Free Market Lessons from Sweden’s Single Payer System


Posted by Errol Pierre

The United States with a population of over 313 million people spends over 17% of its GDP on health expenditures while over 14% of its population lack health insurance. This has led to runaway costs, access to care issues, and in the face of recent healthcare reform efforts, worries of severe physician shortages come 2014. On the contrary, Sweden, with a much smaller, homogenous population of 9.4 million people has been able to keep health expenditures less than 10% of its GDP while covering all of its population. If efficiency of health dollars were the metric to compare health systems internationally, Sweden would lead the U.S. in this regard for the last 30 years. Despite their successes, like all developed nations, Sweden faced threats of increasing costs in the 1990’s due to an economic downturn. Additionally, Sweden also saw an aging population with a longer life expectancy from advancements in technology and modern medicine. When healthcare is government run it inevitably will succumb to rationing when tax dollars are scare. However, Sweden has been able to achieve sustainable results through policy and market reforms focused on (1) the decentralization of healthcare management, (2) cost containment measures, and (3) physician and hospital competition.

Decentralization of Healthcare Management

While Sweden is a model for a single payer system, many of their reforms can be applicable to the United Stated. In Sweden the Health and Sickness Care Law of 1982 decentralized the Swedish government’s control of healthcare to keep it “accessible, efficient, and equitable.”  Counties within the country were given more autonomy to set up boards and administer health services. In turn, many of the national rules dissolved. This decentralization gave more power for regional decisions within the counties of Sweden. This is unlike America where the answer to the uninsured population in its most recent healthcare reform efforts was to use the national approach of health exchanges and essential health benefits rather than delegating the particular solutions to individual states and localities. For example the Department of Health & Human Services mandated that every state have a health benefit exchange by 2014 or the Federal government would create one within the state.

Lesson Learned: Place the burden of the uninsured into the hands of local governments to formulate strategies to address the issues that are sensitive to the local values.

For example, in the U.S. one third of the uninsured find insurance within 6 months. In Sweden, many counties pay for insurance costs for citizens up to 6 months until they find a new job. This would eliminate 15 million of the 45 million uninsured. Additionally, 50% of the uninsured work part-time. A U.S. state resolution would be a sickness fund (similar to Medicaid) that caters to individuals that work less than 40 hours a week with multiple employers, which would lower the uninsured rates to ~20 million. Lastly, 43% of the uninsured are located in only 4 states (New York, Florida, Texas and California). A focus on local initiatives to answer a national problem similar to Sweden could have potentially been a better use of resources and national funds than a Federal law impacting all 50 states.

Cost Containment

In 1984, with the passage of the Dagmar Reform of 1984, national revenues were divvied up and doled out to counties as block grants based on population size. As a result, private providers could no longer directly bill the national healthcare system for medical services rendered. This is very similar to how physicians who treat Medicare enrollees operate today. From 1984 to 1985 the count of practicing physicians went from well over 5,000 to just over 2,000 greatly controlling costs. Block grants also declined the percentage of GDP in Sweden spent on health expenditures. Sweden is one of the few countries that have been able to lower the percentage of health expenditures.

Additionally, as the economy worsened in the early 1990’s, the Swedish government froze taxes from 1991 until 1994. During this time 22% of the country’s beds for acute bed care were eliminated. Also self referrals received a higher copayment. This is very different in the U.S. where economic downturns cause private insurance enrollment decreases due to cost containments that occur in the private sector. However, since all health care cost controls are not vested in local state government, public spending and public health expenditures balloon during such times. For example, Medicaid spending increased by one third from 2000 to 2003 during the U.S. economic down turn. It grew by 10% between 2010 and 2011 representing 25% of all expenditures for states. U.S. healthcare reform efforts plan to reduce Medicare and Medicaid by 500 billion respectively which is likely to get caught up in the same political stalemate as the Medicare “doc-fix” since these decisions have not been decentralized and delegated to local governments. Since Sweden represents close to 80% of all health expenditures compared to less than 50% in the U.S., they are more sensitive to cost containment measures which lead to quicker reaction and better results.

The Federal government in the U.S. has continued to push off a fix to Medicare reimbursement reductions due to lobbying from physicians and trade groups. If these decisions were made at a local level to handle local concerns, States would have the ability to better control costs. Additionally, 50% of the Medicaid spend is handled by the states. This allows the states conversely to only handle 50% of the costs.

Lesson Learned: Medicare and Medicaid should be handled purely at the state levels since many states have balance budget amendments, cannot run deficits, and it is very costly for states to borrow funds.

Lastly, in 2002, Sweden introduced reference pricing and generic substitution for pharmacy coverage. This meant that when a drug was purchased, the health system would pick up 110% of the lowest priced drug. If a brand name drug was requested over a generic, the consumer would be responsible for the difference. From 2002 through 2005 Sweden realized $7 billion in savings which was close to 10% of total drug spend.

Lesson Learned: Adopt reference pricing and generic substitution in both Medicare and Medicaid programs across the U.S. to sharply cut pharmacy growth rates.

Physician & Hospital Controls

The United States is quickly facing a physician shortage when 20 million or more Americans will enter the insurance market in 2014 through Health Benefit Exchanges. In 1993 Sweden passed a law called The Point of Service Primary Care Reform which answered concerns of primary care shortages. The law made counties responsible for making sure every Swede had access to primary care. Additionally, it capped the amount of specialty training that occurred outside general medicine. It set ceilings and floors for the amount of patients treated by a single practice (1-3k patients per year). It provided credits and loan forgiveness to primary care doctors who started a new practice. And finally, the law allowed pay for performance measures that reduced the reimbursement to physicians who underperformed. Such controls including other initiatives has led to the use of electronic medical records for 94% of Swedish primary care physicians as compared to only 45% in the U.S. Additionally, 49% of Swedish physician practices have the capacity for advanced electronic health information compared to only 26% in the U.S. Lastly, 54% of Swedish practices will see patients after hours as compared to 29% in the U.S.

Lesson Learned: Strong controls on physicians at the local government level can greatly eliminate the potential of primary care shortages and improve the quality of care.

Conclusion

There are feasible lessons to be learned from recent healthcare reforms in Sweden particularly in the areas of decentralization, cost containment, and physician controls. In particular there are four lessons to be learned that are viable in the U.S. despite the current political climate and threat of the unconstitutionality of the Patient Protection and Affordable Care Act. Lesson 1: decentralize the burden of the uninsured to the individual states. Lesson 2: Allow individual states to budget for health care through block grants. Lesson 3: adopt reference pricing and generic alternative scripting. Lesson 4: place strong controls on physicians to eliminate shortages and increase access to care.

Despite America’s strong dislike for government run healthcare, roughly 40% of the population (125M Americans) is enrolled in a federally facilitated health program. Specifically there are 44M Medicare recipients, 62M Medicaid recipients, 10M Tricare recipients (health insurance for the U.S. military) , and 8M Federal Employee Health Benefit recipients. Sweden has been able to use free market principles within a government run system to manage care and cost. And yes, with any balance between quantity and quality, rationing of care does exist. But in a free market, when does rationing based on supply and demand not exist outside of anomalies like luxury and inferior goods?


A Systemic Approach to Containing Health Care Spending


Posted by Joel Wittman

In this election year, U.S. national spending on health care will reach $2.8 trillion, or about 18% of total spending on all goods and services. This high level of spending reduces the ability to invest in other important parts of the economy and also adds to the national debt. There is wide agreement that ways must be found to bend the health care cost curve.

National health spending is projected to continue to grow faster than the economy, increasing from 18% to about 25% of the gross domestic product (GDP) by 2037.1 Federal health spending is projected to increase from 25% to approximately 40% of total federal spending by 2037. These trends could squeeze out critical investments in education and infrastructure, contribute to unsustainable debt levels, and constrain wage increases for the middle class.

Although the influx of baby boomers will increase the number of Medicare beneficiaries, growth in per capita health costs will increasingly drive growth in federal health spending over the long term. This means that health costs throughout the system drive federal health spending. Reforms that shift federal spending to individuals, employers, and states fail to address the problem. The only sustainable solution is to control overall growth in health costs.

Although the Affordable Care Act (ACA) will significantly reduce Medicare spending over the next decade, health costs remain a major challenge. To effectively contain costs, solutions must target the drivers of both the level of costs and the growth in costs — and both medical prices and the quantity of services play important roles. Solutions will need to reduce costs not only for public payers but also for private payers. Finally, solutions will need to root out administrative costs that do not improve health status and outcomes.

The Center for American Progress convened leading health-policy experts with diverse perspectives to develop bold and innovative solutions that meet these criteria.  See the following solutions below that were recommended:

Promote Payment Rates within Global Targets

Under the current fragmented payment system, providers can shift costs from public payers to private payers and from large insurers to small insurers. Since each provider negotiates payment rates with multiple insurers, administrative costs are excessive. Moreover, continued consolidation of market power among providers will increase prices over time. For all these reasons, the current system is not sustainable.

Under a model of self-regulation, public and private payers would negotiate payment rates with providers, and these rates would be binding on all payers and providers in a state. Providers could still offer rates below the negotiated rates.  The privately negotiated rates would have to adhere to a global spending target for both public and private payers in the state.

Accelerate Use of Alternatives to Fee-For-Service Payment

Fee-for-service payment encourages wasteful use of high-cost tests and procedures. Instead of paying a fee for each service, payers could pay a fixed amount to physicians and hospitals for a bundle of services (bundled payments) or for all the care that a patient needs (global payments).

Use Competitive Bidding for All Commodities

Evidence suggests that prices for many products, such as medical equipment and devices, are excessive. Instead of the government setting prices, market forces should be used to allow manufacturers and suppliers to compete to offer the lowest price. In 2011, such competitive bidding reduced Medicare spending on medical equipment such as wheelchairs by more than 42%. The ACA requires Medicare to expand competitive bidding for equipment, prosthetics, orthotics, and supplies to all regions by 2016.  It is suggested that Medicare expand the current program nationwide to include all commodities and extend to all federal health programs, including the insurance exchanges that will start in 2014.

Require Exchanges to Offer Tiered Products

The market dominance of select providers often drives substantial price variation. To address this problem, insurers can offer tiered plans. These insurance products designate a high-value tier of providers with high quality and low costs and reduce cost sharing for patients who obtain services from these providers.

Require All Exchanges to Be Active Purchasers

If exchanges passively offer any insurance product that meets minimal standards, an important opportunity will be lost. As soon as reliable quality-reporting systems exist and exchanges achieve adequate scale, it is critical that federal and state exchanges engage in active purchasing — leveraging their bargaining power to secure the best premium rates and promote reforms in payment and delivery systems.

Simplify Administrative Systems for All Payers and Providers

The United States spends nearly $360 billion a year on administrative costs, accounting for 14% of excessive health spending.  It is suggested that payers and providers electronically exchange eligibility, claims, and other administrative information as soon as possible and public and private payers and providers should use a single, standardized physician credentialing system.  Electronic health records should integrate clinical and administrative functions — such as billing, prior authorization, and payments.

Require Full Transparency of Prices

Price transparency would allow consumers to plan ahead and choose lower-cost providers, which may lead high-cost providers to lower prices. Although price transparency could facilitate collusion, this risk could be addressed through aggressive enforcement of antitrust laws.

Make Better Use of Nonphysician Providers

Eliminate restrictive state scope-of-practice laws prevent non-physician providers from practicing to the full extent of their training and provide adequate reimbursement for those services.

Expand the Medicare Ban on Physician Self-Referrals

It is suggested that the Stark law should be expanded to prohibit physician self-referrals for services that are paid for by private insurers. In addition, the loopholes for in-office imaging, pathology laboratories, and radiation therapy should be closed. Physicians who use alternatives to fee-for-service payment should be exempted because these methods reduce incentives to increase volume.

Leverage the Federal Employees Program to Drive Reform

It is suggested that the FEHBP align with Medicare by requiring plans to transition to alternative payment methods, reduce payments to hospitals with high rates of readmissions and hospital-acquired conditions, and adjust payments to hospitals and physicians on the basis of their performance on quality measures. In addition, the FEHBP should require carriers to offer tiered products and conduct competitive bidding on behalf of plans for all commodities. Finally, the FEHBP should require plans to provide price information to enrollees and prohibit gag clauses in plan contracts with providers

Reduce the Costs of Defensive Medicine

Regardless of whether a claim results in liability, the risk of being sued may cause physicians to practice a type of defensive medicine that increases costs without improving the quality of care.  A promising strategy would provide a so-called safe harbor, in which physicians would be presumed to have no liability if they used qualified health-information-technology systems and adhered to evidence-based clinical practice guidelines that did not reflect defensive medicine. Physicians could use clinical-decision support systems that incorporate these guidelines.

Conclusions

Although many in the health industry perceive that it is not in their interest to contain national health spending, it is a fact that the current spending patterns cannot continue. In the absence of any meaningful change, payers could simply shift costs to individuals. As those costs become more and more unaffordable, people would severely restrict their consumption of health care and might forgo necessary care. Alternatively, governments could impose deep cuts in provider payments unrelated to value or the quality of care. Without an alternative innovative strategy, these options could become the default. They are not in the long-term interests of patients, employers, states, insurers, or providers.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

 


What Can Be Done About Hospital Readmissions? – Is Home Care Part of the Solution


posted by Joel Wittman

A comprehensive analysis of Medicare claims data demonstrates that Medicare payments more than double when the beneficiary’s care contains at least one hospital visit.  A report by the Alliance for Home Health Quality and Innovation examined the effects of hospital admissions and readmissions on Medicare expenditures.

Hospital readmissions play a key role in the amount Medicare spends per patient per episode.  The research aims to more fully explain how hospital readmissions affect the Medicare episode payment and to provide guidance on the Medicare home health benefit.  The data will provide information on to lawmakers as they look to revamp the Medicare fee-for-service payment system and eliminate unnecessary spending on avoidable hospitalizations.

In post-acute care episodes, patients whose episodes contained at least one readmission cost Medicare twice as much – roughly $33,000 compared to $15,000.  When the number of chronic conditions per patient increases, so does the average number of readmissions, suggesting that a more complex patient is more likely to be readmitted.  Services such as home health may be able to reduce the number of unplanned readmissions for some clinically appropriate patients by caring for them in home health and improving coordination and continuity of care.

There are interesting trends when an episode contains an admission.  With regard to chronic conditions, the severity of the primary chronic condition, rather than the number of conditions, plays a more significant role in the impact on Medicare payment for the episode.  For example, an episode with a primary chronic condition of diabetes and a prior admission generates a Medicare episode payment nearly three times that of a diabetes episode without a prior admission.  This suggest that better management of low-severity chronic conditions (as well as high-severity conditions), which can be provided by home health care, may limit prior admissions for pre-acute episodes or even prevent some hospital admissions and subsequent post-acute care.  As the severity of a chronic condition increases, so does the proportion of episodes in non post-acute care episodes.  However, when patient with low-severity chronic conditions require a hospital admission, the payment per episode nearly quadruples since the cost of caring for these patients is relatively low without the readmission.

The data suggest that better management of chronic disease through home health intervention could enable more patients to remain out of the hospital following an initial admission.  With clinically appropriate and effective care, patients have the potential to avoid some unnecessary admissions altogether, ultimately saving Medicare and taxpayers a significant amount.  Home health care combines the right mix of care management, prevention training, and close observation to significantly reduce hospital admissions.

A program conducted in upstate New York generated some positive results.  See below:

A group of hospitals in upstate New York have been able to cut inpatient readmissions by 25 percent as the result of a home visit program, reported the Rochester Democrat and Chronicle.

The collaboration between Rochester General Hospital and three other area facilities not only cut readmissions over 30 days but also cut down readmissions over a 60-day period, the article noted.

Reduction of readmissions is critical particularly for hospitals as the Centers for Medicare & Medicaid Services intends to cut payments for excess numbers of patients readmitted within 30 days of discharge for congestive heart failure, heart attacks and pneumonia. According to research, up to 75 percent of hospital readmissions may be avoidable, Consumer Reports magazine noted.  Specific cost savings from the initiative were not immediately disclosed but could be as much as $100 saved for every dollar invested. “The cost of the intervention is measured in hundreds of dollars,” said Martin Lustick, corporate medical director for Excellus BlueCross Blue Shield. “The cost of a readmission is upward of $10,000.”

The program, known as Care Transitions Intervention, was conducted in coordination with the hospitals, local home health agencies, Excellus and the Monroe Plan for Medical Care, a Medicaid managed care program, according to the article. State and federal grants will allow the initiative to expand.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


What Did SCOTUS* Do?


Posted by Joel Wittman

In my article that was posted in the April 2012 Blog, I posed the question of how the Supreme Court will rule on the Patient Protection and Affordable Care Act (ACA) and what the effects might be of the decision.  I wrote in the April Blog: “Things are never as simple as they seem to be.  The good intention of the current administration to increase access to health insurance coverage for all individuals at affordable pricing may not be good enough to preserve the goals of the ACA.  Do you throw out the baby with the bath water if the entire plan is deemed unconstitutional?  Do you preserve part of plan and try to make the best of the remaining regulations?  Or, do you leave the ACA as is and have the first meaningful health care reform since the Great Society?  Only SCOTUS can let us know.”  Well, now we know.

In a landmark and surprising decision, the Court ruled 5 to 4 to uphold the ACA but with a change to the penalty phase for states that do not comply with the expanded Medicaid program (states would lose any new financing related to the expansion and not their entire federal Medicaid contribution).  The controversial “individual mandate” provision was not overturned by the Court because of the crossover vote cast by Chief Justice Roberts.  By siding with the liberal bloc of the Court, the Chief Justice exhibited, in my opinion, a common sense approach to resolving this issue.  While he did write that the individual mandate cannot be supported under the commerce clause of the constitution, he approved its legality as a tax, ergo Congress has the constitutional authority to impose taxes.  Again, in my opinion, a sensible approach to resolving a divisive matter.  The Chief Justice commented that it is not the judiciary’s responsibility to set policy; this falls to the people in the form of their elected officials.  A wise decision given that a rescission of the ACA would have created wholesale chaos in the healthcare industry, not to mention the deleterious effects it would have on that portion of the population that would be denied health care coverage.

The ACA addressed only one part of the holy health care trinity – access, quality, and cost – that comprises health care.  It does a wonderful job of increasing access and does suggest changes to curtail costs and improve quality.  But, it’s a start.  And the industry had already reacted to the provisions of the ACA well before its constitutionality was upheld.  The reform train has left the station, is gaining momentum, and is transporting change to the way in which health care services are delivered and reimbursed.

The ACA has already introduced changes to the health care landscape.  Its effects on the health care industry include creation of Accountable Care Organizations, bundled reimbursement methodologies, outcomes measurement, financial sanctions for poor quality results, and greater emphasis on care coordination and management (see Inspiris and Humana).

All sectors of the industry are affected.  Hospitals stand to improve their profitability as their uncompensated care will be reduced as a larger portion of the population receive health care coverage.  The effects on the insurance industry seem to be mixed:  those companies that focus on the Medicaid population should experience an increase to their business (see Amerigroup and Molina Healthcare) while it is not certain that the access to new clients would be enough to offset the cost to insurers related to the requirements to cover patients with pre-existing conditions, charge sick patients the same as healthy ones, eliminate the coverage caps on patient reimbursement, and adhere to the medical-loss ratio.  Medical device companies face a 2.3% tax on sales starting in January 2013 to help finance the ACA while pharmaceutical firms have already agreed to pay more taxes and offer additional rebates and subsidies in an effort to close the Medicare “doughnut hole.”   It would also seem that corporate America would encounter reductions in profitability because of the requirement to provide coverage to employees.

The times they are “a-changin’.”  Adaptation to the ACA should not come as a surprise to the health care community.  The law was a known quantity and the result of bargaining between industry executives and politicians.  I’m confident that the industry will continue to innovate, will be able to meet these challenges, and will provide affordable, quality health care to patients while experiencing a positive impact on the bottom line.  After all, health care is a business.

* Supreme Court of the United States

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

 


The Role of Mergers and Aquisitions in the Not-For-Profit Healthcare Sector: Part II


Posted By Joel Wittman

Part II: Part II – What to consider when a not-for-profit is the acquirer

In last month’s post, I wrote about the considerations to take into account when evaluating the sale of a not-for-profit health care entity.  In this month’s article, I will look at the issues to consider when a non-profit is the acquirer.

Since Congress enacted health reform legislation in 2010, there has been a marked increase in mergers and acquisitions in the healthcare space. Although for-profit organizations drove the bulk of the nearly 1,000 transactions taking place in 2011, a growing number of nonprofits have begun to see mergers and acquisitions as part of a larger strategy to effectively navigate the reformed healthcare marketplace. This reflects the increasing role that nonprofit organizations play in the delivery and financing of healthcare in the US – according to an estimate by a nonprofit healthcare trade group, about 60 percent of community hospitals are nonprofit, roughly one-third of nursing homes are nonprofit, and almost 20 percent of home health agencies are nonprofit. Further, over 40 percent of all private health insurance enrollees receive services from a nonprofit health plan.

Nonprofit healthcare organizations consider mergers and acquisitions for the same reasons for-profit entities do. They seek to improve quality or efficiency; they desire increased access to capital, enhanced capital base or expansion of cash flow; they want to expand service lines, enhance product offerings or target other geographic areas; or they seek to gain specific types of talent or other assets. But unlike the for-profit environment, nonprofit organizations have other specific issues to consider as they plot a merger or an acquisition strategy. It is recommended that a nonprofit organization’s board and management perform a detailed strategic analysis before executing an M&A strategy.  The following four considerations are a solid start.
Fit. The idea of considering organizational fit when thinking about pursuing a merger or an acquisition with another company seems simple, but it can be a rather complicated matter. Although for-profit companies also consider whether a potential buyer or acquisition fits strategically or organizationally, nonprofit organizations have their mission to the communities they serve to consider beyond these primary issues when it comes to fit. Unlike for-profit companies, nonprofit healthcare organizations exist within a framework of mission-based operations, and the mission colors everything from operational strategy to daily execution. The leadership of every nonprofit organization considering an M&A strategy needs to be clear about its mission, how open to change that mission might be, how an M&A strategy will affect that mission, and what limitations – or opportunities – that mission offers. And if acquiring another non-profit, boards must think about how changing the target’s mission affects perception or buy-in among the target’s patients, providers, staff or payers.

Financial impact. Nonprofit board members and staff management need to think carefully about the financial implications of the potential transaction. Naturally, a common part of the M&A process is to weigh the financial advantages and disadvantages of the transaction, as well as to evaluate an organization’s financials and assess its real value. Part of the discussion is whether an acquisition is best the use of funds to further the organization’s mission.  In today’s environment, many providers are leveraging their healthy balance sheets to reach a level of scale that can offset future reimbursement cuts.  This may be an appropriate strategy, but an organization that may not have internal acquisition and integration experts must evaluate if the use of funds for an acquisition is priced appropriately considering the internal and external integration risk.  Nonprofits also need to consider additional layers of financial impact; any partners advising a nonprofit about a transaction need to be well-versed in these layers. Special tax situations must be considered, as well as the value and disposition of certain types of charitable assets.
Process. There is a logical process to every transaction – but nonprofit organizations have additional steps to follow and angles to consider. The additional steps can extend the acquisition timeline and put the nonprofit buyer at a disadvantage when they are competing for a target.  An experienced advisor can help a nonprofit board and leadership prepare and execute the specific processes that need to happen and minimize the potential disadvantages. All nonprofit M&A transactions will naturally need to involve a realistic valuation of the transaction, a substantive due diligence process, evaluation of legal and antitrust issues and a detailed analysis of financial impact. The legal and financial implications of a nonprofit transaction differ from those of a for-profit transaction, so any strategic process should accommodate not only specific evaluation and analysis of these implications, but appropriate planning to execute them.

Access. Probably the biggest difference between a for-profit entity considering a merger or an acquisition and a nonprofit entity is that in the nonprofit world, there are relatively few knowledgeable financial and strategic advisors who understand the nonprofit environment, and of these, even fewer have significant access and deep relationships across the industry. As your organization considers an M&A strategy, ask yourself whether you have the right access – not just to sources of capital, but also to potential buyers or acquisition targets. Do you know how to source and evaluate potential targets? Do you how to begin a conversation with a target? Finding the right partner with the right access and market credibility is critical to the success of your M&A strategy.

Last month’s and this month’s postings provided the reader with some thoughts about both the sell and buy sides of mergers and acquisitions in the non-profit health care community.  So, for all of you not-for-profit health care organizations out there, are you a seller or, perhaps, a buyer?  Either consideration will require a thoughtful and careful approach.   Please let me know what you decide to do.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry.  He can be reached at joel.wittman@verizon.net.


The Role of Mergers and Aquisitions in the Not-For-Profit Healthcare Sector: Part I


Posted by Joel Wittman

Part I – What to consider when evaluating the sale of a not-for-profit organization

Nonprofit health care organizations are faced with a conundrum.  Is entering the world of mergers and acquisitions (M&A) on either, or both, the sell and/or buy sides, a strategy to be undertaken by nonprofit healthcare organizations in response to the changing healthcare landscape?

In March of this year, Moody’s Investor Service predicted increased M&A activity in the nonprofit healthcare arena.  They cited as reasons for this increase decreased Medicare reimbursements, changes to state funding schemes for Medicaid, and a reform environment that urges increased efficiency and care coordination.  As a reaction to these compelling reasons, and in an effort to continue providing care to its constituent communities, some nonprofit providers are being forced to consider merging with another organization or putting the organization up for sale.  This is a very complex and emotional issue facing the Boards of nonprofit providers.  Sink or swim?  Don’t sell or sell?  How to evaluate the options?

Nonprofit providers historically have played a large role in healthcare as a traditional care provider; their work with the surrounding community and their focus on their nonprofit missions not only embeds them in a community, but often limits the creative thinking that might allow the expansion and extension of the mission. However, in today’s healthcare environment, it is imperative that board members of nonprofit provider organizations evaluate all of the options available to them.  Nonprofit Boards of Directors typically do not have vast experience working on the M&A process and, therefore, have struggled to identify issues and considerations when evaluating their strategic options, including selling the organization.  This lack of experience makes it necessary for the organization to conduct a thorough analysis, including the option of its sale.

Easier said than done.  What should the Boards and management consider as they begin their strategic review.  The following may be an appropriate way to begin

Sustainability of the Mission

With the deterioration of the reimbursement environment and decreasing margins, nonprofit boards are being forced to consider the sustainability of the organization.  First, a Board has to evaluate what strategies it could pursue that will better position the organization for survival in the post-reform environment

A key component of this evaluation is the organization’s ability to access capital. One of the greatest challenges reported by nonprofit healthcare organizations is obtaining necessary funding or financing to upgrade facilities and equipment. Boards are often reluctant to use reserve funds to invest in innovation or changes in strategy. Many Boards view reserve funds as their mission’s backstop. The critical decision point is whether the use of funds will truly sustain the mission or just provide a temporary fix to a fatal decline.

Ultimately, a Board may come to the conclusion that its long-term mission is at risk and decide it is better to sell the company and use current cash reserves and proceeds from the sale to alter or extend the mission. Evaluating this issue is a complex process, requiring a deep understanding of trends in the industry combined with a thorough analysis of an organization’s strategic options.

Impact on the Mission

After wrestling with the question of whether their organization is sustainable, the top concern for nonprofit Boards when they think about selling is how the transaction will ultimately affect the organization’s mission.

Although Boards will examine multiple variables in the acquisition process, the impact on mission is critical – it is the Board’s ultimate fiduciary responsibility. Boards need to consider the potential positive impact on the community if they sell to another provider and use the proceeds of the sale and current cash reserves to expand, extend or alter the mission.

Some Boards find that the community can still receive high quality care from another provider, and the use of proceeds from a sale can allow the organization to serve more community members in need in other ways. This is especially so for those providers faced with declining margins who might struggle to survive as the environment worsens. Such a scenario requires board members to consider how flexible the organization’s mission is, how open to adjustment it might be, and how any changes to its mission would affect its ability to serve the surrounding community.

Impact on Community/Stakeholders

Consideration of stakeholder impact goes along with thinking critically about how an acquisition will affect an organization’s mission. Any nonprofit Board thinking about selling to a for-profit company should think carefully about how a potential sale might affect all of the various stakeholders – patients, staff, surrounding community members, donors and volunteers.

How a Board begins the search for a buyer can be a delicate matter. Any advisors the Board retains should be well-versed in not only finding the right buyers, but in finding them in a way that is respectful of its role in the community.

Many stakeholder groups make negative assumptions about the effects of the purchase of a nonprofit organization by a for-profit entity, even though research suggests that such assumptions are not valid. Careful consideration and planning can ensure that all stakeholders are on board with a potential sale and the benefits it can bring to an organization and the community it serves.

Impact on Quality and Service Lines When Considering Selling to a For-Profit

A common concern by nonprofit Boards when considering selling the organization – particularly to a for-profit – is that they could experience a drop in quality of care.  Research shows that this is false – in many cases, providers maintain the same level of care or experience an increase in quality.

Board members should think about dedication to quality in examining potential buyers, as well as how an acquisition might affect service lines and community benefit. Most nonprofit providers offer services that are less lucrative or even unprofitable, usually as part of their stated missions or in service to the surrounding community. Board members should ask themselves whether they would be willing to see a change in service mix after an acquisition and how that might affect the organization and the community overall.

The Congressional Budget Office (CBO) has reported virtually no change in the amount of charity care provided before and after an acquisition of a nonprofit provider by a for-profit company. In fact, nonprofit Boards should consider the possibility that the right buyer could find ways to meet their mission profitably and efficiently. CBO analysts have cited studies showing that for-profit providers tend to be more efficient and cost-effective than nonprofit providers, adeptly changing their mix of services to respond to reimbursement patterns and aggressively coding to increase reimbursement.

No one ever said it was going to be easy.  This is the responsibility that Boards members have agreed to assume when consenting to serve on the Boards of Directors of nonprofit healthcare organizations.  Mission vs. Margin (profit, that is).  Are they mutually exclusive?  Can the differences be reconciled?

Next month I will write about issues to consider when a nonprofit organization is the acquirer.

 

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry.  He can be reached at joel.wittman@verizon.net.


How Much are Three Letters Worth?


Posted by Debbie Koh

Pursuing a graduate degree is a huge undertaking. At Wagner, getting a Masters of Public Administration typically means an investment of two years’ time (nights studying at Bobst Library you’ll never get back), tuition (roughly $40,000 per year), and any lost wages if you’re not working (opportunity cost).

It’s reasonable to question whether such a significant investment is worth it, especially when considering a public service career. So what convinced me that getting those three letters behind my name was worth the time and resources? I’d say the following areas: networking, experience and skills.

- Networking: No, I don’t mean the jaded, using-other-people’s-connections-to get-ahead kind of networking. I’m talking about being brought into a group of students and alumni who are joined by the desire to use their careers to achieve some sort of social impact. That shared motivation is what drove my day-to-day conversations with other students, helped me conduct information interviews with alumni, and encouraged me to connect with prospective and new students. Sometimes this kind of networking opened doors to career opportunities and sometimes it didn’t, but it helped me decide what made sense to keep pursuing and what to leave behind.

- Experience: Wagner offers a unique opportunity to build up one’s work experience. Being in New York meant that I had access to a huge array of institutions, organizations, and companies. If I wanted to work for a non-profit with US headquarters and overseas offices, or a small consulting firm with local and national clients, I could (and did). Capstone, which remains the highlight of my Wagner experience, provided me with solid experience that I could reference in job interviews and lessons learned that I apply in my current job. Finally, it was inspiring to learn from from the variety of backgrounds that were captured even in a specific program like Health Policy and Management, and from the larger student body.

- Skills: Probably the easiest, most obvious reason the go to graduate school, but it’s still worth noting. Economics, statistics, and finance skills are critical to have but difficult to get outside the classroom. In addition, taking time to become knowledgeable and stay current about one’s field – whether hospital management or international development – often falls prey to the daily demands of the workplace. Graduate school provides the opportunity to study the history, theory and recent developments in one’s practice area. I believe that this is a key component to producing high-quality work in any field.

The affordability and utility of an MPA or any graduate degree will always be a personal choice. It’s impossible to know how my career might be different or whether I would’ve had the same opportunities without attending Wagner. Certainly, no program is perfect – but for me, it was worth it.

Debbie graduated from Wagner in 2010 with her MPA in Health Policy and Management, International Health. She returned to her native California in 2011 and currently works for Venture Strategies Innovations. Follow her on Twitter at @thedebkoh or connect via LinkedIn. All views expressed are her own.


What Will SCOTUS* Do?


Posted by Joel Wittman

After three days of hearing oral arguments on the legality of all, or parts, of the Patient Protection and Affordable Care Act (ACA), the Supreme Court is hopeful of rendering its decision in June.  Based on what we’ve heard so far, it doesn’t bode well for the ACA.  The primary issue of contention is the inclusion of an “insurance mandate” whereby citizens are required to purchase health insurance or pay a penalty.  The mandate seems to be the linchpin of the reform act; without this requirement will insurance premiums skyrocket and will access to health insurance be limited?  This also raises the question of severability.  If the mandate is struck down, will the entire ACA also be invalidated or can parts of it survive?  Will the law’s popular “guarantee issue” and “community rating” provisions survive without the mandate that virtually all Americans must have health insurance?  Guarantee issue prevents insurers from discriminating against people with pre-existing conditions and community rating standardizes insurance premiums for those living in the same area.  The states that have attempted to enact guarantee issue and community rating systems without instituting mandates saw their health reforms fail – insurance premiums skyrocketed, consumers had fewer choices and the number of uninsured went up.

So, what is the insurance industry to do?  Insurers must prepare for a worst-case scenario – a ruling that the individual mandate is unconstitutional, but insurers still must provide policies for all people.  In that situation, insurers say premiums will rise sharply because of people with chronic illnesses and pre-existing conditions, for example, would buy health coverage, but healthy people would not.  Short of persuading Congress to write a new law, the insurers are considering certain contingencies including:

- Penalizing those who enroll outside of short annual windows

- Denying treatment for specific conditions, especially right after a policy is purchased

- Rewarding certain insurance buyers, such as offering much lower premiums for younger and healthier people

- Expanding employers’ role in automatically enrolling employees for health insurance

- Urging credit- rating firms to use health insurance status as a factor in determining individuals’ credit ratings.

There remains, however, a divided opinion about the exclusion or inclusion of the individual mandate in the health reform act.  Some believe that its exclusion will cripple the ACA and all of its proposed benefits, while others contend that the penalty associated with the mandate is not onerous enough to deter individuals from not purchasing health insurance.

Things are never as simple as they seem to be.  The good intention of the current administration to increase access to health insurance coverage for all individuals at affordable pricing may not be good enough to preserve the goals of the ACA.  Do you throw out the baby with the bath water if the entire plan is deemed unconstitutional?  Do you preserve part of plan and try to make the best of the remaining regulations?  Or, do you leave the ACA as is and have the first meaningful health care reform since the Great Society?  Only SCOTUS can let us know.

* Supreme Court of the United States

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


Building an Exchange Strategy Part II – Understanding Your Political Climate


Posted By  Errol Pierre

By 2014 there will potentially be a health benefit exchange in every state across the country. Like snowflakes no exchange will be alike and politics will play a pivotal role in the differences found between them. While the healthcare reform bill signed into law requires the establishment of exchanges, the details of operation have yet to be determined. In fact, in March 2012, the Department of Health and Human Services (HHS) provided 600 pages of additional guidance to the states. The guidance given was more of a framework while much of the particulars were purposefully left out. This has made the role of the individual State Governors ever important. They are now in a position of power and play a very integral role in bringing exchanges from a theoretical policy concept to a legislative and operational reality.

Right or Left
At a high level, left leaning blue states will design their exchange to be an active purchaser. This will allow the Governor to take an active role in the day to day exchange operations. Under the direction of an exchange board, most likely selected by the Governor, these states would choose precisely which insurance companies participate, the types of policies sold, the rates of the selected products, and how enrollment and eligibility of those enrolled would work. In some more aggressive instances, states could even negotiate pricings with doctors, hospitals and pharmaceutical companies in the very same ways insurance companies do today in the private sector. This is obviously foreign territory to many of the states pursuing such a model. Nonetheless, proponents of the model see value in such an approach believing more oversight will lead to more affordability and better health outcomes in the long run.

Right leaning red states on the other hand will opt for a facilitator model. The state will merely be a marketplace for health benefit transactions between consumers and insurance companies to occur. They will set the high level guidelines and guardrails and merely outline the rules of engagement. Much of the market dynamics will be left up to private insurance and market forces to sort out. Benefit design, rate approval, distribution strategy, the “off-exchange” marketplace, and pricing will all be left up to “the invisible hand” of Adam Smith’s market forces. The idea of competition lowering healthcare costs has been refuted by the likes of many including Alain Enthoven – the father of managed competition – and Kenneth Arrow – the pioneer in research on asymmetric information as a market failure in healthcare. Nonetheless, American capitalism seems to have trumped over such doubts in these states. As a result, the role of government in these exchanges will be as minimal as the healthcare reform legislation will allow. There are already mandates that must be in place for each exchange. For example there must be four benefit categories ranked by actuarial values labeled bronze, silver, gold, and platinum for simplicity. The legislation also caps insurance company profit at 20% before operating costs are factored in. Lastly, the legislation requires health insurance companies to accept all enrollees and requires that the ratio between the pricing of the healthiest and the sickest consumer not exceed a 3 to 1 ratio. All in all, governors of these red states feel too much regulation stifles competition and the reform bill already has enough rules. As such, they are reluctant to add any further requirements on top of the federal ones. In this role the state will play referee rather than player/coach.

Politics at Play
State by state, there will be different shades of blue as states consider the ramifications of building a health benefit exchange. Health insurers must be prepared to understand how these different shades will impact the development of health policy. Vermont, for example, will be one of those very bold blue states. On May 26, 2011, Governor Peter Shumlin signed into law a historic universal healthcare bill which would cover every citizen in the state under a single payer system called Green Mountain Care. It will be in place by 2017 and the state has been drawing down federal funds from the national health reform bill as it prepares.

Like blue states, there too will be shades of red. Arkansas is a perfect example of a bright red state. Legislative opposition to a state run exchange was so great, Jay Bradford, the State Insurance Commissioner, had to  start preparing for a federally run exchange. By law, when a state cannot come up with its own legislation to run an exchange, the federal government is required to step in and set one up. Ironically, legislators that are so vehemently against Obama’s healthcare reform legislation will end up with a federally run exchange led behind Kathleen Sebelius, the current Secretary of Health and Human Services and former democratic Governor of Kansas.

Understanding the political environment of your state of operation is paramount to assessing the viability of a successful exchange strategy for a private insurance company. An active purchaser model lends itself to be a market where the constraints may be too great to be successful and sustainable. If the market is too controlled, healthcare coverage quickly becomes a commodity and erodes the levers of differentiation used to be competitive. Health insurance companies could come to the conclusion that participating in such a state will not be viable and opt to stay on the sidelines. However, the state would technically have the right to mandate (either directly or indirectly) insurance company participation, which could turn the state into a defacto-single payer.

On the other hand, a facilitator model lends itself to be the more favorable for an insurance company to operate within. However, a state that has done everything to obstruct healthcare reform progress like Arkansas is just as dangerous. It most likely will end up with a federally run exchange which could potentially be more burdensome than a facilitated one a red state would have had the option to create.

Errol Pierre works at a large insurance company focused on business development, sales, and strategy for employee benefits. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu

 


Four Recommendations to Achieve Health Care Savings


Posted by Joel Wittman

The now-defunct so-called congressional “super committee” that was charged with the task of identifying deficit reductions received several recommendations that would create significant health care savings over a ten year period.  Despite the failure of the committee to successfully achieve its mandate, it is well worth exploring the cost reduction suggestions the committee received from health care executives.  These chief executives of both for-profit and not-for-profit health care companies, members of the Healthcare Leadership Council (HLC), presented a set of reform proposals that would not only generate $410 billion in savings over 10 years, but would also strengthen Medicare’s long-term sustainability.  In fact, according to Mary R. Grealy, president of HLC, “the reform recommendations will contribute to deficit reduction without placing an unfair or disproportionate burden on patients, healthcare consumers, or our most vulnerable citizens.”

HLC’s recommendations to the “super committee” included:

Create a new “Medicare Exchange” in which private insurance plans would compete on the basis of cost, quality, and value.  

While acknowledging that this recommendation would be compared to the Medicare reform concept contained in Congressman Paul Ryan’s proposed budget, the HLC indicated that the differences include the fact that there Medicare beneficiaries would have the option of staying in traditional fee-for-service Medicare and there would be a more generous inflation factor – growth in GDP plus one percent – for premium subsidies.

The thought behind this proposal is that Medicare beneficiaries should have the same freedom of choice as Medicare Part D prescription drug program participants, federal employees and members of Congress participating in the Federal Employees Health Benefits Program, and those who will utilize the new state-level insurance exchanges created as part of the Affordable Care Act.  The competitive environment will require healthcare providers, plans, manufacturers, and distributors to achieve greater cost-efficiencies while still offering quality and value to beneficiaries.

As Ms. Grealy stated: “ If given the choice between deeper provider cuts, which will reduce patient access to care, and reducing costs by using consumer choice to incentivize  cost-effective innovation, it doesn’t seem like a difficult decision.”  However, does it seem similar to the public option plan that was vigorously opposed when being considered as part of the ACA?  And, can competition be the driver of health care cost reductions in an imperfect market place?

Gradually increase the Medicare eligibility age from 65 to 67.

As more Americans remain healthy over a longer period of time, this transition would mirror the increase in the Social Security retirement age and reflect today’s longer average lifespans.  The increase would be implemented over roughly a decade, raising the eligibility age by two months annually.  The shrinking ratio of active workers to Medicare beneficiaries makes this change inevitable.  The Affordable Care Act makes such a change possible in that Americans in their mid-60s not yet eligible for Medicare would be able to purchase health insurance on the new state exchanges without their health status affecting their ability to acquire coverage.  But at what cost?  More than the price of Medicare Part B premium coverage?

Reform Medicare’s cost-sharing structure.

This reform would involve making the Medicare Part A and B beneficiary cost-sharing uniform, with a reasonable deductible and co-pays as well as a cap on annual out-of-pocket costs.  This would make Medicare costs more predictable and consistent for beneficiaries while also ensuring that seniors wouldn’t be devastated by catastrophic care costs or faced with limits on hospital stays.  Another part of this proposal would be a requirement that individuals with incomes of $150,000 and greater pay their full premium costs for Medicare Parts B and D.  Supposedly, this would affect less than 3% of Medicare beneficiaries and would generate budget savings while protecting financially vulnerable beneficiaries.  Uh-oh.  Is this an “us against them” issue?

Implement medical liability reform.

HLC members recommended liability reform measures including a cap on non-economic damages in medical malpractice cases, a one-year statute of limitations from the point of injury to the filing of litigation, and a “fair share” rule to have defendants pay damages commensurate with their responsibility for the injury involved.  Acknowledging the partisan difficulty in advancing tort reform legislation, alternative approaches including linking liability protections to healthcare providers’ use of health information technology and practice of evidence-based medicine should be considered.

The above four recommendations would generate just over $410 billion in budget savings over a ten-year period, based on Congressional Budget Office estimates and other published budget projections.  Alas, the “super committee” wasn’t so super after all and could not generate a program acceptable to the partisan participants. But, should that mean that some worthwhile recommendations not be explored further with the thought of strengthening our healthcare system?  Or do we slowly move along and be subject to on-going sequestration reimbursement rate reductions?

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.