Five big industry changes to watch in 2016

The healthcare industry has seen a whirlwind of changes in recent years, and 2016 won’t be any exception. Understanding and embracing these changes is key to a managed care organization's prosperity and, in some cases, survival. Among the trends are companies changing from nonprofit to for-profit and widespread consolidation. Meanwhile, technological advances and consumerism are taking center stage. In addition, drug prices continue to rise, forcing payers to develop new strategies for dealing with them.

The shift from nonprofit to for-profit

A fine line seems to distinguish nonprofit and for-profit insurers these days. Nonprofits benefit from tax advantages-and can build up significant reserves and pay high executive salaries comparable to for-profits-while not paying dividends. Given this, regulators are scrutinizing whether nonprofits should be exempt from taxes, says Managed Healthcare Executive Editorial Board Member Don Hall, MPH, principal, DeltaSigma, LLC.

Sarasohn-KahnJane Sarasohn-Kahn, MA, MHSA, health economist, adviser, and author of THINK-Health and Health Populi blog, cites several other reasons why nonprofits may begin converting to for-profits. Because of the increased costs of doing business in healthcare, organizations have to do more with less. Furthermore, lower reimbursements and the growing value-based payment environment (e.g., bundled payment, pay-for-performance, population health management, and other constrained financing models), have incentivized stakeholders to behave with a commercial ethos.

Hall expects the trend will get stronger, particularly with mergers of for-profits. “They will concentrate more on their efforts to put pressure on regulators,” he says. The bottom line is that nonprofits should review why they are nonprofit and make sure they adhere to those tenets. They should communicate their commitments to regulators, members, and providers; the distinction should be clear to anyone who does business with them.

Next: The next big industry change

Consolidation is rampant

Significant consolidation has already occurred in the marketplace, and more is expected. “Consolidation is a natural occurrence amidst rising costs and greater transparency,” Sarasohn-Kahn says. “Scaling is inevitable, and so health plans, providers, and suppliers are all undergoing consolidation to play more effectively in the value-based healthcare marketplace.”

StoneIn addition, health plans need administrative efficiencies and capital to invest in technology, they need to spread their costs over a broader customer base, and they need scale to gain market power, says Terry Stone, global managing partner, health and life sciences practice group, Oliver Wyman.

Stone expects to not only see consolidation for scale, but also foresees more consolidation for capabilities. “Even large insurers built to today’s models are going to find themselves needing to start making decisions about what kind of business they’re going to be in the future-a low-cost, bare-bones operation; a trusted adviser; or a value-added operation oriented toward customer experience,” she says. “They will then have to start acquiring the capabilities to play that role effectively. The second wave of consolidation, oriented toward vertical integration rather than scale, is the one that will truly transform the industry.”

Picking partners and collaborators for alliances will require strategic competence to survive and thrive in this kind of market, Sarasohn-Kahn says. “Driving healthy corporate cultures in the post-merger environment is challenging, but crucial, so companies who can bolster morale and operational effectiveness at the same time will be positioned to do well.”

In light of all this, Stone says healthcare executives need to be realistic. “Most mergers and acquisitions fail, and the failures are related to people and culture rather than strategy,” she says. One of the most successful mergers Oliver Wyman has seen in healthcare in recent years was between a pair of specialty benefit managers-CareCore National and MedSolutions-that formed eviCore. The chief executive officers spent six months talking about culture and learning to trust each other before making the first move toward a deal. They imposed a level of transparency that most payers have simply never seen before. The deal was a notable success, but only because the leaders committed to it personally, says Stone. In today’s market, that level of commitment and devotion is an incredibly valuable corporate asset.

As consolidation continues, Hall expects many smaller Medicare- and Medicaid-focused plans to be acquired. Medicare uses a Star Rating System to measure how well Medicare Advantage and prescription drug (Part D) plans perform. With the Star Rating System holding such critical weight, plans will invest significantly in improving their ratings. For many the cost will be too high, however, and selling will become an attractive option, he says.

Hall expects some states that did not expand Medicaid under the Affordable Care Act to do so. This will also help drive consolidation, as it will add millions of new individuals and billions in new premiums to the Medicaid market, he says.

Plans that don’t want to sell will need to focus on using their smaller size to operate more effectively in certain areas than larger plans, Hall says. This includes better consumer engagement, personalized service, and attention to the details that large companies often ignore. Eliminating computer-answering systems will make a significant positive impact, he says.

Next: The next big industry change

Technology takes hold

Technology encompasses several areas of investment beyond traditional clinical medical devices. Growing areas include information technology, especially electronic health records (EHRs), and growing mobile platforms for collaborative and team-based care.

In particular, now that EHRs have been used for a while, they contain a wealth of data. “There has been an increased focus on harvesting data from all sources and integrating it with personal health records,” Hall says. “Health plans will continue to evolve their usage of information to develop more personalized healthcare delivery for members.”

Sarasohn-Kahn says the upfront and operational costs of technological investment options should be assessed in a lifecycle context, forecasting the anticipated expenditure over the long period, balanced by the return of the investment in both direct and indirect terms.

As a health economist, Sarasohn-Kahn uses cost-benefit and cost-effectiveness tools to analyze these investments, paying attention to both quantitative and qualitative returns. “The latter could include, for example, patients’ experience which might increase-or negatively impact-Hospital Consumer Assessment of Healthcare Providers and Systems [HCAHPS] scores, which could directly affect payer reimbursement,” she says. “From a provider point of view, technology, like telehealth and remote health monitoring, can help to extend the resource-challenged physician supply and bring care closer to consumers, leveraging both primary care extenders and specialists where they are needed and underserved.”

When it comes to technology, embracing change can be difficult. Hall urges payers to adopt it. “Our industry won’t be any different than other industries,” he says. “If we don’t adapt, companies such as Amazon, Google, and Apple, will sweep aside a lot of healthcare companies that currently exist.

One example is Google’s investment in Oscar Health, a health plan focused on consumers. “This company utilizes technology in way that engages members, which is rarely seen,” Hall says.

Next: The next big industry change

A move toward consumerism

Addressing the rise in consumerism requires more than giving consumers good customer service. It also includes providing them with the tools to make intelligent decisions. “But when it comes to responding well to consumerism, healthcare companies have often been giving it lip service,” Hall says. “I can’t point to any health plan that has really mastered it.”

For the last five years, Stone says the healthcare market has primarily focused on value-based care delivery, while responding to consumerism has lagged. Health plans have never been forced to understand consumers the way retailers and consumer packaged goods companies have had to, she says.

The rise of consumer-driven health plans, greater out-of-pocket costs, consumers’ taking on more self-service in daily tasks such as travel planning and financial management, and the proliferation of mobile platforms are conversing and driving the trend. The “payer” is now the patient, paying more out of the household budget. In fact, approximately $1 in every $5 was spent on healthcare for the average U.S. family in 2015, according to the U.S. Department of Commerce. The growing era of high-deductible health plans, coupled with health savings accounts, is also forcing patients to become healthcare consumers and shoppers, motivation for health industry players to behave more like retail companies.

Consumer science is extraordinarily sophisticated today, and health plans need to catch up now-as employers turn to private exchanges, where expanded choice has led to more consumer purchase of high-deductible plans. According to Mercer’s recent National Survey of Employer Sponsored Health Plans, only 23% of employees in traditional benefit programs are enrolled in high-deductible health insurance products. On Mercer’s private exchange, however, 59% chose high-deductible products, many of them cheaper than the plans their employers might have previously offered. “In these plans, consumers will increasingly become more engaged with their care,” Stone says. “In fact, Oliver Wyman has found that people in high-deductible plans are twice as likely to use cost tracking and transparency tools.”

Technology presents an additional opportunity to advance consumerism, Stone continues. As health plans learn to develop products for smaller groups with different healthcare needs-for example, younger individuals who doubt they will encounter a major health issue any time soon, customers who value convenience, patients with chronic conditions such as diabetes, and young families-they will start moving patients to more economically rational forms of care.

One example is encouraging certain members to use telemedicine services. Sixty four percent of Americans would be willing to see a doctor via video, according to a survey from American Well.

Meanwhile the Healthcare Information and Management Systems Society and Harvard University predict that three out of five office visits potentially can be virtual. This works out to about 300 million visits that can be completed via video, but according to Deloitte, there were only about 75 million virtual visits in 2014. In theory, this leaves an opportunity to complete 225 million doctor visits in a more convenient, cost-effective way.

Once we break the stranglehold of the preferred provider organization (PPO), which restricts the variety of providers a consumer can visit, insurers will have the ability to craft products that make much more use of advanced primary care networks, disease-specific practices, retail-based care, and other forms of care that are still being created. “Consumers will use them because they are convenient and save money,” Stone says.

In the long run, winners in the healthcare market will be companies that provide extraordinary value, not just low prices. “That means health plans need to figure out what role they need to play to keep their members healthy and improve outcomes, which will require a kind of customer engagement that we haven’t seen before,” Stone says.

Next: The next big industry change

Drug costs on the rise

Pharmaceutical companies focused specifically on cancer and rare diseases are commanding higher prices for their products. At one point, close to 20 companies identified themselves as oncology specialists, says Stone. “Surprisingly, despite an intensive industry research and development focus on a very narrow area, there is far less drug-on-drug competition than one might expect,” Stone says. “This gives payers far less leverage where costs are rising the fastest. But when competition finally does occur-as it did with Gilead’s hepatitis drug Sovaldi-payers will have the opportunity to push back.”

In fact, for the third consecutive year, annual increases in drug prices among manufacturers have risen to the top of the list as the most significant factor contributing to growth in per-member-per-month (PMPM) drug trending within managed care, says David Calabrese, RPh, MHP, chief pharmacy officer, OptumRx. Recently, select manufacturers (e.g., Turing and Valeant Pharmaceuticals) have been under substantial fire in the media and among lawmakers for exorbitant increases in their branded drug products. To further exacerbate concerns, significant increases in inflation rates have also now carried over to the generic drug market, with a number of previously low-cost generic products (e.g., doxycycline) experiencing substantial growth in pricing as well. 

CalabreseWith budgetary pressures among plan sponsors at unprecedented levels because of various economic factors, recent drug pricing has taken center stage among payers and regulators alike. “This will become a major focal point in upcoming elections, and I believe manufacturers will be under much greater scrutiny relative to their year-over-year increases in drug pricing, particularly as compared to national benchmarks like the Consumer Pricing Index,” Calabrese says. “Subsequently, I predict gradual decreases in upfront drug inflation rates. However, this in turn will likely be offset by a retraction among manufacturers in the degree to which they discount and rebate drug products to payers and purchasers, as a way to retain their existing profit margins.”

In light of this, Calabrese would caution healthcare executives to develop mechanisms, either internally or in partnership with their pharmacy benefit manager, to very closely and routinely monitor drug inflation rates down to an individual product and individual manufacturer level. “Aggressive steps should be taken from both a formulary and utilization management perspective to counter such significant increases as they occur,” he says. “Individuals negotiating rebate contracts with manufacturers should be pushing hard for price protection language in these contracts to ward against such significant year-over-year price increases.”

Additionally, managed care organizations should be thinking much more creatively in the pursuit of alternative outcomes-based contracts with drug manufacturers that can require these organizations to go at-risk for the clinical value that their products are touted to deliver, says Calabrese. 

But Stone advises healthcare executives to not think of a drug’s costs as inherently good or bad. Instead, they should consider how the drug’s cost fits into the total cost of care to determine where to raise or cut prices. “Scientifically sophisticated life-saving drugs that target relatively rare diseases are going to continue to be expensive, and typically there won’t be much that can be done about it,” she says. “And simple, inexpensive drugs for conditions such as hypertension, high cholesterol, depression, and asthma probably don’t comprise enough of the total cost of care.”

Through this lens, executives can examine the “close calls” to deliver a better product with a lower total cost of care. For example, Oliver Wyman works with an insurer who did a deep analysis of the total cost of care for asthma patients taking two drugs. One was a lower cost inhaled medication and the other was an oral drug. The oral drug cost more-but compliance was significantly better than with the inhaler, preventing many unnecessary emergency department visits. Therefore, the more expensive drug yielded a significantly lower total cost of care.

Stone also warns executives to keep a close eye on the cost of fraud and abuse. “For expensive drugs, you need sound, defensible policies, but you also need to invest in an adequate level of oversight,” she says. “Expensive injectable drugs are an invitation to unscrupulous marketing and fraud. Be sure they’re being used appropriately.”

Another reason drug costs are escalating is that pharmaceutical companies significantly influence Congress. Hall says it’s time to force Congress to make laws that benefit consumers and reduce unnecessary healthcare spending.

Karen Appold is a medical writer in Lehigh Valley, Pennsylvania.