The FTC and the Alphabet Soup Antidote –
An Information Driven Structural Revolution
October 15, 2012
My friend Pete is a senior player in a major regional academic medical center, and a terrific raconteur. He was hilarious in his recounting to a group of pals, the horror of trying to put together a small merger a couple of years ago with another not-for-profit hospital across the state in which he operates. The essence of the problem – the FTC was defining competition in such a fashion that no deal could ever be possible, and after years of work and millions of dollars in expenses, his deal was dead. The story was funny, but the telling was understandably bitter. Pete lived to fight another day and another way – and he just won big.
He did a deep dive into the new alphabet soup of alignment and compensation structures, and put together a data driven, ACO centric series of deals that encompasses 10x the geography and population of the original FDA blocked merger. This is very cool – but particularly so, as he did the whole thing in a matter of months, and the money that he saved on lawyers and accountants is the down payment to build a huge new data center to inform the whole thing. Better still, this should allow his organization to reap cost savings and take advantage of purchasing and operational synergies in a way that the simple merger never would have.
The rate of enforcement actions by the FTC in the healthcare service industry has more than doubled over the last decade – largely targeted at traditional corporate style combinations. As hospitals have responded to increasing costs by seeking cost savings in combination, the FTC, DOJ and state authorities have stepped up vigilance to prevent combinations which could lead to anti-competitive pricing. In local-market M&A transactions in healthcare services pose a dilemma; the potential for anti-competitive pricing, is clearly offset in reality by cost savings potential – savings that the system desperately needs. The traditional corporate transactions and corresponding anti-trust regulations are really not designed to bridge this conundrum.
This anti-trust vigilance has spilled over into the not-for-profit arena following the post-acquisition study of the 1999 Sutter Health acquisition of Summit Hospital in Oakland, California. The California Attorney General sued to block the merger, only to have an injunction overturned by a judicial ruling. A subsequent study – two years later – indicated that the consolidation had resulted in price increases of 72%, and the die was cast – not-for-profit mergers were absolutely fair game – and my friend Pete was an unsuspecting “beneficiary” in his failed merger with another non-profit.
From revenue to cost/information driven solutions
The dominance of fee-for-service pricing mechanisms in recent years has driven revenue model dominated business solutions in healthcare. I know that for at least the last 10-15 years, my friend Pete has fixed all of his budgetary problems with a simple formula – charge more money. Pete’s experience has been standard industry practice for at least the last decade, as illustrated by the chart below.
Not too surprisingly, this run up in costs has resulted in a system with a fair amount of fat – particularly around overhead associated with software and systems for “coding enhancement” – estimated to be upwards of 15% of total system costs. Additional overhead crept into the system as combined entities – optimized for an HMO environment in the’80’s and 90’s – disintegrated into individual units offering specialty care solutions. These models were vastly more efficient than the in-hospital services that they replaced – but because they did not reduce hospital capacity, perversely overall systems overheads increased. As an example, the rise of ASC’s and related specialty hospitals has further reduced overall system utilization rates – recently exacerbated by the decline in utilization driven by a weak economy and the widespread adoption of high deductible health insurance.
The insurance industry countered this trend by continuously dropping rates to fractionated specialty care providers – creating yawning gaps between prices being paid to independent providers and those paid to hospitals – routinely as much as 2X, as recently noted in the Wall Street Journal, August 27,2012, Same Doctor Visit, Double the Cost. Hospitals successfully defended their higher reimbursement, based on the somewhat strained logic – “we provide a unique and necessary benefit for society, those specialty shops have stolen our most profitable business, therefore you must subsidize our higher overheads. As you might expect, this pricing differential has provided the impetus for a land-rush of physician practice acquisitions by hospitals.
My friend Pete merged his physician clinic with his hospital years ago for this very reason, and has enjoyed higher rates of billing for the same services ever since. Not too surprisingly, a large group of regulatory and consumer advocacy groups have been screaming bloody murder about this recently, and these deals are getting harder to do without some larger and explicit purpose as articulated and encouraged by the Affordable Care Act (ObamaCare).
ACA and Accountability for Quality
Dr. Elliott Fisher, Director of the Center for Health Policy Research at Dartmouth Medical School – first coined the term Accountable Care Organization in 2006 during a discussion at a public meeting of the Medicare Payment Advisory Commission. The concept is actually quite clever – if exceedingly difficult to translate from concept to reality: 1) ACO’s are Provider-led organizations with a strong base of primary care that are collectively accountable for quality and total per capita costs across the full continuum of care for a population of patients, 2) Payments linked to quality improvements that also reduce overall costs; and, 3) Reliable and progressively more sophisticated performance measurement, to support improvement and provide confidence that savings are achieved through improvements in care. Most importantly, the success of the ACO model in fostering clinical excellence while simultaneously controlling costs depends on its ability to “incentivize hospitals, physicians, post-acute care facilities, and other providers involved to form linkages and facilitate coordination of care delivery.”
Let’s see, we’ve gone from a policy which specifically discourages, and has the power to block “linkages”, to one which actively promoted them. More importantly, the system went full-throttle in support of these innovations, including Bundled Payments (BPI) Co-management Agreements (CMA’s) and a raft of additional acronyms that would have done FDR proud – this is a revolution being done with prototypes, and they are coming thick and fast. We have an alphabet soup of new structures, and a world of new opportunities.
From the point of view of an old M&A hand, what we have is: 1) The ability to form novel combinations driven from physician organizations – medical practices – where value is created by documented care improvement, and cost reductions driven by documented use of best practices – evidence based pathways and the like, 2) The ability to form “cross-border” arrangements between physicians and hospitals that never existed previously, offering the unusual prospect of lower costs and better care, and 3) The wondrously gentle hand of the DOJ which is not requiring prior approval of these combinations and is offering all forms of safe harbors and the like.
The devil lies in the details in these structures – like all healthcare transactions – but with one additional caveat. These systems need information and quality improvement capabilities in scale, and the more complex the deal, the more specialized the information and quality systems. Doing this job properly requires systems that do not exist today from any vendor, targeted at cost reduction and quality improvement – executed across disparate provider groups with incompatible data and management systems.
These are radically different systems requirements than almost all existing medical management systems, which are targeted at three fundamental characteristics espoused by my old friend Jock – a longtime physician and infomatician: 1) Save time, 2) Make money, and 3) Stay out of jail.
We have selected oncology as perhaps the most appealing clinical target – based on the three key attributes of 1) Clinical and cost benefits from combined disparate clinician groups, 2) Defined clinical pathways and defined best practices to inform clinical activities post combination, and 3) Opportunities to dramatically improve patient experience through combination and advanced information management. The trouble is: 1) These are difficult and time consuming transactions to structure with multiple parties, 2) Payer involvement is critical, and 3) Advanced information systems are a requirement to make this work – and we need to build them.
Is it worth the trouble?
Yes – for three reasons. First, from a financial point of view, we are fairly certain that we can take 10-15% of the cost out of a combined oncology care platform, and do it fairly quickly. There is a fair amount of “secret sauce” in pulling this off – but it can be done.
Second, we can actually improve the patient care experience. This needs to be the central quality objective of the project.
Finally, done right this is both a quality management system and can facilitate rapid learning – regarding care, cost, and satisfaction. Remember the data should be a treasure trove of information and value.
What’s Different this time?
Structured information about cost and quality – the answer is really that simple. There has been an explosion of structured data used in clinical care in the last 5 years – most famously in the electronic medical record (EMR). While these systems are truly atavistic by modern IT system standards – lacking even the most modest of decent data field definition standards – they are vastly better than what existed even 10 years ago. Better yet, the best of these systems are moving to the cloud – bringing with them the promise of continuous improvement and uniform versioning inherent in such systems.
The wild proliferation of incompatible data systems between and within medical systems has resulted in a commensurate explosion in the demand for gigantic data warehouses – both wildly inefficient and grossly over-powered for most of the problems actually faced by medical quality professionals – tantamount to shooting a fly with a cannon. Cloud based solutions are actually very well suited to address these issues, particularly when coupled with rules engines, and fed data from disparate sources.
Like in the pharmacy industry, information in oncology care is changing into a control mechanism – integrating patient, payer and provider. This is a fundamentally different configuration than ever before – and it will drive changes in care delivery and ultimately lead to tremendous industry consolidation. Stay tuned.