If you've followed Hospitalogy for a while you'd know that I sort of geek out when it comes to space. So I figured it'd make sense to compare ongoing, converging trends in healthcare to a black hole's event horizon - a point where nothing, not even light, can escape.
Eventually, anything that has passed the event horizon converges to a single point, called a singularity, a point where gravity is so strong and all laws of physics break down beyond comprehension.
That's a pretty fitting analogy for healthcare, isn't it?
Anyway, there are a few inflection points that will define healthcare over the foreseeable future, and I wanted to outline those trends below. If there are any others you consider equally as important, please feel free to reply to this email with your thoughts and opinions. I welcome any and all, as always.
Medicare Advantage vs. Health Systems
This trend will be one of the defining singularities of the U.S. healthcare system over the coming decade+.
The narrative is simple, and one that healthcare professionals are familiar with: The U.S. population is aging. There are more folks than ever aging into Medicare at 65. Seniors have a choice between Traditional Medicare (fee-for-service) and Medicare Advantage, privatized Medicare plans.
Medicare Advantage (MA) is increasing in popularity given structural advantages present in the privatized Medicare program. These advantages (pun intended) include supplemental benefits (e.g., social security check givebacks), more marketing dollars, brokers, and more familiarity with seniors coming from commercial insurance plans.
The secular growth in Medicare Advantage presents new dynamics for payors and providers.
The Payor Side
MA gross margins are capped at 85% of premiums: Insurers are mandated to pay out 85% of premiums as medical expenses.
Consequently, payors shifted toward a vertical integration strategy - owning healthcare delivery assets. I've written about this dynamic ad nauseum. Through owning care delivery, payors can lock in medical loss ratios - topline gross margins - at 85%, then push down those medical expenses to owned healthcare delivery assets - where there is no such regulation. At that point, insurers can generate more, uncapped profits at the healthcare delivery level. For instance, senior clinics co-ran by Humana and ChenMed generated medical loss ratios in the 60%'s. This strategy is how insurers double dip and circumvent locked gross margins mandated by the ACA.
The strategy is playing out and will continue to play out until the FTC can figure out how to prove merger harm in vertical M&A cases. This has yet to happen, and as a result, we've seen Optum align with 90,000 physicians (almost 10% of all practicing MDs), 40,000+ APPs, major publicly traded home health agencies, and more. Meanwhile they're currently huffing and puffing at smaller private equity owned physician rollups, which is absolutely wild to me.
You should also know there are pending investigations and investigative journalism into foul play involving vertically integrated players (see this recent Stat article). It wouldn't surprise me whatsoever if these practices are more widespread. As these players grow in their market density, patient steerage and prior auth requirements will become more rampant - and worse - for providers. Insurers are financially incentivized to do this, and to push patients to the lowest cost possible care setting. Is that what is best for the patient? It's increasingly the insurer's decision, rather than the doctor's.
Finally, keep an eye on Medicare Advantage growth and regulation over the coming years. We are almost assured to see consolidation within the segment, and a continued watchful eye on risk adjustment practices.
The Provider Side
Why are hospitals & health systems wary of Medicare Advantage plans?
While the vast majority of providers are in network with Traditional Medicare (fee-for-service), this dynamic is quite different in MA. Insurers set up their own networks and negotiate with providers. Access issues aside, as mentioned in the payor section, there exists more intense patient steerage in Medicare Advantage. Insurers want to drive patients to the lowest cost care setting, or deny where they think that medical intervention is inappropriate. Oftentimes you see these denials pop up on Twitter in the most ridiculous scenarios.
For the factors described above, most health systems have described Medicare Advantage reimbursement as net-negative to the tune of -5% of Medicare reimbursement.
Couple that -5% reimbursement with the fact that these seniors are hopping ON to MA plans FROM extremely lucrative, high-paying commercial plans and it's a margin squeeze for providers happening over an extended period.
You're already seeing the effects of the MA trend play out. More and more hospitals are going out of network with MA providers. How does this end in rural areas where there is one health system that chooses to go out of network? How might MA narrow networks affect access over time? See pieces on rural healthcare vs. MA here and here as examples.
If you're a research organization or data provider, I would LOVE to see an analysis on the shift in referral pattern behavior in a market where Optum or another vertically integrated entity is extremely dense (and heavy Medicare Advantage penetration) compared to a market with high traditional Medicare FFS.
GLP-1 Popularity and Coverage
Now, moving on to a couple of more 'emergent' healthcare event horizons, the first of which is the ongoing GLP-1 saga. It seems like literature is published every day on the efficacy of GLP-1s, their effects on cardiovascular and chronic diseases, and the miracle drug that can solve the obesity crisis - even helping to stop addictions like alcoholism. Potential use cases are pretty expansive and wild to think about.
Both Nikhil Krishnan and Out of Pocket and Chrissy Farr & Second Opinion have covered GLP-1 issues pretty thoroughly, so I'm sending you guys their way to understand the arguments and nuances.
The glaring problem? Cost and coverage of GLP-1s by employers and insurers, and the ability to maintain long-term benefits despite the fact that most folks are on their health insurance for 2-3 years on average.
But here's maybe an uncomfortable truth: America loves drugs. And there is ravenous demand for GLP-1s. So, while coverage is limited today to narrow use cases, prevalence of GLP-1s will grow. Most will say that GLP-1 coverage needs to come equipped with lifestyle change and coaching (which I agree with), but I question the reality of that actually happening given that there's little to no accountability in healthcare to begin with in America. Plenty of folks just want their fix.
On the provider side, assuming that GLP-1 usage expands (especially if the cost drops, which I'd also expect), and there are no identified critical long-term side effects, then there is a possible risk of long-term demand collapse for providers in affected arenas. Since obesity is a chronic disease that leads to a number of complications & downstream diseases, the drug could present demand problems for all specialties and ancillary services attached to heart health, diabetes, and more. It's not just providers - it's all the ancillaries and medical devices attached to those providers as well.
Now, in reality, this doomsday scenario is unlikely to occur. We'll probably end up somewhere in the middle. I consider it a good thing for population health as a whole (and the biotech industry), but net bad for revenue generation in healthcare services provision.
How far will AI go in Healthcare?
You're probably tired of hearing about AI in healthcare, so I'll keep this section short. Artificial intelligence in general has exploded (and OpenAI also almost exploded, sheesh). There are a number of emerging use cases in healthcare, some of which are more viable than others, and all of which will be proven out in one way or another. Read this excellent post to learn about everything AI in Healthcare today.
Right now, there are two schools of thought surrounding AI in healthcare:
Incrementalism and Productivity Boost: many applications today are focused on fixing existing problems TODAY: reducing existing administrative complexities like documentation, enhancing workflows to cut down on admin bloat, or assisting a physician in procedures to make them 20% more productive, or 20% more accurate in diagnosis.
Healthcare Evolution: The more sci-fi esque artificial intelligence camp believes that AI should be used to transform how care gets delivered. Many of these use cases sit squarely in the clinical camp (rather than the administrative side) and involve little direct input from doctors. Think things like CarePods or an AI doctor that can prescribe things for you, or any other number of things that solves for the shortage or productivity problem in healthcare. Obviously there are many regulatory hurdles to jump over with this Techno Optimist disruptive stance given it took a full fledged national pandemic to soften telehealth rules, but I'm going to love watching it all play out.
What else is top of mind for you? I thought about adding in labor and labor shortage dynamics in here as a fellow event horizon too, but ultimately decided to leave them out considering the same stories have been playing out for a while.
What else is trending headed into December?
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