Hospitals and health systems join forces to optimize quality and lower costs, but both goals can be hampered by unexpected challenges.
Cost concerns are driving many mergers and acquisitions, but hospital and health system leaders are finding that there are hidden challenges when bringing their operations together.
Left unchecked, those issues can degrade quality of care and threaten the cost savings that motivated the mergers in the first place.
There have been more than 70 deals per year recently, with consolidation occurring mostly in midsize systems (those between $1 billion to $5 billion).
Many of the remaining smaller systems are not attractive acquisition targets, notes Peter Bonis, MD, chief medical officer for clinical effectiveness with Wolters Kluwer Health, which provides data, software, and consulting for healthcare organizations.
The brisk M&A activity stems from hospital systems trying to achieve cost reductions and leverage other economies of scale in response to growing margin pressure, Bonis notes.
The Congressional Budget Office (CBO) estimates that overall operating margins were 7.7% in 2016 but up to 30% of systems had negative margins. The CBO forecasts that average margins will be negative 0.2% in 2025 unless hospital systems increase their productivity at rates faster than expected for the overall economy.
At current rates of growth, healthcare will represent 20% of the total economy—$5.7 trillion—by 2026, Bonis notes.
"The incongruent reality is that the U.S. provider system is facing a financial crunch when overall spending and growth in healthcare is at the highest point in history," Bonis says. "Consolidation offers the promise of catalyzing productivity gains."
"However, results so far have been mixed," he says. "On average, two years after the transaction expenses have declined, revenue and margins have declined even more. Best practices around M&A continue to evolve."
Spending May Increase
In the short-term, consolidation may increase healthcare spending in some regions as consolidated systems leverage their scale in negotiating contracts with payers and suppliers, Bonis says.
"In the long term, system consolidation has the potential to benefit patient care by achieving a more consumer-friendly experience, [and] reducing unwanted variability in care, thereby altering the cost-versus-quality equation," Bonis says.
He continues, "About one-third of healthcare spending is wasted and a sizeable portion of the waste results from clinical variability. Provider networks offer the scale to address unwanted clinical variability, which, while challenging, is one of the most impactful means to achieve a sustainable cost structure and better quality of care for all of us."
Addressing that clinical variability, including the supply chains that are intertwined, is a hidden challenge for CEOs, says Lee Ann McWhorter, director of strategic alliances for First Databank, a company that manages a medical device database. (See correction note at bottom of story.)
McWhorter previously worked with Adventist Health and Carolinas Healthcare, systems that acquired multiple hospitals in recent years.
In the merger of even a relatively small hospital into a larger health system, or a partnership between two hospitals, back office and logistical operations can affect quality in ways that are hard to identify at first, she says.
Cost concerns may arise before long, but that often means quality issues are often underneath the surface, she says.
Downstream Quality Effects
The effects on quality may come from areas of the merger that at first seem to have a distant relationship to quality of care, she says.
"These are issues that seem like they might take care of themselves seamlessly in the background, but, in fact, this has to be a top-level concern for CEOs when you're merging operations, McWhorter says.
"CFOs are very concerned about the financial costs, but the CEOs are more concerned about the cost/quality/outcome assessment. They want to ensure that patients have the best possible outcome, and what goes on in the supply chain has definite downstream effect on outcomes," she says.
Hospital and health system leaders can be surprised by the complexity of combining their back-office operations, McWhorter says. Their supply chains and other behind-the-scenes functions may be radically different and integrating them can disrupt patient care.
"You have various parties using disjointed systems, a lot of different processes, and manual processes that are not easily transferred from one system to another. You also have a lot of discrepant data, and the healthcare system is so dependent now on data of all types," she says.
A huge challenge in M&A activity is reconciling the item master list, essentially the clinical supply catalog, for each facility, McWhorter says.
The master list can vary widely from one facility to another. McWhorter has seen 80-bed hospitals with a 600,000-item master list, but large health systems can have dramatically smaller lists because they have vetted the available items for quality and value.*
"Whatever is on that master list, people are going to order. So, if you have 600,000 items on an item master, you've got a lot of rogue spending, people buying things off contract and things that have not been evaluated by value analysis and product evaluation committees," she says.
"Standardizing that process, and the data that flow from it, has to be a top priority in the M&A effort. Otherwise the parties are going to find that one of the main motivations for the merger is being undercut, sometimes in a huge way," McWhorter says.
Correction: This story has been updated with the correct spelling of Lee Ann McWhorter's name and the name of the company for which she works.
*Editor's note: An earlier version of this story stated that large health systems can have master lists with items numbering "in the hundreds." That phrase has been removed to more accurately reflect Lee Ann McWhorter's statements.
Mergers and acquisitions continue at a strong pace as hospitals find it increasingly difficult to survive on their own.
The changing face of healthcare is making it difficult for hospitals to make it on their own, with many actively looking for partners who can make them part of a larger organization.
St. Joseph's Health in New Jersey is one of the latest to go looking for a partner, motivated by previous mergers in the state that made it more difficult for smaller or stand-alone hospitals to compete without increased leverage with insurers and greater economies of scale.
St. Joseph's announced recently that it is actively seeking a suitor that will allow it to remain true to its Catholic heritage and mission.
A majority of hospitals are in a partnership and many others are seeking one in order to survive. Of the over 5,500 hospitals in the United States, nearly 60% are part of a health system, according to the American Hospital Association.
That percentage will continue growing, says Fatema Zanzi, JD, partner with the law firm of Drinker Biddle in Chicago.
"Smaller, independent hospitals, and even one- or two-hospital health systems are finding that they can't sustain themselves without being part of a larger health system," Zanzi says.
"There is going to be a point soon where there won't be that many hospitals that are independent, but there still are a good number of independent hospitals in certain markets. Those markets may follow before long," Zanzi says.
The need for capital improvements, especially in technology, is a big driver, she says, and independent hospitals have a more difficult time obtaining that capital with lower bond ratings.
"From a patient care perspective, hospitals are finding that they need to be part of a larger system to provide the kind of holistic care that is expected now, with outpatient care, urgent care, mental health all, everything a patient needs," she says.
Zanzi points out that in addition to the benefits of scale and access to capital, joining a health system or partnering with another facility brings access to talent.
"You want the top talent at your organization to attract more patients, and partnering with someone else broadens your access to the talent pool," she says. "That's true of physicians, but it's true on the executive side too. You get access to the best people."
Looking for the Right Partner
Most hospitals go into merger opportunities with the determination to stick to one's values and do the right thing for the community, says John Maher, EVP and COO at Quorum Health Resources, a hospital management firm.
That can make the search more difficult than if the hospital focused mostly on financial success, but it is the right path when those values are core to the hospital.
"Any time an organization like St. Joseph’s in New Jersey is looking for a partner, it is crucial for the partnership to be mutually beneficial for the system and the hospital. When determining the optimal vehicle to enable an organization’s future success, the form must follow function," Maher says.
"A closer relationship with another organization may be needed to achieve the organization’s long-term goals. However, the mission, vision, and values should drive the structure, rather than allowing the constraints of a structure dictate the outcome," he says.
St. Joseph’s approach to vetting partners based on culture makes a lot of sense, says Stephen Thome, principal in the Health Care Advisory services practice with Grant Thornton.
"So many mergers fail because cultures don’t align, which prevents getting meaningful work done to align strategy, integrate operations, and compete externally instead of internally," Thome says. "Focusing on cultural alignment early will lead to long-term success."
More Access to Capital
St. Joseph's is a good example of access to capital can drive partnerships, Thome says.
"For instance, St. Joe’s achieved a 7.3% operating margin, which is very robust for a healthcare provider, but Moody’s gave St. Joe’s its lowest investment grade rating," Thome says. "Scale matters to lenders, to payers, and any other organizations in the ecosystem who negotiate prices and rates."
Maher notes these other key drivers:
Changes to payment models: The evolution of payment methodologies has dramatically increased the need for the alignment of care across the continuum.
Gaining scale: To expand across a broader continuum of care and reduce costs, gaining scale is paramount for hospitals. A partner can mitigate the cost of remaining independent, which in turn, helps the organization reduce unit cost and gain scale. Particularly, independent and rural hospitals struggle to access scale; thus, making it difficult to obtain affordable capital and recruit physicians.
Inpatient volumes: At the same time, inpatient volumes have been declining. According to Analysis of American Hospital Association Annual Survey Data for community hospitals from the U.S. Census Bureau, between 2004 and 2014, inpatient admissions at community hospitals fell by 5.7% (from 35.1 million to 33.1 million), while the number of total inpatient days declined by 8.7% (from 197.6 to 180.5 million).
200 Deals in 2nd Quarter
There were more than 200 mergers and acquisitions in the second quarter of 2018, according to a recent report on M&A activity by PwC.
Total deal value declined by double-digits versus Q1 2018 and Q2 2017, but PwC notes that both past periods had seen exceptional megadeal activity. In Q2 2018, 255 deals were announced, which represents a decline of 7.3% over the prior quarter but an increase of 9.4% over the prior year.
"There are some hospitals and small health systems that are fiercely independent and protective of what they've done, and they feel like they still have the margins to continue that service to the community," Zanzi says. "That's admirable if they can sustain it, but I think it's going to get more difficult as the margins get smaller and smaller."
Mergers and acquisitions by hospitals and health systems are up from the same time in 2017.
Mergers and acquisitions are up in 2018 over the same period in 2017, with three deals involving systems that have more than $1 billion in revenue, according to an analysis by Kaufman Hall, a healthcare consulting and software provider.
There were 30 partnership transactions in the first quarter of 2018, which is an 11% increase over 2017's first quarter.
In addition to the three $1 billion-plus deals, there were four that included systems with revenue bases of $500 million to $1 billion partnering with even bigger organizations.
These are other key findings from the report:
The trend for mega-deals continue. In 2017 there were 10 involving sellers with net revenues of $1 billion or greater.
The largest deal in the first quarter of 2018 was the merger of Bon Secours Health System and Mercy Health, which will create a 43-hospital system serving seven states. The newly formed system will have $8 billion in net operating revenue.
Another notable partnership involves Einstein Healthcare Network, the largest independent academic medical center in the Philadelphia region, and Jefferson Health, a 14-hospital system with about $5 billion in annual revenue.
HCA Healthcare is acquiring Mission Health, a seven-hospital system based in Asheville, N.C. The report notes that HCA's deal with not-for-profit Mission Health advances the for-profit corporation's acquisition strategy at a time when other for-profit healthcare organizations have been trimming their portfolios. Community Health Systems announced divestiture of six hospitals in the first quarter of 2018.
In 2017, 32% of sale transactions involved for-profit divestitures. In the first quarter of 2018, slightly over one-third (11) of the transactions included for-profit targets.
"Sizable organizations are continuing to pursue even larger partners in 2018, as providers look to establish a broader base of services and operations, in part, to compete against non-traditional market entrants that are bringing consumer focus and lower costs to the industry," said Anu Singh, managing director at Kaufman Hall. "Greater scale enables health systems to build the tangible and intellectual capital required to secure the resources they need to transform traditional business models from an economic and service standpoint. Without such scale, legacy hospitals and health systems are going to find it difficult, if not impossible, to stay competitive in markets with these new entrants and emerging mega-systems."
Singh notes that large for-profit and not-for-profit health systems continue to reposition their operations to increase market access in regions of strategic interest, while rationalizing, downsizing, and even exiting markets where there is not a path to relevance over the long term.
"These moves reinforce the shift from the financial to the strategic rationale of most partnership activity. At least in this dimension, the distinction between for-profit and not-for-profit is dwindling," he says.
Insurers try to avoid signing up consumers for some health plans even though they are officially counted as options under the ACA. The result is less freedom to choose.
The health plan choices available to consumers have dwindled since the start of the Affordable Care Act, frustrating consumers and becoming a key indicator of the law's decline, but the problem could be worse than it appears.
Insurance companies sometimes avoid marketing certain "ghost plans" that are technically offered under the ACA.
Carriers adopt this strategy to minimize risk from certain demographics and geographic areas in which they do not fully understand the risk pool, says Michael Levin, CEO and cofounder of Vericred, a healthcare data services company in New York City that works directly with insurers. They also may understand the risk and worry a certain plan would prove unprofitable.
The carriers' strategy results in less choice for consumers seeking health plans, he says.
"There is a lot of talk about choice in the market leading up to open enrollment, how many carriers are participating, and what plans are available. What's lost—because it's not understood outside of this work with the carriers—is that health plans are being suppressed by the carriers," Levin says.
"If a carrier normally offers 10 plans but is suppressing nine of those 10 plans, how much choice are they really offering in that market?" he says.
More Ghost Plans Coming?
There was concern that insurers might use this strategy more in the coming year because of increasing uncertainty about how they would fare economically without the risk adjustment payments provided under the ACA.
Earlier this month, the Trump administration froze the payments, designed to compensate insurers for making coverage available to lower-income and high-risk consumers. But the administration resumed the payments Tuesday, perhaps motivated to address the issue before the midterm elections.
"For the first half of this year, we were very excited about how the market was filling out. There seemed to be more stability, with more certainty about what the regulations were going to be, and carriers were entering the markets, adding more choices," Levin says.
The decision to halt the risk payments could have prompted carriers to create more ghost plans, resulting in even less choice for consumers, he says.
Under the Affordable Care Act, individuals can buy a health plan either by going through one of the state exchanges—their only option if they are eligible for subsidies—or use brokers—either human or web-based—to help them find the right ACA health plan.
"Using a broker is becoming more popular because there are people creating new experiences that offer better decision support than Healthcare.gov," Levin says.
The selection is not always the same, however. Some plans are available only on the exchanges, some only through brokers, and some are available from both, Levin explains.
"Last year we saw a number of carriers saying they had a number of plans available, but they didn't want to actively market them. Some didn't even put those plans on their websites, and some wanted them actively suppressed from digital brokers," Levin says.
"We think it was born out of the craziness leading up to the open enrollment and the defunding of the cost-sharing reductions," he says.
Practice Undermines ACA
Carriers sometimes say they take this approach to protect the consumer, Levin explains. They say, for instance, that some plans are best sold through their own websites where they can provide the proper explanation of benefits and help consumers make the right decision.
Those plans are less suited for digital brokers where consumers might not get the same level of decision support, carriers have told Levin.
But that is not the only motivation.
"We've also been told by carriers that they just don't want to build their membership in a certain market because it is too uncertain and they don't know the risk pool there," Levin says. "They say, 'We would rather not sell these plans, and we would rather not add members to our book of business.' Some have been very candid about that."
Some carriers avoid any explanation for the decision, just declaring that they are "not actively marketing these plans," Levin says.
The practice undermines the goal of the ACA, Levin says.
"A primary goal of the Affordable Care Act is bringing choice to the consumer so they can select the right plan for themselves and their families, based on their own circumstances and needs," he says. "This makes that more difficult for the consumer, and it would be frustrating for them if they knew that other options were out there but they're just not being told about them."
States are testing the waters with Medicare-for-all type plans while waiting for federal solutions. The cost of single-payer plans could be the biggest hurdle.
"Medicare for all" is becoming a rallying cry in state elections, with state legislators coming up with their own versions of single-payer healthcare despite, or possibly because of, the stagnation of similar ideas at the federal level.
The push for a single-payer healthcare system is proving successful for some, such as socialist Alexandria Ocasio-Cortez, who rocked New York by beating the 10-term incumbent Joe Crowley in a New York City district. She is a vocal proponent of single-payer healthcare.
The proliferation of state plans and in particular Ocasio-Cortez's victory in New York could indicate growing support for single-payer healthcare, says Sally C. Pipes, president and CEO of the Pacific Research Institute in San Francisco.
Pipes says the American public may be drawn by the promises of a healthcare plan that eliminates premiums and other disliked features of the current system.
"The horse is out of the barn in terms of single payer. They keep pushing it and pushing it and this has become a major issue that gets the voters' attention, especially for progressive Democrats," Pipes says.
She says, "There's an effort in the states to test the waters as they wait for things to change in Washington. Because Obamacare wasn't repealed and replaced, Democrats are saying single payer is what they wanted all along, so now they're going for it."
Multiple State Proposals
Four single payer proposals are on the table nationally, including one from Sen. Bernie Sanders (I-VT) that calls for Medicare to be available to all Americans. State legislators and candidates are taking up the issue ahead of midterm elections, rallying the many voters who are fed up with the current healthcare system and want a solution in the form of a government-sponsored single payer.
The state plans are similarly idealistic, calling for universal coverage of all residents regardless of income and eliminating premiums, copays, and deductibles.
Many states have serious proposals for single-payer systems. In Michigan, Rep. Yousef Rabhi (D-Ann Arbor) is proposing a government-administered single-payer system to provide coverage to everyone in the state.
The MiCare plan would provide state residents with medical, dental, mental health, and prescription drug coverage while eliminating healthcare premiums, copays, and deductibles, Rabhi says.
Healthcare providers would remain independent, and patients would be able to pick among participating providers under the MiCare plan. Michigan would pay for the plan by cutting administrative costs generated by for-profit insurance companies and raising taxes, Rabhi says. He claims the state would save a net $20 billion in the first year.
"Instead of the exorbitant costs, stress and uncertainty of premiums, deductibles, co-insurance and other out-of-pocket payments, working families would pay a small and simple progressive payroll tax designed to save real money on their overall health expenses," Rabhi explains in his proposal.
He continues, "Large and medium employers would pay a payroll tax set at a level lower than the current average employer expenditures for employee health care, saving many employers money immediately."
Also, in Michigan, a Democrat running for governor has proposed MichCare. Abdul El-Sayed, MD, says he would pay for his single-payer plan with a new, graduated payroll tax that all working people would pay, coupled with new taxes on the gross earnings of businesses making more than $2 million a year.
The New York state Assembly recently passed a bill calling for a statewide single-payer universal healthcare system, for the fourth year in a row.
The New York Health Act would include comprehensive outpatient and inpatient medical care, primary and preventive care, prescription drugs, lab tests, rehab, dental, vision, hearing, and all benefits required by current state insurance law, by publicly funded medical programs or provided by the state public employee package.
The bill passed easily in the Democrat-led chamber but the state's Republican-led Senate is not expected to take up the measure this year.
Minnesota State Rep. Erin Murphy (DFL-St. Paul) is running for governor on a platform that includes her Pathway to Single-Payer plan, which will set the state up to "lead the nation by becoming the first state to provide guaranteed, affordable health care to everyone," as stated in a press release.
More Momentum Than in Past
Pipes opposes single-payer healthcare, saying Americans would regret the choice only after experiencing the increased taxes and reduced services of such a system. But single payer has become a powerful political tool, she says.
"Before Bernie Sanders proposed single payer in 2016, it wasn't really taken seriously, but now you have all these states supporting it," she says. "Political leaders are seeing this as an issue they can run on and get lots of support, draw big crowds, and look like they're giving people what they want."
Americans have been on the fence about Medicare-for-all plans for a while, with one survey of 1,850 U.S. adults finding that 51% supported the idea.
That figure could be increasing, Pipes says. If it is, Pipes says she suspects it is largely because politicians can run on the pie-in-the-sky promises of eliminating premiums, copays, and deductibles while giving few details about how to pay for such a plan.
"Both New York and Michigan say theirs would be paid for by progressive income tax increases and a new payroll tax, but they haven't come out and said just what the cost would be. That's unlike in California, where the Senate appropriations committee said SB 562 would cost $400 billion a year," Pipes says. "People are drawn to the promised improvements, but they have to consider the cost at some point."
Single payer is a polarizing topic, with Democrats and Republicans typically coming down sharply on either side of the issue, but Pipes says Democrats run the risk of dividing their own voters.
"People support single payer when you ask them if they'd like a system that eliminates everything they don't like about the current system, but when you ask if they want to pay more taxes that support goes down," Pipes says.
"The Democrats are finding this is a successful way to motivate people in a campaign but when they have to answer questions about raising taxes on everyone, including working class voters, they could find themselves driving a wedge between their constituents," she says.
Losing risk adjustments will further weaken insurers, but only if the problem isn't fixed soon.
The loss of the risk adjustment payments that healthcare insurers depend on to remain profitable under the Affordable Care Act could be another devastating blow that drives them away from the marketplace and further increases premiums.
But that's only if the Trump administration doesn't restore the payments, and it has strong motivation to do so.
The problem could be fixed by changing the payment formula CMS uses, without any legislation or regulatory maneuvers.
Saying it had no choice after a recent court ruling, CMS announced Saturday that it is temporarily ending the billions of dollars of payments intended to compensate insurers for covering even the sickest consumers.
A district court ruling in New Mexico called the calculations used to determine risk adjustment payments "arbitrary and capricious."
The decision puts on hold $10.4 billion that would have been provided to insurers for the 2017 benefit year.
Health plans were quick to condemn the decision, saying it creates even more uncertainty as they determine premiums for 2019. The Blue Cross Blue Shield Association released a statement predicting dire consequences.
"Without a quick resolution to this matter, this action will significantly increase 2019 premiums for millions of individuals and small business owners and could result in far fewer health plan choices," the association said. "It will undermine Americans' access to affordable coverage, particularly for those who need medical care the most."
No Need to Panic
Similar handwringing and grave predictions came from others in the insurance industry and media analysts, but that reaction is overblown, says Robert H. Iseman, JD, partner with the Rivkin Radler law firm in Albany, New York.
If nothing further happens with risk adjustments, it is true that insurers would suffer another blow and pass the hurt on to consumers in the individual and small group markets, he says.
But he thinks that is highly unlikely.
"You have to approach this from the political angle. A lot of people are overreacting without taking into account the fact we have midterm elections coming up, and I think the last thing the Trump administration would want is further disruption of the healthcare market due to events that are within their control," he says. "HHS has the ability, through regulation, to fix anything that may be wrong with the risk adjustments required in the ACA."
Iseman notes that CMS said as much in its announcement, with Administrator Seema Verma noting that CMS has asked the district court to reconsider its ruling. CMS "hopes for a prompt resolution that allows [it] to prevent more adverse impacts on Americans who receive their insurance in the individual and small group markets," Verma said.
"A lot of people are overreacting ... and I think the last thing the Trump administration would want is further disruption of the healthcare market due to events that are within their control."
—Robert H. Iseman
The motivation for CMS is not entirely clear, however. There was another ruling from the U.S. Court for the District of Massachusetts, a month before the New Mexico district court's, which said that CMS had acted within its authority in basing its risk adjustment calculations on statewide average premiums.
"It's a little puzzling why, with the conflicting court decisions, they decided now that they can't make the payments any longer," Iseman says. "There must be a line of reasoning that led them to see the New Mexico decision as more authoritative, but they have not said what that might be."
The Last Risk-Sharing Feature
The risk adjustments are especially important to health plans because they have already lost the other two risk-sharing features of the ACA: the "risk corridor" program that incentivized insurers to offer coverage in difficult or unattractive markets, and the cost sharing reduction program that subsidized discounts on deductibles and copays for lower-income individuals.
"When those things happened a lot of the same people were writing the same things, that this is the end of the world for insurers," Iseman says. "Those were supposed to be catastrophic. The loss of the individual mandate was supposed to be the death knell for the whole program. But what's left of the ACA continues to function, at least in the sense that the exchanges continue to provide meaningful coverage for individuals and small businesses."
The risk adjustment payments are the one risk-sharing mechanism that has remained, and it works pretty well, he says.
"These payments that are being withheld now are based on the insurers' experience in 2017, which is another reason I can't believe something won't be done to fix this," he says.
CMS could fix the problem by reworking the formula it uses to calculate the payments, Iseman says, because the particulars of the formula were at the heart of the New Mexico ruling.
One concern has been that smaller insurers are disadvantaged because they do not have access to the same amount of data as their larger competitors, and the formula relies on that data to determine payments.
"This is really an arithmetic problem," he says. "They can change the way the formula works or how they are administering the formula, without having to change the regulations in the ACA."
Critics have contended that the CMS decision is just another effort by the Trump administration to dismantle key components of the ACA and let it fail, and Iseman doesn't rule out the possibility that CMS will announce a discontinuation of the risk adjustment program going forward.
But because the $10.4 billion in payments for the 2017 premium year were already earned, he expects them to be distributed.
"I think they will be worked out sooner, rather than later. Insurers are getting ready to consider what's on the exchanges this fall, and they're setting premiums for next year, so they need this resolved quickly," Iseman says.
"Ordinarily I don't know if the Trump administration would find that a compelling reason to give them what they want, but with the midterm elections coming up, I think you have to look at this from a practical aspect and the administration won't want to leave this hanging," he says.
Confidence in profitability with value-based contracts doubles over two years.
Hospitals and other healthcare providers have been skeptical about the effect of value-based care on profits, but a recent poll suggests they are much more willing to gamble on the idea.
The percentage of healthcare organizations that say value-based contracts improve profitability jumped to 46% in a recent poll by KPMG LLP, the U.S. audit, tax, and advisory firm—double the 23% found in the same poll two years ago. The poll was conducted as part of a webcast on value-based care.
These are additional findings from the poll:
Only 20% expect lower profitability from value-based contracts. That is a sharp decrease from the 2016 results in which 35% of respondents saw value-based contracts hurting profitability and the 52% who said so in 2014.
Healthcare providers still largely get paid by the fee-for-service model that links reimbursement to activity. Only 10% of respondents said they had a majority of their contracts tied to value-based reimbursement, such as shared savings, bundled payments, or capitation.
Approximately 49% of respondents said their value-based contracts represented a small percentage (less than 10%) of their contracts.
Respondents said the biggest challenges to reporting healthcare quality in a value-based program were technological challenges of converting EHR data to reports, lack of monitoring controls/dashboards, training/adoption by staff, and poor governance/oversight/procedures.
CMS was cited as the most in influential resource for healthcare organizations creating their definitions for quality reporting, cited by 32% of respondents. The other influential resources were the Healthcare Effectiveness Data and Information Set (HEDIS), the National Committee for Quality Assurance (NCQA), commercial programs and VBC arrangements, and the Consumer Assessment of Healthcare Providers & Systems (CAHPS) patient experience surveys.
Performance- based payment models are beginning to replace traditional fee-for-service models as healthcare organizations become more optimistic about profitability, says Matt Snyder, KPMG advisory principal.
"The need to shift from volume to value is shared by payers, providers, and ultimately patients. "It is key to generate, assemble, and share data in a reportable manner to help reap the benefits of value-based reimbursement," Snyder says. "In addition to other reporting requirements, payers are increasingly playing the role of 'data service platform' to healthcare providers in order to help them manage patient care."
Humana is accused of placing Roche diabetes products on its formulary in exchange for compensation. This is a new avenue for kickback charges.
Health plans must now contend with a greater risk of being sued for millions of dollars under the False Claims Act and anti-kickback statutes after a court ruled that the type of "creative" business deals that were accepted in the past could now land them in court.
Granting pharmaceutical companies placement on their formularies could yield charges of fraud against the health plans and everyone else involved if it looks like there was any form of compensation, the court determined.
In United States of America ex rel. Crystal Derrick v. Hoffman-La Roche LTD et al., a U.S. District Court judge in Illinois recently allowed an FCA case to move forward, sending a message that insurance companies, pharmaceutical companies, and pharmacy benefit managers are not immune from FCA and anti-kickback statutes.
The complaint alleges that Roche paid Humana a kickback in exchange for Humana placing Roche’s diabetes testing products on its Medicare Advantage formularies. It also claims that the plaintiff was fired after objecting to the fraud.
The FCA imposes treble damages, in addition to civil penalties and attorneys’ fees on defendants. The whistleblower plaintiff is entitled to a percentage of the treble damages, which can come to tens of millions.
Drug Rebates Overpaid
United States District Court Judge Elaine E. Bucklo found that whistleblower Crystal Derrick had properly alleged fraudulent conduct and retaliation by her employer Roche Diagnostics. Derrick doesn't allege there was a direct payment for access to the formulary, however.
Instead, the lawsuit alleges that Roche Diagnostics overpaid Humana $45 million in drug rebates, then offered to accept a $27.5 million refund and allow Humana to keep the other $17.5 million.
Humana negotiated and managed to retain $34 million of the $45 million overpayment, using the formulary access as leverage, Derrick contends.
Though the case is still being litigated, the judge's decision sends a clear signal to health plans, says Ross Brooks, cochair of the whistleblower practice at the Sanford Heisler Sharp, LLP law firm in New York City, which represents Derrick.
One party's forgiveness of another's debt can be considered a kickback, he says.
The negotiations came at the end of a contract between Roche and Humana, and the health plan was planning to change its formulary and the favorable copays it allowed for Roche products.
"Roche used that as an opportunity to try to lend Humana a favor, in the form of forgiveness for overpayment of the rebates," Brooks says. "The court found that type of deal in the form of debt forgiveness would constitute a kickback."
No Safe Harbor
That was hardly the first time a company offered debt forgiveness in exchange for something of value, Brooks notes. Humana and Roche had argued that the managed care safe harbor in the FCA protected them from liability, but the court disagreed.
This was a major clarification that should cause health plans and other companies to reassess their working relationships, Brooks says.
"That should lead them to scrutinize these business arrangements, now that they know the safe harbor does not necessarily insulate them from a false claim allegation," he says. "The safe harbor was intended to address what was, at the time of the passage of the safe harbor, an unusual type of entity, the managed care organization."
Some of the more recent opinions related to risk adjustment payments, in which managed care organizations were accused of overstating the poor health of patients in order to collect higher capitated payments, Brooks says.
"But this was the first opinion in which the placement of a product on a formulary satisfied the anti-kickback statute for the purposes of False Claims Act litigation," he says. "The forgiveness of debt was an inducement to receive placement on a Medicare Advantage formulary, so that's a relatively new form of alleged kickback that had not been addressed in prior opinions."
That new angle, along with the limitations on the managed care safe harbors, creates much more FCA vulnerability for insurance companies, Brooks says. Whistleblowers and prosecutors probably will be emboldened by the ruling, he says.
"It's a significant opinion because of the court's interpretation of the managed care safe harbor. Historically, managed care plans have been able to rely on that safe harbor to insulate many different forms of creative business arrangements," he says. "But the government and whistleblowers will be able to invoke this opinion to challenge arrangements that might have historically been acceptable in the industry."
Expensive drugs often are not covered by even the plans offering the best benefits in return for higher premiums.
The highest monthly premiums in Medicare Part D and Medicare Advantage plans do not always guarantee better coverage for specialty drugs, according to recent research.
The study from HealthPocket, a website that compares and ranks all health insurance plans, looked at the challenges facing beneficiaries in 2018 Medicare Part D and Medicare Advantage plans when trying to find the most extensive specialty drug coverage.
Coverage for specialty drugs is particularly important for some consumers because the medications can cost thousands of dollars per month if obtained out-of-pocket. Medicare drug plans can reduce those costs if the specialty drug is on formulary and but they often are not.
Medicare beneficiaries in this situation can petition a plan for a formulary exception, but the request can be denied. If they want to find a new health plan that covers the specialty drug, they usually must wait for the next enrollment period.
The average Medicare Advantage plan had more specialty drugs (635) listed on its formulary than the average Part D plan (531).
However, the insurance plan with the largest coverage of specialty drugs in 2018 was a Medicare Part D plan, Educators Rx Advantage (PDP) offered in Utah and Idaho, with 952 specialty medications covered.
The plans with the fewest specialty drugs listed in their formularies (301) came from the Medicare Advantage category.
Paying the highest monthly premium did not obtain the broadest specialty drug coverage. (Health plans do not claim that it does.)
Blue Cross MedicareRx Plus (PDP) offered in Texas had the highest monthly Part D premium of $197.10 but only covered 642 specialty drugs as compared to the 952 specialty drugs in the plan with the broadest coverage.
Among traditional Medicare Advantage plans, Medicare Plus Blue PPO Assure (PPO) from Blue Cross Blue Shield of Michigan had the highest monthly premium at $312.50 and covered 609 specialty drugs.
The average 5-star Part D plan covered 495 specialty drugs, which is fewer than the 531 average for Part D plans as a whole. 5-star Medicare Advantage plans fared better than 5-star Part D plans.
On average, 5-star Medicare Advantage plans covered 606 specialty drugs, fewer than Medicare Advantage plans as a whole (635) but more than the average for 5-star Part D plans (495).
HealthPocket recommends that Medicare insurance comparison websites present the number of covered drugs and the number of covered specialty drugs for each Medicare drug plan.
Allowing more consumers to band together for group insurance could further undercut the Affordable Care Act. Health plans will be cautious about the risk inherent with these plans.
The recent move by the Trump administration to allow small businesses to create association health plans (AHP) could exacerbate existing problems in the insurance industry.
AHPs will be able to charge lower premiums in exchange for less extensive coverage that does not meet the minimum requirements of the Affordable Care Act.
Employers and consumers might benefit from the availability of AHPs, but will have to avoid being wooed by lower premiums on coverage that could cost them more in the long run, says Kevin Fine, who leads the healthcare strategies advisory group at Kaufman Rossin.
The final rule on AHPs still leaves questions unanswered about exactly how the plans would work, Fine notes, and that means the potential impact on the insurance industry is still elusive.
Effects Could Ripple
But he says there will be losers.
"This will be a disruptor, because people will look at the lower premiums and make jumps to the new plans. That will decrease membership in ACA plans and it could have detrimental effects on the healthcare system, health plans, taxpayers, everyone who foots the cost of providing healthcare," Fine says.
"This could result in greater sickness and more hospital stays if people switch to this lower level of coverage and don't receive the same level of care they might have under an ACA plan, leading to greater costs and worse health conditions down the road," he says.
Health plan leaders are looking at the AHP expansion with caution, waiting to see what the impact might be, Fine says. The impact on any particular health plan is likely to be determined by its particular market focus.
"Each insurance carrier has its own bread-and-butter they go after—commercial plans, Medicare, larger or smaller groups, and certain demographics. I don't expect health plan CEOs will be adjusting their insurance portfolios in response to this until they get a better sense of how this fits into the market they typically go after," Fine says.
"Some may find that this is something their customers are looking for and will go to other plans if they don't offer it. But they will be cautious about pulling together different types of members from different geographic areas and demographics in an association plan without understanding the types of risk that comes with, because combining different groups like that will always entail risk," he says.
Lower Premiums Attractive
Fine does expect consumer demand for AHPs to increase. The lower premiums will be irresistible to some employers and individuals, he says.
"People will always rate shop without having a clear idea of what they're getting for that premium, or even accepting the low level of coverage if they do understand. And you'll always have health plans that push their products without giving consumers a good idea of what they're getting," he says. "That will happen no matter what administration or type of health plans are out there."
The Congressional Budget Office estimates that expanded availability of AHPs could prompt more than 4 million people to ditch ACA-compliant health plans for the less expensive alternatives.
Fine notes that those people are likely to be younger and healthier, further draining ACA plans of the customers needed to compensate for the sicker ones and balance the books.
That move was seen as a direct blow to the stability of the ACA because it siphons off the most desirable consumers.
"This rule is a way to limit the growth opportunity of the exchanges. It puts another bump in the road for them," Fine says.
The rise of AHPs was driven in part, however, by the faults of the ACA, Fine says. Like AHPs, ACA offered benefits in some areas but brought risks that came to fruition in terms of soaring premiums and deductibles.
"Any significant insurance change has a tremendous amount of risk associated with it," Fine says. "We saw in ACA that the fundamentals were great but the risks were great too, and now we've seen the majority of carriers pulling out of that market because they couldn't find a way to manage that risk."
"We can't look at an option like association plans and focus on just the benefits, because those risks can be significant and sometimes we don't understand them until we get further down the road," he says.
