How Healthcare’s Transformation Affects Physicians and Patients

The CVS acquisition of Aetna in 2018 is an important, unconventional joining of health insurers with providers and pharmacies. This is really a vertical integration. Aetna insures 44 million people. Will Aetna patients be channeled toward CVS? It is hard to imagine that will not happen, and the ultimate consequences are not clear.

Walgreens has its own healthcare app. Walgreens says that through its app, it can refer you to the best quality care in your area. So partnerships with Walgreens lead to an endorsement from them. That endorsement is not based on transparent criteria of medical quality but is the product of a commercial relationship. This is still early days, but it has the possibility of changing the way millions of people choose their healthcare.

Site-neutral payments are another important issue. The Centers for Medicare and Medicaid Services (CMS) reduced payments for office visits at hospital outpatient clinics to match the reimbursement rate for independent doctor offices. While these types of payments are official policy, they are still not consistently implemented.

Before this move toward site-neutral payments, prices were distorted. For example, during the mass migration of cardiologists to hospitals five or 10 years ago, cardiologists working in their previous offices, but now under the corporate banner of the hospital across the parking lot, were able to charge 50 to 100 percent more for exactly the same service they provided when they were independent. Correcting that obvious anomaly can only do good.

When the Affordable Care Act was being debated in 2010, the notion was that spending 17 percent of our GDP for healthcare was excessive and must be reined in. What has actually happened? CMS is now projecting a 5.5 percent annual increase in healthcare spending between now and 2027. The total cost of healthcare today in the United States is $3.6 trillion, and CMS is projecting healthcare spending will reach $6 trillion by 2027. That will be 19.5 percent of the GDP. What makes up that 5.5 percent annual increase? Some 2.5 percent is just higher prices, and the other 3 percent will come from increased utilization, partly for demographic reasons and partly because of improved access to care. Regardless of the source, we're going from a $3.6 trillion problem, which is already the focus of an incredible amount of attention, to a $6 trillion problem.

Most of the increase is on the hospital side. According to a study in Becker's Hospital CFO Report, inpatient prices in hospitals increased 42 percent between 2007 and 2014, while inpatient physician charges increased only 18 percent. The same relationship was present for outpatient services. Hospital outpatient services increased 25 percent versus 6 percent for physician outpatient charges. This is part of the reason why site-neutral payments are really important.

The total number of transactions was down by about a fifth in 2018. However, the average cost of hospital mergers has increased by a 14 percent compound annual growth rate since 2008. This means there are fewer mergers, but the average size is increasing significantly. This means market share will be concentrated in a smaller number of larger entities.

Private equity is buying more and more physician practices, for an average price of $1 million to $2 million per physician. These offers are difficult to refuse in today’s practice environment. Most transactions are based on increasing profit margins prior to a sale in three to seven years. It is difficult to see how this will make healthcare better or less expensive.

Amazon, Berkshire Hathaway, and J.P. Morgan Chase have created an entity called Haven. The CEO, Dr. Atul Gawande, says Haven “will create new solutions and work to change systems, technologies, contracts, policy, and whatever else is in the way of better health care.” These three companies provide health insurance to 1.2 million people, so if this was nothing other than improving their health insurance, it would still be an ambitious program. However, these companies actually have the capital and scale to create new models of healthcare delivery.

Another effort can be viewed as the beginning of a rebellion. Four major healthcare systems in the United States—Ascension, Intermountain, SSM, and Trinity—have recognized the seriousness of rising prescription drug prices and are banding together to form their own generic drug company, Civica RX. This is one partial but important solution to the high prices of generic drugs. It will be interesting to see how well the experiment succeeds.

We are now seeing a rapid migration to telemedicine. It wasn’t that long ago that telemedicine was on the fringes of healthcare delivery. Now it's mainstream and potentially a disruptor. Walmart now charges only $4 for any telemedicine visit for any of its insureds. Kaiser Permanente counted 50 million virtual physician visits in 2016.

We've been insuring telemedicine for the better part of a decade, and our claims experience has been very good. There is a recorded record of the physician's advice. Moreover, many telemedicine contracts are doctor-to-doctor or doctor-to-institution. For example, with tele-ICU or tele–stroke consultation, there is no clear doctor-patient relationship between that tele-doc and the patient. This means that any liability is largely being transferred to the institution using the telemedicine service.

A RAND analysis of telemedicine found that quality of care provided in a telemedicine setting is equivalent to the quality of care for similar conditions provided in the conventional setting. But RAND also found 80 percent of telemedicine consults are for upper respiratory infections. So we have to ask, are we primarily increasing access to unnecessary care?

Like telemedicine, retail medicine has moved from marginal to mainstream to a potential disruptor. CVS is now the eighth largest company in the United States—not the eighth largest healthcare company, but the eighth largest company. Eight out of 10 Americans live within 10 miles of a CVS pharmacy. But retail medicine is similar to telemedicine. It remains to be seen what will happen to the cost and quality of the care provided.

Apple, Amazon, Google, IBM, and Salesforce are collaborating to create a standard for healthcare data. While standards would greatly facilitate analysis, there are more than 2000 exabytes of healthcare data generated annually. It is probably not a coincidence that these groups are leading this initiative, because they are among the few companies that would be in a position to process data on this scale. If we believe that the world will be a better place with better data, we should applaud this effort. On the other hand, I’m not sure why I would want Salesforce analyzing my medical data.

It will be quite interesting to see where this goes.

The digitization of millions of electronic healthcare records for analysis by outside vendors is already happening today. The Ascension health system, second largest in the United States, is working with Google to analyze more than 50 million patient records. The records have not been anonymized, nor has permission been sought from the clearly identifiable patients and doctors. The goal is to use artificial intelligence to analyze the data and ultimately produce superior care algorithms. Though the arrangement may be legal under existing law, it raises serious questions about privacy and ownership of one’s personal information.

Electronic healthcare record (EHR) systems remain incredibly expensive, yet many don't connect to the office next door or to the hospital across the parking lot, much less across cities and states. Examples of these costs abound. The Department of Veterans Affairs will contract with Cerner to upgrade its EHR at a cost of $16 billion over 10 years. A northern California health system spent $300 million to develop their own EHR. It didn't work, so they started over. It took another billion dollars, and the better part of a decade, before they indeed had a very good EHR.

This gives you a sense of one of the fundamental problems with today’s EHRs. Why does every system, every hospital, every doctor need to design and build their own EHR? It's like each community having to design and build its own cars. And then there is the issue of data breaches. The average healthcare data breach now costs $6.5 million in penalties and remediation. It’s mandatory to report a breach to Health and Human Services (HHS). Only 300 breaches a year have been reported. How many do we think there really are? Probably many thousands. This is a very serious problem.