This special report from Russell Reynolds Associates is part of an ongoing series that examines the complex challenges facing the global healthcare industry. In this discussion, we examine the regulatory, payment reform and service delivery issues facing Health Services organizations today.
Our second installment—Embracing Change: New Growth Drivers and Leadership Requirements—addresses innovation and leadership issues in global Pharmaceutical and Biotech organizations.
Earlier this year we gathered for our most recent CEO/Innovators Roundtable in Washington, D.C.,organized by Russell Reynolds Associates, BDC Advisors, and Foley & Lardner LLP—and what a difference a few months made. When we came together for our previous Roundtable in June of 2012, the healthcare field was in an unusual state of suspended animation. The overwhelming consensus at our event was that the healthcare industry was in need of transformation and innovation—and in many areas, as we saw, that change was well under way. Nonetheless, at the time, the Supreme Court had yet to weigh in on the Affordable Care Act, and the nation’s voters were months away from a presidential election that threatened to stop healthcare reform in its tracks. Consumers; managed care payers; physician groups; and other healthcare providers, hospital systems and integrated health plans all were caught in between forces. It was hard to pivot when the nation’s largest healthcare payer—the U.S. government—was in such a state of flux.
Shortly after our June event, however, the Supreme Court affirmed the legality of the health reform law, and in November, voters returned President Obama to office for a second term. With those two events, healthcare reform was instantly resuscitated. It was as if the patient was helped off the hospital bed and ushered to the starting line of a marathon—and was expected to win. Meanwhile, all this was unfolding amidst talk of fiscal cliffs and impending budget sequestration.
President Obama let there be no doubt about the importance of transforming healthcare in the context of fiscal restraint when he declared in his inauguration speech that: “We must make the hard choices to reduce the cost of healthcare and the size of our deficit.” He drove home the point just two days after our Roundtable gathered in February, telling Scott Pelley of “CBS Evening News” during a Super Bowl interview: “We spend a lot more on healthcare than every other country does, and we don’t get better outcomes—so there’s a lot of waste in the system, and there are things that we can do to reduce healthcare costs.” And if there was any doubt about the direction of change, Obama announced in his State of the Union address that: “We’ll bring down costs by changing the way our government pays for Medicare. Our medical bills shouldn’t be based on the number of tests ordered or days spent in the hospital—they should be based on the quality of care that our seniors receive.” For those in the industry, the president’s message was clear: The country’s largest payer is moving away from fee-for-service to a broadly defined accountable care model.
The first major step in this transformation is right around the corner. The Affordable Care Actmandated health insurance exchanges are required by law to be operational next October, with plans ready to cover consumers by New Year’s Day 2014. It will be a massive undertaking. As of the February 15, 2013, deadline for declaring their intentions, the majority of states (26 of them) essentially had punted on the issue, leaving it to the federal government to set up exchanges within their borders. Regardless of who is managing the exchanges, the net result will be an additional 20 million to 30 million Americans joining the health insurance risk pool. Employees who can’t find suitable coverage at work will need to turn to the health insurance exchanges. It’s projected that approximately 6 million people simply will opt out of private coverage and pay a tax penalty to remain uninsured.
The Affordable Care Act’s exchanges are a powerful catalyst, but, as we’ve seen at our Roundtables, there are other equally strong forces at work that are spurring change, innovation and reform in healthcare. Consumers increasingly will be involved in the cost of their insurance and their own care, and their preferences will spark changes in the marketplace. Technology, including electronic medical records, diagnostic applications, consumer-empowering tools and Big Data analysis, also will stimulate industry transformation. Public companies able to raise vast amounts of capital on the open market, as well as private equity-backed companies, will compete for consumers alongside nonprofit hospital groups, traditional physician practices and health insurance organizations.
Economic, Consumer, Physician and Cost Challenges Are Enormous
While all these forces are pushing the healthcare field to reform, the hurdles can seem frustratingly high. On the surface, the healthcare economic news has been encouraging over the past few years, but it’s still unsustainable. In 2012, healthcare expenditures grew by a mere 4.3 percent, capping four years of historically low growth. Yet the growth rate still is double that of the U.S. economy and continues to account for nearly18 percent of the U.S. gross domestic product. At this rate, healthcare expenses eventually will envelop the entire economy. At our Roundtable, one attendee pointed to a study in the Annals of Family Medicine that suggests that in just eight years, the cost of health insurance will consume 50 percent of a typical American family’s income. The same study projected that by 2033, health insurance costs will exceed an average family’s income. Merely slowing growth won’t suffice as a viable reform solution. Cutting costs will be essential.
When it comes to physicians, anecdotal evidence indicates that younger doctors increasingly are embracing the models of integrated team-based care, capitated payment and population health management. However, it’s also true that only 5 percent of physicians currently practice in an accountable care organization, and most of those who are not are highly dubious of the prospect of being involved. According to the 2012 Medscape survey of practicing physicians, nearly half (47 percent of the 25,000 physicians surveyed) felt that quality measures and treatment guidelines would have a negative impact on patient care, and 67 percent said they wouldn’t reduce testing to contain costs. When it comes to cost transparency, the physician community is hardly an enabler. In fact, only 38 percent of physicians said they regularly discuss treatment costs with patients. Even when the patient initiates the conversation, the number rises to just 46 percent.
This suggests that consumer-driven cost transparency won’t be particularly easy. On the bright side, new organizations are entering the healthcare space with the goal of helping employers and their employees understand and manage healthcare costs. For most consumers, however, the challenge is daunting. Consider the report from JAMA Internal Medicine that was released just a few days after we gathered in February. The report documented how incredibly difficult it is for consumers to obtain accurate pricing information, even on a widely practiced procedure such as hip replacement. Researchers called 100 randomly selected hospitals throughout the country plus 20 top orthopedic centers and asked for the bundled price (hospital and physician fees) of the hip replacement for a fictitious 62-year-old uninsured grandmother. Even after followup calls, just 12 of the top hospitals and 54 of the randomly selected hospitals could provide a cost projection, and those estimates ranged wildly from $11,100 to $125,798. In some cases, the estimates proved too high because hospitals were willing to negotiate lower rates, while with other hospitals, the price didn’t factor in rehabilitation costs. This price inquiry was the work of an enlightened consumer—albeit a fictitious one—who knew which questions to ask and was comfortable with negotiations. The challenge for traditional consumers, who lack a basic understanding of the issues and who, historically, have been insulated from the true cost of healthcare, will be more dramatic.
While there is great hope in the power of consumers to drive change in healthcare, it’s many of these same consumers who are responsible for the high healthcare costs. Take, for example, the issue of obesity in the United States. According to data from the Centers for Disease Control and Prevention, 35 percent of Americans are obese (with a body mass index greater than 30). The cost of treating obesity-related diseases was estimated at $190 billion per year by Cornell professor John Cawley in the Journal of Health Economics. If Cawley’s numbers are right, that means obesity accounts for 21 percent of the nation’s healthcare costs. Solve the obesity epidemic, and a major share of the healthcare cost problem disappears.
The trend line, however, is pointed in the other direction. A recent report by the Robert Wood Johnson Foundation projects that by 2030, the national obesity rate could climb to 44 percent, with several states in excess of 60 percent. Far from lowering the cost of healthcare, rising obesity rates will lead to increased healthcare costs. When it comes to smoking, approximately 20 percent of Americans still do so, accounting for another $96 billion in annual healthcare costs. It’s worth repeating that solving for obesity and smoking virtually resolves the problem of taking 20 percent to 30 percent of costs out of the system. Yet, that’s no easy task.
Despite the vast challenges facing the healthcare industry, the talent and resources currently engaged in unraveling the long-term industry problems are equally enormous and impressive. At our CEO/Innovators Roundtables, we continue to be inspired by the ideas and actions of our attendees and their organizations. Since we began this twice-yearly event in 2009, we have heard from leaders and innovators in technology, science, public and private health insurance payer organizations, federal and state government executives, medical groups, hospitals, private equity and venture capital. These leaders have weighed in on the wide range of solutions and challenges in the healthcare field, from the promise of novel treatments to the management of data and consumer technology.
As we’ve heard from diverse groups throughout the country, the reality is that healthcare reform may look slightly different in various geographies. If there is one unifying consensus that has emerged since our last meeting, it’s that some form of capitated payment/population-health management will be a central part of the solution. In order for that to occur, however, the economic incentives must be realigned so that physician groups, hospitals and other provider organizations are paid for keeping large populations of people healthy. In today’s world, however, healthcare markets still operate in a volume-based fee-for-service environment.
Some transformative models that are having success include Blue Cross Blue Shield of Massachusetts’ Alternative Quality Contract and a restructuring program being studied at Kaiser Permanente. One model that drew some attention at our February event is that of the Southcentral Foundation, headquartered in Anchorage, Alaska. The nonprofit healthcare plan was honored last year with the U.S. Department of Commerce’s Malcolm Baldrige Award for business innovation and performance. Southcentral operates 26 facilities serving 60,000 Alaska Natives (13,000 of whom live in remote wilderness areas accessible only by boat or plane). Patients are referred to as customer-owners, highlighting shared responsibility for their healthcare.
At Southcentral, care is delivered in a coordinated-care team process, generally consisting of a doctor, a nurse, two medical assistants, a behavioral health therapist and an administrative assistant. A team typically is responsible for approximately 1,400 patients and is connected to Southcentral pharmacists, nutritionists, and specialists such as eye doctors and dentists. Team members work in an open, collaborative environment with no offices or nursing stations and are compensated based on their performance, not on services ordered or performed.
In Alaska, the model is working well. Customer-owners can call the same day for an appointment as long as they do so by 4 p.m. and arrive by 4:30 p.m. Nurses field calls to determine if a customer-owner needs to come in or if the issue can be dealt with over the phone. Medical teams also rely on extensive outbound communication, using phone calls, emails and text messages to ensure that customer-owners are sticking to their health management plans. Each care team is hooked into a “data mall” of information, which, according to The New York Times, “coughs up easily understood graphics showing how well doctors and the teams they lead are doing to improve health outcomes and cut costs compared with their colleagues, their past performance and national benchmarks, and it provides them with action lists of what they can do to improve and mentors to guide them.” Doctors whose teams are underperforming their peers in, say, scheduling eye appointments for diabetics quickly catch up to the norm.
This same-day, always-on healthcare model has led to some astounding results:
- 50 percent decrease in emergency room and urgent care visits
- 53 percent decrease in hospital admissions
- 65 percent decrease in specialty care
- 35 percent decrease in primary care
Southcentral’s system may not work everywhere, but it’s an indication as to where healthcare is headed.
Looking forward, on the first day of this winter’s event, we asked our panelists to focus on how technology is transforming the industry and to offer insight on how provider groups and commercial aggregators/integrators are evolving in the midst of reform. The second day, we tackled the issue of consumer empowerment and the cost management imperative. If you were able to join us, we think you’ll find this review a helpful way to keep the conversation and network building alive until our next meeting. If you weren’t able to make it in February, we hope that this will help bring you up to speed on some of the ideas with which many industry innovators are experimenting and that you will be able to join us at the next CEO/Innovators Roundtable scheduled for October 10-11 in Chicago.
Finally, a brief note about these discussions and the writeups that follow: Each session during the event was moderated by experts in field—those listed at the top of each summary—but the discussions included lively debate, input and dialogue from the entire group of attendees.
Analytics Providers/“Intel Inside”
- Charles Saunders, M.D., Chief Executive Officer, Healthagen, a Division of Aetna
- John Doulis, M.B.B.S., Chief Information Officer, MedCare Investment Funds
What should the role of information technology be when it comes to transforming healthcare? Technology, of course, increasingly will be part of every facet of healthcare. It will assist in engaging patients in their health decisions, it will include the deployment of high-tech devices and it will encompass large-scale data analyses. On the macro level, one of the principal roles of technology will be to help providers flourish—to be successful in their jobs—under a populationhealth business paradigm. Healthcare organizations will be faced with three core issues as they seek to implement and accelerate the adoption of healthcare information technology solutions.
The first issue is gaining access to clinical and patient data. On a very basic level, it can be difficult to extrapolate data from patients’ medical health records. The second issue is that health insurance claims data must then be integrated with clinical data. Situations where providers are forced to access multiple databases, often with a number of terminals sitting side by side, are untenable. While cataloging structured data such as universally accepted data fields is relatively easy, there is a wide range of unstructured data that can show up in patient records (images, notes, videos, documents) that are difficult to integrate. Some highly integrated healthcare organizations have an advantage because they already capture both sets of data in an integrated format.
Assuming the data can be collected, aggregated and integrated digitally, the third and potentially most challenging issue is that meaning must be gleaned from these data. Can an analysis isolate the sickest patients in a given population? And can this analysis help determine what should be done to treat those patients? Only when these three issues are integrated will they begin to offer a real solution to healthcare organizations.
While those data problems are being addressed, there is an enormous challenge in disseminating the information to the provider community and ensuring that the solutions actually are leveraged. According to a report by the U.S. Agency for Healthcare Research and Quality, it takes 17 years for 50 percent of physicians to adopt published guidelines. Even when actionable data are available, the medical community doesn’t always act on the information. Bending the cost curve will require a huge investment in technology, combined with strategies that promote broad-scale adoption by the medical community.
If there was a cautionary note about technology among the group, it was as a reminder not to become too enamored with it as a comprehensive solution but rather to view it as a catalyst for change. A consensus emerged that real healthcare solutions will come about when a care team— including the patient—is actively monitoring the data and responding to the information in real time.
Without patients playing a role and taking responsibility for their care, there is only so much that technology can do. This will prove to be a serious challenge to long-term success in the healthcare industry. Several studies have shown that patients typically adhere to their prescriptions only 45 percent to 55 percent of the time. One particular study found that within a month of a heart attack, only 70 percent of 17,000 patients were taking their prescribed betablockers— by the end of a year, the percentage had dropped to just 45 percent. Technology solutions such as automated phone calls, emails and texts will play a role in spurring patients into action, but, ultimately, the patient still must take the pill. Just as incentives are being realigned for physicians, they also need to be changed for consumers and patients.
Many organizations are using gamification, or game-focused platforms, to incentivize consumers to improve and manage their health. One healthcare entity uses rewards to ensure that pregnant women attend all their medical appointments. Other approaches may leverage consumers’ online social networks as a way to get people to manage their fitness and health. Consumer products companies also are entering the consumer-engagement marketplace, which suggests that traditional players will be experiencing increased competition from outside the industry. Nike’s FuelBand, which allows people to set daily fitness goals, track progress throughout the day and compete against friends, is just one example of modern technologies and emerging players in the healthcare technology field.
Complicating matters for traditional players are structural hurdles such as HIPPA, or Health Insurance Portability and Accountability Act, privacy rules. While the global trend is to share information widely, in healthcare, the law works in the opposite direction—clamping down on the exchange of patient information. One solution discussed at the Roundtable may simply be to put a patient’s health information on a microchip-enabled card. In this paradigm, patients would physically possess their electronic records and thus be able to control the use of the information by sharing it as broadly or as little as they choose.
What is clear is that unless patients and consumers are integrated and engaged in their own healthcare, the prospects for improving quality while decreasing costs are limited.
National Aggregators/Integrators Evolve—Providers
- Bernadette Loftus, M.D., Associate Executive Director, Mid-Atlantic Permanente Medical Group
- Brad Perkins, M.D., Executive Vice President for Strategy & Innovation and Chief Transformation Officer, Vanguard Health Systems
Most observers at the Roundtable posited that the healthcare system in the United States has 10 years to transform itself. A few attendees suggested change will take place much more quickly, spurred on by consumer expectations and technology. The future most likely will encompass a wide range of players, including academic medical centers, nonprofit healthcare systems, fully integrated healthcare organizations and for-profit health systems, as well as traditional payer organizations that are evolving into entirely new entities. In some markets, all these players will exist, while in other markets, one or another will dominate. Accountable care organizations in the western United States may look dramatically different from the way they do in Minnesota or, say, in the Mid-Atlantic or New England states.
The industry consolidation that nearly all believe is inevitable certainly will eliminate competitors in some markets, but it also will create new ones that seek to replicate and improve upon successful models. Organizations likely will be forced to compete for consumers in ways they never have before, providing quick, easy, affordable and quality healthcare in real time. One open question is where this inevitable consolidation will leave physicians. Will they increasingly become employees of large healthcare systems, sacrificing independence for stability and the ability to focus exclusively on medicine? Or will physicians partner with virtually integrated healthcare systems, maintaining independence while still leveraging the power of a larger organization? The answer to both of these questions, most likely, is yes.
When it comes to healthcare aggregators/integrators, both of these paradigms—fully integrated and virtually integrated—are emerging as viable models for the future. The nonprofit fully integrated program is one that employs its own physicians, nurses and other clinicians who practice in the organization’s facilities, providing a one-stop shop for consumers. In this approach, the payer and provider are combined, enabling highly integrated data analysis and data solutions for physicians and consumers to leverage—with no need to gather and interpret information from a third party. One challenge for consumers is that these highly integrated health systems can limit consumers’ perception of choice—such as being able to choose exactly which physician they want to see. To combat this perception, these closed-network plans must provide a high-quality, low-cost, finely tuned, patient-focused system that delivers on-demand access and care 365 days a year.
Competing on quality and cost, however, also is the metric by which for-profit virtually integrated models measure themselves. Indeed, these for-profit institutions have a discipline enforced upon them by quarterly earnings reports and investors who will flee if success isn’t efficient and scalable. By rolling out effective solutions in a highly disciplined manner to its network of hospitals and care facilities, these virtually integrated systems may realize cost savings on the order of 30 percent to 40 percent. Instead of employing physicians directly, the virtually integrated model seeks to align them through a set of principles, guidelines and incentives. Underpinning this approach is an underlying belief that physicians and physician groups will leverage their independence to innovate when it comes to cost savings and healthcare solutions. If the program works, these organizations can go to the public equity markets in search of new capital that will enable them to scale quickly and efficiently.
Can both models survive—a nonprofit fully integrated process and a for-profit virtually integrated one—particularly in markets where they may compete head to head? The consensus in the group discussion was yes. Indeed, they likely will be competing against still other organizations that enter the accountable care environment. So what might accountable care organizations, broadly defined, look like in 10 years? One projection is that they will function as full-service health organizations, including pharmacies, home-health physicians and skilled nursing facilities adjacent to hospitals. If the scale is large enough, particularly in urban and suburban markets, it’s possible that the accountable care organizations of tomorrow even may address the issue of food deserts, where, currently, access to high-quality, healthy food is severely limited. In this light, not only will healthcare organizations be treating chronic diseases such as obesity and its related ailments but getting at the root cause of them as well.
National Aggregators/Integrators Evolve—Commercial Players
- Jeff Kang, M.D., M.P.H., Senior Vice President, Health and Wellness Services and Solutions, Walgreen Co.
- Walter Ettinger, Jr., M.D., Executive Vice President and Chief Medical Officer, Accretive Health, Inc.
- Paul Kusserow, Senior Vice President, Chief Strategy, Innovations and Corporate Development Officer, Humana Inc.
- Seth Frazier, Senior Vice President, Chief Transformation Officer, Evolent Health
The provider universe is hardly the only area where innovation and disruption are taking place. Several commercial players are intent on gaining market share while improving healthcare outcomes and adopting integrated strategies that will accelerate the transition to accountable care business models. Retail pharmacies have long been part of the care delivery marketplace, and that trend looks to be accelerating. Not only do consumers receive medication at these retail outlets, but pharmaci