Category Archives: Insights

Overcoming the Market Dominance of Hospitals

This article first appeared in JAMANetwork.com. It is co-authored with Soleil Shah and Amol S. Navathe.

Amidst remarkable uncertainty for its future, one of the most concerning and constant trends in US health care has been the increasing consolidation of health delivery organizations. In health care, 2 main forms of consolidation exist. Horizontal consolidation occurs when hospitals or physician groups merge together, enabling the combined entity to increase its market share. For example, in 2015, Stanford Health Care merged with ValleyCare Health System, combining a 2-hospital 613-bed academic medical system with a 242-bed hospital. After hospitals merge, a market often becomes less competitive because of decreased hospital competition. Vertical consolidation occurs when a hospital increases its employed physicians by acquiring a physician practice. Between July 2016 and January 2018, hospitals acquired 8000 medical practices, and 14 000 physicians left private practice to become employed by hospitals.1 This process makes the physician market less competitive by reducing the number of physicians vying for patients.

The coronavirus disease 2019 (COVID-19) pandemic may exacerbate both types of consolidation. Sudden declines in utilization and revenue have threatened financial sustainability or imbued uncertainty into the future of some hospitals and physicians. In a July 2020 survey of 230 independent physician practices, 60 (26%) were considering partnering with a larger entity due to COVID-19.2 Furthermore, of 58 independent physicians without ownership in their practice, 23 (40%) considered employment, creating additional barriers for independent practices to remain competitive.3 Notable hospital mergers have also taken place within the pandemic period. In October 2020, Atrium Health completed a merger with Wake Forest Baptist Health, creating one of the nation’s largest health systems by consolidating 42 hospitals across 4 states (North Carolina, South Carolina, Georgia, and Virginia) with an expected $11 billion in combined net revenue.

Hospital consolidation in the past decade has not improved quality. Among 246 acquired hospitals and 1986 control hospitals, being acquired was associated with a moderate decline in performance on an aggregate patient experience measure (from the 50th percentile to the 41st percentile) but no significant changes in 30-day readmissions or mortality rates.4 Due to a lack of competition, the prices for services provided by physician practices tend to increase after acquisition.5 Additionally, legal limitations have weakened the ability of the Federal Trade Commission (FTC) to enforce antitrust rules on nonprofit hospitals, even though these hospitals are involved in the majority of hospital and health system mergers.6 Thus, consolidation and the creation of multistate hospital systems could continue to have potentially adverse consequences for patients. A new economic and policy framework designed to limit anticompetitive and therefore anti-consumer incentives by market-dominant hospitals (MDHs) may help mitigate the negative consequences of consolidation.

Factors That Influence Health Care Consolidation

Consolidation has been a predominant business strategy for hospitals and physicians in the United States for decades. Hospitals consolidate to gain market share and use resulting leverage to charge higher prices to private payers or employers large enough to self-insure. One major reason this may occur with relatively little resistance is the nature of health care markets. Numerous plans compete to offer health insurance to employers, and employers that self-insure must select from among these plans or third-party administrators (TPAs).

To attract employers, payers and TPAs strive to offer large networks of clinicians and health care centers to minimize care disruptions for employees. But when most physicians in a region are employed by a large hospital network, private payers and employers often have limited options other than to contract with that network, forcing them to tolerate 6% to 10% increases in prices each year.7 Adding to their leverage, these large networks often offer differentiated services like organ transplants or advanced specialty therapies that make them a “must-have” in private-payer or employer networks. Thus, the financial incentive for hospitals to merge or acquire physicians to gain must-have status is high.

Hospital consolidation is also supported by the nature of antitrust regulations, which are limited by how markets are defined. Since the 1990s, academics and regulators have defined local markets in health care using tertiary hospital catchment areas or hospital referral regions (HRRs). HRRs were constructed based on referral patterns of cardiovascular and neurosurgery hospitalizations from 1992-1993 Medicare data for research purposes.8 Yet these outdated HRRs meant for research are frequently used in antitrust enforcement today, despite the hospital mergers that have occurred since their development. In 2018, a review of community hospitals reported that 3491 of 5198 hospitals (67%) belonged to a multihospital health system, compared with just 2524 of 4956 (51%) in 1998.9

HRRs also usually encompass areas much larger than what is practical for most patients to conveniently access. In major metropolitan markets, patients often choose between one or 2 hospitals within a small radius of their residence.10 For example, the Manhattan HRR includes all 4 New York City boroughs other than the Bronx, even though most patients in Manhattan may not travel between boroughs for care. This means hospitals tend to have pricing power much greater relative to their defined market share in the HRR. Thus, using HRRs hampers antitrust regulators from adequately recognizing and responding to the local effects of hospital consolidation.

Now, as hundreds of independent physician practices and smaller hospitals experience revenue losses due to COVID-19, the economic incentive for hospitals to merge, acquire physician practices, or employ more physicians is likely increasing. Both forms of consolidation could lead to more MDH networks. Therefore, it is important for regulators to develop a framework that accounts for the true extent of market dominance among large hospital networks when determining their influence on prices.

Potential Solutions

A first step to addressing hospital consolidation is to update HRRs or develop a methodology for defining hospital markets based on more recent data and geographic care utilization patterns by patients. Regulators could consider localized health service use patterns to match patient choices with market definitions; for example, how likely is it for patients to cross bridges, county lines, or leave their cities for care. Medicare Payment Advisory Commission areas, which are metropolitan statistical areas within a state or rest-of-state nonmetropolitan areas, might be a desired middle ground between county-level and state-level definitions that could be evaluated. Regardless, the definition of hospital markets used in antitrust enforcement needs to be redefined using updated empirical analysis. It is even possible that market definitions will vary by service type (eg, hospital competition over heart valve replacement procedures vs obstetric care).

Once fair market definitions are established, hospitals with more than 50% market share for any service should be deemed as having an MDH label, which could serve as a warning signal for regulators and prompt scrutiny over anticompetitive practices of the new entity. Furthermore, MDHs could be required to accept all forms of public insurance and invest a fixed percentage of their total revenue into health care provisions for low-income or marginalized communities. This could help limit declines in quality and access that result from mergers.

MDH regulation could target horizontal consolidation but may not be sufficient to reduce vertical consolidation since the incentive for financially struggling physicians and smaller practices to be acquired by larger hospitals still exists. Vertical consolidation could be addressed if the federal government coordinated across sectors to create an MDH redistribution fund (MRF). The beneficiaries of the fund would be physician groups and hospitals in financial need, which would reflect their Medicaid case mix, critical access status, and perhaps revenue loss as a result of COVID-19 capacity constraints. MDHs that are nonprofit entities, and thus benefitting from less FTC scrutiny, could be required to donate 5% of their tax exemption to the MRF. The federal government could then redistribute the MRF proceeds to its beneficiaries as loans or, if the beneficiaries choose to remain independent, as grants instead. Insolvent or cash-strapped physician groups that would otherwise consider employment under a larger hospital could then have greater ability and incentive to remain independent. These efforts could help ensure physician markets remain competitive and offer consumers more choice.

Conclusions

COVID-19 has the potential to exacerbate the nation’s history of hospital consolidation. Stronger incentives to counteract consolidation could protect patients against potential adverse effects of anticompetitive hospital networks. Policy makers and regulators should consider legislation that defines and regulates MDHs, while promoting asset redistribution via an MRF, as a potential safeguard to the adverse consequences of the consolidation trend.Back to top

Article Information

Corresponding Author: Robert P. Kocher, MD, Stanford University School of Medicine, 291 Campus Dr, Stanford, CA 94305-5450 (bkocher@venrock.com).

Published Online: February 19, 2021. doi:10.1001/jama.2021.0079

Conflict of Interest Disclosures: Dr Kocher reported working at Venrock, a venture capital firm where he invests in health care businesses, and serving on a board for Premera. Mr Shah reported receipt of personal fees from The Advisory Board Company outside the submitted work. Dr Navathe reported receipt of grants from Hawaii Medical Services Association, Anthem Public Policy Institute, the Commonwealth Fund, Oscar Health, Cigna Corporation, the Robert Wood Johnson Foundation, Donaghue Foundation, the Pennsylvania Department of Health, Ochsner Health System, United Healthcare, and Blue Cross Blue Shield of North Carolina; other from Integrated Services (board member; not compensated) and Embedded Healthcare Equity; and personal fees from the following: Navvis Healthcare and Agathos (advisor services); Navahealth (principal); University Health System-Singapore and the Social Security Administration-France (advisor and travel); Elsevier Press (honorarium for editorial role); the Medicare Payment Advisory Commission (commissioner and travel); and the Cleveland Clinic (speaker fees and travel) outside the submitted work.

References

  1. Physicians Advocacy Institute.  Updated physician practice acquisition study: national and regional changes in physician employment 2012-2018. February 2019. Accessed January 3, 2021.http://www.physiciansadvocacyinstitute.org/Portals/0/assets/docs/021919-Avalere-PAI-Physician-Employment-Trends-Study-2018-Update.pdf
  2. McKinsey and Company.  Physician employment: the path forward in the COVID-19 era. July 17, 2020. Accessed November 22, 2020.https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/physician-employment-the-path-forward-in-the-covid-19-era#
  3. Merritt Hawkins.  Survey of America’s Physicians: COVID-19 Edition. August 19, 2020. Accessed February 17, 2021.https://www.merritthawkins.com/trends-and-insights/article/surveys/survey-of-americas-physicians-covid-19-edition/
  4. Beaulieu  ND, Dafny  LS, Landon  BE, Dalton  JB, Kuye  I, McWilliams  JM.  Changes in quality of care after hospital mergers and acquisitions.   N Engl J Med. 2020;382(1):51-59. doi:10.1056/NEJMsa1901383PubMedGoogle ScholarCrossref
  5. Capps  C, Dranove  D, Ody  C.  The effect of hospital acquisitions of physician practices on prices and spending.   J Health Econ. 2018;59:139-152.
  6. Schwartz  K, Lopez  E, Rae  M, Neuman  T.  Kaiser Family Foundation website. What we know about provider consolidation. Published September 2, 2020. Accessed December 5, 2020.https://www.kff.org/health-costs/issue-brief/what-we-know-about-provider-consolidation/
  7. PricewaterhouseCoopers Health Research Institute.  Medical cost trend: behind the numbers 2021. Accessed November 22, 2020.http://www.pwc.com/us/en/health-industries/behind-the-numbers/index.jhtml
  8. Jia  P, Wang  F, Xierali  IM.  Evaluating the effectiveness of the hospital referral region (HRR) boundaries.   Annals of GIS. 2020;26(3):251-260.
  9. American Hospital Association.  Trendwatch Chartbook 2018. Table 2.1: Number of community hospitals, 1995–2018. Accessed January 3, 2021https://www.aha.org/system/files/media/file/2020/10/TrendwatchChartbook-2020-Appendix.pdf
  10. Kocher  B, Emanuel  EJ.  Overcoming the pricing power of hospitals.   JAMA. 2012;308(12):1213-1214.

Source: http://bobkocher.org

Running Through Walls: Inclusion Comes First

Eric Brown, CEO of Dynamic Signal, joins Venrock partner Brian Ascher to speak about diversity, equity, and inclusion. Brown believes you can’t have great culture without putting inclusion first, which is why it was the first thing on his agenda as he stepped into his role as CEO of Dynamic Signal last year. Brown discusses some of the company’s initiatives, including the Mentorship and Access program, and shares how these programs have been received so far. Brown also shares the challenges of balancing family and work and how he had to purposefully make space for each of them to exist in harmony. 

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Want more? Here’s the latest on Running Through Walls.

Eric Brown, CEO of Dynamic Signal, joins Venrock partner Brian Ascher to speak about diversity, equity, and inclusion. Brown believes you can’t have great culture without putting inclusion first, which is why it was the first thing on his agenda as he stepped into his role as CEO of Dynamic Signal last year. Brown discusses some of the company’s initiatives, including the Mentorship and Access program, and shares how these programs have been received so far. Brown also shares the challenges of balancing family and work and how he had to purposefully make space for each of them to exist in harmony.
  1. Inclusion Comes First
  2. Winning the Digital Shelf
  3. What Data Tells Us
  4. Career Goals
  5. Navigating the IPO Process

Running Through Walls: Winning the Digital Shelf

Venrock Partner Mike Tyrrell speaks with Jason Purcell, co-founder and CEO of Salsify to discuss his career and how Endeca’s $1B exit lead to the creation of Salsify. Purcell explains how we are in the midst of a “masses of markets” world, and delves into how commerce experience management platforms like Salsify are helping brands navigate a space where consumers engage with products on a broad variety of channels and win on the digital shelf. Purcell shares the toughest part of his journey at Salsify and what the company sees as its “North Star”. They also discuss the importance of repeated clear communication in leadership strategy, particularly when a company grows past the startup stage.  

  • Subscribe:

Want more? Here’s the latest on Running Through Walls.

Eric Brown, CEO of Dynamic Signal, joins Venrock partner Brian Ascher to speak about diversity, equity, and inclusion. Brown believes you can’t have great culture without putting inclusion first, which is why it was the first thing on his agenda as he stepped into his role as CEO of Dynamic Signal last year. Brown discusses some of the company’s initiatives, including the Mentorship and Access program, and shares how these programs have been received so far. Brown also shares the challenges of balancing family and work and how he had to purposefully make space for each of them to exist in harmony.
  1. Inclusion Comes First
  2. Winning the Digital Shelf
  3. What Data Tells Us
  4. Career Goals
  5. Navigating the IPO Process

Reducing Administrative Waste in the US Health Care System

This article first appeared in JAMANetwork.com.

The US health care system is famous for its expense and its waste. In a 2019 study, Shrank et al1 estimated that about 25%, or $760 billion to $935 billion, of the $3.6 trillion the US spends on health care annually is potentially wasteful. This equates to each person spending an unnecessary $2500 per year on health care. The largest category of wasteful spending in the US (about 30%) is administrative costs. Eliminating administrative expense has the benefit of lowering health care costs without affecting spending on patient care. It is the safest form of health care cost savings; virtually no one argues that administrative costs should remain high. Reducing administrative waste should be the highest priority for payers and policy makers given that everyone, including patients and clinicians, would benefit from lower health care costs.

The US health care system is administratively complex by design. Inherently, a multipayer system offering many variations of benefits, paying for care in a fragmented delivery system, and using a multitude of different payment models is administratively complex. Each health plan incurs cost to build sales and marketing function, deliver customer service, possess actuarial and benefit design functions, form a health care network, credential physicians and other health care practitioners, develop payment rules, set up payment operations, and ensure regulatory compliance. The Affordable Care Act (ACA) specifies that administrative costs cannot exceed 15% of premiums for commercial health plans. By comparison, Medicare spends about 5% of premiums on administration. Medicare achieves lower administrative expenses because it has no sales and marketing expenses, no network expenses, standardized benefit design, and simpler payment processes. The medical loss ratio rule of the ACA creates a perverse incentive for health plans because higher premiums enable higher administrative spending.

Essentially, administrators for payers and health care centers are trying to accomplish a relatively straightforward goal: ensure that a patient is eligible for care based on their insurance and benefit design, the patient receives care from qualified clinicians, the care is appropriate and of high quality, and the correct amount is collected from the patient and paid to the clinicians. Completing this process requires an extraordinary amount of labor. Hospitals employ up to 1 full-time person per bed to support billing.2 In total, nearly 4 full-time employees per physician work on administrative tasks, and this ratio is increasing.3 Health care labor accounts for the majority of all health care costs in the US. Even though health care has been the largest source of new jobs in the US from 2001 to 2016, and accounted for 29% of all new jobs, labor costs were the largest driver of the 6% compound annual growth rate of health insurance premiums over this period.3

The costliest administrative task for payers and health care organizations is payments. According to an analysis from a single academic medical center, an estimated 62% of administrative costs were for billing and insurance.2 The study also calculated that billing costs were $20.49 for a primary care visit, $61.54 for an emergency department visit, and $215.10 for an inpatient surgical procedure. As a percent of revenue, primary care physicians spent 14.5%, emergency departments spent 25.2%, and hospital surgical departments spent 3.1%.2 Administrative costs in medicine are approximately 3 times higher than in other professions, such as law and accounting.4

Both payers and health care organizations have incentive to keep adding more people and creating new processes to gain temporary economic advantage. Payers add more prior authorization steps, increase first-pass claims denials, and use payments as a tool to collect additional data points on claims for short-term medical loss ratio gains. Health care organizations work with electronic health records to add decision support to guide clinicians to more highly paid diagnosis codes; hire scribes, coders, and chart reviewers to find more items to bill; and work with third parties to get more procedures authorized and denials overturned for short-term revenue gains. This give and take has led to spiraling costs because the return on investment for every additional hour of labor, for both sides, is positive, and neither side wants to cut costs or complexity because it would be costly if done unilaterally.

In 2010, the ACA tried to rein in administrative waste. As recognition of the high cost of billing and payments, section 1104 of the ACA required the US Department of Health and Human Services to promulgate rules to standardize many aspects of billing and payments. Specifically, the ACA called for a national system to determine benefits eligibility, coverage information, patient cost-sharing to improve collections at the time of care, real-time claim status updates, autoadjudication standards, and real-time and automated approval for referrals and prior authorizations. These actions were supposed to be implemented in 3 waves in 2013, 2014, and 2016. However, only the first 2 waves were implemented in 2013 and 2014. These regulations standardized eligibility, required real-time claims status, and created electronic fund transfer standards. The most cost-saving actions, autoadjudication of claims and prior authorizations, were supposed to be implemented in 2016 but were never enacted. Health care organizations opposed these rules because to make these processes work, payment systems would need to query clinical data systems to confirm patient data, accurately risk-adjust, and extract pay-for-performance quality metrics and they did not want to allow access to their systems by insurers. Interconnectivity of payment and clinical data systems could reduce the labor cost associated with data extraction, data review, and appeals for both payers and health care organizations.

In other industries, administrative standardization is driven by the largest participants. In banking, the Federal Reserve drove adoption of the Automated Clearing House for banking transactions, Walmart forced the adoption of universal product codes, and American Airlines and IBM created the Semi-Automated Business Research Environment that is used nearly universally to manage airline inventory and passenger names.4

Because the US health care system is so fragmented, there is not a clearly dominant entity to set administrative standards and force adoption. The federal government is the largest payer, but its market power is not concentrated because its payments flow through hundreds of different programs, including 50 unique Medicaid programs, Medicare, hundreds of Medicare Advantage plans, ACA insurance exchanges, federal employee health benefits, the military health system, Veterans Affairs, and the Indian Health Service. Each of these programs has governance over its administrative rules. Some programs, such as Covered California, use their local market power to force standardization of administrative elements, such as benefit design. The private sector alternatives lack either geographic reach or local market scale. The largest private sector entities are the payers United Healthcare and Anthem. However, neither of these companies are positioned to be administrative standard setters. United Healthcare lacks local market scale because it usually only accounts for 10% to 20% of patients for clinicians. Anthem lacks geographic scale because it only operates in 23 states. Only the Medicare system operates in all states and is accepted by nearly all health care organizations, which means changes to Medicare’s administrative rules are adopted nearly universally. Medicare is also a large payer, through the Medicare Advantage program, to the largest commercial payers, which could enhance Medicare’s ability to serve as an administrative standard setter. This makes Medicare the only participant with the market power to set administrative standards.

The federal government can use regulatory authority to reduce administrative costs. The opportunity today is both larger than in 2010 when the ACA targeted administrative simplification and more readily capturable as a result of improvements in information technology. The authority derived from the ACA should be used to implement the third wave of administrative simplification regulations, which requires autoadjudication of claims and prior authorizations and, as a by-product, creates long-awaited payment system and electronic health record interoperability. The Trump administration launched the Patients Over Paperwork program to reduce administrative burden. This program has simplified documentation for office visits and reduced reporting burden for many programs, and claims to have saved health care organizations an estimated $6.6 billion and 42 million hours of labor through 2021.5 More opportunity likely exists to rationalize the more than 1700 metrics that Medicare collects, which is estimated to incur $15.4 billion in annual data collection and reporting costs.6 There are additional opportunities that technology such as artificial intelligence may be capable of addressing, including a national clinician credentialing system; risk adjustment relying on data science models instead of physicians coding hierarchical condition categories; and identifying fraud, waste, and abuse.

Although the coronavirus disease 2019 pandemic is rightfully the highest priority for the US health care system at the moment, reducing administrative costs represents the largest opportunity to lower health care costs. These pressures will be intensified by the looming Medicare Trust Fund insolvency in 2026, higher than expected Medicaid and ACA premium subsidy payments as a result of millions of displaced jobs, an aging population, and underlying medical inflation exceeding gross domestic product growth. Fortunately, much can be done to reduce administrative costs.

Article Information

Corresponding Author: Robert P. Kocher, MD, USC Schaeffer Center, 635 Downey Way, Verna & Peter Dauterive Hall, Los Angeles, CA 90089 (bkocher@venrock.com).

Conflict of Interest Disclosures: Dr Kocher reported being a partner at the venture capital firm Venrock, where he invests in health care technology and services business, serving as a board member for Premera and Devoted Health, and being a special assistant for health care and economic policy for President Obama and working on administrative simplification policies outside the submitted work.

References
  • 1. Shrank  WH, Rogstad  TL, Parekh  N.  Waste in the US health care system: estimated costs and potential for savings.   JAMA. 2019;322(15):1501-1509. doi:10.1001/jama.2019.13978
  • 2. Tseng  P, Kaplan  RS, Richman  BD, Shah  MA, Schulman  KA.  Administrative costs associated with physician billing and insurance-related activities at an academic health care system.   JAMA. 2018;319(7):691-697. doi:10.1001/jama.2017.19148
  • 6. Wilensky  G.  The need to simplify measuring quality in health care.   JAMA. 2018;319(23):2369-2370. doi:10.1001/jama.2018.6858

Source: http://bobkocher.org

Strategic Priorities For The Centers For Medicare And Medicaid Services To Advance Medicaid Reform

This article first appeared in healthaffairs.org. It is co-authored with Amol S. Navathe, Mark B. McClellan, Christopher Chen, Judy Zerzan, and Julian Harris.

In the months and years ahead, a key priority for the Centers for Medicare and Medicaid Services (CMS) will be supporting and stabilizing states in their provision of Medicaid. This will require reversing some Trump administration policies such as allowing work requirements and restoring the integrity of Medicaid. But there is a need to go beyond reversing policy, to focus instead on improving Medicaid for Americans in need. The COVID-19 public health emergency (PHE) has further stretched state budgets as more individuals became unemployed and lost private health insurance, thus experiencing a double hit that grew Medicaid enrollment. This strains an already stressed system—despite advances made possible through the Affordable Care Act (ACA), which enabled waiver programs that resulted in Medicaid expansion and greater innovation in health delivery.

The PHE has made access to care and outcome disparities more visible. Compared to patients with Medicare and private insurance, patients on Medicaid have had less consistency (across states) in access to COVID-19 testing; treatments such as antibodies infusions; and less consistent access to new technologies such as remote patient monitoring, telemedicine, virtual diabetes care, and behavioral health that have been critical for individuals with chronic disease during the PHE. Although some states’ Medicaid programs are ahead of Medicare for telehealth and behavioral health.

The issues with chronic disease care in particular compound perennial limits on Medicaid recipients’ access to primary care. This is especially true when it comes to advanced “next-generation” primary care models (such as the ChenMed, Oak Street, Iora, and similar models) that require prospective payments, and specialty care. Access to similar Medicaid-focused programs such as CityBlock is not widespread. To address these troubling disparities for Medicaid patients, frequently driven by social risk factors, and close the gap relative to those covered by Medicare fee-for-service and Medicare Advantage, we believe it is critical to create attractive opportunities for innovation in Medicaid.

Fortunately, there is tremendous opportunity to improve the health and well-being of Medicaid beneficiaries while improving health care outcomes, equity, and the stability of state budgets. There are several reasons, described below, why CMS should be assertive in supporting greater Medicaid reform. What is more, the agency should not and cannot rely on its considerable efforts and experimentation in the Medicare program to improve care for Medicaid beneficiaries, close disparities, and catalyze systemwide changes for the entire nation.

Core Factors

Health Care Organization And Clinician Factors

The health delivery system—including physician practices and hospitals—that serves Medicaid beneficiaries often differs from the network of providers serving Medicare beneficiaries and private insurance enrollees. Those clinicians and practices who do care for Medicaid beneficiaries have patient rolls composed overwhelmingly of Medicaid beneficiaries—even dual-eligible individuals are a small minority. Because Medicaid rates are lower and safety-net organizations tend to be more financially strapped, this lack of payer diversity hinders innovation because it mitigates the impact of reforms driven by Medicare and commercial payer programs and prevents more generous payments that may “cross-subsidize” quality investments.

Social Factors

Medicaid beneficiaries have greater social needs, and there is little coordination between the social and health care safety nets, particularly with respect to infrastructure investments at the health care organization. Without addressing lower financial attractiveness of Medicaid beneficiaries for health care organizations and physician practices, making progress against health care inequity is impossible.  

Populations

Medicaid cares for relatively distinct populations (while some of them are transiently enrolled, most are enrolled and re-enrolled frequently) many of whom face health inequities:

  • Pregnant women;
  • Children;
  • Elderly low-income individuals also eligible for Medicare (duals);
  • Nursing-home residents;
  • Individuals with disabilities;
  • Low-income adults via ACA expansion; and
  • American Indians and Alaska Natives.

Health Care Delivery Patterns

The different, largely younger, population covered by Medicaid compared to Medicare means that the “opportunity” for health improvement and cost savings differ as well. Medicare innovations will not automatically translate to sensible models for Medicaid. Furthermore, the time horizon for savings in the younger Medicaid population may take longer to generate cost savings, particularly for preventive care. For example, postacute variation is a huge problem in Medicare, but it is not for Medicaid. Conversely, high-risk pregnancies and maternity carebehavioral health, and substance use dependence are big issues for Medicaid and not Medicare. 

Market Concentration

Most states use managed care organizations (MCOs) to mitigate budget uncertainty and manage Medicaid populations. Nevertheless, this structure can be very fragmented across the health services and long-term services and supports. MCOs are subject to market power dynamics and thus frequently fail to negotiate value-based contracts or pay high enough rates to make value-based contracts attractive. This weakness is exacerbated by MCOs’ fragmentation in many states, short one-year term contracting for value-based contracts, and high beneficiary turnover.

Key Priorities

The priorities—laid out in this exhibit of major recommendations—can be organized into two groups: new models, demonstrations, and programs developed by CMS that could be adapted and implemented by states, and waivers and other investments led by CMS. The goal would be to have major priorities and investments led by the federal government with opportunities for customization and adaptation to local environments, markets, and communities.

New Models, Demonstrations, And Programs Developed By CMS That Could Roll Out To States

Create Templated Payment Models To Spur New Care Models

Model design templates—developed with input from MCOs to overcome implementation challenges—could be customized for states’ specific populations. These models would also need to address issues with access due to lower Medicaid payment rates—using innovations to care for Medicaid populations through financially attractive and rapidly advancing lower-cost care models—such as telemedicine for behavioral health, for example. Importantly, adopting these models should come with automatic authority for implementation rather than requiring additional administrative steps for CMS to allow implementation, within fee-for-service or MCO programs, to create administrative efficiencies for states (along with technical assistance, program evaluation, and data support from CMS).

For example, CMS should explore the following potential primary care innovations and specialized care reforms targeted at Medicaid, all with a focus on equity (in order of priority):

  1. Population-based prospective (capitated) primary care models, particularly for children. This could include advanced primary care home models in coordination with MCOs.
  2. Maternity bundled payment models that include prenatal care, delivery, postnatal care for mother, and a defined (for example, 3–6 months) period of neonatal care including the neonatal intensive care unit;
  3. Substance use dependence payment models that support novel care models for medication-assisted treatment (that is, suboxone or methadone);
  4. Behavioral health integration into primary and specialty care;
  5. Chronic disease episode models around type I diabetes, asthma care, and autism spectrum disorders or developmental delay;
  6. Demonstrations to reduce administrative burden under value-based payments, improving payment speed to reduce accounts receivable days (that is, reduce overhead);
  7. Telehealth care models for routine care where possible (behavioral health, postpartum screening for pregnancy-induced hypertension or preeclampsia) and low acuity urgent care; and
  8. Specialized clinic models including federally qualified health centers (FQHCs) and rural health clinics. CMS could work with the Health Resources and Services Administration to make value-based payment programs targeted toward FQHCs (and other safety-net clinics) as part of an effort to further strengthen them financially but improve upon the current cost-plus system.

Develop And Implement A New State Innovation Model Program

Under such a program, CMS should provide guidance on multiyear benchmarks, multipayer alignment, infrastructure enhancements, and other critical success factors.

Incentivize Equity Directly As A Requirement In Payment Reforms

Include measurement, with standards on data categories and collection as well as measures, and financial incentives for equity improvements by Medicaid population segment in each relevant model. Many states have already started down the path of measuring and reporting quality metrics by population segment. Going forward, reforms should prioritize direct financial incentives for closing outcome gaps that exist by Medicaid population segment and by other key dimensions such as race/ethnicity and socioeconomic status.

Include Medicaid Explicitly As A Required Partner In CMS Multipayer Initiatives

Overcoming behavioral and financial inertia is critical to creating system change. Many health care organizations and physician practices serve Medicaid alongside Medicare beneficiaries and privately insured individuals. Including Medicaid will often create stronger alignment with private payer populations, both of which experience maternity care as the top driver of acute hospitalization and spending. This should include engaging MCOs in a state alongside multiyear contracts. States such as Washington and Maine have created multipayer efforts around primary care, although in these cases in which states did take leadership, Medicare has not been uniformly included and aligned. Bringing Medicare to state-led multipayer efforts would also be a step forward.

Similarly, all federally developed Medicaid models should require multipayer collaboration, multiyear benchmarks, and state innovation model (SIM)/delivery system reform incentive payment (DSRIP)-like funding for data sharing and infrastructure enhancements to create alignment and administrative simplicity for the health delivery system.

Use Innovative Payment Models To Test Integration Of Social Services With Health Services

Medicaid beneficiaries often face outsize social challenges alongside health risks. There is substantive evidence that investments in social services return financial benefits to health services. Demonstration projects that explicitly link social services such as housing, access to food/food security, supported employment, and othershave shown benefits on individual/household well-being and concomitant savings on health expenditures. States should test explicit integration, while protecting against providing social services to reduce health expenditures only and redundant spending. Furthermore, enrollment in Medicaid could automatically trigger standardized assessments and enrollment in social services (including accountability for this assessment/enrollment at the health care organization).

Waivers And Other Investments Led By CMS Plus Enhancements/Clarifications On Programs Covered Under Medicaid State Plan Benefits

While waivers can enable programmatic innovation, CMS should also enable new programs and interventions by expansively clarifying what can be covered directly under Medicaid state plan benefits.

Target Bold, Transformative Goals

One “big idea” could be to make a commitment to rapidly improve customer service, patient experience, and provider experience within Medicaid participation. “Value” in value-based reforms does not translate to value for the patient-consumer-beneficiary. Medicaid could make a transformative statement to change this approach to drive value to the individual member level. This would include revamping quality and performance measures to reflect beneficiary concerns, with greater emphasis on access (to in-office and telehealth services) and patient experience (for example, Consumer Assessment of Healthcare Providers and Systems survey or perhaps better, enable an SMS-based, rapid mechanism for feedback).  

This would enable innovative program designs, including subsidies or provision of internet access and higher bandwidth, ensuring better access to more easily accessible, lower-cost telehealth and text-based care services.

States could be held accountable for standards and encouraged, enabled, and subsidized to make investments that drive up customer choice and satisfaction, provider satisfaction, and enhance ways to use technology to lower administrative costs and improve the ability of providers to manage care and costs.

The federal government could help address churn in the Medicaid program by creating standards for minimum enrollment. This could start with one year of minimum enrollment for children, where cost is not very high.

Pursue Bipartisan Efforts To Integrate Social And Health Services And Consider Expansion To More Low-Income Adults

A systematic plan could include combining and simplifying social and human services programs. The Medicaid program could be a central enrollment hub or participate in one, enabling enrollment in social services and creating accountability for health care providers around it. Examine opportunities such as combining programs run through the US Department of Agriculture (Special Supplemental Nutrition Program for Women, Infants, and Children and Supplemental Nutrition Assistance Program); Internal Revenue Service (earned income tax credit); and Department of Housing and Urban Development. This work could build on common data infrastructure and move toward implementation of community information exchanges (CIEs), which are similar to health information exchanges but include additional non-health data attributes related to social and human services (for example, social factors). A CIE would be a critical step toward a central enrollment hub and ensure that the Medicaid program can appropriately align with other social service programs. This would supplement changes to health services requiring Medicaid fee-for-service providers or those contracted with MCOs to build the capabilities of advanced medical homes, specialized care models, and also pursue partnerships with other community stakeholders such as employers. This could follow models such as North Carolina.

Standardize Extended Duration Of Managed Care Contracts

Current yearly updates to rates remove incentives for organizations to invest in infrastructure and capabilities to better manage spending. This is also a major headwind for value-based payment adoptions.

Address Lower Medicaid Rates To The Extent Possible

Establishing stronger access and network adequacy regulatory standards may lead to more equitable payment rates as a complementary approach to cross-payer initiatives. The Center for Medicare and Medicaid Innovation (the Innovation Center) could also be a vehicle for testing programs with higher rates or through SIMs or the DSRIP program.

If the federal government were to help states achieve Medicaid provider reimbursement that is more on par with Medicare, it would further accelerate improvements to access and expand the number of providers who participate in the Medicaid networks.

Infrastructure Enhancements

There are several areas, such as data exchange between health and social service programs and reliable insurance claims information systems, in which core infrastructure needs hinder health reforms in Medicaid. Waivers could be an important mechanism to make targeted investments to improve key areas of infrastructure.

Expand programs such as the 90/10 match for health information exchanges to continue investments at the state level. Medicaid data are less accessible (slower to get) than Medicare, and this makes developing and implementing non-fee-for-service payment models in Medicaid challenging. Beneficiary data are usually missing mobile numbers and email addresses. Beneficiaries are often auto-assigned to plans and have suboptimal onboarding and customer service. Waiver programs that invest in these infrastructure developments tied to key performance indicators could unlock tremendous value for states and serve as enablers for future payment reforms. This could build on existing state efforts to implement Master Person Index initiatives and integrated eligibility. Washington State, for example, is working on both.

Investments could also cut across health and social services, creating a unified data exchange that allows for incorporation of social data into health programs and vice versa. This will be critical to make risk-adjustment system enhancements. Tying data collection efforts to payment reforms or waivers may be a critical path forward, either as part of value-based payments (counted under medical loss ratio as in Washington state), housing services, or other community investments (such as North Carolina). This would benefit from coordination with states and the Office of the National Coordinator for Health Information Technology (ONC) on the Health Information Technology for Economic and Clinical Health Act of 2009 implementation and interoperability.

Some states already use select social factors in risk-adjustment. For example, payment rates to MCOs are risk-adjusted by Z-codes for homelessness in the state of Washington. Other factors have also been shown to be important, such as debt burden and food insecurity, with states such as Minnesota, Massachusettsand Rhode Island as leading exemplars.

State-based waivers could require enhanced collection of social determinants of health (SDOH) data and expanded systems to share systematic data across social and health service networks. States could place interoperability requirements to align with those of CMS following ONC standards. This may also include generating more robust evidence on how to most effectively make investments in SDOH and expectations on timing and drivers of health and economic benefits.

Restoring And Improving The Social Safety Net

The Biden-Harris administration faces daunting challenges with COVID-19 but also has an opportunity to restore and improve how our health insurance and social safety nets work at the state level. Both dimensions are underscored by the increasing numbers of Americans relying on Medicaid for health insurance. By supporting states through CMS, using avenues such as the Innovation Center, waivers, and other means, the federal government can reform Medicaid to better serve its beneficiaries.

Authors’ Note  

The authors thank Maura Boughter-Dornfeld for research assistance. This blog post has benefited from discussions with Cindy Mann, Elizabeth Fowler, and Mandy Cohen. Dr. Navathe reports grants from Hawaii Medical Service Association, Anthem Public Policy Institute, the Commonwealth Fund, Oscar Health, Cigna Corporation, Robert Wood Johnson Foundation, Donaghue Foundation, Pennsylvania Department of Health, Ochsner Health System, United Healthcare, Blue Cross Blue Shield of North Carolina, Blue Shield of California; personal fees from Navvis Healthcare, Agathos, Inc., personal fees and equity from Navahealth, YNHHSC/CORE, Maine Health Accountable Care Organization, Maine Department of Health and Human Services, National University Health System–Singapore, Ministry of Health–Singapore, Elsevier Press, Medicare Payment Advisory Commission, Cleveland Clinic, Analysis Group, and equity from Embedded Healthcare, and other from Integrated Services, Inc., outside the submitted work.

Source: http://bobkocher.org

What we must do to prepare for the next pandemic, a guest commentary

This article first appeared in BioCentury.com. It is co-authored with David Beier.

The U.S. is not ready for the next pandemic. Our public health infrastructure and planning process are not up to the challenge, our capacity to treat at-risk citizens is insufficient, and we are not making enough of a new category of antiviral that can treat emerging viruses: mAbs derived from patients.

The bottom line is this — we are poised to make the same mistakes again unless we act now. Five measures would help the U.S. scale up testing, therapeutics and vaccine development. The goal must be to create policies, financial structures and new capabilities that enable innovation, provide the necessary manufacturing capabilities, and protect the supply chain before the next pandemic hits.

Years before the COVID crisis struck, prior presidents (Bush and Obama) focused on pandemic planning, for example by setting standards for a national stockpile of personal protective equipment (PPE). But the Trump administration failed to build up our reserves or secure our supply, shutting down the unit of the National Security Council tasked with global health security. Fortunately, one of Biden’s first acts as president was to restore this office.

Our health system has struggled to deliver mAbs targeting the virus, which can prevent infections from becoming severe, because these therapies require IV administration and access to infusion centers is primarily at the same hospitals that are overburdened and trying to avoid serving early-stage patients. If health systems figure out how to administer mAbs to all the patients who would benefit, we will quickly experience shortages since there are not enough doses being manufactured.

The Biden administration is faced with fixing this fact and has created a temporary White House office led by Jeff Zients to develop a national plan and assist states in operationalizing it.

The industrial landscape should include alliances and agreements to cooperate to serve the supply chain as a matter of routine.

The one bright spot has been vaccine development. The dedication of modern science to truth and the hard work of testing biological hypotheses has resulted in multiple highly effective vaccines. The commitment of more than $20 billion has been well worth it. But as former FDA Commissioner Scott Gottlieb notes, the underinvestment in shorter term treatments such as biologics — about $1 billion — has been disappointing.

The two paths to effective medical intervention for COVID-19 and future pandemic threats are vaccines and new medicines. So, how are we doing? Brilliantly on the science but not so well on manufacturing or delivering doses to patients. We can do better and here is how:

1. Antitrust carve-outs to permit companies to share information about manufacturing limitations and future plans to construct U.S.-based mAb manufacturing capacity. The industrial landscape should include alliances and agreements to cooperate to serve the supply chain as a matter of routine.

2. A biotech infrastructure bank or lending facility. We should create a credit facility that permits low-cost lending, guaranteed by the government, to finance the construction of new biotech manufacturing facilities. The government should be creative in structuring financial terms, including securing modest equity stakes for government.

3. Commitment of research and development funds in the form of grants, advanced purchase commitments or use of “prize” authority under existing federal law to advance new engineering and technological solutions to improve, speed or increase product yields for new biotechnologies manufacturing, especially mAbs. This program could be administered by NIH with technical assistance from NIST, and the National Academy of Engineering.

4. Creation of standby pandemic manufacturing facilities. These would serve a similar purpose to the national stockpile for PPE, diagnostics tests (imagine if we had enough low cost self-administered COVID-19 antigen tests, ventilators and the like). The concept is to create government funded backup capacity. These could be run like National Labs as Government Owned, Contractor Operated (GOCO) facilities.

5. Short- and medium-term access to vital pandemic and other medicines. The supply chains for these medicines very frequently involve sourcing from non-American players. The first step is to exclude from any national security review normal commercial supply contracts with companies located in countries with whom the United States has a military alliance, such as NATO countries, Japan and South Korea. Other contracts involving routine, commodity-like supplies should be permitted to continue for as long as the medical need for the final medical product continues and until U.S. capacity is sufficient. Any national security rules or reviews should be fair, prompt and governed by clear and consistent rules.

We must use the shock of the COVID pandemic to plan ahead.

Testing must also be a priority. There have never been adequate incentives for the development of point-of-care diagnostic tools, despite years of warnings. We continue to remain behind the rapid testing eight ball today as we struggle to put in place the screening testing needed to safely re-open schools, businesses and travel.

The next pandemic, or even COVID-22 or COVID-23, may be in waiting, so we need to take these lessons seriously. Infectious diseases can be prevented or treated using mAbs. Any plan to use this cutting-edge medical arsenal must accelerate the manufacturing and distribution of these medicines. Anything less ignores the tragic lessons from this once-in-a-century public health crisis.

David Beier is managing director at Bay City Capital and a board member of the California Life Sciences Association; he previously served as chief domestic policy adviser for Vice President Al Gore and has been a senior executive at Amgen Inc. (NASDAQ:AMGN) and the Genentech Inc. unit of Roche (SIX:ROG; OTCQX:RHHBY).

Bob Kocher is a partner at Venrock, adjunct professor at Stanford University and a senior fellow at University of Southern California’s Schaeffer Center for Health Policy.

Signed commentaries do not necessarily reflect the views of BioCentury.

Source: http://bobkocher.org

Running Through Walls: What Data Tells Us

Dataminr uses AI to detect when major events are happening, long before the first news reports emerge. How is this possible? Venrock’s Nick Beim chats with Dataminr’s co-founder and CEO Ted Bailey to discuss how the rise of real-time data platforms and misinformation around the 9/11 attacks helped spark the idea for the company. He shares how Dataminr helps clients mitigate and respond to potential crises more effectively, including the ongoing pandemic. They also discuss how the Dataminr workforce is responding to all-remote work and how Bailey has grown as a leader since founding the company in 2009.

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Want more? Here’s the latest on Running Through Walls.

Eric Brown, CEO of Dynamic Signal, joins Venrock partner Brian Ascher to speak about diversity, equity, and inclusion. Brown believes you can’t have great culture without putting inclusion first, which is why it was the first thing on his agenda as he stepped into his role as CEO of Dynamic Signal last year. Brown discusses some of the company’s initiatives, including the Mentorship and Access program, and shares how these programs have been received so far. Brown also shares the challenges of balancing family and work and how he had to purposefully make space for each of them to exist in harmony.
  1. Inclusion Comes First
  2. Winning the Digital Shelf
  3. What Data Tells Us
  4. Career Goals
  5. Navigating the IPO Process

Venrock 9

Venrock raised a new, $450 million pool of capital today to continue our mission to invest in early stage technology and healthcare businesses that are taking novel approaches to solving important problems.  While the fund size and overall strategy remain consistent with prior funds, our implementation and approach evolves constantly and unpredictably. People, trends and technology change so quickly that pattern recognition from prior experience is more likely to lead us astray than provide advantages in identifying or building great businesses.  We drive ourselves every day, to challenge our assumptions and beliefs, to learn, stretch, re-evaluate and take-in new data. There is no repeatable roadmap and continued excellence will require as much effort, creativity and luck as we can muster.  

The path to finding “great” entrepreneurs and “great” ideas is winding and foggy, at best.  The uncertainties and challenges on the decade plus journey test the fortitude, creativity and resilience of all involved.  But when you get it right, there is no better feeling – as much because of the problems overcome and relationships forged along the way, as the scale of the outcome (though our investors really do like the outcome…).  We look forward to giving it our absolute best for this new fund, Venrock 9. 

Running Through Walls: Career Goals

Emily Drabant Conley, CEO of Federation Bio, joins Venrock partner Racquel Bracken to chat about lessons learned from her time at 23andMe and how Federation Bio is disrupting the microbiome space. Conley discusses key takeaways from her experience in handling moments of crisis, including the importance of transparency and staying consistent with your company’s mission. As a female CEO, Conley shares what traits of 23andMe’s Anne Wojcicki she tries to emulate and discusses how setting aggressive goals has helped her career. Conley also discusses the opportunities that come with working at a small company and reveals her passion for cooking, which she’s ramped up during the pandemic.

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Want more? Here’s the latest on Running Through Walls.

Eric Brown, CEO of Dynamic Signal, joins Venrock partner Brian Ascher to speak about diversity, equity, and inclusion. Brown believes you can’t have great culture without putting inclusion first, which is why it was the first thing on his agenda as he stepped into his role as CEO of Dynamic Signal last year. Brown discusses some of the company’s initiatives, including the Mentorship and Access program, and shares how these programs have been received so far. Brown also shares the challenges of balancing family and work and how he had to purposefully make space for each of them to exist in harmony.
  1. Inclusion Comes First
  2. Winning the Digital Shelf
  3. What Data Tells Us
  4. Career Goals
  5. Navigating the IPO Process

Incentives and information drive health care innovation: lessons from Medicare Advantage

This article first appeared in statnews.com. It is co-authored with Bryan Roberts.

Health care in America often feels like it moves at a glacial pace, if that fast. Case in point: fax machines remain indispensable as a way of transferring information. On a larger scale, the U.S. health care system still struggles with readmissions, medication adherence, chronic disease outcomes, and more. True innovation is rare.

But every so often a crack in the ice occurs that leads to rapid change. Sometimes legislative action is the trigger. The Affordable Care Act and the HITECH Act sparked lots of innovation and startup activity. As we look to 2021, though, the odds of a split or Republican-controlled Senate are high and so the likelihood of major innovative legislative change is low.

In the absence of legislative or regulatory decree, we believe that two requirements — aligned economic incentives and the availability of data and information — can trigger bursts of innovation in our super complicated, fragmented, highly regulated, and archaic health care system. Without these two, not much happens.

Viewed through the lenses of incentives and information, it becomes clear why some potential innovations are broadly adopted and others never gain traction. The U.S. is stubbornly resistant to things like preventive care and paying family caregivers. Why? The economics make no sense for payers, so providers have no financial incentive to carry them out.

On the flip side, the U.S. quickly adopted the use of new hepatitis C drugs and telemedicine amid Covid-19. The adoption of expensive hepatitis C drugs occurred because they offered providers cures for their patients with few side effects and they were profitable for the drugs’ manufacturers. The switch to telemedicine made economic sense for payers because it is cheaper than in-person visits and it was a lifeline for providers when patients were reluctant to go for office visits.

Several characteristics of the U.S. health care system drive the need for clear and material incentives for innovation. Most importantly, the industry generates very little profit outside of pharmaceuticals. Gross margins are a fraction of what they are in other business sectors and net margins for these businesses hover distressingly close to zero — and sometimes below. As a result, publicly traded health care businesses tend to trade between 0.5 and two times annual revenue, compared to software businesses that trade at 10 times to 30 times annual revenues.

Such anemic financials mean that health care businesses have little ability to adopt new ideas that lack compelling near-term financial benefit, even though they may have innovative attributes like convenience, improved outcomes, and user satisfaction. While companies in other industries with high-margin, high-customer lifetime value can adopt — or at least explore — innovations with longer-term or nebulous payoffs, health care companies require acute, tangible economic results.

Another critical characteristic of the health care ecosystem is its highly transactional relationship with its users: patients. In business terms, health care companies have high customer churn (the percentage of customers who stop using a product or service during a set period) and low levels of satisfaction and loyalty.

Most health care providers don’t track the metrics that populate the management dashboards of most other businesses, things like customer acquisition cost, annual revenue per customer, customer churn, or gross margin by customer. When they are tracked, often by new entrants rather than incumbents, the numbers are generally poor compared to other industries.

For example, health insurance companies often cover a fully insured member for only 18 to 24 months. This short relationship affects nearly everything about how an insurance company subsequently behaves with respect to its members. Being financially responsible for someone for such a short period of time can never justify investments in longer-term health, whether preventive care or excellent chronic disease management, since the results would only benefit competitors — the member’s next health plan.

Health systems are little better. Rarely do they have any idea how much it costs to acquire a patient or a doctor. Those hospital billboards along highways advertising short emergency department waiting times and new services are expensive and it’s hard to assess their value. Few health systems calculate the long-term value of a patient. Instead, they view each patient-care event as a purely transactional relationship optimized for near-term revenue, which makes sense given the tight financial statements and the revenue model. This leads them to deliver as much care as they can with little investment in following up to ensure that the care was effective or to anticipate future care needs.

Access to information and clinical and claims data that can generate insight at the point of innovation adoption or action is often overlooked, but is of equal importance to financial incentives. Despite widespread digitization of data, it remains difficult, slow, and expensive to gain the information required to give clinicians the financial incentive to make the right decision. Even when primary care providers have incentives to gather, organize, and act on information, downstream specialists and hospital providers have no desire to share clinical data because the goal would be to find ways to reduce utilization — and therefore lower revenue — for these providers.

This is part of the reason why, even though data sharing protocols exist for nearly real time awareness, clinical and billing data lag days to months after care is provided since they are often available to accountable care organizations or capitated primary care providers only after a bill has been received by Medicare or an insurance company.

The canonical current manifestation of both aligned incentives and access to data and information is Medicare Advantage, a program that Medicare beneficiaries can opt into that delivers all of the Medicare benefits through private insurance companies. It is often lower cost and offers additional benefits in exchange for more care management by the Medicare Advantage insurance companies.

This alignment, together with strong economic and demographic tailwinds, is the reason why most insurers, many integrated delivery systems, and primary care groups are doubling down in this business segment. In Medicare Advantage, insurers not only have access to the information they and their partners (employed or delegated-risk physicians) require to make better choices, but they also have financial incentives to take better and lower-cost care of patients based on the potential for large profits or losses based on the difference between the patient risk-adjusted payment from the government plus quality bonus payments and what care actually costs. An added benefit is that Medicare Advantage payers have longer member-retention periods, closer to eight years compared to two years for commercial insurers.

This constellation of characteristics — financial incentive, information availability, and a longer-term customer relationship — can lead to more longitudinal and proactive care for chronically ill patients. In some cases, financially motivated capitated primary care physicians are able to achieve 40% decreases in hospitalizations in Medicare Advantage plans compared to fee-for-service primary care physicians working in traditional Medicare with very different financial incentives.

The different performance of affordable care organizations (ACOs) can also be explained by the alignment or misalignment of incentives and information. ACOs were designed to try to replicate the success of Medicare Advantage care in the larger traditional fee-for-service Medicare program. In essence, primary care physicians, who are traditionally small businesses with little market power, can band together in an ACO to get statistical scale to enter into a risk and quality contract with Medicare. The ACO is given a benchmark cost per patient based on risk and geography. If the cost of caring for that pool of patients comes in below the benchmark, the physicians and Medicare share the savings.

Although the program generated $1.19 billion in net savings in 2019, the success of individual ACOs is unevenly distributed. ACOs led by independent physicians, which have no facilities and capital equipment overhead, saved $201 per beneficiary. In contrast, hospital-led ACOs saved just $80 per beneficiary. This makes sense, as hospitals have less incentive than independent primary care physicians to save money since much of the money they are saving is from decreasing revenue from their hospitals.

We do not see health care innovation as unpredictable. We believe that what gets adopted and the rate of adoption is explained fully by incentives and information. Strong incentives coupled with meaningful insights from information can make glaciers thaw and improve health care rapidly.

Bob Kocher and Bryan Roberts are partners at Venrock, a venture capital firm, where they invest in health care businesses.

Source: http://bobkocher.org