The Economist recently published a report on the cost impact of healthcare reform in the US.
The data shows that the fundamental idea of bending the cost curve by changing the way healthcare is reimbursed — moving from a fee-for-service to a fee-for-outcomes — is actually working. Hospitals are actually doing fewer unnecessary tests than they previously did. According to the report, before Obamacare, hospitals did as many tests and procedures as they could, because that’s how they made money.
Now that the focus is on patient outcomes — keeping patients out of the hospital and feeling better after they’ve been discharged — costs are going down. Bundled payments for procedures is limiting out-of-control expense growth.
Whether you agree with the Affordable Healthcare Act or not, it’s hard to argue with the data. And what’s really interesting to me is how it shows what can happen in the private sector when you change the rules just a little bit.
The Train Has Left the Station
Regardless of what happens in the Supreme Court in June, in large part, the train has left the station. The healthcare industry has responded by saying, “Okay, fine. We always knew this was kind of the right way to do things, but the system was never organized in a way for us to make money that way. Now that the ground rules have changed and it’s clear how we get reimbursed, we’ll adjust.”
Over the last couple of years, we’ve seen significant, wholesale changes on the provider side, particularly in large integrated hospital systems (IDNs/ACOs) and in health insurance. As lines blur and health systems begin taking on risk, leadership is getting on board and beginning to align their businesses to the ways in which the rules have changed, and it’s having a big impact.
It’s very promising that with another seven or eight million people now insured, the growth rate of healthcare costs is beginning to slow down.
Modest Changes, Big Impact
We’re seeing these changes because of modest changes in the rules. We didn’t completely overhaul the health insurance system or go to a single-payer plan. We made a few critical changes: individual mandate, removing restrictions on pre-existing conditions, premium subsidies, and reimbursement for keeping people well, not just doing procedures. All of these changes have had a significant downstream impact on how healthcare is now delivered and paid for.
Anytime there is a change like this, it’s a two-edged sword. It’s both a threat and an opportunity. It’s certainly a threat to companies who can’t change or who are unwilling to change, but it’s also an opportunity.
The Two-Edged Sword: Threat and Opportunity
For example, limits to reimbursement for 30-day CHF (congestive heart failure) readmissions is an initial threat to hospitals. They simply won’t get paid if the patient shows up again within a month for the same problem. So now hospitals must focus on maintaining post-discharge health. But that’s a good thing, right? And it’s a good long-term investment, because hospitals can reduce their costs by keeping people out of the hospital. So they’re realizing there are other ways to make money in this environment.
What’s instructive about Obamacare is that it didn’t just say, “Okay, you are now mandated to keep people well.” That’s like pushing on a string – it’s hard to do. But if you say, “You know what, we’re not going to pay you for 30-day readmission,” then suddenly there is an upstream effect. Hospital management and healthcare companies are going to start figuring out how to keep people well so they can avoid being penalized.
The upstream policy change of how someone’s going to get paid significantly affected how care is mandated and delivered downstream.
The Challenge for Pharma
The challenge for pharma is that it’s the one health sector that has yet to be seriously challenged by an outcomes mandate. Yes, the FDA looks hard at clinical effectiveness, but hospitals and providers now have measures for actual outcomes. Until now, pharma has pretty much operated within the framework of marketing-driven outcomes; if a drug doesn’t work, doctors aren’t going to prescribe it.
Increasingly, there will be head-to-head studies and pharma will need to able to demonstrate clear clinical outcomes for products, particularly the high-priced ones, in order to be reimbursed. Payers are not going to reimburse for very expensive drugs unless pharma can definitively demonstrate outcomes commensurate with their price.
When that happens, there will be an immediate impact on overall pricing and ultimately financial performance for pharma. It will sharpen the business environment for the industry because we are going to have to focus on more than equivalent efficacy. The industry will have to really concentrate on whether products are making significant, measurable impacts and if those impacts justify the price we’re charging.
So it is a double-edged sword for pharma, too.
Is It a Threat or Opportunity?
It’s a threat for companies that don’t have differentiated products. But it’s also a huge opportunity for those innovative companies that are already headed down the path of value differentiation and are playing by the new rules.