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The veteran healthcare executive says this may be a Netflix vs. Blockbuster moment for hospitals. And health plans may be under pressure to meet the statutory levels for medical spending and recontract with their networks to offer enhanced payments in return for clinical improvement activities.
Don McDaniel, CEO of Canton & Company, a healthcare advisory and consultancy company, has spent a career working with healthcare professionals across the industry.
Prior to founding Canton & Company, McDaniel was the founder, chairman and CEO of Sage Growth Partners; vice chairman and chairman of Continuum Health; CEO of Lighthouse Risk Solutions; SVP and general manager of consulting of Northrop Grumman Health IT' and more.
He also taught health economics for more than 20 years at Carey Business School and the Bloomberg School of Public Health, both at Johns Hopkins University in
Keith Loria, a regular contributor to Managed Healthcare Executive®, recently interviewed McDaniel. This transcript has been edited for clarity and length.
How would you characterize the expected impact of the COVID-19 pandemic on the health economy overall and how the possible economic downturn will affect healthcare broadly?
Like any other sentinel event, there will be short- and loving-term implications. Given the order of magnitude, and the “different-ness” of this event, the response has been dramatic. For example, policymakers de-regulated licensing and communications, allowing providers—regardless of where they were licensed—to treat patients in need. This was a humanitarian response and an economic response. Consumers needed treatment and health services; providers needed revenue.
We have seen a dramatic pivot of services from face-to-face to remote visits. It is hard to envision that we will fully return to the prior regulatory regime. Now that there are signs of return, I suspect hospitals will uncover pent-up demand and, starting with the rescheduling of elective procedures, begin the process of getting consumers back in queue.There will, however, be some permanent impact of services volumes and questions as to whether certain institutional settings, like hospitals, are really required to serve certain needs.
Relative to the health insurance industry, many insurers are the beneficiaries of lower health services utilization and deferred care. This twill likely result in improved financial performance for the balance of 2020 and into 2021. However, given the artificial nature of the impacts, we might expect both utilization backlog and worsening health status to impact loss ratios in the next several years. I suspect that health plans will be under pressure to meet the statutory levels for medical spending and may look to recontract with their networks to offer enhanced payments in return for clinical improvement activities as they are loathe to rebate premium dollars to subscribers.
Finally, the healthcare industry’s return has a larger economic impact than most people suspect; with roughly 1 in 7 jobs tied to the industry, the sooner the “business of healthcare” returns, the better it is for the business of America, and our economic standing. In most communities, hospitals are the largest employers with physician organizations closely following. Healthcare’s return to normalcy will become a key driver of overall economic health.
How will it impact hospital systems. What challenges will it create?
To date, the impact on hospitals and other institutional entities has been significant. Seemingly regardless of proximity to COVID outbreaks, elective hospital and ambulatory health services everywhere have been deemed as nonessential and healthcare services capacity has been re-purposed to prepare for the onslaught of virus cases – in some cases a reality, in others not so much. Some hospitals, those in hot zones for COVID have continued to be busy but have experienced a pivot from their general acute care purpose to mono-focused on the virus. Many other hospitals have been forced to curtail services and implement social distancing, and those have seen dramatic reductions in their volumes. Generally immune to economic downturns, we have seen COVID cause many hospitals to furlough significant staff. As the recovery begins in earnest, many hospitals are ramping up staff to recall patients that have been waiting for elective services, with some executives suggesting they may operate to deliver these services seven days a week for some period of time.
Many will likely be laying people off. How soon do you believe regular medical services will spring back to life? And what will make that happen?
A return to scheduling prior cancellations is starting in earnest in many parts of the country. I think this re-ramp will continue through the summer, and many hospital executives I know are targeting 75%-80% of full volume as a goal by year end. The return to some level of normalcy for healthcare organizations is an important economic signal, driving its concentration of employees. While I expect some organizations to affect reductions in force, many have already been triggered with leaders now planning how and when they can get staff back to work. Return to work in healthcare organizations is dependent upon the ability of those organizations to withstand a second wave of cases.
How about payers? What will they be facing with the possible economic downturn to come?
So far, I think most payers are in a wait-and-see mode, with this being described as the calm before the storm. Most actuaries that I have talked with are witnessing suppressed medical-loss ratios (MLRs)and are projecting the same through the end of 2020. But the question is when will pent-up demand start to impact MLRs in the future?
There is also building concern about the long-term impact of chronically ill patients that have forgone care during the COVID-induced shutdown; others are concerned about poor dietary and sedentary habits exacerbated during the shut-in. In the tale of two cities that is our reimbursement system, provider organizations that rely on predominantly FFS (fee-for-service) payments have been scrambling and struggling, while risk-bearing provider organizations are, in some cases, awash in cash. Among that latter group, albeit a small segment of provider organizations nationwide, the winners will be those that used the “downtime” to invest in operations improvement and new capabilities that will serve them well post-recovery.
Many will be paying COVID-19 related payouts but not other things. Will that affect anything?
Again, in the short term, COVID has been a good guy for payers— but it remains to be seen what the tail involves.
How about Medicare and Medicaid? What do you expect the impact to be there?
I honestly do not expect much to change with Medicare and Medicaid. I think the writing is on the wall, these programs are on a forced march to defined-contribution. The favorable economics and accountability of Medicare Advantage and Medicaid managed care are increasingly undeniable. If anything, this crisis validated the private market’s ability to manage through a crisis, at least related to private-sector healthcare. Given the collective government response to COVID vis-à-vis industry’s response, Americans will come out of COVID wanting to be aligned with professional organizations that are consumer centric.
What do you feel is important in getting things back to normal and having a sound health economy again?
Testing, testing, testing, and a dramatic, consistent flattening of the curve. The other game changer would be a faster than expected vaccine breakthrough. I do also get sense that Americans are feeling that maybe the economic harm isn’t commensurate with the health impacts moving forward, and people are hankering to get back to business as usual.
Historically, large unemployment numbers meant people would skip going to the doctor. Is that something that we should fear this time around?
Given the nature of this pandemic, no fault of anyone who is unemployed or will be, I suspect that CMS and the states will deploy various strategies to ensure continuation of access and some semblance of benefits. I don’t know if that means ACA and new Medicaid expansion, but I do think it’s advantageous that most of our states are waiver states and have the private health plan commerce infrastructure in place to accommodate scaling for more enrollees.
How does Medicaid expansion and the ACA provide a health insurance safety net of sorts?
It’s unfortunate to think that we’d have to rely on Medicaid expansion in this situation, but given the explosion of newly uninsured, the fact that we have a majority of states that are Medicaid waiver states (1115 or 1915 waivers that allow states to move their Medicaid populations into managed care plans), and many of those states expanded eligibility for Medicaid under ACA – to 133% of FPL (federal poverty level) we are better positioned for expansion of Medicaid than we were after the financial crisis. There will likely be additional pressure placed on the feds by the states for enhanced short-term benefits and continued calls for additional state expansion.
What can hospitals do to get back on track?
Getting back on track will require skill, luck, and lots of elbow grease. The elbow grease will entail massive outreach to reestablish connections with patients. I do believe hospitals and their boards will be spending more time trying to prepare for the next black swan event.
I think it’s fair to say that it was almost impossible to plan for Covid, but was it impossible to plan for scenarios where facilities were closed for extended periods of time, where we needed to affect mass layoffs, where we needed to connect with people virtually, etcetera? Given the retail experience over the past 10 years, maybe this is healthcare’s example of Blockbuster vs. Netflix.
What is the impact on specialists versus primary care doctors? What do you see as far as the impact on both segments?
I think its primary care’s time to shine and take the mantle, from gatekeeper to quarterback. We have seen clearly that most of what is needed by patients can be done in their homes and communities, especially when those efforts are spearheaded in partnership with a high-quality primary care physician and an integrated care team.
What can payers do to withstand any long-term effects?
This is a tough question, as all aspects of what we have come to understand as managed care have been eliminated from the playbook. I think the best thing payers can do is continue to encourage smart, provider-based organizations to manage risk-based populations and empower them to develop a truly holistic health ecosystem. I am not sure if hospitals value this opportunity, but we should see a whole new level of plan-provider partnerships develop from this.