Healthcare after the ruling: Let the work continue

The Supreme Court’s decision to uphold the Affordable Care Act (ACA) means that the transformational changes already underway in the healthcare system will accelerate in three key areas: expanded access for individuals via health insurance exchanges and expanded Medicaid eligibility, where states consent; greater integration of care, and more affordable care. To keep up, health insurers, care providers, pharmaceutical firms and other healthcare companies need to take action.

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Healthcare after the ruling Let the work continue

Contacts

Beirut Gabriel Chahine Partner +961-1-985-655 gabriel.chahine @strategyand.pwc.com Berlin Peter Behner Partner +49-30-88705-841 peter.behner @strategyand.pwc.com

Chicago Gary Ahlquist Senior Partner +1-312-578-4708 gary.ahlquist @strategyand.pwc.com Minoo Javanmardian, Ph.D. Senior Partner +1-312-578-4712 minoo.javanmardian @strategyand.pwc.com Ashish Kaura Partner +1-312-578-4838 ashish.kaura @strategyand.pwc.com London Tobias Handschuh Partner +44-20-7393-3368 tobias.handschuh @strategyand.pwc.com

Mexico City Carlos Navarro Partner +52-55-9178-4209 c.navarro @strategyand.pwc.com New York Gil Irwin Senior Partner +1-212-551-6548 gil.irwin @strategyand.pwc.com Jack Topdjian Partner +1-212-551-6601 jack.topdjian @strategyand.pwc.com Joyjit Saha Choudhury Partner +1-212-551-6871 joyjit.sahachoudhury @strategyand.pwc.com Sundar Subramanian Partner +1-212-551-6651 sundar.subramanian @strategyand.pwc.com

San Francisco Thom Bales Partner +1-415-627-3371 thom.bales @strategyand.pwc.com Shanghai Sarah Butler Partner +86-21-2327-9800 sarah.butler @strategyand.pwc.com Tokyo Kenji Mitsui Partner +81-3-6757-8692 kenji.mitsui @strategyand.pwc.com

This report was originally published by Booz & Company in 2012.

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About the authors

Sanjay B. Saxena was formerly a partner with Booz & Company. Brett Spencer was formerly a principal with Booz & Company. Minoo Javanmardian, Ph.D., is a senior partner with Strategy& based in Chicago. She co-leads the firm’s North American payor practice, and specializes in strategy and strategy-based transformation for global healthcare clients in the payor and provider sectors, and at the intersection of those sectors. Ashish Kaura is a partner with Strategy& based in Chicago. He specializes in the development of growth strategies and new business models in response to market discontinuities for healthcare and health services companies.

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ACA upheld

The Supreme Court’s decision to uphold the Affordable Care Act (ACA) concludes more than two years of uncertainty and delay in the concerted effort needed to resolve the fundamental problems that threaten the viability of the U.S. healthcare system. Although future challenges will undoubtedly emerge in the form of ongoing legislative debate, the upcoming presidential election, and potential delays in the exchange implementation timeline, the transformational changes already under way will accelerate in three key areas: expanded access for individuals via health insurance exchanges and expanded Medicaid eligibility, where states consent; greater integration of care, and more affordable care. To keep up, health insurers, care providers, pharmaceutical firms, and other healthcare companies should take the following actions:

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Expanded access

Get ready fast for exchanges. Given the current progress and the amount of work yet to be done on the state-run insurance exchanges mandated by the ACA, we don’t expect them to pop up overnight. Nevertheless, states that have delayed the development of insurance exchanges will now either speed up their efforts to avoid federal control of their exchanges or, more likely, reconsider using the federal exchange option. Health plans have been preparing for the “Exchange Era” and the consumer and small group markets it will engender, but now they will need to move more quickly, especially as the specifics of the exchanges in their markets become clear. If not already under way, this shift will require that they prioritize the development of new capabilities aimed at generating insights into consumer and shopper behaviors, adherence to healthy behaviors, and enhancing customer experiences. Most provider groups, on the other hand, have not even begun to consider their exchange strategies and will need to do so now or risk losing out to more nimble competitors. Re-assess the likelihood of Medicaid expansion. ACA was set to grow the Medicaid population by 16 million in 2019, primarily by expanding eligibility to nonelderly adults below 133 percent of poverty level. However, now that the court has ruled that this expansion is up to the states, this growth will be highly market-dependent. States will weigh a number of factors in making their decisions, including budget impact, public perceptions, and political considerations. A thorough understanding of each state’s inclination and a state-specific plan of action for accessing managed Medicaid markets will be necessary. Nevertheless, health plans should continue to expect a strong shift toward managed care and sizable expansion in Medicaid rolls over time. Our initial scenario analysis indicates that this market will still expand by at least 8 million people by 2019. In states that elect not to expand Medicaid, many patients will remain uninsured, because the penalties are too weak and the likelihood of enforcement will be inadequate to persuade very poor individuals to
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purchase coverage. As a result, providers in these markets will have a continuing need for charity care and disproportionate share payment support. They will have to work with state officials to ensure that the financial trade-offs are understood. Prepare for the rise of the healthcare consumer. The Supreme Court ruling ensures that consumerism, which is being driven by ever greater access to healthcare information and individuals having more financial responsibility for the cost of their care, especially outpatient and elective services, will continue to be an important accelerant to change. Consumers’ ability to vote with their feet in a world of guaranteed issue and renewal will raise the bar on service and delivery across the board. Providers and payors will need to understand healthcare consumers and cater to their specific needs in a simple, empathetic manner to engender lifetime loyalty. This shift will have a significant impact on how care is delivered. Retail and virtual care will continue to expand as important care-delivery models, for several reasons: They are the most efficient means for delivering high volume and easily standardized services, they offer ease of access, and there is increasing acceptance of mid-level providers and growing comfort with online interactions by both providers and patients. Health systems will join the fray in this market, competing with pharmacy and retail outlets. And so will health plans, which will use their growing retail fronts to vie for this business, especially in the wellness market. Consumer-centered collaboration across sectors, including with pharmaceutical and medical products companies, will be critical for tailoring new products to patient needs, as well as for engaging consumers in ways that support good healthcare choices and improved outcomes.

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Greater integration of care

Prepare to roll out new payment and care models. The new payment and care coordination models that many payors and providers have been piloting the past few years, such as bundled payments that are less dependent on fee for service, are going to become the new norm for a growing number of healthcare purchases. This shift will be most rapid for discrete, episodic categories of care, such as relatively standardized surgeries like hip replacements. But as health systems get more comfortable assessing and managing such risks, they will extend the approach to more population-based reimbursements, such as those proposed in Accountable Care Organizations (ACOs). Implementation remains a challenge, especially during the transition period when neither the level of risk being assumed nor the payment for services is optimal. Nevertheless, it is time to roll out these models, which focus efforts on managing total cost and outcomes. Step up efforts to create a more integrated healthcare system. The shift away from the traditional fee-for-service model also means that hospital systems will move more quickly into clinically integrated networks that are more capable of risk management and optimizing interventions across the continuum of care. Notwithstanding the significant outlays required to subsidize physician incomes, health systems will have to participate in the ongoing physician “land grab” by creating partnerships and/or acquiring physician groups and developing the IT infrastructure necessary to support risk-based decision making and outcome-driven clinical practice. Hospitals that are unable to build integrated delivery systems on their own will be forced to partner or merge with larger systems to achieve the necessary scale and capabilities to cover the entire continuum of care. In contrast, some well-integrated health systems could elect to effectively disintermediate health plans by contracting directly with large, self-insured employers and/or offering local provider-branded products on the new health insurance exchanges. Health plans should begin to form integrated networks with health systems, such as ACOs, on a region-by-region basis, often on a virtual
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basis, and occasionally as a capital partner. In some cases, health plans may choose to acquire select delivery system assets. These integrated partnerships will require high levels of involvement by multiple stakeholders throughout the healthcare system — physicians, hospitals, health systems, health plans, pharmaceutical and medical product companies, employers, patients, and retailers, who will have to work in a concerted, aligned manner to move the dial on affordability and outcomes. Within markets, smaller physician practices will need to continue to organize into larger integrated groups. When there are no nearby hospital systems to partner with, physicians should push forward on their own, forming large groups capable of sharing risk. These groups will use their size to purchase capacity from hospital systems as needed, and they could make attractive partners for payors, although some may elect to use their size as leverage for greater reimbursement.

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More affordable care

Accelerate cost-reduction efforts. Faced with the ACA’s constraints on underwriting and the medical loss ratio caps, many insurers have already begun taking steps to streamline and rationalize their cost structures. Although many of these efforts have focused on administrative costs, managing medical costs is also critical to both competing on exchanges and retaining existing employer group business. Addressing affordability for Medicaid and Medicare segments is also important, given the fiscal challenges facing the states and the federal government. In their efforts to control costs, Medicare and commercial insurers will help drive quality and consistency into the healthcare system. They are already limiting or eliminating payment for avoidable re-admissions and hospital-acquired complications, and they are scrutinizing unnecessary variation in care patterns. These changes alone will cost hospital systems more than 5 percent of their historical revenue base and will force care providers to adopt the quality practices that are now commonplace in other industries. Facing the prospect of declining revenue, hospital and health systems will have to pursue significant cost reduction by lowering their overall cost structure, right-sizing their asset bases, and variabilizing ongoing costs. Scale will become increasingly important as a means of optimizing basic functions, such as revenue cycle and procurement. In addition, health systems will acquire the assets and capabilities needed to shift their focus from inpatient to outpatient modes of care. These strategic imperatives ensure that hospitals will continue to evolve into clinically integrated health systems, which will be well positioned to tolerate risk exposure at the episodic and population levels — a substantial advantage as new payment models that are less dependent on fee for service continue to spread. Begin designing care models to serve low-reimbursement patient segments. Care-delivery innovation must be pursued because fundamentally new models will be needed to serve the large, low-reimbursement Medicaid and exchange populations that are likely to represent as much as
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25 percent of the healthcare markets in the coming years. These systems will have to be transformative rather than evolutionary in nature and will have to rely less on traditional one-on-one physician care and more on virtual care, group sessions, and mid-level providers. Further, new competition will likely emerge in these markets, including retailers, pharmacy benefit managers, and other nontraditional players. To achieve the necessary efficiency, greater collaboration among health plans, hospitals, health systems, physicians, and product and service providers (e.g., pharma, medical products, and lab services) will be needed than we have seen in the past.

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Onward

This transition will not be easy. We anticipate that payors and providers will continue to seek each other’s support as they find the best ways to accomplish change. New skills, capabilities, forms of organization, culture and — not least — new capital will be required. As is always the case, the market will decide the final structure of collaboration and integration. The affirmation of the Affordable Care Act by the highest court in the land isn’t just a confirmation of its legality, it is a reminder that the trends that gave rise to reform in the first place — insufficient access, fragmented care, and deteriorating affordability — remain as compelling as ever. It also clarified the future of healthcare and gave direction to new and ongoing efforts to build a sustainable healthcare system. Now, let the work continue.

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This report was originally published by Booz & Company in 2012.

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