Could We Be at the Edge of Health Care’s Tipping Point?

Brian Klepper

Originally published 10/25/2018 in the Valid Points Newsletter

Health care wonks play a game where they wonder whether health care really is changing in ways that are palpably better for everyone. Everyone, that is, except for the senior executives of the drug and device firms, electronic health record companies, major health plans and health systems that have become so adept at relentlessly squeezing more money out of us and everyone we know. There’s a sort of desperate hopefulness afoot here, the idea that our activities are undermining the stranglehold on policy and the marketplace that keep the current regimes in place and thriving. Then reality kicks in and we remember that, so far, not much has changed. Health care continues, as Dave Chase points out, to steal the American dream.

That said, it is impossible to not notice positive progress in health care market dynamics. While I’ve alluded to many of these observations in previous comments, its worth recounting a few trends.

  • The table above shows that health plans have been spectacularly successful over the past decade, but they’re in an increasingly difficult spot now. Major health plan average stock price growth over a 37 quarter period ranges from almost 16% per quarter for Anthem to 29%/quarter for Humana. Effectively, these health plans’ earn more as health care costs more, which gives them every incentive to tolerate and encourage poor and inappropriate care, as well as egregious unit pricing.
  • The health plans’ breathtaking stock price performance is a mixed blessing. On the down side, US health care costs continue to spiral upward and more businesses and individuals are being priced out of the market, which means that a decreasing pool of insurables is available. Worse, while it may be counter-intuitive, these health plans can’t buy into tactics that would make health care more efficient. Doing so would reduce total spend, in turn reducing health plan earnings, stock price and market capitalization. Relative health care upstarts like Walmart and Amazon, with health care businesses that are a sideline rather than core to their operations, do not have these constraints.
  • There is anecdotal evidence on many fronts that organizational health care purchasers – employers and unions – are losing patience with a health system that is obviously intent on taking every advantage possible. Colleagues in the health care stop loss captive community say that interest in their structures has never been higher and that they’re flooded with interest from self-insured companies of all sizes. This could be understood as an effort by employers and their advisors to access new mechanisms of benefits management efficiency.
  • Purchasers’ and other risk-bearers’ are increasingly receptive to approaches that go around health plans’ standard offerings in high value niches. Many jumbo and large employers have long track records of being willing to try alternative solutions. But many more now appear to be interested in out-of-the-box programs for high value niches – e.g., musculoskeletal, drug management, cardiometabolic, reference-based pricing/bundled payments – as well as innovations in health system arrangements. (See, for example, the direct contracting arrangements between organizations like Intel and Memorialcare in Irvine, CA.) We’re also seeing focused interest by non-conventional purchasing collaboratives – e.g. industry associations – that bring together relatively small employers – <100-2,500 employees – into aggregations of >100,000 lives that have much more substantial purchasing leverage. And we’ve also noticed heightened interest in aggressive health care risk management by third party administration firms, second tier insurers and worksite clinic firms that believe they can rapidly win more market share by significantly reducing health plan cost and/or delivering a substantial return-on-investment in their programming.
  • Decades of fee-for-service reimbursement and policy dominated by industry lobbies have created a health system bloated and dependent on excess. Care and cost patterns for common conditions and procedures are remarkably different than in the health systems of every other industrialized country, and most pronounced in the relative roles of primary vs. specialty care services. Each inefficiency that has become taken for granted throughout US health care is an opportunity for improvement, and every health care niche is brimming over with innovations that exploit these opportunities.
  • The potential impacts are profound. In addition to very significant available improvements in health outcomes, the math associated with high performance health care clinical, financial and administrative risk management modules suggests that more than half of current spending – about $1.75 trillion annually – could, in theory, be recovered. But let’s assume that that number is only for riders on the crazy bus, and that the real number is only half that. We’re still north of potential savings of $850 billion annually.

There’s no doubt that, with its control over policy and much of the marketplace, the most powerful companies in the health care industry have a vice grip on virtually every aspect of how it works. That said, purchasers are hitting a wall and are more willing than at any time in the last several decades to try solutions that are unconventional. Built on deep subject matter expertise in high value niches and lubricated by ubiquitous technologies like analytics, artificial intelligence and blockchain, innovations are mushrooming in every part of health care, offering unprecedented care and management opportunities for a fraction of previous cost and pricing. And health care’s current value proposition is so upside down that investors see massive opportunity in many niches.

Assume that several massive, extremely capable players – Walmart, Amazon and Google are the companies that come to mind most immediately and prominently, but the potential for well-funded startups is also there – can harness these vectors. In addition, these organizations could create new administrative efficiencies, identifying, harnessing and scaling high performing organizations within specific high value health care sectors. Assume their approaches allow them to make purchasers offers they can’t refuse – say, 20%-25% lower than current health care spend within specific care niches or across an enterprise. It’s difficult to see how this couldn’t achieve very significant, positive and rapid structural change in the industry, and relief from the terrible circumstances that have evolved in health care over decades.

So there’s reason for optimism, but with a big dose of caution. This kind of scenario might save us from the devils we’ve come to know all too well. What we don’t and can’t know at this point is who the devils we don’t know are.

Brian Klepper is Executive Vice President of The Validation Institute.

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