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Category: The Business of Health Care

THCB 20th Birthday Classic: Value-based care – no progress since 1997?

As the 20th Birthday rolls on I thought I’d bring out a more recent piece first published in October 2020, albeit one that relies heavily on 25 year old data to make a point. This is some evidence to back up Jeff Goldsmith’s comment on the original that for all the talk “ ‘Value based” payment is a religious movement, not a business trend’ ” By the way, Humana updated these numbers last year and there’s been basically no change — Matthew Holt

By MATTHEW HOLT

Humana is out with a report saying that its Medicare Advantage members who are covered by value-based care (VBC) arrangements do better and cost less than either their Medicare Advantage members who aren’t or people in regular Medicare FFS. To us wonks this is motherhood, apple pie, etc, particularly as proportionately Humana is the insurer that relies the most on Medicare Advantage for its business and has one of the larger publicity machines behind its innovation group. Not to mention Humana has decent slugs of ownership of at-home doctors group Heal and the now publicly-traded capitated medical group Oak Street Health.

Humana has 4m Medicare advantage members with ~2/3rds of those in value-based care arrangements. The report has lots of data about how Humana makes everything better for those Medicare Advantage members and how VBC shows slightly better outcomes at a lower cost. But that wasn’t really what caught my eye. What did was their chart about how they pay their physicians/medical group

What it says on the surface is that of their Medicare Advantage members, 67% are in VBC arrangements. But that covers a wide range of different payment schemes. The 67% VBC schemes include:

  • Global capitation for everything 19%
  • Global cap for everything but not drugs 5%
  • FFS + care coordination payment + some shared savings 7%
  • FFS + some share savings 36%
  • FFS + some bonus 19%
  • FFS only 14%

What Humana doesn’t say is how much risk the middle group is at. Those are the 7% of PCP groups being paid “FFS + care coordination payment + some shared savings” and the 36% getting “FFS + some share savings.” My guess is not much. So they could have been put in the non-VBC group. But the interesting thing is the results.

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Torben Nielsen, CEO, Uptiv Health

Early this month I caught up with Torben Nielsen who is now CEO of Uptiv Health. Another one from the Redesign Health factory, Uptiv Health came out of stealth recently with the goal of improving the experience and reducing the cost of those patients who have to have regular infusion treatments. Uptiv Health just raised $7.5m and is opening its first location in Detroit at the end of August 2023, with a goal of becoming the health home of those chronic disease patients. Why do we need a new offering in infusion care? Torben will tell you–Matthew Holt

THCB 20th Birthday Classic: McKinsey wants to inspire lots of change; caveat emptor

by MATTHEW HOLT

So to celebrate 20 years, we’ll be publishing a few classics for the next week or so. This is one of my faves from the early days of THCB, back in 2006. It’s interesting to compare it with Jeff Goldsmith’s NEW piece from yesterday on vertical integration because at the time a pair of Harvard professors, Michael Porter and Elizabeth Teisberg were telling hospitals to change their operations in a way that seemed to me were going to destroy their business–cut down to one or two service lines they were best at and stop with the rest. McKinsey picked up on this and I went to town on why they were all wrong. In fact in the next decade and a half, despite all the fuss and consulting fees generated, almost no hospital system did anything other than merge horizontally with local competitors, stick up its prices, and buy feeder systems of primary care doctors or ally with/bribe specialists to keep their procedural referrals up. The result is the huge regional oligopolies that we have now. Despite all the ignoring of their advice, I don’t think Porter/Teisberg or McKinsey went broke in that same period.–Matthew Holt

McKinsey, an organization that prides itself on increasing the amount of consulting dollars it gets paid by improving the strategic direction of American business is making another foray into health care.

You may recall their last study on CDHPs was roundly criticized (see Tom Hillard for a good example including a hilarious and brutal smackdown of their research methodology in the last couple of paras), and this time they cleverly aren’t bothering with data—in fact they’re basically copying Porter and Teisberg. The piece, by Kurt Grote, Edward Levine and Paul Mango, is about hospitals and how they need to get into the 21st century.

And of course the idea is that hospitals need to change their business approach.  Well, given that I hadn’t noticed a rash of hospital closings and the the industry as a whole has been growing its revenues pretty successfully over the years, what exactly are the problems?

The rise of employer-sponsored insurance in the 1930s and 1940s, and the emergence of government-sponsored insurance in the 1960s all insulated hospitals from the need to compete for patients. Today hospitals are “price takers” for nearly 50 percent of their revenues, which is subject to the political whims of the federal and state governments. Hospitals are also required to see, evaluate, and treat virtually any patient who shows up, solvent or not. Furthermore, physicians were productive because hospitals put a great deal of capital at their disposal. Yet these hospitals didn’t enforce standardized and efficient approaches to the delivery of care. At many hospitals today, doctors still bear only limited economic
responsibility for the care decisions they make. Little wonder that it is often they who introduce expensive—and sometimes excessive—nonreimbursable technologies or that hospitals not only suffer from declining margins but are also performing less well than other players in the health care value chain
 

The piece then has a pretty incomprehensible chart that compares the EBITDA (profit) of hospitals compared to drug companies and insurers. Surprisingly enough they make a whole lot less EBITDA than those businesses–although long time THCB readers will know we’ve been well down that path. And apparently their margins got worse and then better (from 25% in 1990 to 15% in 1995 to 10% in 2000 but back up to 15% in 2004).

McKinsey’s answer, basically filched from Porter/Teisberg, is for hospitals to specialize in particular service lines, stop being generalists and start trying to please the consumer who’ll be choosing among them. As a general mantra, this might be good for consultants to stick up on Powerpoint, but to be nice it’s massively oversimplified, and to be nasty it’s just plain wrong for most hospitals for the current and foreseeable medium-term future.

Their analysis ignores the fact that there are (at least) three broad categories of hospitals–inner city and rural  safety-net providers, big academic medical centers, and suburban community hospitals. Each of these has a completely different audience, completely different set of incentives, and more to McKinsey’s point, different profit margins.

Right up front they talk about the 50% of revenue that comes from the government–but for the first two categories, it’s more than that! And for everyone, as public programs grow, it’s going to be increasing.

Those hospitals relying on Medicare make most of their money but playing very careful attention to the DRG mix. The ones who play that game well and make most profit on Medicare outliers (like the for-profits McKinsey features in its metrics) don’t really want to change that by stopping their patients becoming those outliers, because if they get better at treating patients, they make less money. Brent James’ famous Intermountain story tells the truth, and until Medicare really changes the way it pays, you don’t want to be ahead of that curve. Intermountain may have spent more than 10 years leaving money on the table, but those rich Mormons can afford it.

Meanwhile, for the mainstream community hospitals, as more and more services and patients leave the building, the imperative is not to change their business model, it’s to get their hands on that revenue that’s leaving with them. That’s why most big hospitals are now-co-investing with physicians in specialty hospitals et al. But while that’s a defensive battle to build better “hotels” for the star surgeons, it’s still about building better “hotels”–not junking the model of being the nicest possible host to the big time admitting surgeons.

The McKinsey/Porter/Teisberg theory is of course that if you get good at one service line, you’ll be attractive to consumers, and that they’ll choose you. There is more truth to this notion now than there was five years ago, but not much more. Doctors choose hospitals for their patients. That’s always been the case, other for those that get admitted via the ED, and that’s a function of location. That’s why hospitals suck up to surgeons. But even when consumers make choices, they’re not very active consumers beyond the deductible, and basically all hospital spending is beyond the deductible, and even in the cash non-hospital business (the stuff like genetic testing) most consumers take their doctor’s advice.

Which leads of course to who the other real consumer for the hospital is, and that’s the third party payer. First rule of dealing with payers is to figure out how to play the Medicare system well enough that you make it very profitable, but not too “well” that you get busted, a la Columbia/HCA, Tenet & St Barnabas.

Second rule is that you need to get bargaining strength against the health plans. No one can pretend that health plans really care in a global sense about having their providers cut costs and improve care delivery. They may say they care about it, but health plans add a chunk on the top of what they pay providers and stick that to their clients (usually employers) — who basically take it in a mealy mouthed way.

There is, though, a fight in any local market about where to draw the line on hospital pricing. But this fight is not about having providers from outside (or even within) the region swooping in to capture all a payer’s business with better pricing on certain service lines, and payers moving patients to these disease-specific treatment centers.  Well, it is about that in the McKinsey/Porter/Teisberg fantasy land, but in reality the fight is about setting global pricing for all the services a payer needs for its members in that region.

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Vertical Integration Doesn’t Work in Healthcare:  Time to Move On

So in this week of THCB’s 20th birthday it’s a little ironic that we are running what is almost a mea culpa article from Jeff Goldsmith. I first heard Jeff speak in 1995 (I think!) at the now defunct UMGA meeting, where he explained how he felt virtual vertical integration was the best future for health care. Nearly 30 years on he has some reflections. If you want to read a longer version of this piece, it’s hereMatthew Holt

By JEFF GOLDSMITH

The concept of vertical integration has recently resurfaced in healthcare both as a solution to maturing demand for healthcare organizations’ traditional products and as a vehicle for ambitious outsiders to “disrupt” care delivery.    Vertical integration is a strategy which emerged in US in the 19th Century industrial economy.  It relied upon achieving economies of scale and co-ordination through managing the industrial value chain.    We are now in a post-industrial age, where economies of scale are in scarce supply.  Health enterprises that are pursuing vertical integration need to change course. If you look and feel like Sears or General Motors, you may well end up like them.  This essay outlines reasons for believing that vertical integration is a strategic dead end and what actions healthcare leaders need to take.

Where Did Vertical Integration Come From?

The River Rogue Ford Plant

The strategy of vertical integration was a creature of the US industrial Revolution. The concept was elucidated by the late Alfred DuPont Chandler, Jr. of the Harvard Business School. Chandler found a common pattern of growth and adaptation of 70 large US industrial firms. He looked in detail at four firms that came to dominate markedly different sectors of the US economy:  DuPont, General Motors, Sears Roebuck and Standard Oil of New Jersey. They all followed a common pattern: after growing horizontally through merging with like firms, they vertically integrated by acquiring firms that supplied them raw materials or intermediate products or who distributed the finished products to final customers. Vertical integration enabled firms to own and co-ordinate the entire value chain, squeezing out middlemens’ profits.

The most famous example of vertical integration was the famed 1200 acre River Rouge complex at Ford in Detroit, where literally iron ore to make steel, copper to make wiring and sand to make windshields went in one end of the plant and finished automobiles rolled out the other end. Only the tires, made in nearby Akron Ohio, were manufactured elsewhere. Ford owned 700 thousand acres of forest, iron and limestone mines in the Mesabi range, and built a fleet of ore boats to bring the ore and other raw materials down to Detroit to be made into cars. 

Subsequent stages of industrial evolution required two cycles of re-organization to achieve greater cost discipline and control, as well as diversification into related products and geographical markets. Industrial firms that did not follow this pattern either failed or were acquired. But Chandler also showed that the benefits of each stage of evolution were fleeting; specifically, the benefits conferred by controlling the entire value chain did not last unless companies took other actions. Those interested in this process should read Chandler’s pathbreaking book: Strategy and Structure: Chapters in the History of the US Industrial Enterprise (1962).   

By the late 1960’s, the sun was setting on the firms Chandler wrote about. Chandler’s writing coincided with an historic transition in the US economy from a manufacturing dominated industrial economy to a post-industrial economy dominated by technology and services. Supply chains re-oriented around relocating and coordinating the value-added process where it could be most efficient and profitable.  Owning the entire value chain no longer made economic sense. River Rouge was designated a SuperFund site and part of it has been repurposed as a factory for Ford’s new electric F-150 Lightning truck. 

Why Vertical Integration Arose in Healthcare

I met Alfred Chandler in 1976 when I was being recruited to the Harvard Business School faculty. As a result of this meeting and reading Chandler’s writing, I wrote about the relevance to healthcare of Chandler’s framework in the Harvard Business Review in 1980 and then in a 1981 book Can Hospitals Survive: The New Competitive Healthcare Market, which was, to my knowledge, the first serious discussion of vertical integration in health services.

Can Hospitals Survive correctly predicted a significant decline in inpatient hospital use (inpatient days fell 20% in the next decade!). It also argued that Chandler’s pattern of market evolution would prevail in hospital care as the market for its core product matured. However, some of the strategic advice in this book did not age well, because it focused on defending the hospital’s inpatient franchise rather than evolving toward a more agile and less costly business model. Ambulatory services, which are today almost half of hospital revenues, were viewed as precursors to hospitalization rather than the emerging care template.

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I Want a Lazy Girl Job Too

BY KIM BELLARD

I came across a phrase the other day that is so evocative, so delicious, that I had to write about it: “lazy girl job,” or, as you might know it. @#lazygirljob.

Now, before anyone gets too offended, it’s not about labeling girls as lazy; it’s not really even about lazy or even only girls.  It’s about wanting jobs with the proverbial work-life balance: jobs that pay decently, don’t require crazy hours, and give employees flexibility to manage the other parts of their lives.  Author Eliza Van Cort told Bryan Robinson, writing in Forbes: “The phrasing ‘lazy girl job’ is less than ideal—prioritizing your mental health and work-life integration is NOT lazy.”

The concept is attributed to Gabrielle Judge, who coined it on TikTok back in May (which is why I didn’t hear about it until recently).  According to her, it means not living paycheck to paycheck or having to work in unsafe conditions. She believes job flexibility doesn’t mean coming in at 10 am instead of 9 am because you have a dentist appointment; it means you have more control over your hours and when you get your work done. If Sheryl Sandberg was all about “leaning in,” Ms. Judge is about leaning out.  

Ms. Judge explained to NBC News:

Decentering your 9-to-5 from your identity is so important because if you don’t, then you’re kind of putting your eggs all in one basket that you can’t necessarily control. So it’s like, how can we stay neutral to what’s going on in our jobs, still show up and do them, but maybe it’s not 100% of who we are 24/7?

“I’m only accepting the soft life, period,” she says.

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Is More Physician-Owned Hospitals the Solution to our Health Cost problem?

BY JEFF GOLDSMITH

Robert Frost once said,  “Home is where, when you have to go there, they have to take you in.”

Increasingly, in our struggling society, that place is your local full service community hospital.  During COVID, if it wasn’t your local hospital standing up testing sites, pumping out vaccinations and working double overtime helping patients breathe, we would have lost several hundred thousand more of our fellow Americans.  

But it wasn’t just COVID where hospitals leaped into the breach.    As primary care physicians’ practices collapsed from documentation overburden and chronic underpayment, hospitals took them in on salary.  If it wasn’t for hospitals, vast swatches of the northern most three hundred miles of the US and large stretches of our inner cities would be a physician desert.  Hospitals subsidize those practices to a tune of $150k a year to have a full service medical offering and keep their own doors open.  

As our public mental health system withered, the hospital emergency department  (and, gulp, police forces). became our main mental health resource.   Tens of thousands of mentally ill folks languish overnight in hospital observation units because, despite not being “acutely ill”, there is nowhere for the hospital to place them.  And as our struggling long term care facilities withered under COVID, those mentally ill folks were joined in observation by seriously impaired older folks too sick to be cared for at home.  As funding for public health has withered on the vine, hospitals have become the de facto public health system in the US.  

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What Can We Learn from the Envision Bankruptcy?

By JEFF GOLDSMITH

Envision, a $10 billion physician and ambulatory surgery firm owned by private equity giant Kohlberg Kravis Roberts, filed Chapter 11 bankruptcy on May 15.  It was the largest healthcare bankruptcy in US history.   Envision claimed to employ 25 thousand clinicians- emergency physicians, anesthesiologists, hospitalists, intensivists, and advanced practice nurses and contracted with 780 hospitals.  Envision’s ER physicians delivered 12 million visits in 2021, not quite 10% of the US total hospital ED visits.

The Envision bankruptcy eclipsed by nearly four-fold in current dollars the Allegheny Health Education and Research Foundation (AHERF) bankruptcy in the late 1990’s.   KKR has written off $3.5 billion in equity in Envision.   Envision’s most valuable asset, AmSurg and its 257 ambulatory surgical facilities, was separated from the company with a sustainable debt structure.  And at least $5.6 billion of the remaining Envision debt will be converted to equity at the barrel of a gun, at dimes on the dollar of face value. 

KKR took Envision private in 2018 when Envision generated $1 billion in profit, in luminous retrospect the peak of the company’s good fortune.   Envision’s core business was physician staffing of hospital emergency departments and operating suites.    In 2016, then publicly traded, Envision merged with then publicly traded ambulatory surgical operator AmSurg.  This merger seemed at the time to be a sensible diversification of Envision’s “hospital contractor” business risk.   

Indeed, Envision’s bonus acquisition of anesthesia staffing provider Sheridan, acquired by AMSURG in 2014,  helped broaden its portfolio away from the Medicaid intensive core emergency room staffing business (EmCare), which required extensive cost-shifting (and out of network billing) to cover losses from treating Medicaid and uninsured patients.   It is clear from hindsight that where you start, e.g. your core business, limits your capacity to spread or effectively manage your business risk, an issue to which we will return.

The COVID hospital cataclysm can certainly be seen as a proximate cause of Envision’s demise.

The interruptions of elective care and the flooding of emergency departments with elderly COVID patients, which kept non-COVID emergencies away, damaged Envision’s core business as well as nuking ambulatory surgery. By the spring of 2020, Envision was exploring a bankruptcy filing.  An estimated $275 million in CARES Act relief and draining a $300 million emergency credit line from troubled European banker Credit Suisse temporarily staunched the bleeding.  But the pan-healthcare post-COVID labor cost surge also raised nursing expenses and led to selective further shutdowns in elective care and further cash flow challenges.  

While one cannot fault KKR’s due diligence team for missing a global infectious disease pandemic, with hindsight’s radiant clarity, there were other issues simmering on the back burner by the time of the 2018 deal that should have raised concerns.  Two large struggling investor owned hospital chains,  Tenet and Community Health Systems, began divesting marginal properties in earnest in 2018, placing a lot of Envision’s contracts in the pivotal states of Florida and Texas at risk.

More importantly,  there were escalating contract issues with  UnitedHealth, one of Envision’s biggest payers,  as well as increasing political agitation about out-of-network billing, which provided Envision vital incremental cash flow.  These problems culminated in a United decision in January 2021 to terminate insurance coverage with Envision, making its entire vast physician group “out of network”. 

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Nils Bottler, Angelini Ventures

I’ve been friends with Roberto Ascione for many years. Roberto is a keen Napoli fan who on the side runs the Healthware Group and also the Frontiers Health Conference that I’ve been going to for many years (and where Jess DaMassa is co-MC). Recently Healthware acquired the media company pharmaphorum and hired star reporter (and another friend) Jonah Comstock, ex MobiHealthNews and HIMSS Media. This is THCB’s second cross-posting with pharmaphorum.Matthew Holt

Nils Bottler, who recently joined Angelini Ventures as Principal, is an avid skier, surfer, and digital health investor based in Berlin. In a new podcast, he spoke with Paul Tunnah, pharmaphorum founder, about his career, the German start-up landscape, and where Angelini Ventures aims to have an impact.

Interview with Ogi Kavazovic, CEO of House Rx

Ogi Kavazovic, CEO of House Rx joined Matthew Holt to explain how his company is trying to ungum the specialty pharmacy market. Its a huge market with a few huge oligopolies in charge of it, and Ogi thinks there is room to work directly with the clinics responsible for most patients using injectables and provide them a better and cheaper experience. Last year they raised $30m in a round led by Bessemer, but as Ogi says there’s along way to go!

Last in Line: Hospitals Brace for a Chilly 2023

BY JEFF GOLDSMITH

As they emerge from the COVID pandemic, US hospitals have a terrible case of Long COVID.  They experienced the worst financial performance in 2022 in this analyst’s 47 year memory.  As the nation recovers from the worst inflation in forty years, hospitals will find themselves locked in conflict with health insurers over contract renewals that would reset their rates to the actual delivered cost of care.  “Last in line” in the US battle with inflation, hospitals will be exposed to public criticism when they attempt to recover from pandemic-induced financial losses. 

Hospital payment rates for commercial payers are backward looking. Commercial insurance contracts between hospitals and health insurers were multi-year contracts negotiated before the pandemic.  They continued in force during the pandemic, despite explosive rises in people and materials costs.    As a consequence, health costs were conspicuously missing from the main drivers of the 2021-22 inflation surge– food, housing, energy, durable goods, etc.    

Hospitals’ operating costs blew up during COVID due to a shortage of clinicians, the predations of temporary staff agencies, shortages of supplies and drugs and crippling cyberattacks that disabled their IT systems.   Hospital losses worsened during 2022 because they are unable to place patients who are no longer acutely ill but who cannot be placed in long term, psychiatric or home-based care (a problem shared by Britain’s disintegrating National Health Service).   Thousands of patients are stuck in limbo in hospital “observation” units, for which government and commercial payers do not compensate them adequately or at all.   

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