Health Reform: The Five Tipping Points We should be Watching

Former FBI Director Jim Comey’s testimony about his interactions with the President took center stage last week, diverting media attention away from health reform efforts playing out across key federal agencies, in Congress and in the states.

The story-lines at a federal level are these:

  • The Senate hopes to pass its Repeal and Replace bill by its August recess. Rumors are Majority Leader McConnell will invoke Rule 14 to pass a bill that’s less aggressive on Medicaid cuts and neutralizes some of the expected premium spikes for older and sicker adults who qualify.
  • The FDA is accelerating its reforms focused on streamlining its approval process so competing drugs gain market access and, in theory, drive drug prices down. 
  • In Veterans Health, VA Secretary Shulkin’s well-received candor about the agency’s lethargic culture and spotty performance and his privatization alternatives are working their way through the Congressional authorization process.
  • The Department of Justice has stepped up enforcement of the False Claims Act and indicated interest in revisiting the health industry’s consolidation and competitive compacts.
  • And in tandem with these, the FY18- FY27 federal budget that’s working its way through Congress cuts federal funding for most health programs, leaves Medicare intact, transfers responsibility for Medicaid to the states via block grants and assumes more vibrant economy will take care of the rest.

At a state level, the story-lines are equally provocative: Blue states like California will test a single payer ballot initiative this year, Maryland’s will try to constrain drug prices and so on. Red states are seeking waivers for their Medicaid programs akin to Indiana’s and Purple states like Ohio are posturing for greater freedom from the feds. And there’s an interesting intramural debate between states that expanded Medicaid circa the Affordable Care Act and those that didn’t if the House-passed American Health Care Act is enacted: a Missouri Hospital Association study released last week showed that the AHCA’s funding for non-expansion states would short them $684 billion over 10 years exposing their Governors to additional political risk. And a new theme emerging in some Red states is tension between the Executive and legislative bodies: the Kansas legislature repudiated Gov. Brownback’s tax cuts resulting in a revenue shortfall and suspension of key social service programs, in Tennessee, Gov. Haslam’s efforts to expand Medicaid were rejected by its legislature and so on. Health reforms at the state level are getting more attention across the political spectrum because that’s where voters and special interests seem to be gaining more traction while federal efforts seem mired in politics.

What’s consistent across these activities are three themes the GOP’s betting on to keep control of Congress in 2018 and the White House in 2020:

  • The private sector works better than the government.
  • The healthcare industry is inefficient.
  • States are more capable administrators of the health system than the federal government.

I spend most of my time in board planning sessions these days: hospitals considering affiliations and the scale and scope of their endeavors; health insurers transitioning to provider-risk sharing and diversifying into new businesses; device and drug makers estimating market dynamics and regulatory constraints; investors and lenders trying to understand the changing landscape and how to protect their assets. I tell them no one knows for sure how all this will play out. I encourage preparedness based on Scenario Plans specific to the organization’s mission, vision, strategy and performance, and close monitoring of Tipping Points that could change the focus of their strategy or force a re-do altogether. Here are my top five Tipping Points:

1-State Pushback: States are obligated to balance their books. Delegating Medicaid and insurance oversight to states is great politics for federal legislators but problematic in red and blue states if accompanied by regulations that hog-tie Governors with red-ink. Lawsuits against Congress by states are not unprecedented. Just as 46 state attorneys general banned together against tobacco companies, states—both Blue and Red—might challenge feds about unfunded mandates, loose oversight of opioid regulations that have resulted in easy access, or failure to address public health and access disparities effectively and willfully. The Tipping Point to watch is aggressive states will be in asserting control of policies and programs that might complicate national health reforms.

2-Employer Coverage Retreat: From 2005 to 2015, employer sponsored insurance premiums increased 61% and employee contributions increased 83% (Kaiser/HRET). In the 57% of companies that provide coverage, employee contributions are increasing (19% for single/29% for family policies) and high deductible products are fast becoming the status quo. Corporate obligations to health benefits are problematic to investors and lenders as health costs seem uncontrollable, prompting industries like hospitality, restaurant, retail, light manufacturing and others to suspend most benefits for employees. In my research with CEOs, given the likelihood the employer mandate and Cadillac tax will be repealed, I’m hearing “I want to be a fast second” i.e. when my competition drops coverage altogether, I’ll follow quickly. A Tipping Point will be when a Fortune 500 CEO announces suspension of employee health coverage, providing a catastrophic coverage for its employees and dependents in its place.

3-Physician Activism: Physicians are unhappy. They want clinical autonomy, adequate compensation and freedom from administrative hassles like meaningful use, quality reporting and participation in clinically integrated networks where their performance is impacted by the behaviors of their peers. Though 38% have ended up as employees of health systems and others have found security in large group settings, the natives are restless. There’s palpable disaffection for the direction the profession is heading. Having HHS Sec. Tom Price, an orthopedic surgeon by trade, in a key slot, there’s hope for the good ol’ days of medicine, but MACRA, payer profiling, and sophisticated direct-to-consumer shopping systems are leading many to break ranks. And uncertainty about the plight of accountable care organizations and other value-based programs is frustrating to clinicians sold on their future by industry futurists. The Tipping Points will be work-actions taken against federal and state authorities: walk-outs, slow-downs and denial of access on an orchestrated basis coupled with push back against participation in value-based, risk sharing programs going forward. 

4-Hospital Closures: We operate 4900 hospitals. The inpatient business is increasingly unprofitable, the outpatient business is being cherry-picked by opportunistic investors, and cheaper, accessible, safe and effective alternatives are proliferating. This year, 5 hospitals have shut down already.  Multi-hospital systems are consolidating clinical programs and transitioning beds to post-acute use. Investor-owned systems like Community Health are auctioning their hospitals to pay down debt, and safety net hospitals are scrambling to find funds to keep their doors open. The Tipping Point are closures in communities where the inpatient business is anemic, commercial populations are dwindling and announced cuts to Medicaid are sending doctors and patients out of town.

5-Capital Retreat: Healthcare has been a staple for investors and lenders: it’s a solid group of sectors with a strong demand and resilient performance. And it’s been a steady contributor to the S&P’s 12% growth in the last year. But the $1.4 trillion that’s capital ready for deployment is in a sellers’ market: credit worthiness faces a higher standard across the industry, with larger organizations able to negotiate terms and smaller organizations unable to meet comparable terms. As the Fed raises rates this month, debt will cost more. As the over-heated technology market settles, investors will choose wisely from a growing cadre of attractive health sector options. And the potential of a market correction has private equity poised for deals where their funds can go further. The Tipping Point will be defaults that spark acceleration of investment banker led auctions and shutdowns.

The nuances in each of these is unique but they’re co-dependent: a Tipping Point in one prompts activity in the others. They impact each sector differently, with winners and losers in each.

For boards and management across the system, certainty about the future is a pipe-dream. Preparation around possible scenarios and close monitoring of the Tipping Points are imperatives. Health Reform is a bigger story than what the Senate will produce in coming weeks and what’s happening in state houses and DC. It’s about how an industry that’s thrived on steady incrementalism will adapt to the distinct probability of radical disruptions.

Paul

P.S. There are two important Congressional hearings worth watching this week in DC: Sen. Lamar Alexander’s Health Education, Labor and Pensions (HELP) committee will hold a hearing about drug price escalation Tuesday, and Rep. Mike Burgess’ Health Subcommittee of the Energy and Commerce Committee will hold a hearing Wednesday about re-authorization of the Children’s Health Insurance Program (CHIP) and funding for Federally Qualified Health Centers (FQHC) Wednesday.