North Carolina’s Battle for Health Care Value

Brian Klepper

First posted 12/10/18 in The Valid Points Newsletter


Lobbying? We’ve got 9 million taxpayers and 720,000 participants in this plan who understand that they aren’t consuming health care, it’s consuming them.”


North Carolina State Treasurer Dale Folwell


In North Carolina, a storm is brewing that highlights the health care industry’s influence and stranglehold over public dollars. An experienced civic-minded reformer with clout has emerged. Dale Folwell is a Certified Public Accountant who served four terms as a Republican in the NC House of Representatives and was elected Speaker Pro Tempore. Now State Treasurer, he has responsibility for the State Employees’ Health Plan and its 727,000 employees, dependents and retirees (including my wife, a sign language interpreter in the Charlotte-Mecklenburg  school system). The plan spends $3.3 billion annually, making it the largest health care purchaser in the state. “Right now, the State Health Plan and members spend more on health care to employees and retirees than is appropriated for the entire university system or for public safety,” says Folwell. He has made it his mission to bring reason and stability to that program.

Beginning January 1, 2020, Folwell proposes to switch the health plan’s reimbursement method to reference-based pricing. The approach, around a decade and now gaining momentum with employers around the country, would in this case pay 177% of (or nearly double) Medicare reimbursement. The health plan’s program, called the Provider Reimbursement Initiative, would allow providers a reasonable margin, but would cut an estimated $300 million annually from the plan costs and another $60 million from enrollees’ costs in the program’s first year. The health plan’s Board of Trustees unanimously supported the proposal.

In promoting his plan, Folwell has described some of the issues he’s faced. The most important is that, under longstanding arrangements with the state’s providers and the plan’s administrator, Blue Cross of North Carolina, the health plan can’t access pricing information on the services its purchasing. “I know what I’m being charged, but I don’t know what I’m paying,” Folwell explained. “For years, the plan has paid medical claims after the fact without knowing the contracted fee. It is unacceptable, unsustainable and indefensible. We aim to change that.”

“I said [to Blue Cross], I know what you are charging but what am I supposed to pay? There is no transparency,” Folwell said. “Blue Cross would not tell me, and there are laws on the books that say they need to tell us. The health care system has worked long and hard to develop this broken system, and they’ve been completely successful.”

Not surprisingly, the state’s health care lobby is gearing up to protect its turf.  State Rep. Josh Dobson, a McDowell County Republican, is expected to file a bill that would block Folwell from instituting the plan. Steve Lawler, President of the North Carolina Healthcare Association, one of a half dozen health industry associations with powerful lobbies, has claimed that Folwell has resisted discussion. But Lawler does not appear to have publicly addressed the transparency or excessive cost issues that are central to Folwell’s complaint.

While the battle is shaping up to be a high stakes, all-out fight, the health care lobby may not simply get its way this time. Robert Broome, Executive Director of the formidable State Employees Association of North Carolina, favors Folwell’s plan and said, “The state health plan board made a very sound financial and public policy decision that will save money for taxpayers and will save money for plan members, while bringing some common sense to how we pay for health care. It boggles my mind that folks could actually line up and be opposed to this.”

The beauty of Folwell’s strategy is that it is grounded in doing the right thing, and he has made it very visible to the Carolina rank-and-file. When challenged, there is every reason to believe that most politicians and business leaders will openly support the public interest over the health care industry’s interest, especially an industry that has become wealthy by taking advantage whenever possible for decades.

Folwell’s bold initiative takes its cue from a groundbreaking reference-based pricing initiative by the  Montana State Employees Health Plan, with about 30,000 enrollees. That program’s success has since led the Montana Association of Counties to implement a similar program. Here’s an introductory video on how that program works, and another one here explaining how the payment is calculated.

As health care costs have relentlessly risen, much of it due to opaquely excessive care and unjustifiable unit pricing, federal, state and local government workers around the country have seen their benefits slashed and their contributions dramatically increase. The initiatives in North Carolina and Montana may be the leading edge of a drive by purchasers exercising their new found market leverage. There’s every reason to believe they can be replicated throughout the country by governmental and non-governmental purchasers, fundamentally moving our broken health care system in the right direction.

It’s also important to remember that reference-based pricing is just one of several dozen powerful quality- and cost-management arrows in a larger health care performance management quiver. Smart employers and unions around the country are finally beginning to go around their health plans and deploy high performance solutions in drug management, musculoskeletal care, cardiometabolic care, imaging, allergies, claims review and many other opportunity areas for quality improvement and cost containment.

Mr. Folwell may well be the champion we need at the moment, and it’s possible he could achieve something meaningful. If governmental and business leaders follow his lead in North Carolina and around the country, it would be a key first step to dramatically changing our health system for the better.

Brian Klepper is a Charlotte-based health care analyst and EVP of The Validation Institute.

Saying No To The Drug Crisis


First published 11/27/18 on The Health Care Blog

BKlepper 102018In a recent essay, VIVIO Health’s CEO Pramod John guides us through four sensible drug policy changes and supporting rationales that could make drug pricing much fairer. Reading through it, one is struck by the magnitude of the drug manufacturing industry’s influence over policy, profoundly benefiting that sector at the deep expense of American purchasers. As Mr. John points out, the U.S. has the world’s only unregulated market for drug pricing. We have created a safe harbor provision that allows and protects unnecessary intermediaries like pharmacy benefit managers. We have created mechanisms that use taxpayer dollars to fund drug discovery, but then funnel the financial benefit exclusively to commercial interests. And we have tolerated distorted definitions of value – defined in terms that most benefit the drug manufacturers – that now dominate our pricing discussions.

The power of this maneuvering is clear in statistics on health industry revenues and earningsAn Axios analysis of financial documents from 112 publicly traded health care companies during the 3rd quarter of 2018 showed global profits of $50 billion on revenues of $636 billion. Half of that profit was controlled by 10 companies, 9 of which were pharmaceutical firms. Drug companies collected 23% of the total revenues during that quarter, but retained an astounding 63% of the profits, meaning that the drug sector accounts for nearly two-thirds of the entire health care industry’s profitability. Said another way, the drug industry reaps twice the profits of the rest of the industry combined.

Pfizer, the top performing publicly traded company in Q3, generated $4.1 billion in profits on $13.3 billion in revenue, for a 31% quarterly margin and a 45% increase in profitability over Q3 2017. (By comparison, the 2nd and 3rd top performers, Johnson & Johnson and United Health Group, seemed meek, with Q3 2018 margins of 19.3% and 5.6%, respectively.) Convinced that significantly more can be extracted from the market, last week the organization thumbed its nose at the American people and announced another price increase, this time 5-9% on 41 drugs or 10% of its product portfolio, starting January 15, 2019. This action, of course, gave cover to other manufacturers wanting to do the same thing.

The drug industry has, in the main, been too smart to perpetrate this kind of price gouging over the short term. Instead, they’ve preferred to slowly ‘boil the frog,’ with relentless and predictable increases two to three times per year. While complaints abound, nobody has yet refused to pay. These increases have been reliably absorbed by U.S. taxpayers, employers and unions, conveying that there’s probably room for higher pricing still.

These bold business and profit-taking behaviors have been lubricated by a steady stream of pharma lobbying dollars to both parties of Congress – $280 million in 2017 alone, as reported by Open Secrets – which has been directly complicit in creating this economic albatross hung around the necks of the American people. Worse, we’ve come to consider this situation as acceptable and business as usual.

One question now is whether Congress can rise above simply being bought off and take actions for the common good rather than the industry’s financial interests. There’s some reason for optimism, with drug price management proposals from both sides of the aisle. In a Washington Post piece this month, Zeke Emanuel, one of the Obama Administration’s key architects of the Affordable Care Act, wrote:

… the Republican plan demonstrates that even conservatives are feeling pressure to regulate drug prices. The ideological challenge is how to regulate them. It is going to be difficult for Republicans to repudiate their president and stonewall on the issue over the next few years. Perhaps, with more than 90 percent of Democratic and Republican voters supporting regulation, a bipartisan compromise might emerge.

 Let’s hope he’s right, but until our lawmakers stop taking money from pharma, let’s not hold our breath.

One thing is clear. The actions of Pfizer and other powerful drug industry players have repeatedly demonstrated a willingness to test the limits of what captured regulation and a dominated market will bear, as well as a blatant disregard for the larger societal implications of those actions. This is also true for other health industry sectors, but because the numbers are so much higher within pharma, the ramifications are much more serious. Congress’ continued avoidance of meaningful remedies effectively abets an open threat to our national economic security.

While we hope that Congress comes through, so far that’s been a pipe dream. The drug industry is playing a game of chicken with America’s taxpayers, but also with its employers and unions, daring them to take the heat that would come from saying no. What we need is for America’s largest firms to collectively come together, refuse to pay exorbitant drug prices, and demand changes to the drug companies’ business models.

Our paralysis, our refusal to respond to the predatory forces within our borders, is the irony. If and when the reckoning comes, pharma can retort that its actions were transparent, and that we did it to ourselves by not saying no.

Brian Klepper is a health care analyst and the EVP of the Validation Institute.

Getting Noticed As A High Performance Vendor

Brian Klepper

Originally published in the Valid Points newsletter on 11/07/18.

All growing health care organizations struggle for visibility. Within the vast health care universe, thousands of companies strive to be noticed as better and different than others competing in the same spaces. Organizational health care buyers face an overwhelming signal-to-noise challenge, trying to discern whether programs improve quality and cost and, if so, by how much. It’s a market beleaguered by untrustworthy information, and it’s an arrangement that favors vendors’ interests, at purchasers’ expense.

Those delivering higher value – consistently better health outcomes and/or reduced costs – may be surprised to find lukewarm reception from the health plans they thought would be eager to learn of new ways to deliver better results. The cold reality is that most health plans make more if health care costs more. Only organizations that are at financial risk for management of quality and cost – e.g., fully insured health plans, managed Medicaid plans, Medicare Advantage plans – are likely to be eager for approaches that can streamline processes and improve outcomes.

More promising clients are organizations that can directly benefit from higher value health care. Organizational purchasers – employers and unions – fit this profile. So do firms, like clinic and medical management companies, that sell themselves as full continuum risk managers for purchasers. And health plans that see the potential to undercut the market by offering a richer benefit design for less money than is available through conventional approaches.

There are questions that can help purchasers discern whether a vendor is a high performer. For example, can the vendor provide credible enterprise-wide, rather than anecdotal, data showing better health outcomes and/or lower costs than conventional approaches? Can it provide client testimonials (along with contact information, so you can talk independently with its clients) showing that its experience aligns with the vendor’s performance claims? Is it scalable, meaning that it can easily set up operations in new locations that get the same results? Are its impacts enduring (or sticky), meaning that its clinical and financial management processes continue to yield results over time? And is it confident enough in its capabilities that it is willing to put some or all of its fees at risk, against the performance targets it claims it can achieve?

Fastidious purchasers can certainly take responsibility for a vendor due diligence process, which has been the norm in health care purchasing for decades. But as most employer and union benefits managers know, that can be a strenuously onerous and inefficient undertaking, especially when multiple vendors are involved.

An alternative is for vendors to make it as easy as possible for purchasers to have confidence in their performance claims, by subjecting their processes to credible independent, third party assessments. Validation Institute validation does this by systematically reviewing the analytical elements – the data sources, data and calculations – of a vendor’s performance claims, to see whether they align with promised results. Alignment and the vendor receiving validation can, to a reasonable degree, supplant or bolster the purchaser’s due diligence, giving purchaser confidence that actual outcomes will be close to those that were promised.

While the validation process tests the accuracy of performance claims, the evaluation process associated with the Health Value Awards seeks to identify superior performance. It assumes that the vendor has been validated, and then, using independent, third party judges again, asks both objective and subjective questions that give insight into the market viability, importance and elegance of the solution at hand.

In a complex and chaotic market, the goal is to provide an evaluation process that is unconflicted and above reproach, that can project credibility so that purchasers can comfortably turn to it for guidance. Organizations like Good Housekeeping and Consumer Reports have achieved this kind of authority over decades, but have primarily focused on evaluating consumer goods and being a resource to individual, not organizational, purchasers. Health care is a more intricate, involved and emotional buy in a sense, but it is also one that comes down to determinations of quality and cost.

Health care organizations that believe that they deliver better value and that have the data to support that can, for little cost, obtain credible independent third party assurance that their performance claims are true. Organizational purchasers will and should scrutinize the third party’s processes, but once satisfied, will, for the most part, turn over due diligence.

Which makes third party validation and demonstration of superior results the fastest route for a health care vendors to stand out in a sea of competitors.

Brian Klepper is a health care analyst and the Executive Vice President of The Validation Institute.

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.

Getting High Performance Health Care Services Into the Market as Quickly as Possible

Brian Klepper

Originally published 10/18/2018 in The Valid Points Newsletter.

BKlepper 102018Even though high performing health care services may offer strong value propositions, being unconventional makes them still a hard sell. The fixes of legacy health care organizations are in, and their service networks and methods are solidly entrenched. Innovation capable of displacement is never warmly received by incumbents.

Accordingly, approaches that negatively impact the benefits advisor’s revenue stream or that can be seen as chipping away at a health plan’s control of the case, probably will be opposed as threats. Powerful savings may be weighed against even minor disruptions. And then there’s the issue of whether the new service will require the benefits manager to manage a new, separate contract.

Two principles are relevant here. The first is The Godfather Principle, which advises that to increase the probability of being considered, vendors need to make offers that purchasers can’t refuse. A proposal might go something like, “If you agree to work with us, we’ll financially guarantee that your population’s health outcomes will improve and/or your total health care spend will drop by – pick a big number that you’re sure you can achieve – 20-25 percent.” This figure exudes experience with and confidence in your approach, and is so large that if the benefits manager turns it down out of hand and the company’s CFO hears about it, the benefits manager’s job could be in peril.

Which bring us to the second principle: Administrative Simplicity.Promised savings as large as I’m suggesting also imply that more than one risk management approach (or “module”) is necessary to achieve them. Coordinated collaboration between several high performance risk management companies, can work together on a “platform” that, over time, integrates each module’s key functions – e.g. training, communications, analytics, outreach – into a seamless set of capabilities that can be easily accessed by patients and purchasers.

In other words, organizational health care purchasers are already administratively overwhelmed and don’t want additional administrative management responsibilities. They most certainly don’t want oversight of a slew of narrowly focused services – e.g., diabetes management, large case management, care navigation, allergy services – which may, together, deliver better results at the end of the day but that would create a labor intensive hardship to monitor. So the smart money is for high performing vendors to find each other and come together under a set of unified contractual or organizational terms, making it as easy and productive as possible for purchasers to work with them.

Within the spheres that my colleagues and I inhabit, it’s clear that that organizational purchasers are becoming sufficiently fed up with the legacy health care industry’s predatory practices that they’re increasingly willing to consider exciting, high performing new solutions. Even under the most favorable circumstances, the high performers would be well-served to appreciate the magnitude of the challenge, and to begin to optimize their processes to facilitate as rapid penetration of the market as possible.

Brian Klepper is Executive Vice President of The Validation Institute.

The Box and the Opportunity for Health Care Change

Brian Klepper

Originally published 10/09/2018 in the Valid Points Newsletter

Below are calculations of major health plan stock price growth over a 37 quarter period between May 15, 2009 and September 28, 2018. Note that, during this time, the big plans’ stock price value skyrocketed between 585% and 1,072%, about 2.75x the growth of the Dow Jones Index and 2.25x the growth of the S&P. Humana and United have sustained a breathtaking average per quarter growth of 29.0% and 26.1% respectively.

While stock price is driven by many factors, including historical and expected profitability, these data clearly reflect the truth that health plans earn more if health care costs more. The plans have no reason to remove important element that inflate cost – e.g., low value network providers or unnecessary/inappropriate care. The overarching incentive within the current model is to facilitate more care and more expensive care.

A corollary of these dynamics is that the major plans’ financial performance is undermined by approaches that drive down cost. Restructuring to identify and scale high value services is not an option because total spend would surely drop, dragging earnings, stock price and market capitalization down with it.

The plans can make hay while the sun shines and use that largess to buy into other more currently vibrant lines of business. Even so, they know they’re in a box, stuck trying to maintain a volume-based, low value system in a market that is increasingly adamant about searching for and buying high value.

Major health care newcomers, especially those with heavily diversified interests like Walmart and Amazon, are not saddled with the legacy firms’ perverse constraints, which lends them a strong advantage in a market susceptible to alternatives. Unlike incumbents, they don’t depend on doing the wrong things in health care to prop up market value. They can win by driving better value.

All this suggests there’s a way out of our excruciating health care dilemma. The old guard will be hard pressed to maintain in a market that seeks value, especially when powerful new aggregators appear capable of stepping into the breach and an army of capable risk managers delivers superior results in an array of high value niches.

But that approach depends on high performing vendors convincing self-funded health care benefits managers and their advisers to go around the conventional health care management approaches that have led to ever increasing costs over decades. To succeed, vendors will need to make offers that purchasers can’t refuse. We’ll focus on what that might look like in a future column.

Brian Klepper is The Validation Institute’s Executive Analyst and Editor.

Guaranteeing Health Care Performance

Brian Klepper Originally posted 9/28/18 on Valid Points BKlepper In hunting for high performance health care organizations – those that consistently deliver better health outcomes and/or lower costs in high value niches – we can assume that, at a minimum, really excellent vendors have credible long term (>24 months) data that demonstrate their superior performance. Their clients enthusiastically shower them with testimonials. They can scale their operations to generate the same excellent results in new locations or with new populations. Their impacts endure over time, continuously driving improved performance. Perhaps most importantly, though, the leaders of these companies typically have become so comfortable with the dynamics of their management processes that they’re willing to put their fees at risk against the performance targets they claim they can achieve. Continue reading “Guaranteeing Health Care Performance”