Major Trends Shaping the Economics of Health Care
in a Time of Transformation
Author: Stephen L. Ondra, MD
Economic strain and social changes have resulted in an era of rapid and ongoing health care transformation in the United States and around the world. While a worldwide phenomenon, the United States is experiencing some of the most profound and disruptive changes due to the longstanding spending spiral. Health care spending in the U.S. now exceeds $3.5T, accounting for 18% of the national gross domestic product (GDP). By 2026, spending is expected to reach $5.7T and account for 20% of GDP.1,2 When compared to other comparably industrialized nations, the U.S. spends about a third more on health care services without a commensurate improvement in population health outcomes.
Using the common definition of health care value:
We see that the U.S. has high quality but low value health care system.
In response to the low value of the “health care product” both government and private sector care purchasers care have become increasingly assertive in pushing the system towards solutions that will improve the value received for the health care services for which they are paying. Out of necessity, government has taken a leading role in this effort. Over 60% of Americans now believe that access to reasonable and affordable health care is a fundamental human right that government is ultimately responsible to ensure—the cost of health care is increasingly carried by government.3 In fact, government programs now account for 40% of all health care coverage and 50% of all health care spending. This is expected to increase to 48% of coverage and 60% of all spending by 2026, assuming that there are no major changes in the system.4
The last major government health care action was the 2010 passage of the Patient Protection and Affordable Care Act (ACA) or Obamacare.5 In addition to increasing coverage to over 25 million previously uninsured Americans, the law profoundly changed the health insurance industry by legislative and regulatory tools that essentially eliminated underwriting of preexisting conditions and provided for the guaranteed issuance of insurance. The law also created the Center for Medicare and Medicaid Innovation (CMMI) to accelerate the shift from a volume driven fee-for-service (FFS) model to a more value-based reimbursement (VBR) model, by incentivizing participation in Accountable Care Organizations (ACO’s), Patient Centered Medical Homes (PCMH’s) and Bundled Payments for Care Improvement (BPCI). These models have predictably seen varying degrees of success and, based on the initial experience, are now being modified and improved in next generation models. In addition to government, private businesses are pushing the private payers that manage their programs to be ever more aggressive in creating higher value for services. As a result, we see large payers tying over 60% of their contracts to some form of value driven performance. While the minority of these programs have true downside performance risk today, there is a slow shift in that direction. For example, capitated global payments, which is expected to rise to 7.3% of all contracts by 2021.6
Unsatisfied with the speed of transformation, private purchasers are pushing even more aggressively in this direction. To speed this, a number of private companies are creating Center of Excellence (COE) relationships or are carving out payment bundles separate from the private payers that manage most of their benefit designs. As a result, private payers are also accelerating their shift to VBR models.7
Despite all this pressure, the difficulty of transition from the familiar and still dominant FFS business model, to a very different and unfamiliar VBR model results in change that is too slow to control costs in a timely way. As a result, care providers can expect increased downward pressure on FFS reimbursement, further shrinking already thin profit margins. This will increase stress in the provider sector and indirectly create a reason for providers to work more closely with private and public sector health care payers and purchasers to improve current VBR models and also develop new approaches to finally get to the critical mass needed to achieve a better quality, more consumer friendly and higher value health system.
We can also expect government to pass some form of major legislation in the next five to ten years. This is likely to build on the ACA, which has proved to be surprisingly durable, persevering despite multiple court challenges. A third challenge in the Supreme Court, ongoing at the time of this writing, is widely anticipated to once again uphold much of the ACA. A failure to do so would create a profound disruption in the health care system. Assuming the law is largely upheld, an expansion of coverage is likely at some point. This may well be by adding a public option or Medicare buy-in option, in turn expanding the role of government as the payer of most common and last resort.
In addition to reimbursement changes, technology is also beginning to transform the health care sector and delivery of care. The COVID-19 pandemic is one of the most profound sociologic phenomena in human history and it should be no surprise that its deep impact on health care delivery will persist long after the pandemic is brought under control. The delivery of virtual care through tele-health, remote patient monitoring and other tools were, by necessity, greatly accelerated and expanded due to the pandemic. This is not likely to return to baseline but rather combined with payment changes and other technology to catalyze even more transformation in the health care delivery model.
Improvements in data acquisition and monitoring are beginning to provide the raw materials needed for artificial intelligence (AI) to enter the health care space. While still in its infancy, AI is likely to rapidly enter the health care space, resulting in profound changes in the delivery and management of care—perhaps more than any technology has ever impacted health care or society as a whole.
All of this uncertainty, stress and change is very disruptive to business planning across the health sector and the practice of medicine. Yet, out of the seeming chaos and confusion, if one steps back there is a signal that can be found in all the noise and that can help in creating strategic and operational plans for long term success.
All this change means there will be winners and losers in the health care delivery space. To navigate this time successfully will require providers to be nimble and innovative. Investments in infrastructure should favor tools that can be used in the current dominant FFS model but can also be extensible in a way that will accommodate the emerging VBR models and new technology. Organizations must seek out experience with managing VBR models in areas of high impact, while keeping risk exposure small enough avoid serious bottom line damage, until the organization is prepared to identify and manage risk appropriately.
Lastly, to succeed in the emerging health care environment will require a scale that will allow access to large enough populations to wash out random variation risk and to also invest in the needed infrastructure. This may result in mergers and acquisitions, but there are also creative business alignments that can allow independent practices to collaborate and work together in safe harbors provided by regulatory relief that is beginning to emerge.
Change will continue and with it is both risk and opportunity. Success will favor the innovative and bold.
- CMS Office of the Actuary Report: Feb. 14, 2018
- Healthcare spending will hit 19.4% of GDP in the next decade, CMS projects: Meyer, Harris. Modern Healthcare, Feb. 20, 2019
- More Americans Say Government Should Ensure Healthcare Coverage. Bialik, K. Fact Tank. January 13, 2017
- The Federal Share of American Health Spending is Now Approaching 50%: Conover, Chris. Forbes, June 1, 2018
- The Uninsured and the ACA: A Primer – Key Facts about Health Insurance and the Uninsured amidst Changes to the Affordable Care Act. Garfield, Rachel. Orgera, Kendal. Damico, Anthony. The Kaiser Family Foundation. Jan 25, 2019
- Value-based health insurer contracts growing in number, but not risk adoption: Castellucci, Maria. Modern Healthcare, Aug 24, 2019
- Employers Accelerate Move to Value Based Care in 2018. Japsen B. Aug. 17, 2017