Leveraging New Business Models to Improve Value

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1 Leveraging New Business Models to Improve Value Kenneth Kaufman, Kaufman Hall June 24, 2014 Today s Agenda 1. The Macro Economic Issues Driving Real Change in Healthcare 2. The Statistical Picture 3. The Themes of Real Change 4. First Principles 1

The Driving Force Behind the Change to America s Healthcare System The Dominant Role of Healthcare Spending (CBO s Long-Term Budget Projection) Source: Congressional Budget Office: Extended

2 The Driving Force Behind the Change to America s Healthcare System The Dominant Role of Healthcare Spending (CBO s Long-Term Budget Projection) Source: Congressional Budget Office: Extended Alternative Fiscal Scenario. Extrapolated by Committee for a Responsible Federal Budget, as illustrated in Blinder, A.S.: After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. New York: The Penguin Press, The Numbers Send a Clear and Present Message The implication for budgeteers is clear: If we can somehow solve the health care cost problem, we will also solve the long-run deficit problem. But if we can t control health care costs, the long-run deficit problem is insoluble. Alan S. Blinder Source: Blinder, A.S.: After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. New York: The Penguin Press,

3 A Revenue Solution Not a Chance! Federal taxes have historically run at about 18.5% of gross domestic product (GDP). To solve the CBO-estimated deficit, federal taxes would need to rise to 32% of GDP. It will never happen. Source: Blinder, A.S.: After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. New York: The Penguin Press,

Where We Are Coming From Changes in the Real National Health Expenditure and GDP Per Capita, 1961-2012 Since 1960, NHE has increased by an average of 2.

4 Where We Are Coming From Changes in the Real National Health Expenditure and GDP Per Capita, Since 1960, NHE has increased by an average of 2.3% more than GDP growth As a result, NHE increased from 5% of GDP in 1960 to 17.2% of GDP in 2012 Source: Blumenthal, D., et al.: Health Care Spending A Giant Slain or Sleeping? New England Journal of Medicine, 369: , Dec. 26, 2013; and Martin, A.B., et al.: National Health Spending in 2012: Rate of Health Spending Growth Remained Low for the Fourth Consecutive Year. Health Affairs 33(1): 67-77, Jan Where Are We Now? The annual growth rate in real spending for healthcare increased by only 0.8% per person in 2012, 1 and is expected to be just 1.3% over the period. 2 This is below the real gross domestic product. Healthcare prices in February 2014 rose only 1.2% above February 2013 Annual employment growth in the hospital sector has been very slow, increasing at an average rate of just 0.8% since 2007 and only 0.1% from March 2013 to March Medicare spending per beneficiary grew at a rate of 1.6% annually from 2010 to 2012 down considerably from previous years, and roughly 2 percentage points below the growth rate of per capita GDP 4 Sources: (1) Blumenthal, D., et al.: Health Care Spending A Giant Slain or Sleeping? New England Journal of Medicine, 369: , Dec. 26, 2013; (2) Council of Economic Advisors: Trends in Health Care Cost Growth and the Role of the Affordable Care Act. Nov. 2013; (3) Altarum Institute: Labor Brief. Apr. 8, 2014; and (4) Medicare Payment Advisory Commission: Report to the Congress Medicare Payment Policy, Mar

5 What Is Changing? Overall growth in NHE for the past 4 years of about 3.7% is the slowest rate recorded in the 53-year history of the National Health Expenditure Accounts 1 NHE was 17.2% of GDP in 2012, an actual decline from 17.4% in Prescription drug expenditures, which account for approximately 11% of overall U.S. healthcare expenditures, declined from annual growth of 12.4% in 2000 to 0.4% in ; 17% of current pharmaceutical spending is on drugs that will go off patent in the next 5 years 4 The use of advanced diagnostic imaging grew by more than 6% per year from approximately 1995 to 2005, but growth has flattened since The number of bypass cardiac surgeries decreased by 20% from the volumes of the mid-90s 6 Source: (1) Gnadinger, T.: National Health Spending Growth Remains Low for Fourth Consecutive Year. Health Affairs Blog, Jan. 6, 2014; (2) Martin, A.B., et al.: National Health Spending in 2012: Rate of Health Spending Growth Remained Low for the Fourth Consecutive Year. Health Affairs 33(1): 67-77, Jan. 2014; (3) Schumock, G.T., et al.: National Trends in Prescription Drug Expenditures and Projections for Am J Health-Syst Pharm Vol. 71, 2014; and (4-6) Blumenthal, D., et al.: Health Care Spending A Giant Slain or Sleeping? New England Journal of Medicine, 369: , Dec. 26, The Emerging Points of Disruption to Healthcare s Business Model 1. Redesigning America s healthcare business model 2. The tipping point. The end of inpatient-centric care. 3. The entry of new, well-funded, and highly capable competitors 4. Healthcare as a retail good with real price sensitivity 5. Transformational change to the employee insurance market 9

6 1. Redesigning America s Healthcare Business Model The Fee-for-Service/Medicare-Based Business Model Hospitals Doctors Redesigning America s Healthcare Business Model (continued) A Significantly Different Model Employers Healthcare Company Medicare and Medicaid Select Contract (?) Who Is This? Content of Care Hospital Doctors Outpatient Services Continuum of Care Commodity Make vs. buy Low-cost provider Contract to specifications 11

7 2. The Tipping Point A Move from an Inpatient-Centric Care Model to an Outpatient-Centric Care Model Inpatient Use Rates for Chicago, Cook County, and the State of Illinois Have Decreased by 9%+ Inpatient Use Rate Trends (per 1K population) % Change In Use Rates Illinois Cook County Greater Chicago Market % -9.0% 0% -9.8% 0% -9.3% Notes: Excludes Normal Newborns (MS-DRG 795 and DRG 391). Sources: Claritas 2000/2012 estimates. Illinois Department of Public Health (IDPH): Inpatient hospital discharge data from Jan 2001 through Dec The Entry of New, Well-Funded, and Highly Capable Competitors Disruptive Contextual Change Encourages the Entry and Aggressive Expansion of A-traditional Competitors Diagnosing and following chronic care patients in Walgreens clinics Theranos Wellness Centers at Walgreens stores 13

8 4. Healthcare as a Retail Good Moving the Healthcare Delivery System from a Wholesale Business to a Retail Business New points of competition Brand Access Convenience Customer satisfaction IT connectivity Consistent quality Service Price Takes legacy providers out of their comfort zone 14 Price Competition Has Arrived Source: Kalorama Information: The U.S. Market for Urgent Care, March

9 5. Transformational Changes to the Employee Insurance Market A move to high-deductible health insurance plans Moving employees from employer-sponsored insurance to the private exchanges Reducing costs by purposefully moving employees to lower-cost sites of care and providing technology to accomplish this 16 A Rapid and Profound Movement to High- Deductible Insurance Plans Percent of Covered Workers Enrolled in a High-Deductible Health Plan or Medical Savings Account, Source: Kaiser Family Foundation/Health Research & Educational Trust: Employer Health Benefits: 2013 Annual Survey. Aug. 20,

10 Annual enrollment (in millions) Walgreens Leads the Way from Employer-Sponsored Health Insurance to Putting Employees on the Private Exchanges Accenture Projects That Private Exchange Enrollment Will Grow Rapidly Source: Accenture: Are You Ready? Private Health Insurance Exchanges Are Looming. May 17, The Response of the Day-to-Day Delivery System Old Model BIG HOSPITAL The aggregation of services Healthcare in the hospital The dis-aggregation of services Hospital New Model BIG HEALTH SYSTEM Outpatient Center Primary Care Freestanding ER Home Health Hospital Healthcare in the community Outpatient Center Primary Care 19

First Principles in a Disruptive Environment 1. Can your organization become a Healthcare Company? 2. Are you capable of re-organizing your hospital as essentially an outpatient-based delivery system?

11 First Principles in a Disruptive Environment 1. Can your organization become a Healthcare Company? 2. Are you capable of re-organizing your hospital as essentially an outpatient-based delivery system? 3. Are you aggressively re-positioning your hospital to operate under a fee-for-value reimbursement system? 4. Can you see your organization operating at an entirely different and much lower cost structure? 20 Perform at your best when your best is required. Your best is required each day. John Wooden Former Head UCLA Basketball Coach 21

Health Care Spending and the Aging of the Population

Order Code RS22619 March 13, 2007 Health Care Spending and the Aging of the Population Jennifer Jenson Specialist in Health Economics Domestic Social Policy Division Summary Health care spending has been