalating healthcare premiums and soaring deductibles are now forcing consumers to shop and make decisions that have previously been made by someone else. In the past 4 decades, healthcare choices have been driven by doctors, more recently by payers and now, out of sheer necessity, by consumers themselves.
Besides the underlying threat of marketplace uncertainty, which impacts all types healthcare businesses, there are a few, prevailing trends that have surfaced and will remain sustainable, regardless of impending legislative decisions at both the federal and state levels. Whether we will see a healthcare marketplace that closer resembles open competition or we arrive at a federally mandated single payer system, there are a few inevitable catalysts that are already driving transformation within all sectors of healthcare delivery. For owners and operators of healthcare portfolios, these transformative trends should be fundamental assumptions for M&A strategies as well as ongoing decision-making:
1) Growing consumerism — Fueled by increased pricing transparency, access to information about provide performance/outcomes, better educated senior population and treatment alternatives
2) Continued growth of ambulatory care (over hospital-based and other inpatient care) — Fueled by pricing transparency and ongoing technology advancements
3) Innovation (in diagnosing and treatment)– Fueled by drug discoveries, changing physician practice patterns and more direct consumer marketing/engagement
Author: Kevin O'Donnell (www.healthcareresourcesofamerica.com)
