The CEO of a community hospital in NH warns of dire consequences if coverage gains achieved through Obamacare are reversed by the American Health Care Act.
Before lawmakers in Washington roll back Medicaid expansion under the Patient Protection and Affordable Care Act (PPACA), they should meet face-to-face with Peter Wright.
Wright is president and CEO of Claremont, NH-based Valley Regional Healthcare, which operates a 25-bed community hospital. "Any negative changes to Medicaid will be just brutal for us. Our financial assistance program has been reduced dramatically since expanded Medicaid and the ACA have gone into effect," Wright told HealthLeaders last week.
New Hampshire is one of a handful of states that expanded Medicaid through the so-called private option, which allows income-eligible adults to purchase subsidized health coverage on the PPACA insurance exchange. This year, about 50,000 low-income Granite State adults have coverage through Medicaid Expansion.
Claremont is located near the White Mountains in New Hampshire's North Country. The area's views of the high peaks and low per-capita incomes are hallmarks of the community.
Wright says the Medicaid coverage cutbacks proposed in the American Health Care Act (AHCA) wending through Congress would have a devastating impact on Valley Regional and many of its patients.
"It has the potential to cripple us. Somewhere between 64% and 67% of everything we do in this organization is serving patients on Medicare, Medicaid or financial assistance," he says. "We are already in a fragile state and financially struggling, with no margin or a negative margin."
For the 2016 fiscal year, Valley Regional posted operating revenue at $38.4 million. Operating expenses outstripped revenue by more than $4 million.
Last week's scoring of the AHCA by the Congressional Budget Office, which projected millions of Americans would lose coverage from the rollback of Medicaid Expansion, is sending chills across the North Country.
"The CBO scoring confirms our concerns that the AHCA will leave hundreds if not thousands of patients without critical insurance coverage. We know that 961 people in Claremont (roughly 7%) and 2,128 people in Sullivan County (roughly 5%) have the potential of losing their coverage," Wright says.
Adoption of the AHCA or any other legislation that undermines insurance coverage for economically disadvantaged Americans poses an existential threat to Valley Regional and many of its patients, he says.
"Studies show that once patients lose coverage, they avoid necessary primary and preventive care, leaving medical issues to become emergency situations. This more severe care usually ends up in the emergency department, where the cost is higher. Without insurance, Valley Regional will be forced to absorb the expense, increasing our uncompensated care and threatening our financial stability."
Losing Access
If Valley Regional is forced to close, many low-income patients will lose access to care. "We are located at ground zero of one of the communities that has the highest need in the entire state. You can't expect people in this community to travel for care because they won't. Sometimes, they even have trouble getting to us."
Any significant rollback of Medicaid Expansion will lead to a dramatic spike in uncompensated care across The Granite State, Steve Ahnen, president of the New Hampshire Hospital Association, told HealthLeaders last week.
"Since Medicaid Expansion went into effect, we have seen about a 45% reduction in the number of uninsured patients who show up in emergency departments seeking care across the state," he says.
Projected coverage reductions are just the tip of the AHCA iceberg because the architects of the bill did nothing to restore the $155 billion cut in Medicare reimbursement to hospitals over a 10-year period that helped finance Obamacare, Ahnen says.
"So, at a time when we could be seeing fewer people covered with insurance, we could also be seeing lower reimbursement for hospitals from Medicare."
The AHCA needs to go back to the drawing board, he says. "We would see a significant challenge across the state with the kind of retrenchment and rollback that is envisioned in this bill. Certainly, in many communities like Claremont, they would feel this very swiftly and very significantly."
The positive effects of the Patient Protection and Affordable Care Act on population health are undeniable, says the head of the Commonwealth Fund.
Researchers found significant gains in access to healthcare and across nearly four dozen healthcare performance measures since the implementation of key PPACA provisions five years ago.
A report showing that fewer people lacked health insurance in the years following the healthcare reform law's coverage expansion was released Thursday by the Commonwealth Fund.
Data in the organization's annual Commonwealth Fund Scorecard shows that the positive impact of the PPACA is undeniable, David Blumenthal, MD, president of the nonprofit healthcare think tank, told reporters Wednesday.
"It is clear that states, especially those that have expanded Medicaid, have made substantial progress in ensuring that their residents have health insurance. Millions are better able to get the healthcare they need since the law was passed, and the quality of care has improved for many."
The Commonwealth Fund scorecard evaluates 44 indicators grouped into four dimensions of performance: access and affordability, prevention/quality, avoidable hospital use and costs, and healthy lives.
Blumenthal emphasized widespread gains in patient safety in doctors' offices and hospitals and said the study helps set the bar for proposals to repeal and replace the PPACA.
"We must hold onto the gains that we have made and build on them to improve even more. We must ensure that people in every state and community can benefit from the achievements of the past five years."
State Rankings
Vermont earned the highest ranking in the scorecard study, followed by Minnesota, Hawaii, Rhode Island, and Massachusetts. Mississippi received the lowest ranking.
The scorecard study found several healthcare-performance improvements that likely are related directly to the PPACA:
Gains in the rate of health insurance coverage and the ability to access care when needed
Higher levels of treatment quality and patient safety
Reductions in hospital readmission rates
While the scorecard study shows a considerable amount of performance variation in the delivery of healthcare services, gains from the PPACA are measurable and widespread, according to the report.
Medicaid Expansion Revved Performance Gains
It notes that nearly all state health systems improved on a broad array of health indicators between 2013 and 2015. The period coincides with implementation of the Affordable Care Act's major coverage expansions.
The most significant healthcare-performance gains were observed in states that accepted Medicaid expansion.
Those states typically ranked higher than non-expansion states before and after the law's coverage expansions, but also saw the greatest gains in healthcare access between 2013 and 2015.
States that achieved double-digit reductions in their uninsured rate for working-age adults between 2013 to 2015—Arkansas, California, Kentucky, Nevada, New Mexico, Oregon, Rhode Island, Washington, and West Virginia—all expanded Medicaid as soon as federal resources became available in 2014, according to the report.
Room for Improvement
Despite the many gains highlighted, researchers identified some areas of concern.
Disparities in healthcare were found to be persistent among low-income populations. And the rate of premature death (before age 75) could have been lower during the study period if access to coverage had increased slightly in 30 states, research suggests.
The Congressional Budget Office analysis of the Republican bill to replace the ACA projects that millions of people will lose health insurance coverage. Physician and hospital groups are expressing concern.
Healthcare-provider organizations reacted with a chorus of criticism to Monday's release of the Congressional Budget Office score of the House Republican proposal to repeal and replace the Patient Protection and Affordable Care Act.
"The American Health Care Act is projected to cause 14 million Americans to lose their health insurance coverage as early as next year, and as many as 24 million by 2026. These are people, not numbers—people who all too often will be left without access to regular care, putting their health at risk," Darrell Kirch, MD, president and CEO of the Association of American Medical Colleges said in a media statement Monday.
The AAMC represents nearly 400 teaching hospitals and health systems.
Although House Speaker Paul Ryan (R-WI) praised the CBO finding that the American Health Care Act (AHCA) would reduce the federal deficit by $337 billion through 2026, Kirch said the costs of the repeal-and-replace deal outweigh the benefits.
"While some may point to the federal budget savings the AHCA would yield, the fact is these Americans will still need healthcare. America's teaching hospitals will continue to care for these vulnerable patients, but will be forced to absorb the resulting uncompensated care costs, threatening their ability to support and advance their research and education missions."
AOA 'Cannot Support' AHCA
The organization that represents more than 129,000 osteopathic physicians (DOs) says the projected loss of healthcare coverage under the AHCA is unacceptable.
"The Congressional Budget Office scoring confirms that the American Health Care Act neither increases access to care nor addresses the foundational issues plaguing our health care system. The American Osteopathic Association has long supported federal and state efforts to increase access to affordable health care and cannot support this legislation," Boyd Buser, DO, president of the AOA, said in a media statement Monday.
The House Republican plan to repeal and replace the Patient Protection Affordable Care Act has a fatal flaw, Buser said.
"It's critical to recognize that the difficulty in ensuring coverage and access to affordable health care is a symptom of perpetually rising costs. In order to drive down costs, Congress should prioritize prevention and care coordination, two measures proven to reduce overall costs by addressing health problems at the most readily treatable stage and eliminating waste. Decreasing the number of Americans with coverage will not achieve that goal."
AHA: 'Cannot Support' AHCA
The American Hospital Association (AHA) also sounded alarm over the CBO's estimate of coverage reductions.
"The CBO number reinforces our concerns about the importance of maintaining coverage for those vulnerable patients who need it," AHA President and CEO Rick Pollack said in a statement released by his office Monday.
"As we said in our letter to Congress last week, any changes to the Affordable Care Act must be guided by ensuring that we continue to provide healthcare coverage for the millions of people who have benefited from the law. We cannot support a bill that the CBO and others clearly indicate would reduce coverage for so many people."
NJHA Sees Return to 'Dark Days'
Adoption of the AHCA would have grim consequences, Betsy Ryan, JD, president and CEO of the New Jersey Hospital Association, said in a statement Monday.
"The impact of the law, as revealed today by the nonpartisan Congressional Budget Office, would return our country to the dark days where the nation's uninsured rate reached double digits and millions of families didn't have access to primary and preventive care."
"That means a less healthy population and higher healthcare costs. It also means that healthcare providers will once again carry the burden of providing safety-net care. The impact will be borne by all healthcare consumers and taxpayers who will experience cost shifts to pay for that care."
In an ominous symptom of consumerism, patients overburdened by financial obligations are constricting cash flow to providers.
As the Trump administration and Congress bear down on Obamacare, the battle lines are being drawn in the struggle to attain a cost-effective transformation of healthcare services.
"Whether it is the delivery of services, or pharmaceuticals, or how we pay—we are playing politics with healthcare," says Olusegun Ishmael, MD, MBA, an emergency room doctor at Paris Community Hospital in Illinois and former health plan executive.
"It is not like building cars. Healthcare is about people's lives and the quality of life. Most people are going to be alive for a long time, and healthcare helps determine the quality of the life you are going to have."
The evolution of healthcare economics is placing a heavy financial burden on patients, who face a consumerism crossroads, the former health plan vice president says.
"I have talked with some of the nurses I work with; and, overnight, their deductibles have gone up and everybody has health savings accounts. The employer-sponsored insurance model is slowly being whittled away; and, when it is gone, the private individual is going to be left holding the bulk of the cost of their healthcare."
Thrusting higher levels of financial obligations on patients is having both positive and negative impacts, Ishmael says. "The good is [that] patients are going to be asking questions, and challenging people about costs and what treatments are for. The bad is that most patients are not going to be able to meet their costs."
Cost-shifting Constricts Provider Cash Flow
Jeff Goldsmith, PhD, associate professor of public health sciences at University of Virginia, healthcare futurist, and national advisor at Navigant, says overburdening patients financially threatens healthcare-provider cash flow.
In an article published by the Healthcare Financial Management Association in February, Goldsmith sounds alarm over the proliferation of high-deductible health plans (HDHPs) and President Trump's prediction for health savings accounts (HSAs).
"As recent experiences with the sharp growth in HDHPs have conclusively demonstrated, many patients with such accounts have trouble paying their portion of healthcare costs, even with the modest help of money saved in tax-protected consumer accounts like HSAs," Goldsmith wrote.
Of the 160 Americans who have employer-sponsored insurance (ESI), one-third have HDHPs, Goldsmith estimates. He identifies two primary drivers:
Employers shifting health-benefit costs to employees during The Great Recession
The relatively high proportion of HDHPs purchased on the PPACA health insurance exchanges.
"The circumstances mean [that] almost one in five working American families are being billed significant amounts for their healthcare use, representing an important new claim on their wages and savings," he wrote.
Goldsmith concludes that cost-shifting to consumers can constrict healthcare-provider cash flows.
"For households with limited resources, the simple fact is that the growing financial responsibility for out-of-pocket healthcare expense must compete with other more formal and established forms of debt, such as mortgages, credit cards, and student loans, effectively tying the future financial position of hospitals much more directly to the economic cycle than at any time since the advent of health insurance."
Patients face peril at the Consumer Crossroads, Ishmael says. "I don't think enough of the people who are delivering care or enough consumers are at the table to say, 'This does not make any sense.'"
The New Hampshire Insurance Department finds that the state's largest health plans are largely in compliance with state and federal law, but identified a few deficiencies.
As a deadly opioid-abuse epidemic unleashes a public health crisis in New Hampshire, the state's three largest health insurance companies appear to be rising to the challenge, market conduct exams of 2015 data show.
As part of the state government's response to high rates of opioid addiction and overdoses, the New Hampshire Insurance Department (NHID) examined claims data for Indianapolis-based Anthem, Bloomfield, CT-based Cigna Life and Health Insurance Company, and Manchester, NH-based Harvard Pilgrim Health Care of New England.
Claims were reviewed from Jan. 1 to Sept. 30, 2015. Exam findings released March 2 show that the commercial insurance carriers were largely in compliance with state and federal law, but a few deficiencies were identified.
All three companies face calls for corrective action to improve their websites' transparency and ease of access to information about behavioral health and substance use disorder (SUD) coverage.
Harvard Pilgrim was singled out for corrective action over supervision of the company that manages its behavioral health claims, United Behavioral Health/Optum. NHID is set to conduct a follow-up exam of UBH/Optum to determine whether requiring preauthorization for behavioral health services violates federal mental health parity law.
The 2015 SUD claims exams give NHID valuable baseline data on insurance coverage of rates of opioid addiction in the state, including thousands of low-income adults who gained coverage through Medicaid Expansion under the Patient Protection and Affordable Care Act, NHID Commissioner Roger Sevigny said in a media statement.
"The reports give us a baseline understanding of insurance companies' practices as we work to ensure that they comply with the law, especially with respect to mental health parity and network adequacy," he said.
The SUD claims exams reviewed seven market-conduct categories:
Delegated service agreements
Provider networks
Prior authorization practices
Grievances and appeals practices
Claims and denial volumes
Medication-assisted treatment protocols
Adherence to federal mental health parity law
Anthem, Cigna, and Harvard Pilgrim drew criticism over their website capabilities.
For all three insurance carriers, "Examiners had difficulty navigating carriers' websites to find behavioral health/SUD service providers," an NHID exam results overview says.
Anthem and Harvard Pilgrim were ordered to devise corrective action plans to fix their website deficiencies.
The examiners also found the Anthem and Harvard Pilgrim websites deficient in the area of online provider-directory accuracy. NHID is seeking documentation showing corrective action in several online provider-directory capabilities, including the method and frequency of provider-directory verification.
The absence of deficiencies in most market-conduct categories is a positive sign for Anthem, Cigna, and Harvard Pilgrim health plan beneficiaries who are grappling with opioid addiction and other substance abuse problems, Sevigny said.
"I am heartened to see coverage for behavioral health services improving over time in many areas."
Aiming to significantly reduce medication prices presents the president with golden opportunities and a set of daunting challenges, healthcare industry experts say.
President Donald Trump has said medication prices are too high and he plans to address the problem.
During his presidential campaign, Trump called for Medicare to negotiate drug pricing. In January, the president criticized the lobbying efforts of pharmaceutical companies and suggested again that the federal government should negotiate drug prices.
Although he faces high hurdles, the president appears to be on the right track, says Olusegun Ishmael, MD, MBA, an emergency room physician at Paris Community Hospital in Paris, IL, and former insurance company executive.
"The biggest insurer in this country is the U.S. government—between the Veterans Administration, Medicaid, and Medicare. The government should do the same thing that UnitedHealthcare and all the Blues do to negotiate pricing based on their volume," he says.
Insurers and foreign governments have been leveraging their purchasing power to negotiate drug prices for decades, Ishmael says.
"If someone walks into CVS or Walgreens without insurance and wants to get a prescription, they will pay almost twice as much as the UnitedHealthcare pricing. The reason is volume—it is a numbers game. As an insurer, when I have a certain amount of volume, I go to my pharmacy benefit management company and say, 'I am bringing you a million lives.'"
Political Hurdles
Although allowing government agencies to negotiate drug prices makes sense from an economic perspective, it would present the president with a harsh political reality: "Pharma is one of the biggest lobbying groups in the country, so this would be a hard change," Ishmael says.
Even with fellow Republicans controlling Congress, Trump will struggle to convince GOP lawmakers to pass legislation that would allow the government to negotiate drug prices, says Erin Fox, PharmD, director of the Drug Information Service at Salt Lake City, Utah-based University of Utah Health Care.
"Republicans controlled both houses of Congress under most of President Obama's administration, and they did nothing then," she says.
"It is not realistic to think that anything really significant will be done to achieve meaningful drug-pricing regulations unless there is some type of 'nuclear option' such as Trump supporting a single-payer approach to healthcare and dissolving every insurance company in the country. I doubt he could do that."
Any regulatory route that the White House pursues to reduce drug prices would encounter a robust roadblock in Congress, Fox says.
"A lot of Republicans, especially the Tea Party Republicans, are against regulations. So, it is very unlikely that new regulations will be adopted, even if they could do some good."
In fact, President Trump signed an executive order in February designed to cut what he called "job-killing regulations."
Importation of Drugs Problematic
There are some regulatory approaches to reducing drug prices that the Trump administration should avoid, Ishmael and Fox say.
"There has been talk of buying drugs from overseas—that gives me an ulcer," says Ishmael, who is a first-generation immigrant and holds dual American-Nigerian citizenship.
"Part of my concern about importing medication from outside the country is we would have to create another layer of bureaucracy to investigate these drugs to make sure they are safe."
"I have lived and worked in a Third World country," he says. "Medications that you get in a Third World country are not like the medications you get here. They are often selling you pretty much a placebo."
Even importing brand-name medications from countries such as Canada is a poor price-reduction strategy, Fox says.
"The reason Canada's drug prices are cheaper is because they have a single-payer healthcare system and they negotiate prices."
"Drug companies are not stupid" she says. "They know exactly how many drugs they sell to Canada, and they are not going to sell more than that to Canada just because Americans want to buy cheaper drugs from Canada."
Non-Regulatory Options
There are non-regulatory approaches to reducing drug prices that Trump could try.
Changing mindsets among frontline caregivers should be much easier than changing legislation, Ishmael says. One example he cites is the EpiPen, a medication delivery device for allergic reactions that spurred price-sticker shock last year.
There is no justifiable economic rationale for an EpiPen two-pack to cost $600, he says. "An EpiPen should not cost more than three bucks. Epinephrine is generic. It costs not more than 25 to 50 cents if you draw the drug out of a container. The syringe costs less than a dollar."
For patients at risk of severe allergic reactions, healthcare-provider organizations should start selling low-cost syringes with single doses of epinephrine in the physician-office setting, Ishmael says.
Cajoling pharmaceutical companies to increase transparency in the marketing and pricing of medications also could be a promising non-regulatory strategy for Trump to pursue, Fox says.
The pricing of medications is analogous to pricing in the automotive industry, where very few people pay the manufacturer's suggested retail price.
"Unfortunately, there are some people who have to pay the list price. Those are the people with the high-deductible health plans, or the patients without insurance who can't qualify for coupon cards that people with insurance can get," she says.
"Transparency would certainly help the conversation. It would help people understand what's going on and point toward fixes. It would help people understand there is a need for fixes."
"There are some people in Congress who think the system we have works fine." Fox says. "[They say that] this is capitalism and drug manufacturing is a business, where profits are part of the business. The problem is that people's lives are at stake."
The Perils of Playing Politics
The Trump administration needs to plan and act carefully to make significant progress in lowering drug prices, which poses a challenge for the man in charge, Fox says. "He is shaking things up, but the uncertainty that his style brings is potentially detrimental to the healthcare industry."
Furthermore, Trump should avoid nominating a leader of the Food and Drug Administration (FDA) who harbors hostility toward the agency's regulatory role, she says.
"Even in the drug industry, they don't want Trump to appoint a guy who will take away all the rules at FDA. Even the drug industry is saying we need those rules to keep people safe. I cannot imagine a world where medicines are released to the public without any efficacy data to know whether they work."
Playing politics with drug pricing is a potentially deadly sport, Ishmael says.
"It is a trillion-dollar industry. Everybody is in it to make a buck. It is very political, and that is my concern. Between the lobbying firms and our legislators all the way up to Congress and the presidency—who are not providers of care—they are trying to make decisions about healthcare but they are not involved in the day-to-day management of healthcare.
"I have a big concern about politicizing healthcare and patients' lives because the right people who should be making those decisions are not sitting at the table," he says.
The latest iteration of the tool maps the geographic density of specific healthcare service providers and the number of Medicare beneficiaries using those services.
The Centers for Medicare & Medicaid Services has unveiled an expanded version of a data tool that features interactive maps for market saturation and utilization of several healthcare services at the national, state and county level.
The Market Saturation and Utilization Data Tool was developed for use by providers to help analyze their service locations and the service utilization rates of Medicare beneficiaries.
CMS uses the data tool's market saturation and healthcare service utilization information as one means of rooting out fraud and waste in the Medicare program. The tool was formerly called the Moratoria Provider Services and Utilization Data Tool.
Market saturation is defined as the density of providers offering a particular healthcare service in a geographic area relative to the number of Medicare beneficiaries who utilize the service in that area.
Improvements to the tool include an increase in the number of healthcare-service categories from eight to ten. CMS added clinical laboratories that bill independently of other facilities and physical and occupational therapy services.
The interactive-map function of the data tool offers two display options: nation-by-state and state-by-county.
In addition to two color-coding options, the interactive-map function features pull-down menus with three sets of data: 10 healthcare service categories, four yearlong reference time periods, and five Medicare data metrics.
Healthcare service categories:
Emergency ambulance service
Nonemergency ambulance service
Emergency and nonemergency ambulance service
Clinical laboratory that bills independently from other facilities
Home health
Hospice
Medicare Part A independent diagnostic testing facility
Medicare Part B independent diagnostic testing facility
Physical and occupational therapy
Skilled nursing facility
Yearlong reference time periods:
October 2014 through September 2015
January 2015 through December 2015
April 2015 through March 2016
July 2015 through June 2016
Medicare data metrics:
Number of Medicare fee-for-service beneficiaries
Number of service providers
Number of users per service provider
Percentage of users out of fee-for-service beneficiaries
Average number of service providers per county
The latest version of the tool is its fourth update.
Incentivizing hospice care and launching hospice educational efforts in regions with high medical costs could have a significant impact on U.S. healthcare expenditures, researchers find.
To reduce healthcare spending, areas of the country with relatively high medical service costs would benefit most from increased utilization of hospice care, according to a study recently published in Health Affairs.
The study's authors focused on the potential economic benefits of increased hospice care because medical services in the final year of life account for a large share of total U.S. healthcare expenditures.
They found that "hospice use accounted for 8% of the expenditure variation between the highest and the lowest spending quintiles, which demonstrates the powers and limitations of hospice use for saving on costs."
A 2010 study published in the journal Health Services Research found that 5% of Medicare beneficiaries account for more than a quarter of Medicare spending in their final year of life.
The Health Affairs study, titled "Longer Periods of Hospice Service Associated with Lower End-Of-Life Spending in Regions with High Expenditures," is based on Surveillance, Epidemiology, and End Results (SEER) Medicare data and Medicare claims information.
The data sample features 103,745 Medicare beneficiaries who died from nine forms of cancer such as breast, lung, and liver tumors within three years of diagnosis. The study period was from 2004 to 2011.
Cost Analysis
The unadjusted (non–age-sex-race-adjusted) mean end-of-life care expenditure per decedent "was $39,600, ranging from $31,256 in quintile 1 to $49,680 in quintile 5. The mean length of hospice service in the final six months of life was 10.9 days, ranging from 13.0 days in quintile 1 regions to 7.9 days in quintile 5 regions."
Researchers found that the biggest economic benefit from hospice care is derived from increasing utilization in high-medical-service cost regions of the country.
"Longer periods of hospice service were associated with decreased end-of-life expenditures for patients residing in regions with high average expenditures but not for those in regions with low average expenditures," the researchers wrote.
Regional Care Differences
The way physicians practice medicine likely is a key factor in determining the economic impact of hospice care utilization, they determined.
"It is well established that physicians in different geographic regions practice differently. For example, physicians practicing in high-expenditure regions may be more likely than those in low-expenditure regions to recommend discretionary services for which strong evidence is lacking, and to test and treat patients intensively."
In contrast, the economic benefit of hospice care was found to be limited in regions of the country where the practice of medicine is more tight-fisted.
In these regions, increased hospice utilization generated a relatively low economic offset to inpatient and outpatient care at hospital settings, the researchers wrote.
"Whether or not hospice use results in cost savings is determined by the offset between the increase in hospice expenditures and the decrease in inpatient or outpatient expenditures."
Healthcare Policy Implications
While research has shown that hospice care has benefits for patients with terminal conditions, the study found that the economic benefits of hospital care vary regionally.
Incentivizing hospice care and launching hospice educational efforts in regions with high medical costs could have a dramatic impact on total U.S. healthcare expenditures, according to the study.
"Such targeted cost-saving measures may provide substantial economic benefits on a national scale, given that intense end-of-life care expenditures constitute a significant proportion of annual Medicare expenditures."
The shift to value-based care and consumerism is driving health systems and hospitals to optimize gains from nonpatient service activities and innovation.
This article first appeared in the March 2017 issue of HealthLeaders magazine.
For nonpatient service activities at health systems and hospitals, the evolution of financially lean value-based business models and consumer-driven care is transforming strategies for success.
As this evolutionary process unfolds, healthcare providers are facing new market limitations on mature mainstays of nonpatient service activities such as parking facilities. With patient satisfaction among the rallying cries of the value-based revolution, there are limits on generating revenue from parking garages and campus eateries, which patients prefer to enjoy as conveniences rather than to dread as drains on their wallets.
With these market realities, health systems and hospitals are turning to innovation activities as a vehicle for generating a host of benefits, including clinical care advances that improve quality and lower costs, new revenue stream opportunities, and support for broad strategic objectives.
Satisfaction among patients and employees is one of the primary limitations on traditional sources of nonpatient service revenue, says Stephen Allegretto, CPA, MPH, vice president of strategic analytics and value innovation at Yale New Haven Health System (YNHHS) in Connecticut, which includes an academic medical center, more than 6,300 physicians, and a 600-member multispecialty physician foundation. "We have generated parking and cafeteria income for years. That has been a long-term strategy for us. We need to do that; but the more we charge for parking, the more upset both our patients and our employees are."
To optimize the financial impact of nonpatient service activities, innovation is the most promising pathway to success, Allegretto says. "We have all of these 'other operating revenues' that we have had traditionally, and, as patient service revenue continues to decline, we need to find other revenue sources. … The sources we are talking about are nonpatient revenue, so how do we build those? We are not going to build up nonpatient revenue through parking and cafeteria. We are going to build it based on innovation."
YNHHS posted total operating and nonoperating revenue for the fiscal year ending September 2015 at $3.6 billion. Net patient service revenue was the dominant source of operating revenue at 95.6%.
"We have all of these 'other operating revenues' that we have had traditionally, and, as patient service revenue continues to decline, we need to find other revenue sources."
The potential to generate significant new revenue streams through the development of innovative products and services is tremendous, says Chad A. Eckes, MBA, executive vice president of corporate services and CFO at Wake Forest Baptist Medical Center, an integrated health system in Winston-Salem, North Carolina, that operates more than 1,000 acute care, rehabilitation, and psychiatric beds. The medical center and key Wake Forest University partners such as the medical school generated hundreds of millions of dollars in licensing revenue from medical devices based on negative pressure wound therapy (NPWT) technology.
"It was a substantial amount of revenue and a lot of margin coming from the medical center. So we have had a rich history of seeing what diversified revenue streams can mean to the organization. Our royalties on that ran out in 2012, so then we saw what life is like without having a large nonpatient service revenue, and we really want to create that again," Eckes says.
For the fiscal year ending June 2016, Wake Forest University Health Sciences (WFUHS), which includes the medical center and Wake Forest's medical school, reported total revenue at $2.3 billion with $2 billion from net patient service revenue representing the largest source of income. Other primary sources of operating revenue were grants, public and private contracts, and tuition.
With market constraints on generating revenue from traditional nonpatient services, the impact of nonpatient service activities is becoming more strategic than financial at many health systems and hospitals.
At Southwest General Health Center in Middleburg Heights, Ohio, a 332-licensed-bed nonprofit hospital, top executives have developed nonpatient service activities that support broad strategic goals such as community support and population health gains from a school nurse program and the hospital's LifeWorks fitness center, Vice President and CFO Mary Ann Freas says. "Aside from the typical sources of nonpatient service revenue, Southwest has developed programs that reach out into the community in the example of school health, provide patient convenience in the case of the retail pharmacy, or promote wellness in the case of LifeWorks," she says.
For the fiscal year ending December 31, 2016, Southwest generated total operating revenue at $344.6 million. The operating revenue was segmented into net patient service revenue, $333.3 million (96.7%), and other operating revenue, $11.2 million (3.3%). The LifeWorks fitness center accounted for a third of other operating revenue at $3.1 million, Freas said.
Hitting the nonpatient service activity ceiling
While academic studies have shown that traditional nonpatient service activities contribute significantly to total revenue margins, health system and hospital finance leaders are viewing innovation activities as a more promising option to not only bolster their balance sheets but also move other needles at their organizations.
A pair of academic studies published in the journal Health Care Management Review provide strong evidence that nonpatient service activities can have a measurably positive impact on total revenue margins.
University of Florida research published in 2009, titled "Nonpatient Revenues in Hospitals," examined the financial impact of nonpatient service activities at 143 Florida-based hospitals from 2003 to 2005. The two measures of nonpatient service revenue in the research mirror the revenue categories on financial statements: an "other operating revenue" category for income derived from standard hospital operations such as parking, and a "nonoperating revenue" category for activities unrelated to standard hospital operations such as financial investments.
The UF researchers—Niccie McKay, PhD, and Louis Gapenski, PhD—found that nonpatient service activity accounted for a relatively small portion of total revenue but had a significant impact on hospital financial margins.
"The overall role of nonpatient revenues was assessed by combining other operating and nonoperating revenues. … On average, hospitals in the sample had nonpatient revenues that accounted for 5.4% of total revenues," the University of Florida researchers wrote.
Despite the relatively low level of nonpatient service revenue as compared to total revenue, McKay and Gapenski concluded that the financial impact on operating margins was considerable. "Operating margin would have been 0.2 percentage points less without other operating activities. For nonoperating revenues, comparing average operating margin (3.3%) and average total margin before tax (4.8%) indicates that nonoperating activities contributed 1.5 percentage points. Overall, without nonpatient revenues, average total margins before tax would have been 1.7 percentage points lower," the UF researchers wrote.
McKay—who has retired and holds the title professor emerita at the UF Health Services Research, Management, and Policy department—says nonpatient service revenue remains a potentially decisive factor in whether hospitals have positive operating margins. "My sense is that things haven't changed all that much, in that nonpatient revenues are still pretty important," she says.
California hospital research that Health Care Management Review published in 2013—"Nonoperating revenue and hospital financial performance: Do hospitals rely on income from nonpatient care activities to offset losses on patient care?"—drew similar conclusions.
The 2013 study, which is based on data collected from 2003 to 2007, found "nonpatient care activities contributed substantially to overall profitability" at the 232 California hospitals in the sample. "Without engaging in any nonpatient care activities, hospitals' average total margins would have been 2.4% points lower than they actually were during the five-year study period," the journal article says.
Although the 2013 study is in line with the UF researchers' conclusion that nonpatient service activities boost total revenue margins, the California data showed that few struggling hospitals could rely on nonpatient service activities to boost profitability. "Although nonpatient care activities mitigated some of the losses on patient care services, less than 25% of hospitals generated sufficient income from nonpatient care activities to completely offset patient care losses," the 2013 study says.
As the healthcare industry becomes more patient-centered and consumer-driven, health systems and hospitals cannot expect to generate significant revenue from traditional nonpatient service activities such as food services and parking, Eckes says.
"If you do not want to pay for parking, you can park off-campus and walk, which is an option, and we have shuttles. But for convenience and to be able to have something right next to the building, we have these parking options that have a cost and a revenue opportunity associated with it. Even though we need to offset the cost of these conveniences, we do try to keep them reasonable. It is not like we are suggesting that this is a positive margin maker. We are just trying to keep up with the cost of parking facilities"—the goal being that nonpatient service activity at least covers its own costs, so that those costs do not have to be subsidized with patient service revenue, he says.
The same philosophy, which puts a premium on patient satisfaction and discounts financial return on investment, applies to food services and a hotel that the medical center operates, Eckes says. "Nonpatient services are not just cost- and revenue-related. It's also about meeting patients where their desired customer service level is. For example, putting the Starbucks and those types of items into the facility, number one, is improving the customer experience. It's providing a service that our customers are desiring. … We own a hotel that is available for patients and vendors and others. It is a break-even business that works."
Multiple benefits from innovation
In contrast to traditional nonpatient service activities such as parking facilities, which are constrained by market realities, innovation activities can generate multiple benefits for health systems and hospitals, including improving care, lowering expenses, boosting patient engagement, supporting strategic goals, and establishing new revenue streams.
To support medical technology innovation efforts throughout the Yale community, the Center for Biomedical Innovation and Technology (CBIT) was formed. The top goal for the health system's innovation initiatives is to generate a range of benefits across the entire organization, says Malgorzata "Margaret" Cartiera, PhD, investment and innovation manager at CBIT. "We want to make sure that innovation investments take into account the value-based system that Yale New Haven has in mind. The focus is the patient, and making sure that we are bringing new innovations and innovative advances that will bring value across the system," she says.
At University of Utah Health Sciences (UUHS), which features a 528-licensed-bed medical center and medical school, a surge of innovation activity over the past four years has improved quality of care, reduced costs, and boosted patient engagement.
"We are very clinically focused," says Rachel Hess, MD, MS, chief of the UUHS Health System Innovation and Research (HSIR) program, a research and innovation incubator launched in 2014. "We take research from the get-go and think through how it can be immediately disseminated into a clinical space."
For the fiscal year ending June 2016, UUHS posted total operating revenue of $3.7 billion and net patient service revenue of $1.9 billion.
HSIR participated in research published last year in the Journal of the American Medical Association, establishing new diagnosis criteria for sepsis that are designed to hasten treatment of the deadly infection. The research shows that the new diagnosis criteria cut the response time for administration of anti-infective treatment nearly in half, from 7.8 hours to 3.6 hours.
"The sepsis example started with one of the inpatient hospitalists identifying that there was a delay in receipt of antibiotic therapy that he felt was unduly long in patients identified with sepsis, and that earlier identification would be advantageous and could be achieved," Hess says.
The main financial measure for achieving success at HSIR, which received $607,265 in state funding for fiscal year 2016, is generating grant revenue, she says. "The ROI that is expected over five years is about 500%. … We were brought in to not only support but also to increase grant funding."
Hess adds that HSIR spent only $215,378 of the state money in fiscal 2016 and was able to bring in $1.7 million in additional grant funding.
In 2013, UUHS launched a healthcare information technology incubator program that employs student labor and a skeletal professional staff—the Therapeutic Games and Apps Lab (GApp Lab). The GApp Lab features a lean business model with high potential for return on investment, says Roger Altizer, PhD, director of The GApp Lab and an associate professor of population health science at the University of Utah School of Medicine.
"We have about 35 graduate students every semester on scholarships, and we get that money from private funders who pay us to do research, internal hospital money that pays for projects that they think are going to help patients, and research grants. Even with the research grants, we are making software games and other applications that are patient-facing. We've done over 40 discrete projects in the last three years, and we've gotten a couple million dollars in that type of funded research."
The GApp Lab is a low-cost option for UUHS to develop innovative healthcare IT applications such as mobile electronic medical record software developed at the incubator, he says. "We had a project that we did for $50,000 that received an external bid for a million dollars."
Growing demand for digital patient-engagement tools is a golden opportunity for UUHS and The GApp Lab, Altizer says. "Patient engagement is changing rapidly. From mobile apps to virtual reality, we can change the way that patients can interact with both their providers and with their own health data."
Health systems and hospitals are harnessing innovation activities to advance strategic goals.
ProMedica Health System, a locally owned, nonprofit healthcare network, is utilizing innovation activity to support the Toledo, Ohio-based organization's population health strategy, says Lee Hammerling, MD, chief physician executive and chief medical officer.
For the fiscal year ending December 2015, ProMedica posted total operating revenue of $3.1 billion, with $1.7 billion in net patient service revenue, $1.3 billion in premium revenue from ProMedica Insurance Corporation, and $73 million in other operating revenue.
At ProMedica, investing in innovation activities is essential to the health system's population health strategy, he says. "For years, our health system had been engaging in population health management for our patients. We have now broadened that definition of population health to include what we call the social determinants of health. Traditionally, health systems, hospitals, and doctors have not looked at factors like hunger, the ability to secure food for your family, housing, transportation, behavioral health issues, getting a job, and economic factors that impact the ability of people to access care."
Job creation is a key element of ProMedica's population health innovation activities.
In 2015, ProMedica Innovations, the organization's innovation division, opened its 6,000-square-foot Incubator. For startup partners, job creation must be part of the deal, says Hammerling. "When we talk with a company about helping them in a startup, one consideration is they have to create jobs locally."
Linking innovation activities to job creation in northwestern Ohio is part of ProMedica's population health mission to address problematic social determinants, he says. "We're part of the Rust Belt, and we have had some companies relocate from here. It has been a challenging community, but it is improving."
The ProMedica Innovations Incubator is generating positive results after just one year in operation. "It is at full occupancy with three startup companies, all currently generating revenue. The head count went from seven at initiation and is now approximately 40 people employed in total," Hammerling says.
One of the startups, VentureMed Group Ltd., received FDA approval in June to market a catheter device for treatment of peripheral artery disease. The FLEX Scoring Catheter is selling in the European and U.S. markets, he says.
Although the ProMedica Incubator is operating net-negative at this point, the facility's startup trio is paying for rent and services such as financial consulting, Hammerling says. The health system is projecting a positive return on investment from startups in the Incubator within 10 years from commercialization and licensing of products, he says.
Hitting the innovation jackpot
Innovation income at health systems and hospitals is reflected in both the operating and nonoperating revenue categories of annual financial statements.
In the operating revenue category, innovation activity revenue is shown in the "other operating revenue" subcategory as opposed to the patient revenue subcategory. This revenue is mainly in the form of contracts such as licensing deals and grant funding. In the nonoperating revenue category, innovation activity revenue is linked to equity earnings on investments in startup companies.
Wake Forest hit the medical-device licensing jackpot when a pair of medical center reconstructive surgical faculty members—Louis Argenta, MD, FACS, and Michael Moykwas, PhD—invented NPWT. In 1995, the Food and Drug Administration approved the first Wake Forest-patented NPWT device.
Devices developed with Wake Forest's NPWT technology were marketed with the Wound V.A.C. (vacuum-assisted closure) brand.
"Wound V.A.C. had its licensing fees because it is a product selling for billions of dollars worldwide. That has brought major and significant income into Wake Forest Baptist Medical Center over the last 15 years or so," says Eric Tomlinson, DSc, PhD, chief innovation officer at Wake Forest Baptist Medical Center and president of Wake Forest Innovation Quarter, the university's innovation district.
NPWT is based on the age-old principle of sucking on a snakebite to draw venom from the wound. Using a pump and tubing to create negative pressure in combination with a special dressing, Wound V.A.C. not only draws swelling fluids and harmful bacteria from a wound but accentuates the body's healing features.
NPWT has helped physicians around the world avoid an estimated 1 million limb amputations for serious wounds, according to the Chicago-based American College of Surgeons. In June 2016, the physician association honored Argenta with the Jacobson Innovation Award, calling NPWT "the most important advancement in wound healing in the past 25 years."
Wake Forest has garnered several hundred million dollars in licensing revenue from the sales of NPWT devices worldwide; but as with other inventions and advancements, others tried to grab a piece of the action.
In 1993, Wake Forest established an NPWT licensing agreement with San Antonio, Texas-based Kinetics Concepts Inc. (KCI). As the 2012 expiration of Wake Forest's patent rights approached, the license partners filed several patent-infringement lawsuits in the United States and abroad to protect the intellectual property, according to a Securities and Exchange Commission document that KCI filed in December 2010. The SEC document says Wake Forest and KCI filed nine patent-infringement lawsuits from May 2007 to July 2009.
In October 2010, a federal district court in Texas ruled against Wake Forest in one of the patent-infringement cases; then in February 2011, KCI filed a lawsuit in federal district court seeking a judgment that the company should no longer owe royalties. Wake Forest and KCI settled their patent dispute in July 2014, with the Texas company agreeing to pay $280 million in annual installments. The last payout—a $30 million obligation—is set for this June.
KCI made royalty payments to Wake Forest from 2008 to 2010, totaling $268 million, according to the 2010 SEC document.
Effectively managing product development and the licensing business cycle for inventions such as NPWT is a key element of success for innovation activities at healthcare providers and a core competency at Wake Forest Innovation Quarter, Tomlinson says.
"Now, the license has lapsed. The technology [is] still in the marketplace and still being sold very successfully without a license, so we no longer receive income from that license. And that is one of the challenges for the prioritization of ideas in such a property. You are dealing with a marketplace. The challenge in all of these innovation activities is understanding your market dynamics, the competition, the pricing, the time to market, the cost to market, and who can be your partner. Wake Forest Innovation is populated by people who do that market analysis evaluation prior to making financial investments in technologies," he says.
Innovation licensing contracts involving health systems and hospitals feature several key elements, including provisions for up-front payments to compensate the inventor organization for early development work on an innovation, payment terms for medical workers to conduct clinical trials, and revenue milestones, Tomlinson says. "All of those licensing agreements are fairly well-scripted and heavily vetted. We manage them in a very dynamic manner, paying close attention to each and every license field."
The nonprofit Hospital for Special Surgery (HSS) in New York City has scored revenue success with total knee implant prostheses.
In the fiscal year ending December 2015, HSS posted total operating revenue of $982 million and net patient service revenue of $820 million, or 83.5%. Other operating revenue of $145 million, or 14.77%, is relatively high compared to industry trends because the hospital contracts directly with the organization's physicians as opposed to establishing a financially separate physician group or association.
"Beginning at HSS in the 1990s, with the surgeon-engineer team of John Insall and Al Burstein, we developed the Insall-Burstein 1 [IB1], with a follow-on to that design known as the IB2. Those designs were licensed to the big ortho companies and sold well throughout the late '90s and early 2000s," says Leonard Achan, RN, MA, ANP, chief innovation officer and senior vice president of innovation and business development at HSS.
"Additional innovations were made with a different surgeon and engineer group that led to the 913 knee. That knee design included unique geometries that were anatomically inspired. More recently, as the 913 came off patent, we launched yet another knee design called the PS—a posterior stabilized knee that has additional innovations built into it. These total knee implants represent some 30 years of continuous innovation at HSS around the knee."
Combining medical and engineering expertise has been essential in the development of HSS knee implants, he says.
"The primary key to success is the deep relationship between the surgeon and engineer throughout the design process. This relationship is critical to the process—and one could not adequately do it without the other. This is a unique aspect of the design of these types of medical devices."
Knee implant innovations have generated about $100 million in aggregate revenue at HSS, he says. "The institution has benefitted from multiyear revenues from these distinct total knee implants."
Innovation incubators
Community hospitals can engage in innovation activities that are as robust as programs at health systems with much deeper pockets.
The Fogarty Institute for Innovation on the campus of El Camino Hospital is helping the Mountain View, California-based healthcare provider build a brand that is well-suited to the 443-bed facility's Silicon Valley market. "We had a group recently from the French Embassy who are very interested in cloning what we have, and the Danish government has sent multiple teams here. We are very small, but we have a very large impact and a significant reputation," says Kerry Pope, executive director of mentoring at FII.
"El Camino views themselves as the Silicon Valley hospital, and innovation is a core part of their marketing message to both patients and physicians," Pope says.
FII, which has entirely separate governance and finances from El Camino, generates several other benefits for the healthcare provider, says hospital Chief Operating Officer Mick Zdeblick.
"As a community hospital, El Camino Hospital is committed to being an innovative and locally controlled comprehensive healthcare organization that provides quality, cost-competitive services to improve the health and well-being of our community. Our partnership with Fogarty Institute for Innovation demonstrates this commitment. The location of the 'Fog Shop' on our hospital campus gives our staff and physicians the opportunity to engage with inventors and provide real-time and real-life insight. It's a great way to energize our staff and physicians and bring them along in thinking of ways to improve the delivery of care," he says.
"Several FII incubator companies have conducted clinical trials at El Camino Hospital. Participation in these trials, when it strategically aligns, allows our staff and physicians to test the feasibility of the technology and provide valuable learnings to the company. It also offers our patients, when appropriate, with an opportunity to take part in the latest research studies."
Keeping El Camino's finances separate from FII's finances, which include the potential to generate revenue from private startup companies, helps protect the hospital's nonprofit status, Pope says. "About 80% of FII's revenue is from philanthropy and the balance comes from earned income through providing educational services for corporate partners and other entities. El Camino Hospital is a nonprofit hospital—they have their own discrete financials, and the two are never intertwined."
Financial interactions between the hospital and FII have been limited to facility expenses, according to FII CFO Starr McNamara.
In 2007, FII received $780,000 in loans from El Camino to pay for "tenant improvements" for the institute's office and incubator space, McNamara says. FII pays El Camino $156,000 annually for use of the 13,000-square-foot basement space where the institute's "Fog Shop" incubator is located, and the hospital donates the use of medical office space that is considered a $250,000 noncash contribution to FII, she says.
San Carlos, California-based Prescient Surgical, an FII startup company that received FDA approval for its CleanCision surgical-site device in December 2016, is poised to generate significant cost reductions at El Camino, Pope says. "We're especially proud of that one because of the immediate return to the hospital's bottom line by preventing infections that we know are going to happen. Nobody likes to talk about hospital-acquired infections, but they exist—and every time they happen and they require a readmission, it is $20,000 to $40,000 that the hospital has to eat."
For hospitals, innovation activities generate benefits far beyond direct financial impacts, says Jonathan Coe, cofounder, president, and CEO of Prescient Surgical, which raised $7 million of equity investment to develop CleanCision.
"It's important not to focus too much on the financial piece, because if you are a hospital system CEO, you have to say, 'We need to deliver better care, we need to deliver it at less cost, and we need to deliver it with less variability.' You can't constrain yourself to the existing technologies that are out there and cannot necessarily rely on the external community to drive new innovation. The people outside may not be solving your problems."
New nonpatient service activity imperatives
As health systems and hospitals adapt to the shift toward value-based care, optimization of nonpatient service activity requires generating benefits that can be just as significant as boosting operating margins, Coe says. "I think hospital administrators are realizing they need to go through a phase of housecleaning and figure out how they can improve upon the things that they already have today. It is not so much about how they make more money. It is about how they get more customers by doing the best care and avoiding the costs that have limited their profitability."
Manchester, New Hampshire-based Catholic Medical Center (CMC), a not-for-profit 240-staffed-bed acute care hospital, and home of the New England Heart Institute, has a multipronged strategy for nonpatient service activities, says Edward "Ted" L. Dudley III, executive vice president and CFO. For the fiscal year ending June 2016, CMC posted total revenue of $377.9 million, with net patient service revenue of $355 million and other operating revenue of $22.9 million.
CMC has begun offering laboratory and hospitalist services to acute care and postacute care facilities "to leverage core services we do well and assist those who struggle with cost or finding the needed resource," Dudley says.
From a financial perspective, offering laboratory services to other New Hampshire-based healthcare providers is more helpful in covering overhead costs than increasing nonpatient service revenue, he says. "We have to offer a margin because we can't offer these services for free or below our cost. Our partners can basically take what limited resources they have and put them to better use. … We estimate that annual savings to a small critical-access hospital can range anywhere from $350,000 to $500,000. Part of that is coming from reducing FTEs that they no longer need. For us, the margin might only be $150,000 to $200,000; but still, it helps shed some of our overhead."
"We do not look at this as a gigantic revenue source as much as it is a mission-driven core competency maintaining a healthier playing field for everybody."
Dudley says offering laboratory capabilities and hospitalists as professional services to other healthcare providers is bolstering two strategic goals at CMC: supporting the health system's medical mission and positioning the organization for a wave of consolidation that the C-suite sees on the horizon. "It's not a big moneymaker for us, but it does support the mission of CMC to improve the health of the populations we serve; and, since we draw patients from all over the state, we consider this core to our mission. … What we have adopted as part of our mission in New Hampshire is providing services to those hospitals that don't have the financial wherewithal or capacity to offer the same level of quality at a lower cost."
Having strong healthcare-provider partners generates strategic benefits for CMC and the health system's external counterparts, he says. "We do not look at this as a gigantic revenue source as much as it is a mission-driven core competency maintaining a healthier playing field for everybody in New Hampshire. … The state is on the precipice of having a lot of consolidation, and if our lab and hospitalist services help keep other hospitals core to their mission, then we believe that is in our best interest as well."
With leadership responsibilities for both a large health insurance carrier and a large health system, the top financial executive at Highmark Health has a unique vantage point on efforts to transform the healthcare industry.
In her role as executive vice president and CFO of Highmark Health, Karen Hanlon, CPA, has a double vision of the healthcare industry.
Highmark Health is the parent company of Highmark Inc., which is one of the country's largest Blue Cross Blue Shield affiliates, and Allegheny Health Network, which is a health system that features seven acute-care hospitals. In 2015, Highmark Health posted consolidated revenue at $17.7 billion and employed more than 35,000 workers.
In a wide-ranging recent interview with HealthLeaders, Hanlon was asked to comment on consolidation in the healthcare industry and other timely topics.
For Highmark Health, she says the past year's failed attempts at payer megamergers—the Aetna-Humana and Anthem-Cigna deals—are more of a matter of curiosity than a pressing business concern.
"For us, in the markets we are in, provider consolidation has been a bigger and more real challenge than the payer consolidations. But every market is different—healthcare is local."
Highmark Inc. markets health plans in Delaware, Pennsylvania and West Virginia. Allegheny Health Network (AHN) serves patients mainly in western Pennsylvania.
The Department of Justice-initiated collapse of the Aetna-Humana and Anthem-Cigna mergers are unlikely to curb consolidation efforts in the healthcare payer sector, Hanlon says.
"I doubt that we have reached the end game. That does not have to mean that you take the top five and that gets concentrated to three. I think about it more broadly than that. If you think about all of the different health plan carriers throughout the nation, to a certain extent scale matters."
Highmark Inc. and AHN are focusing their business model strategies on delivering medical services with value in mind, she says.
"We look at provider consolidation through the lens of being able to deliver a lower cost of care and to deliver more value to our communities… Kaiser is a good example that people can point to as an operating model that is definitely trying to deliver at a lower cost. Geisinger here in Pennsylvania has regularly been held up as an example of a provider system that is focused on delivering high-value care."
Value-based care models are leaner financially than the fee-for-service business model that has dominated the healthcare sector for decades. Hanlon says this financial reality of the shift to value in the delivery of medical services poses a challenge for all healthcare organizations—even nonprofits.
"For us, we are a nonprofit; so we don't have to have a financial target. We don't have to report to Wall Street or meet shareholder expectations. We do need to make sure we are meeting our mission and our vision in terms of caring for those in the community and delivering high-quality healthcare. At the same time, we do have to be fiscally responsible," Hanlon says.
While Highmark Health is not beholden to the barons of Wall Street, the organization is keenly aware of financial considerations.
"We have ratings from three of the ratings agencies—they regularly are looking at how we are doing and want to make sure we are delivering appropriately against their expectations, and we do care about that. We have outside financing from banks and bond holders, and they also are monitoring us to make sure that we are performing in a fiscally responsible manner," she says.
"We do not have a number that we have to hit for shareholders, but we do triangulate on the expectations that other constituencies have of us; and we need to make sure we continue to meet those expectations, so that we are able to continue to offer products and services in the market."
These considerations come with concrete financial consequences.
"Without the appropriate ratings from the ratings agencies, our customers are not going to think as highly of us. Without good marks from the banks, we are going to have a tough time accessing capital," Hanlon says.
