Health Care Current: August 16, 2016

Innovation through convergence: You cannot do it alone

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory, and legislative changes.

Innovation through convergence: You cannot do it alone

Steve Jobs once said that he modeled his business after The Beatles. But, it wasn’t their lyrics or their songwriting that captivated Jobs. According to him, he was impressed by the way the four musicians complemented one another – they “kept each other's kind of negative tendencies in check.”1 It was this synchronization of character and personality that made Jobs realize that “great things in business are never done by one person, they're done by a team of people.”2 Jobs was known for hand picking the best-of-the-best to team together and come up with innovative solutions to big problems.

Today, we may need the same approach in health care: Businesses and leaders who team together to tackle the problems that have long baffled the industry. And, the lesson Jobs took from The Beatles can be just as applicable in health care. When it comes to providers and health plans who collaborate to form provider-sponsored plans (PSPs), generally the rule is: you cannot do it alone.

PSPs are not a new concept. While some PSPs are market leaders, many have not yet reached scale. Despite this scale issue, several factors are making now a good time for health systems to consider launching or growing one, including potentially:

  • Capturing market share from the growing individual, Medicare, and Medicaid segments
  • Breaking the constraints of fee-for-service (FFS) payments by using risk to align incentives around outcomes
  • Creating innovative models of care
  • Preparing to succeed under the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA)

Deloitte has looked at how PSPs perform financially in the past. In Provider-sponsored health plans: Positioned to win the health insurance market shift, we found that PSPs can be financially successful, their core line of business can influence profitability, and their scale and tenure can boost profitability. Recently, we wanted to understand how these concepts are being applied to PSP organizations that are currently in operation. To do this, we convened executives from nine health systems, health plans, PSPs, and other organizations for a day-long discussion on PSPs. We also spoke with executives from national health plans who partner with PSPs.

Five themes emerged from the conversation, which we outlined in Collaboration meets innovation: Executive perspectives on provider-sponsored health plans:

Running a PSP can be complicated and generally requires that health systems add capabilities. They often require significant capital investment and health plan expertise – expertise that few health systems have in house. But, it’s not enough to just hire a former health plan executive, according to one of the participants. Organizations likely need many competencies to run a PSP, including those related to insurance, investments, and supporting technologies.

PSPs can not only be attractive models for health systems to consider as they look to scale up, better manage population health, and potentially take advantage of MACRA bonus payments and incentives. Many health plans are leveraging PSPs as a new growth channel for their own business or are using it as an opportunity to push their VBC-related collaborations with health systems further along the risk spectrum. But, the health plan executives generally agreed on two critical points:

  • The market conditions have to be right. Markets with “enough population” for scale; a generally healthy demographic that would benefit from prepaid, well-managed care models; a low penetration of Medicare Advantage or Medicaid beneficiaries in managed care; low unemployment; and a vibrant business community are generally considered more attractive markets for these kinds of collaborations. 
  • Health systems with which health plans collaborate to form PSPs must have desirable characteristics. Organizations that are willing to bear additional financial risk and focused on population health; are market share leaders, have significant delivery system assets, strong leadership, strong financial performance, and positive reputation; and are compatible and forward-looking may make more attractive companions in these types of arrangements.

Especially relevant today is the conversation around MACRA. Many of the executives we spoke to said that as health systems develop strategies for new risk-bearing arrangements and value-based care models, MACRA is expected to play an important role in the planning process. Some even believe that MACRA will accelerate health systems’ adoption of financial risk-bearing arrangements and increase their appetite for launching a PSP.

There are plenty of examples to look to for lessons learned. Examples of collaborations for PSPs include Anthem’s partnership with Aurora Health Care in Wisconsin and Aetna’s partnership with Texas Health Resources.3 These partnerships leverage the health plan’s capabilities and resources, and the hospital’s brand and care management skills, thereby solving the challenges some health systems face in trying to build their own plans.

What is common among all of these examples is that, generally, no one person or organization is attempting to solve the issues confronting health care today. It is the teaming approach and bringing together the complementary skills and assets that may allow these health care organizations to succeed with new approaches to care delivery and payment models. But, take it from Jobs: don’t go at it alone.

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1, “The 100 Greatest Steve Jobs Quotes,” October 5, 2012,
2 Ibid.
3 Katherine Moody, “Anthem taps Wisconsin health system for new payer-provider venture,” FierceHealthPayer, April 21, 2016,, accessed June 6, 2016; Susan Morse, “Aetna, Texas Health Resources establish a jointly owned health plan,” Healthcare Finance News, May 27, 2016,, accessed June 6, 2016.

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My Take

By Bill Copeland, Vice Chairman, US Life Sciences & Health Care Industry Leader, Deloitte LLP


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HHS: Per-member-per-month claims costs in the exchanges fell slightly from 2014 to 2015

A recent analysis by the US Department of Health and Human Services (HHS) found that from 2014 to 2015, per-member-per-month (PMPM) claims costs in the individual market fell by 0.1 percent. HHS says that this suggests the risk pool in the public health insurance exchanges has improved.

HHS used enrollee, Rx claims, medical claims, and supplemental diagnosis data it collected from health plans for its risk adjustment and related programs to analyze how costs and enrollees changed from the first to second year of the exchanges.

Among the key findings:

  • PMPM claims costs in the exchanges fell 0.1 percent: According to HHS, this is comparably lower than in other markets, where costs grew: employer-sponsored insurance claims costs (3 percent), private insurance premiums (4 percent), and individual market medical cost trend (6 percent). 
  • States with the largest growth in exchange enrollment often had lower claims cost growth: For example, in the 13 states that had member-month enrollment growth of less than 50 percent, average PMPM claims costs increased 2 percent. In the 10 states that had member-month enrollment growth greater than 100 percent, average PMPM claims costs decreased 5 percent.

This analysis comes as states begin to publish final premium rates for the public exchanges and as health plans prepare for 2017, the first after two of the temporary premium stabilization programs (risk corridors and reinsurance) expire. Many health plans have said that additional changes need to occur in order for the exchanges to remain a viable option for selling coverage to individuals. For example, earlier this year, many health plans said that exchange consumers have been “gaming” the special enrollment periods, signing up for coverage and quickly dropping it after meeting their pressing medical needs.

The US Centers for Medicare and Medicaid Services (CMS) has said it is committed to making changes to help stabilize costs in the individual market exchanges. Last Thursday, Kevin Counihan, CEO of the Health Insurance Marketplace, announced that CMS will soon propose modifications to the risk adjustment program (the permanent risk stabilization program) to absorb some of the costs for large claims. CMS would pay for this through a “small payment” from health plans.

Shortly after the report was published, America’s Health Insurance Plans (AHIP) CEO Marilyn Tavenner released a statement saying that the analysis is overly optimistic and does not take into account the current challenges health plans are experiencing. Tavenner says that improvements to the exchanges are needed and suggests that policy solutions focus on strengthening the risk adjustment program, improving the special enrollment period verification process, and enhancing outreach and enrollment strategies.

Analysis: While it did not directly examine the risk pool, Deloitte’s 2016 Survey of US Health Care Consumers found that key differences between first-year enrollees to the exchanges and returning consumers indicate that the exchange population as a whole is transforming:

  • More newcomers than people who are returning customers report higher incomes: More have a household income of $75,000 to $149,000 (29 percent vs. 19 percent). And, fewer newcomers report a household income of $25,000 to $74,999 (52 percent vs. 57 percent). 
  • More newcomers say they want access to a mobile application for enrolling, managing their account, checking on claims, and paying bills than returning customers (41 percent vs. 35 percent), suggesting that newer consumers are bringing greater technology demands with them. 
  • More newcomers are willing to accept a smaller network of hospitals (33 percent vs. 25 percent) or doctors (32 percent vs. 23 percent) than returning customers, suggesting that many are bringing flexible mindsets to their shopping approach.

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Implementation & Adoption

Medicare Advantage plans pay hospitals less than traditional Medicare

A new study from Health Affairs reviewed hospital payments made from traditional Medicare, Medicare Advantage (MA) health plans, and commercial insurance to find that MA plans pay less for hospital services than traditional Medicare and commercial plans pay more. The findings are based on data from the Health Care Cost Institute (HCCI) and from the CMS Medicare Provider Analysis and Review (MED-PAR). Researchers analyzed aggregate payments within diagnosis-related groups (DRG) and Core Based Statistical Areas (CBSA). The researchers said that MA plan prices better reflect the value of services than traditional Medicare prices and that Medicare could obtain the same quantity of services for a lower cost through MA.

The researchers found an 8 percent difference between MA and traditional Medicare, once they compared within geographic location and DRG. Researchers attributed 2.4 percent of the difference to narrower networks in MA, which influence how many hospitals are available to beneficiaries.

Differences in payment rates between MA plan and traditional Medicare varied by DRG. Payment differences ranged from 84 percent of traditional Medicare payment rates for chest pain to 91 percent of FFS payment rates for cardiac arrhythmia. According to the analysis, MA plans pay significantly lower prices for hospital admissions for conditions with short lengths of stay.

In all categories, private insurance paid more than both traditional Medicare and MA for hospital services. In 2012, private insurance payments were 162 percent of what traditional Medicare paid for the top 100 DRGs overall.

(Source: Health Affairs, “Medicare Advantage Plans Pay Hospitals Less Than Traditional Medicare Pays,” August 2016)

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In 2017, large employers expect health care cost growth to remain steady

Large employers expect health care costs to grow at 6 percent on average in 2017 – the same rate as the last two years – according to recent a survey from the National Business Group on Health (NBGH). But, many employers expect to be able to hold the increase at 5 percent through changes to their health plans.

NBGH collected information on health benefit costs and plan design changes from 133 large employers that provide coverage to more than 15 million employees and their dependents. According to the respondents, the top three cost drivers are specialty pharmacy drugs, high-cost individuals, and high-cost conditions and diseases (e.g., musculoskeletal).

Although no major changes are expected during open enrollment, employers reported the following:

(Source: NBGH, “Large Employers’ 2017 Health Plan Design Survey,” Press Release, August 2016)

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CMMI announces plans to expand Value-Based Insurance Design demonstration

Last week, the CMS Center for Medicare and Medicaid Innovation (CMMI) announced that it will expand the Medicare Advantage Value-Based Insurance Design (MA-VBID) demonstration to more states in the future. The MA-VBID model, which will test whether greater beneficiary engagement can reduce costs and improve care for chronically ill MA enrollees, will begin in January 2017. The demonstration is scheduled to run for five years, and CMS will expand the demonstration in January 2018.

The demonstration waives the “uniformity” requirement, under which MA plans must offer the same benefits and cost-sharing formulas for all plan enrollees. VBID involves restructuring cost sharing to encourage high-cost patients to use more effective care and less ineffective care. Evidence from private health plans that often use VBID elements in their benefit design shows that it can be effective.

In year one, seven states will test MA-VBID for beneficiaries who have at least one of six chronic conditions. The expansion will open the demonstration to three additional states and add two more chronic conditions.

Any MA plan in those states can participate in the new model as long as they have a good performance track record. Plans eligible to apply must have a quality rating of three stars or higher, consistently perform well, cannot be under sanction, and must be able to pass program integrity screening.

CMS is considering proposals for other types of flexibility to MA plans, including allowing them to offer supplemental benefits if beneficiaries participate in disease management programs.

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On the Hill & In the Courts

New draft guidance on medical devices may help improve medical device cybersecurity

Last week, the US Food and Drug Administration (FDA) published draft guidance that says that manufacturers of medical devices may not have to re-submit the devices for regulatory review if the only change is updated software to improve cybersecurity. Device manufacturers file an existing device application, or 510(k) form, when they update a previously-approved device so that the FDA can ensure the device continues to function and be safe.

In the new guidance, the FDA lists three instances in which it says devices may not have to go through the supplemental approval process:

  • Updating software for cosmetic reasons
  • Updating cybersecurity protocols to strengthen system security, protect information, or reduce disruptions in service
  • Restoring a device to the most recently approved version

Under current regulations, updated devices must go through the 510(k) regulatory review process to show that they meet functionality specifications or the original specifications if no change was intended. The FDA says that since updates to cybersecurity do not typically impact performance of a device, these changes should not need another review. However, changes to the “core algorithm” of the software, updates that address an existing hazard in the software, or changes that may significantly affect clinical functionality may require new 510(k) applications.

Many industry leaders expressed support for the goals of the guidance, which is open for comment until November 2016. While some device manufacturers say that improving security and protecting user information is a top priority, the approval process for medical devices can be time consuming and expensive.

The draft guidance does not include provisions for combination products, such as drug/device or biologic/device combinations, but the FDA says that the guiding principles of the draft may lay the groundwork for future guidance on those products.

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CMS: Home health pilot program saved Medicare $10 million

Last week, CMS published performance data for the second year of the Independence at Home (IAH) demonstration. The demonstration, which reaches 10,000 chronically ill Medicare beneficiaries in 15 participating primary care practices, saved Medicare more than $10 million in its second year. The average annual savings were $1,010 per beneficiary.

IAH is testing a primary care delivery model that provides in-home medical care to beneficiaries with multiple chronic illnesses, including Alzheimer’s disease, Parkinson’s, diabetes, congestive heart failure, or functional limitations. Teams of primary care practitioners visit beneficiaries at their homes to coordinate their care proactively. This lowers costs for Medicare by diverting or delaying the need for inpatient or other facility-based care. The program saved Medicare over $25 million in its first performance year, as reported by CMS last year. The demonstration was first authorized in 2012 for a three year period. However, Congress passed a bill in July 2015 to extend the demonstration by two years, through 2017. In addition to lowering costs, the demonstration tracks six performance measures to gauge improvements in care, including decreased emergency department (ED) visits and patient satisfaction.

Practices that meet the performance goals for at least three of the six quality measures can receive bonus payments. In the second performance year, seven out of the 15 practices qualified for bonus payments, which will total almost $8 million. All of the practices improved in at least two of the quality measures, while four practices met performance goals for all six measures.

The demonstration is limited to 10,000 beneficiaries. However, due to the model’s success and the care coordination and cost challenges that beneficiaries with multiple chronic illnesses present to the Medicare program, lawmakers in the Senate have introduced a bill to make the demonstration permanent. The bill, the Independence at Home Act of 2016, has bipartisan support. Many stakeholders, including demonstration participants, also strongly support expanding the program to reach the estimated 2 million Medicare beneficiaries who may benefit from the model.

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NGA releases toolkit to support state efforts in Medicaid transformation

The National Governors Association (NGA) released a toolkit to help states seeking to design, apply for, and implement Medicaid transformation initiatives under Section 1115 demonstration waivers. It is intended to help applicants better understand negotiations that take place between CMS and states during the application and submission process and to establish an efficient path toward approval.

The NGA Center for Best Practices assembled this toolkit based on the successes of a few states who developed statewide Medicaid transformation plans and received federal approval to implement the plans. The report discusses five elements that are critical to a state’s successful Medicaid transformation:

(Source: H. Tewarson, F. Isasi and H. Kennedy, “The future of Medicaid transformation: A practical guide for states,” The National Governors Association, August 2016)

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Around the Country

GAO: 1332 waiver rules may prove too difficult for states

A recent report to Congress from the Government Accountability Office (GAO) says that the rules governing Section 1332 waivers may dissuade states from applying. Section 1332 waivers are designed for states to get federal approval to waive provisions of the ACA as long as the new program still meets the ACA’s health care coverage goals and does not increase the federal deficit. They can start as early as January 1, 2017 if approved. Only one state – Vermont – has applied to date.

The GAO’s analysis is based on federal regulations and interviews with HHS and Treasury officials about their planned approach for assessing state innovation waiver applications. The researchers also spoke with representatives from the NGA, the National Association of Medicaid Directors, and the National Academy for State Health Policy.

The researchers concluded that HHS and Treasury rules for the waiver review and approval process and the requirement that waivers must preserve health coverage and control federal costs may raise challenges for interested states. Key issues the stakeholders identified are:

  • When applying for a waiver, HHS and Treasury require the state to consider impacts of its proposed changes on both the overall state population and on different subgroups of vulnerable state residents, such as the low-income, elderly, and the chronically ill.
  • States may not use savings from other federal waivers – like Section 1115 demonstration waivers – to justify their 1332 waiver applications. For example, if a state proposed a change to its Medicaid program under a section 1115 waiver that could save $1 billion in federal spending, the state cannot use that $1 billion in savings to meet the deficit neutrality criteria for the 1332 waiver, even if submitting a coordinated application.

(Source: Katherine M. Iritani, Government Accountability Office, “Patient Protection and Affordable Care Act: Information on approval process for state innovation waivers,” August 2016)

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Hospitals are learning from the hotel and hospitality industry to improve patient experience

As the health care system continues its transformation, customer service and the patient experience are becoming increasingly important. Health systems are interested in improving patients’ perceptions of the care they receive, their interactions with hospital staff, and the hospital environment. Several startups have entered the market with products to help.

Docent Health, a Boston-based startup, is developing software and mobile applications to help health systems improve patient experience. While hospitals have long focused on the electronic health record, analytics, and ways to improve clinical care, Docent Health offers a technology platform to assist them in managing the nonclinical aspects of the patient experience. These include understanding the patient’s preferences, concerns, and goals to tailor the experience to the individual patient. One product the company offers is a “sentiment index” to capture patient satisfaction levels in real time, which may be more helpful than a survey done later.

Another company, Hospitality Quotient, offers services ranging from training hospital staff to feel more empathy for patients to a complete assessment of an organization’s culture with takeaways for building a stronger culture to improve patient experiences. Clockwise MD has an online tool for check-in and keeping patients informed of their expected wait time by text message. Finally, a company called Tagnos has a technology platform to handle hospital and health systems workflow and improved tracking of factors like room availability and supplies, to cut down on patient dissatisfaction when a room is not ready.

Analysis: Many factors are driving the trend toward investment in improving hospitality and patient experience: the need to stay competitive with other health systems, concern over nontraditional entrants into health care (such as retail clinics and telehealth firms), payment models that provide incentives for hospitals to improve patient experience, and the increasing influence of social media. In a recent Deloitte report, “The value of patient experience,” Deloitte researchers looked at several factors to determine how patient experience impacts health care organizations’ margins.

The researchers looked at scores from the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS), a publicly reported survey of patients’ perspectives of hospital care that looks at whether patients would recommend the facility to family and friends and nine different aspects of patient experience, including:

  • How well nurses and doctors communicate with patients
  • How responsive staff are
  • How well staff help patients manage pain
  • Whether key information is provided at discharge

After classifying hospitals as “excellent,” “moderate,” and “low” scorers with regard to patient experience, the researchers measured hospitals’ experience scores against their financial performance. The results showed a strong correlation between higher patient experience ratings and improved profitability. For example, between 2008 and 2014, hospitals with “excellent” overall patient experience ratings had a net margin of 4.7 percent, on average, compared with 1.8 percent for hospitals with “low” ratings. These findings also held true when the team ran a regression analysis to control for other factors that might contribute to hospitals’ profitability.

Given the market shift towards patient-centered care and renewed payer emphasis on patient experience as a core element of care quality, hospital and health system executives should consider investing in the tools and technologies necessary to better engage patients and enhance patient experience. Furthermore, although patient experience scores don’t always reflect clinical quality, these analyses suggest that the aspects of patient experience most closely associated with better care (such as communication with nurses) also have the strongest association with hospital and health system financial performance.

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Breaking Boundaries

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