1/17/2013

1

Endgame: The Beginning of the Bursting of

the U.S. Healthcare Bubble

Maureen Swan

MedTrend

#1 Trend For Healthcare 2012- 2018

= The National and Global Economy

1/17/2013

2

TWO BASIC ISSUES WITH THE NATIONAL AND GLOBAL ECONOMY:

DEBT

+

DEMOGRAPHICS

The 2 “D’s”

Aging and Longevity: A Catastrophic Success

Retirement is now a well paid, long term occupation

“65” set in 1880s

Average Medicare couple pays in $109K –takes out $343K…

We pay $30,000/ year per 65+ citizen --- the bill all “wrapped in the diapers of our grandchildren”

The hands of too many elderly reaching into the pockets of fewer and less well off youth

1/17/2013

3

The Great Debt Super Cycle* EASY, EXCESS Money + Psychology = Rising Prices/Spending

DEBT

PRICES/ SPENDING= Higher GDP

Housing

Consumer Spending

College Tuition

Healthcare

Government Spending

Co-linked “bubbles

*Term coined by Tony Boeck of Bank Credit Analyst

The Housing Bubble Price bid up that exceeds value

60

110

160

210

1900 1925 1935 1945 1955 1965 1975 1985 1995 2006

Increase in home prices 1898 to 1996 = 1996 to 2006

Source: Robert Shiller

Fueled by Cheap, easy money: debt

1/17/2013

4

The Great Debt SuperCycle: Employers and Consumers Maxed Out

$0

$5,000

$10,000

$15,000

19

64

19

84

20

04

20

09

20

11 $0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

196

4

19

84

200

4

200

9

20

11

$ in Billions $ in Billions

Household Debt Business Debt

Source: Bloomberg, Federal Reserve 2010

U.S. Economic Growth Since 1971 Has Been Built on Exponential Debt Growth –

Can it double again in the next 8 years?

World GDP 2011 = $65T

Source: Federal Reserve *household, financial, government

29

Nov 2012: $50.9T

1/17/2013

5

The Great Debt Super Cycle We Can’t Keep the Same Game Going…

Why Debt? Declining Wages as a % of GDP

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6

US Debt Bad…but not the worst

Declining National Incomes and Household Net Worth

National incomes

2007: $52,823

2010: $49,445 7% decline

Median household net worth DOWN 30% from 2007

Source: Star Tribune, “Falling Incomes Rip a Hole in Middle Class” March 5, 2012.

1/17/2013

7

U.S. Household Deleveraging: 1/3 to 1/2 of the Way There?

Source: McKinsey Consulting, January 2012

Total Expenditures – The U.S. Healthcare Bubble

$148 $356 $1,100

$2,811

$4,780

$8,935

$13,111

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

1960 1970 1980 1990 2000 2010 2018

PerCapita Costs

1960-2008: Population has grown 1.8X, healthcare expenditures 88.9X

Price built up that exceeds value

Healthcare has grown on the back of a debt

fueled economic boom. Debt is now at levels where it is a

DRAG on the economy.

Reality ??

1/17/2013

8

Will the Bubble Keep Growing? Commercial Premiums for a Family of 4

$5,200 $6,826

$10,659

$13,557

$21,015

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,00019

97

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

202

0

Source: Kaiser Family Foundation, MedTrend analysis ,PriceWaterhouse Coopers

% of Median HH Income

X X X X

X X

X

X X X X X

X

X

X

X X

X X

X

15%

5%

10%

20%

25%

30%

35%

40%

51%

The Question for Healthcare

If debt can’t continue to grow at the same rate, what will fund our bubble?

50%+ of your funding= government

44% of 2012 federal government spending funded by DEBT

1/17/2013

9

The Good News… The Bad News…

• GOOD OR BAD? – The US can likely grow federal debt to 150%+ of GDP before the bond

markets revolt – Means we might have 4-5 years to continue to kick the can down the

road… but the consequences at that point become Greek-like (huge austerity, tax hikes, riots, etc.)

• GOOD OR BAD? – The ONLY way we become fiscally healthy is to cut spending – Medicare and Medicaid MUST be cut

U.S. Debt Deal: Deadlocked Commission and S&P Downgrade

• Deadlock = $1.2Trillion automatic cuts

• 2% cut to providers every year 2013-2020

• The resolution is… ??

1/17/2013

10

Deficit Reduction Plan Proposals: Late Spring 2011

Won’t This All Go Away ?

Supreme Court upheld the ACA law

Republicans in Congress don’t like FFS either…

The debt problem doesn’t change – healthcare will be a big target

1/17/2013

11

The End Game is Clear

The core implication to hospitals and doctors is the same :

The Market – Washington and Employers – are saying “ENOUGH”

The Economy WILL NOT allow continued growth at past rates

The healthcare growth bubble will burst.

Pressures to Re-design Delivery to Reduce Utilization and Costs and Improve Value: It’s The “2 D’s”…

Marketplace Changes

1/17/2013

12

Top Trends Impacting Healthcare

STRATEGIES

Lower Unit Reimbursement

New Methods of Reimbursement

Today’s Fee For Service Healthcare World: Volume Based “First Curve”

• Paid per procedure, admission, test

• Specialty/ hospital care pays more

• No true financial risk (pass on costs/failures) – Incentive : do more --build specialty/hospital

products

• Typical Hospital Payer Mix: – Payer Revenue/ $1 Cost

• Commercial (BCBS) $1.30

• Medicare $0.85

• Medicaid $0.35

1/17/2013

13

FFS Payments Getting Cut Presentation to American College of Surgeons 2011

Republican Senator Mark Kirk (IL): “Every group that relies on federal funding

should expect a 10-20% drop in that funding.”

Dr. Britt, president of ACS replied “ This could put providers in a tailspin.”

Kirk’s reply: “The tailspin is the U.S. economy. There

is a new audience at play. (bond market.) The judgments they render are swift and severe.”

Current Medicare Economics

-2% in FFS every year 2013-2020 ?

VPB: 1% growing to 2% withholds = +/- up to 2% reduction in ALL DRGs

Re-admission penalties: 0-2%

Typical 400 bed hospital= $8-10M

1/17/2013

14

Everyone Gets It Now: Make Money on Medicare

Majority of hospitals/ systems plan to cut costs 15-20% from their cost structure

Recognition of inability to cost shift losses to commercial payers who expect no more than CPI

Challenge of reducing unit cost in a hospital: 80%+ of operating costs in labor, supplies, cost of capital

Average hospital margin on Medicare = (13.9%)

Source: Sg2, 2010

The Golden Days of Fee for Service Are Behind Us….

(New Methods of Reimbursement)

1/17/2013

15

Enormous Variability in Healthcare: and now payers know it

Rates of cardio-bypass:

1.9/1000 to 8.9/1000 (Brownlee et al 2011)

Rates of mastectomy versus lumpectomy

.4/1000 to 2.7/1000 (same)

MDs with financial interest refer to medical imaging 2.48 times as much (Fischer 2011)

Clinical guidelines say NO stent in post heart attack patient within 24 hours: but 54% get one. (Cortez 2011)

Healthcare Law

Payment from FFS to payment based on outcomes/ quality: value based purchasing

Payment from FFS to payment that is bundled/ global, putting providers at risk: accountable care

1/17/2013

16

Transitions

Private Practice

• Fee-for-service

Medical home / care system

• Negotiated FFS

ACO

• Total-cost-of-care

The Journey to Accountability Uncertainty of Pace, Not Direction

Hospital-MD Bundling: •Single payment A,B •Demonstration in place •Look for cost savings together •Need tight ties with proceduralists

Episode Bundling: •Pilots already in place •Law adds one more

Shared Savings: •ACOs/ in the new law as voluntary

Capitation/ Risk: •Not in law •Pilots by Healthplans •GAMC

Pay for Performance

Hospital- Physician Bundling

Episode Bundling

Capitation/ Shared Savings/ TCOC Models

Capitation

Degre

e o

f Share

d R

isk

Care Continuum FFS

Source: HCAB

1/17/2013

17

Back Pain Example

• Medicare patient with back pain: TODAY – Visit primary care doctor : $$

– Visit orthopedist: $$

– Visit physical therapist : $$

– Visit primary care doctor: $$

– Visit spine surgeon: $$

– Spine surgery: $$

– Visit surgeon post op : $$

– PT care : $$

• Back Pain under New Payment (TCOC):

– Total cost budget for population

– Incented to keep out of hospital – get back 50% of cost savings

• Bundled:

– CMS: 3 days pre-hospitalization to 30 days post discharge

ACO Update

26 Pioneer ACOs: 3 in Minnesota

ACO participation has more than doubled in last year

CMS just announced 102 new ACOs

MD Led Most Common**

14%

31%

0%

5%

10%

15%

20%

25%

30%

35%

2011 2012Healthcare Intelligence Survey, July 2012

ACO Participation Among Healthcare Organizations

1/17/2013

18

Commercial “Payment Experiments” Well Underway

Commercial payers moving to contracts with “total cost of care” savings components or “bundled” payments and are expanding the amount of dollars at risk

Still focused on large players/ systems

Limited conversations with rural/ CAH

Generally only 5-10% of total revenue under TCOC But could be 25% of any payer’s total contract with the system

Savings returned ranges from 50-75%

Commercial “Payment Experiments” Well Underway

Large employers going after high cost procedures:

Heart

Orthopedics

Direct contracting for bundled payment

Cleveland Clinic – Lowes (heart)

Johns Hopkins – Pepsico

UPS- general surgery

Target: spine surgery protocol?

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19

Challenge of “Feeding the Beast”

Need $2-$8B revenue to “survive?”

Protocols on “best care” up stream can dramatically reduce tertiary revenue downstream

Low back care…. Spine surgery

Diabetes/ CHF/ Chronic care…. Admissions

The right thing to do…

But immediate impact on tertiary models

More Consolidation Ahead

• Accelerated movement to align with systems or integrate with doctors

• 2011 and 2012 “deals” broke previous records

51%

42%

31%

13%

0%

10%

20%

30%

40%

50%

60%

1995 2000 2007 2011

Percentage of stand-alone hospitals in US

Source: AHA

1/17/2013

20

Minnesota Consolidation

• Stillwater Medical Group – HealthPartners

• Park Nicollet – HealthPartners

• Likely 3-4 systems in Metro (HP, Allina, FV)

• Outstate hospitals move to systems:

– New Prague: Mayo

– Red Wing: From FV to Mayo

– Monticello to CentraCare

– Multiple northern hospitals to Essentia; southern to Mayo

Top Trends Impacting Healthcare

The Macro-Economy:

DEBT AND DEMOGRAPHICS

New Methods of Reimbursement

Lower Unit Reimbursement

STRATEGIES

Reach for Scale and Efficiency

Redesign Processes & Care Models to

Improve Value

Grow PC share &

create leverage with payers

IT and Measurement Infrastructure

Provider Alignment/

Consolidation/ System Affiliation

Cu

ltu

re R

e-A

lign

men

t

capital

1/17/2013

21

An Accountability World

Players paid FFS

Independence can work

No/ low coordination

Hospital as a revenue center

Specialty/ hospital driven

Culture of production – rewarded for more

Bundled/ global/ value based

“Integration” required

Coordination a MUST

Hospital is a cost center

Primary care driven

Culture of quality

Question for Chiro Providers

• How can you provide measurable, clinically proven improvements at a better value to employers and health plans?

– Can’t just say it– must prove it

• What role do you want to play in the chronic care and wellness space?

1/17/2013

22

Realities: Maureen’s view only

• If you go after MD business, expect a fight

– Better to go to employers/ plans

• Measureable improvements in value (cost/ quality) MUST be demonstrated

– You need IT infrastructure to do this

• The hospital system controls the payment

– Expect them to try to “commoditize” you; no pmpm from them

Boston Consulting Group’s View: The Likely Business Environment 2012-2015+

Overall low growth of the economy

Much higher economic volatility, leading to increased risk of more recessions

Constant intervention by government to “fix” things

Acceleration in the restructuring of industries Healthcare = Venture capital; consolidations/

mergers; business model change

Employees will extend their working lifetimes

Increased tensions between countries, including protectionism

Broader social unrest

Eventually, significant inflation

Source: Boston Consulting Group, “Stop Kicking The Can Down the Road”, David Rhodes, Daniel Stelter, August 2011

1/17/2013

23

Healthcare Disruption 2020+

Federal/ State/ Consumer

Debt

Aging demographics

Payment Reform

Personal Technologies:

iMedicine

mHealth

Personalized

Genomic Medicine

• Hi tech Dx

• Surgery

• “ICU”

• Remote “monitoring”

• E-visits

• Health apps

Location Based Care:

Cost and Outcome

Personal Health

Maintenance:

Value and Convenience

Healthcare 2012 – 2018: The Beginning of the END of the

Bubble