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March 23, 2011 Dear Fellow Consumers and Providers of Healthcare Products and Services: TMG and our predecessor organizations have now spent fourteen years actively helping healthcare and oil and gas businesses with a variety of business issues ranging from strategic planning to the execution of new business development plans. More recently, we have added new consumer support capabilities in an effort to bridge the gap between businesses and consumers, fostering better alignment, communication, and outcomes. We posted the 2010 Director’s Message immediately before the passage of the Affordable Care Act so the 2011 comments reflect the situation post-passage. The format from last year, where we retained the 2009 comments was useful in seeing how things have changed so once again we retained 2009 and 2010 in addition to the new 2011 comments. I hope this format adds another dimension when looking at how the playing field has changed over the last three years. In spite of some dramatic legislative changes, you may find that many key strategic issues or problems remain unresolved and some new ones have been introduced. 2009: Healthcare is, and will remain, one of the top three most significant domestic issues in the U.S. for the foreseeable future. 2010: Healthcare remains one of the top three domestic issues; and has become the top political issue. U.S. healthcare expenditures will continue to increase as a percentage of our total economy as demand for healthcare services increases with our rapidly growing and aging population. Demographic studies indicate that at least 12 to 13% of Americans are 65 or older and that percentage will increase by about 1% every five years. The U.S. population just passed the 300 million mark and we are projected to hit 400 million by 2043. The political effort to reform healthcare delivery and financing has been reduced to a piecemeal effort to pass selected reforms but even these efforts will find substantial opposition. Consumers have become much more educated on healthcare issues and will demand cost controlling measures that do not impact quality or access to care. Providers recognize that without additional resources the delivery system cannot keep up with demand, and the risks associated with changing prospects for legislative mandates will continue to suppress business planning and investment until reform legislation is actually passed. 2011: For many of the same reasons, after two full years of debate and legislative action, healthcare reform is still a top five domestic issue as support declines for the Affordable Care Act. Now that comprehensive federal healthcare reform legislation has passed, the debate over its costs and implementation has actually gained momentum. Costs in the U.S. healthcare delivery system continue to rise and due to increasing budgetary shortfalls in the public sector, downward pressure on provider reimbursement continues in spite of a chorus of alternate site providers claiming there is no profit left in some services. In order to accommodate a more restrictive public system, and government mandates such as the interoperable EHR, providers are under unprecedented financial pressure that will be reflected in increasing usual and customary charges for products and services provided to patients with private insurance. 2009: The new Obama healthcare team will change the way the healthcare system is organized and financed before the end of their administration. 2010: The ambitious goals of the new administration remain in spite of failures to pass sweeping healthcare reforms. Regardless of the possible legislative defeat of proposed sweeping reforms, including discarding government-run healthcare, the new administration and Congress will continue to pursue a long term solution for universal coverage that is similar to the way Medicare currently works with some significant new restrictions. The solution employs the "Medical Home" concept which is very similar to the way a health maintenance organization (HMO) requires every insured person to have a gatekeeper, your primary care physician (family doctor). Your "Medical Home" will be at your primary care doctor's office and he/she will decide if and when you can access other more expensive healthcare services such as the services of a specialist. Even without a new government-run option, we should still watch for attempts toward the full implementation of the Medical Home in Medicare and Medicaid. As a practical matter, if reimbursement to Medicare and Medicaid providers continues to be reduced, the shortage of participating doctors will be exacerbated; reducing access to care for beneficiaries, and making a gatekeeper model an impractical solution unless alternative physician assistant or nurse practitioner roles are elevated to gatekeeper status. 2011: Assuming full implementation by 2014, the new federal healthcare program will institutionalize the gatekeeper model as the primary mechanism for public care delivery. Although just about anyone within the healthcare industry is familiar with gatekeeper models and their pros and cons, most Americans remain uneducated about the reality of this approach. Unless interventions occur in the meantime, by 2014, the idea of a “Medical Home” or “Patient Centered Medical Home” (PCMH) will become well-known to Americans. Young Americans in particular may have little experience with the HMO model although it is over forty years old. In addition, the pitfalls of a gatekeeper system have less impact on them compared to Baby Boomers and the elderly. The combination of limited access to care, an aging population, and shortages of physicians and nurses creates a problematic scenario for Americans with expectations of their current level of quality and access along with lower costs. The potential addition of capitated reimbursement for providers contributes to future problems with access as providers are forced to spend less time with each patient. 2009: Healthcare providers are embracing the opportunity to collaborate with informed consumers about care options. 2010: The drive toward consumerism and more consumer-centric business models continues to be a priority for providers. Both payers (health plans) and providers (doctors, hospitals, homecare) are investing in ways to become more engaged with consumers and their decision making. It makes perfect sense that they should. Making poor choices adds risk for the consumer, the provider, and the payer. The old mantra of “just do what your doctor tells you” has been expanded to “take what your doctor advises in conjunction with other medical advice and make a decision that’s best for you”. This new holistic decision process recognizes that consumer healthcare decisions are impacted by many factors in addition to their health status. Most major health plans now offer a service for coaching their insureds through the maze of benefits and healthcare options and consumers are also becoming more aware of financial considerations and treatment alternatives. TMG strongly believes that we have entered a new age of the educated, empowered consumer. In 2009, politicians and regulators have also started acknowledging the importance of increased consumerism in creating new, market-driven efficiencies in the healthcare delivery system. 2011: A fascinating paradox was interjected into the U.S. healthcare system in 2010. The growth in educated, informed consumers is now in opposition to federal healthcare policy which is based on restricted access and regulation of choices. This fundamental, base-level struggle has to be resolved although right now, the resolution is up in the air. Meanwhile, providers continue to recognize the emergence of the empowered healthcare consumer as Americans, for a variety of reasons, embrace higher deductible and catastrophic-only type coverage. As financial responsibility increases, consumerism will also increase. The support for this trend should come in the form of education for consumers, and plain language explanations of how the healthcare system works. Whether this growing trend is preempted somehow by a government seeking to intervene to control costs remains to be seen. It is likely, based on our history as a country, that Americans, whether individually or in businesses, will take steps to seize control of healthcare choices and therefore healthcare costs. 2009: Health plans have witnessed a slowdown in the rate of premium increases and government programs, particularly Medicare, are approaching a crisis stage in their ability to fund current levels of coverage. 2010: Private health plans will benefit from an open market but legislation that includes coverage mandates such as pre-existing conditions, if passed, will squeeze profitability, leading to upward pressure on premiums and downward pressure on provider reimbursement. Similarly, the funding crisis with Medicare and Medicaid will continue to worsen; trickling down to continued reductions in provider reimbursement along with new financial burdens on beneficiaries. The old expression that “you know what flows downhill” certainly applies to healthcare. When the federal or state governments create mandates and financially squeeze health plans, or government plan deficits increase, in an effort to control delivery system costs the conventional response is for the plans to squeeze reimbursements to service providers while also limiting benefits to insureds. This is a predictable pattern which in turn depresses supplier prices and payments to medical manufacturers and distributors who depend on providers for their business, producing the unintended consequence of driving increased utilization of low cost imported products. The idea that a health plan or a provider will simply sit there and absorb lower profitability without taking corrective actions is just unrealistic. There’s a little highlighted additional kicker in the financial equation called the government mandate that new, nationwide information technologies be incorporated as the long term mechanism for revolutionizing healthcare service delivery. These ambitious goals specifying a universal information technology platform are financially problematic in a financially strapped industry; intuitively infeasible unless taxpayers are called on to pay for the investment required. The rhetoric from legislators and regulators regarding “advancements in healthcare technology” confuses information technology with patient care technology. The latter has a real prospect of changing the way healthcare is delivered and lowering costs over the long run while adopting new information technology represents a significant short term provider cost increase which directly translates to higher delivery and premium costs. 2011: The financial realities faced by healthcare providers are finally becoming public knowledge to a limited degree. The reality of not being accepted as a patient; or not being able to find a doctor or one you would choose; the increased cost of new drugs and equipment; or increasing financial responsibility are all waking up Americans to the reality that healthcare businesses are struggling to maintain a profit. The tired images of all doctors living in mansions and driving expensive cars are disappearing, and instead we’re hearing stories of physicians, after many years of training, walking away from medicine altogether because they can’t practice and also have a successful business. For these providers, as costs of products and regulatory compliance continue to go up, and reimbursements for services are lowered in some sectors, an unsustainable financial squeeze continues and shows up to the public in the form of closed practices and medical suppliers going out of business. Globally, this pressure is also forcing more services and research to move overseas to countries with lower costs and restrictions. 2009: Healthcare options will continue to increase and mostly through the addition of new, more expensive high technology products and services. 2010: Dramatic new patient care technology options are becoming available; revolutionizing care delivery and outcomes. Technologies that are revolutionizing healthcare come at a cost that has to be recovered by the system. Successful technologies have a return on investment for the system, the provider, and the consumer by making care more efficient, more effective (less complications or follow-up care required), or by enabling care in a less costly setting. For instance, given the personnel and the technology to provide homecare for more acutely ill patients, more expensive institutional care is reduced or eliminated in some cases; instead bringing high powered institution-based services directly to the patient. TMG believes that seamless care (from hospital to home) with an increased emphasis on homecare is gaining rapid acceptance, enabled by new technology in the home. There will always be procedures and conditions that mandate institutional care but to the extent we can move more routine and subacute care to more favorable, less expensive settings, we will also see improved medical outcomes and overall improved health and well-being of patients and their families. For this trend to develop on a large scale, current research and development efforts in the area of telemonitoring and telemedicine need to be further integrated with the vast expertise found at our leading healthcare institutions. 2011: Breakthrough advancements to patient care technology continue to occur in ways that significantly improve outcomes and in some cases, lower costs. The combination of non-invasive inpatient procedures and increasing numbers of alternate site treatments are having a significant impact on outcomes and costs. Sorting out the difference between “good” advancements in healthcare and ones that simply add cost remains one of the most difficult concepts for consumers to understand. For instance, many new, non-invasive treatments that avoid surgery and long hospital stays start paying for themselves the day they become available. In other words, there is an immediate return on investment realized by all parties involved, including the consumer. Other technology solutions also represent advancements but some have a more indirect or peripheral role and tend to just add to costs. At last, there is also a meaningful discussion going on about how to move more care to alternate sites, including homecare. Telemedicine initiatives continue to mature, and to the extent patients who otherwise would have been hospitalized are treated at home, this advancement is exemplary of one way to dramatically lower healthcare costs. Solutions like this are the foundation for lowering costs while actually enhancing actual and perceived quality. 2009: Healthcare is becoming more global with treatment options available around the world. 2010: The globalization of healthcare continues and will become an increasing influence on the U.S. healthcare delivery system. Consumers need to be aware that the scope of options available for care has expanded tremendously in the last decade. Whereas health plans offered limited provider panels 20 years ago, many have started to offer global options for major procedures involving traveling to other countries. Many caveats are involved since other countries, while in a position to provide less expensive care, may or may not exercise the same standards as U.S. providers. The logistics and associated costs of going overseas and taking family members with you can make it a poor choice for many patients yet affordability may override these considerations in many cases for both health plans and consumers. The trend toward investment by U.S. companies in facilities, programs, and collaborative efforts outside the U.S. continues to increase, leading to increasing promotion and utilization of offshore medical services by Americans. Part of this trend will be increased focus on collaborative research programs with institutions in other countries, taking advantage of less restrictive and less costly clinical research environments compared to the U.S. 2011: As the business and healthcare environment in the U.S. becomes more restrictive, the pace of the migration of healthcare services and research to other countries continues to increase. Nothing has happened to stem the tide of medical tourists looking for lower cost procedures and research programs looking for venues where products and procedures can be developed more quickly and at a lower cost. This leaking of economic activity from the U.S. unfortunately further undermines the stability of our domestic delivery system. Down the road, as more intellectual property is lost, a much more dramatic effect could be realized. It is the recognition that we still have a world class healthcare system that prevents this leaking from being more damaging but given enough time without a reversal, this reality could change. 2009: The “retailization” of basic healthcare is underway. 2010: The explosion in non-traditional healthcare delivery methods and settings is accelerating. Consumers need to be aware that many products and services we would think of as reserved for a family doctor’s office or a medical clinic are now commonly offered in pharmacies and grocery stores. The consumer’s interest in accessing more routine services immediately, even if not provided by an M.D., combined with a trend toward increased financial responsibility (savings accounts and high deductible health plans), is driving this type of consumerism. Freestanding urgent care centers have been around for decades, and are experiencing a revival, but one-stop shopping that includes routine medical care is the wave of the future. Prescription drugs are now commonly delivered to the home or supplied by mail through large pharmacy benefit managers and some retailers. Retailization adds risk for consumers because there is less access to professional advice to go along with their decision making but this trend, married with the trend toward consumer involvement in healthcare decision-making, produces one aspect of an overall solution for controlling healthcare costs. 2011: The retailization of routine healthcare continues to grow and represents a useful alternate site for consumers to find low cost care. There are continuing cost and access benefits to the availability of primary care services in retail locations but there are some additional hidden benefits. As opposed to showing up at an emergency room or a physician’s office or clinic for minor urgent care, retail clinics add to the development of more informed healthcare consumers. Competition between clinics spawns a consumer mentality in the public in deciding where to spend their money in order to get the best service and the lowest cost. These locations also promote the use of PAs and pharmacists as caregivers for routine primary care which facilitates the broadening of disciplines used on the front lines of the delivery system. Given these retail outlets are successful in providing quality services, they should become a fixture in a new, more disseminated delivery system. 2009: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) and the subsequent Deficit Reduction Act of 2005 (DRA) mandated many changes in Medicare and Medicaid programs which continue to be implemented. 2010: Other than Medicare Part D (prescription drugs), which will be preserved and improved, we will see a complete revisiting of the strategies and approaches mandated by prior healthcare legislation in response to new financial and political pressures. The financial reality facing the U.S. healthcare delivery system is that costs are increasingly misaligned with the ability of the marketplace (businesses and individuals) to pay in a depressed economic environment that may last for the next several years. Further, taxpayer-funded Medicare and Medicaid programs are financially unsustainable with little prospect at the federal or state level of increasing taxes to cover increasing financial shortfalls. Combine these factors with a wave of essentially unfunded technology adoption (federal government is providing some funding for IT adoption) mandates and increasing consumer dissatisfaction with reduced access and benefits, and something has to change in order to realign the interests of all the parties involved TMG has developed a conceptual model illustrating this problem and how realignment could be achieved over time. We believe this approach to realignment is unavoidable and a significant effort toward realignment has to be initiated within the next two to three years. Please contact Mark Riddell at mriddell@marrellgroup.com if you have ideas, comments, or questions regarding system realignment. 2011: The sustainability of taxpayer-funded health plans remains an unresolved issue even as we move to implement a brand new program. The debate over the Affordable Care Act involved the claim that it would be budget neutral and ultimately a cost-saver for America, in part due to planned savings over time of $500 billion in Medicare. Since the debate, actuarial evidence has revealed that the picture is somewhat less attractive in the near and long terms. Additionally, the new legislation moves away from MA plans which had the potential to privatize a significant portion of the Medicare population while offering better benefits to participants. Unfortunately, most of the current Medicare cost control initiatives aren’t of sufficient scope and impact to materially save the program without also having much more limited access to care and/or premium increases. Most analysts anticipate the stated $500 billion in Medicare savings is not feasible. Whether or not the most recent reform bill survives in its current form, the cost of all taxpayer-funded health plans will have to be reined in over the next decade. The debate has to be centered on how to create a solution that achieves this goal in a way that is gradual and friendly to providers and consumers, enabling them to make adjustments over time. In conclusion, 2011 and 2012 have turned into pivotal years for determining the future of healthcare in America. Unfortunately, even though the Affordable Care Act has passed and rulemaking is underway, the level of uncertainty about the future course of the system may be at an all-time high. This uncertainty is derived from the possibility of more course corrections and a host of unintended consequences that always accompany government programs of this magnitude. Uncertainty by itself adds cost to all levels of the system as investments in service capabilities and personnel remain tenuous and multiple contingencies have to be built into strategic plans. One of the key factors for improving the health of the healthcare delivery system itself is stability and clarity. Under those conditions, where reimbursement and regulatory changes slow to a manageable pace, providers can refocus their efforts on patient care and invest in improvements to patient care. Along with that focus comes more efficiency which adds downward pressure on the cost of healthcare. At the root of a long term, sustainable healthcare solution has to be a more informed and empowered consumer. Consumers have been taking increased financial responsibility for their healthcare decisions which is beginning an evolution away from dependence on third party payers. Provided that government restrictions don’t prevent active consumerism, we should see gradually increasing evidence of the positive impact of consumer engagement. Providers should continue to increase their focus on doing business with increasingly informed consumers who want to participate in decision-making. If we respond appropriately with more consumer education and decision support tools, all parties will benefit. It is this consumer-based model that has the potential to moderate healthcare costs while retaining access and continued improvements in quality and technology. TMG is actively analyzing these trends and finding new ways to support providers and consumers so that collaboration between empowered consumers and consumer-friendly providers becomes the new paradigm. Regards, Mark R. Riddell |