The New Ideas from Kaufman Hall podcast series investigates emerging and unexpected trends in healthcare and beyond, featuring Kaufman Hall experts and guests from health systems, academia and related disciplines.
Season 1, Episode 1 - All the Way Up to the Hospital’s Front Door: Understanding A New Era of Vertical Integration
Whether it’s United Health’s Optum division or the CVS-Aetna merger, vertical integration in healthcare is taking off, as companies look for new ways to manage costs and improve the health of their patients or members.
But which strategies, partnerships or organizational structures show the most promise for truly creating value? How should companies determine which patient populations or conditions to target for new services or greater integration? And what about the legacy hospitals and health systems that are strikingly absent from many of the new entrants’ business models?
On this episode of New Ideas, Craig Garthwaite, Director of the Program on Healthcare at the Kellogg School of Management, sits down with Kaufman Hall’s Haydn Bush to examine Optum’s payer-provider integration efforts, discuss why CVS’s HealthHUBs are so critical to its post-merger success, and take a look inside the future of inpatient hospitals. This week’s episode also explores:
- Why achieving vertical integration and creating value may be more difficult to pull off than anticipated
- New research on which accountable care organizations achieve the best results
- Why risk-based contracts might help tip healthcare payment from volume to value by better aligning incentives
- The potential impact of Medicare for All and other national policy proposals
Haydn Bush has two decades of experience as a journalist and communications professional in healthcare and related fields. He currently serves as vice president in Kaufman Hall’s thought leadership department.
Prior to Kaufman Hall, Haydn worked in various communications roles at the American Hospital Association and McCabe Message Partners, an award-winning public relations firm focused exclusively on health and healthcare.
During his tenure as a writer and editor for Hospitals & Health Networks magazine, Haydn’s reporting on improving care and reducing costs for the patients with the highest healthcare costs received honors from the National Institute for Health Care Management Foundation and American Business Media.
Craig Garthwaite is the Director of the Program on Healthcare at the Kellogg School of Management at Northwestern University. His recent work has focused on the private sector effects of the Affordable Care Act, including the labor supply effects of large insurance expansions, the changes in uncompensated hospital care resulting from public insurance expansions, and the responses of non-profit hospitals to financial shocks.
Professor Garthwaite has also examined the effect of expanded patent protection on pricing in the Indian pharmaceutical market, the innovation response of United States pharmaceutical firms to increases in demand, and the relationship between health insurance expansions and high drug prices.
His research has appeared in the Quarterly Journal of Economics, the American Economic Review, the Review of Economics and Statistics and Health Affairs. In 2015, Professor Garthwaite was named one of Poet and Quants Best 40 under 40 Business School Professors.
Haydn Bush: Welcome to New Ideas from Kaufman Hall. I'm Haydn Bush. On today's edition of New Ideas, we'll be joined by Craig Garthwaite, director of the program on healthcare at Northwestern University's Kellogg School of Management. We'll be talking about a new era of vertical integration in healthcare, from UnitedHealth's OptumCare arm to CVS-Aetna and beyond. Craig, welcome to New Ideas.
Craig Garthwaite: Thank you for having me.
Bush: Why are so many companies and healthcare institutions pursuing vertically integrated models these days?
Garthwaite: So I think there's a general worry that the way we create and capture value in healthcare is changing. A lot of firms are going to have to make investments that do things that either decrease costs or increase people's health. And so everyone's got to make an investment. We're not actually sure where that's going to pay off in the value chain. Let's think about CVS-Aetna. Right? That CVS is going to do things to make people healthier by getting them to get treatment for their chronic conditions at the pharmacy, at their MinuteClinics, the main outcome of that is going to be that those people don't go to the hospital, and so the insurer's going to benefit. And so we’ve got to find a way to get the provider, that MinuteClinic, to be willing to make investments that make people healthier, that pay off to the insurer. Some contract between the insurer and the MinuteClinics—they’re really hard to write, to figure out well, how much of the savings is because of what CVS did, and how much is because of what Aetna, the insurer, did. But if they're all one firm, you know that the firm is going to get the money. We might quibble about what division it goes to. And so it aligns incentives in the value chain a bit. And so we see it there and we also see it on the pharmacy and PBM side as well.
Bush: And what are some of the ways that the PBMs can create some value, say, through CVS-Aetna?
Garthwaite: So if you think about a PBM, what's it trying to do? Primarily, it's trying to reduce your pharmaceutical spending, right? That's their primary mission. Well, there are some drugs we actually want you to take because it ends up reducing your health spending. But the PBM isn't exposed to your health spending and so they don't think about that when they design their formulary and figure out how to get you access to medications. But again, if both the insurer and the PBM are part of the same company, now we're going to make different decisions about how we cover things like insulin for diabetes or medications for high blood pressure. [Those are] all things that could end up in an expensive medical visit, and we want the PBM to think about that as it designs its formulary.
Bush: One of the vertically integrated models that's been getting a lot of attention these days is UnitedHealth's Optum arm. And clearly that's gotten the attention of a lot of hospitals. What's your take on that, and where is the value creation taking place there?
Garthwaite: The idea there is to try and create a more coordinated benefit to get the provider to do things that are good for the insurance company and to think about standards of care. It's part of what's driving a lot of vertical integration, the idea that the payer and the provider are going to be integrated in this way. And if you look across the spectrum, we're seeing a lot of people basically imitating the Optum model, for lack of a better way of talking about it. They're integrating all the way up to the front door of the hospital. No one wants to touch the hospital at this point. I don't hear people saying, "Oh, let's go buy Tenet Healthcare. That's going to be a really good asset to own." But they want everything up to that door, including surgical centers and things like that. I don't think United has fully exploited the sort of providers that it has. If you look at what they've done, I think a lot of it is that these are going to be valuable. We think, as the value creation and capture process for healthcare changes, these providers are going to be very useful for us. And so they've acquired them in that way. But I think if you've talked to people broadly at Optum, I don't think they've fully exploited all the value they might be able to create there.
Bush: Are there examples you might give of other value creation that you think they might look at as they move forward?
Garthwaite: So I think they're going to figure out how to use things like Surgical Care Affiliates, which is the largest ambulatory surgical center in the country, that they bought. They own MedExpress, they own primary care doctors. And I get some sense of what they want to do is, within a particular geography, have sort of the continuum of assets under one profit equation. All the vertical integration that we're talking about there, a lot of it is about aligning the profit incentives. That everyone is thinking, not about how much their individual part of the chain is going to make, but how do we maximize value across the chain.
Bush: You made an interesting point a little while ago about the fact that everyone's going right up to the front door of the hospital, but are not looking, necessarily, at a hospital as part of these systems. What's the hospital's opportunity here?
Garthwaite: I mean, so certainly hospitals themselves are creating their own outpatient facilities and trying to move things to lower-priced sources of care. I think the inpatient hospital is in an interesting inflection point. I think this will be probably, maybe the sixth or seventh time we've talked about the end of the inpatient hospital. It's never happened yet. Maybe this will be the time. As we think about what the inpatient hospital is today, they're really a cost center in the system. And a lot of health systems are thinking that what we really want to do is minimize the use of the inpatient hospital as much as we can. And that requires, fundamentally, a rethinking of the way in which you run a health system, that your goal is not to fill beds. As you move to a more value-based contract, your goal is to keep people out of those beds. So you have to think a bit about the optimal size. Maybe you're going to be closing floors. Maybe you'll be closing entire facilities that we've seen. You want to think about who gets into the hospital, who's the right person to be seen there as opposed to who we can see in an outpatient facility. But as we make health systems bear more of the risk of medical spending, they've got to think about their cost structure. Inpatient facilities are an exceptionally expensive place to see people. So far to date, in the world of accountable care organizations where the idea is a health system takes on risk for the total medical spending of the individual, we've seen fairly weak, at best, results for accountable care organizations that are run by large inpatient hospitals. Where we've seen the strongest results and the best cost savings have been from accountable care organizations that are run by primary care physician groups. And the reason why that is—is that if a primary care physician stops you from going to a specialist or stops you from going to the hospital, they've lost no revenue. They don't own that facility. It was just a referral. And so they have really strong incentives to get you to not go to that facility. Because once you go there, it eats away at the potential value-based payment that they could get. Now if you're an inpatient hospital, the story's totally different. Now every time you don't send someone to that specialist or that inpatient hospital, that's revenue that you don't get from the payer. Maybe you make it up on the backend with the value-based payment, but that's a long way from when you give up that initial revenue, and there's some uncertainty around that. Inpatient hospitals have to really change the way they view themselves in a world of value-based payments.
Bush: I'd like to take a step back to vertical integration again. What are some of the challenges you foresee for these models as they move forward?
Garthwaite: The sheer integration challenge, I think is going to be one that we might be underweighting. So I've done a lot of testimony and talking about CVS-Aetna. I don't believe there's a reason why these companies shouldn't merge, and on net, we don't have an anti-trust concern. That said, the thing that people seem to always forget is the end of my testimony which then always talks about, but it's not clear this is going to actually work. This is really hard to do. Now why that comes second is because there's no anti-trust concern there. That's capitalism. People lose money. That's fine. This is America, right? You have a chance at making money, you have a chance of losing money. From the point of shareholders or people who run the business, there is this question about whether you can actually pull off merging CVS and Aetna together. These are very different companies. You have just… the integration problem of management style and practice and all of that in addition to the sort of value creation idea that I sort of sketched out at the beginning. You'll go to the MinuteClinic. The MinuteClinic will treat your chronic condition, and they'll treat your chronic condition in a way that lowers your overall hospital spending or your overall healthcare spending. I don't think we've fully worked out what that chain of events is, like what the actual treatments are for chronic condition individuals that will lower their spending. We have some sense of the conditions where we think it might work. People talk a lot about diabetes, COPD, congestive heart failure. These are places where some primary care interventions or some interventions in between visits to your specialist could result in lower health savings. We don't have a ton of great evidence of exactly how that chain is going to work. It's probably only going to work for a small subset of patients. And that's where the payer sort of has to make an investment. I said CVS has to make an investment to develop the MinuteClinic side. The payer's got to figure out who do you send there. Who are the people, our most expensive patients that we think we can affect their spending? It not just our most expensive patients. Someone has cystic fibrosis, they take Kalydeco. Kalydeco is $300,000 a year. There's nothing you can do about that. You're not making that price go down. And so those aren't people you're going to have. You need the uncompliant diabetic that you think you can make compliant at the MinuteClinic. You have to first be able to identify those people and then figure out if there are enough of those people that makes the whole thing worthwhile.
Bush: And do you think CVS's announcement recently that they're aggressively expanding and sort of going all in with the HealthHUBs, and clearly, they've sort of talked about Aetna's role in stratifying and sending their members, do you think that's a step in the right direction?
Garthwaite: Yeah. That's the thing we should have seen. Right? If CVS is serious about this, the HealthHUBs are the way they're going to do this. And you're looking at a HealthHUB is going to be a store where 25% of the square footage is going to be dedicated to the provision of medical services. Now there's a lot of reasons why CVS might want to do that. Some of it is its merger with Aetna. Some of it is the very fact that that square footage probably isn't as valuable as it was when they first planned the store, because they planned it maybe in a world before Amazon and now people don't really go there anymore. The real question is can you get the right people there? And then CVS faces another problem, about what do you do when non-Aetna customers show up? They're going to cost more than the revenue they bring in for this management of chronic care. Do you treat them? It's hard to turn them away because they're customers of yours. Can you convert them to Aetna customers? Could you say, "Listen, a more integrated benefit would be good for you?” These are the types of things that they're going to have to wrestle with, but the decision of them to roll out this large number of HealthHUBs is what you should expect if CVS is really trying to make a play in this vertically integrated world.
Bush: You've written quite a bit that there are lessons learned for these models from ACOs and other payment experiments of the last decade or so. And I'd love to hear you expound on what are some of the lessons that the vertically integrated models can learn from previous experiments?
Garthwaite: Yeah. I think the primary lesson that we want to think about here is that, despite what people want to say, markets actually work pretty well in healthcare. And the places where we've seen these models do better are places where we've really thought about and respected the role of markets. And so I think we want to look at sort of how do firms make money, how do doctors in those firms make money, and how do we align the incentives of those individuals to have lower overall spending? If our goal is to reduce spending, we've got to respect the incentives in the system.
Bush: People have been talking about the shift from volume to value for probably 15 years now. Do you think any of that shifts if we finally get to the point where enough providers and insurers are engaged in legitimate risk-based contracts where the providers are bearing more risk?
Garthwaite: I think you need that. I think we need to have the contractual structure be one that you can benefit if you can manage risk, and that all of the relevant parties in the chain that you need to make an investment are aligned on this risk-bearing contract. I think one thing we have found from ACOs, I think that's driving some of this move to vertical integration is that those contracts, actually, are just very hard to write. They're hard to write between the payer and the provider. They're hard to write between the provider and their actual physicians. How do we incentivize their effort? And so the more that we can get alignment within the corporate form, maybe we can deal with some of these contractual difficulties. I think we've seen some results recently from Blue Cross Blue Shield Massachusetts, which had the alternative quality contract which is the longest-running private value-based contract. And there, they're doing pretty well. Again, it gets down to basic incentives. Why was Blue Cross Blue Shield Massachusetts willing to do this? Well, they're one of the dominant players in the market. We always worry, in our fragmented system, that one insurer's going to make a costly effort to influence the behavior of the provider to go from volume to value. That provider's not going to do it just for that insurer's patients. They're probably going to change their practice overall because it's really hard to modify your behavior from patient to patient. And so there'll be these spillovers to all the other insurers in the market who will benefit from this costly investment from the first insurer. In that setting, no one wants to make that first investment in value. And so you got to think carefully about that. Where we see this is going to work the most is when the private insurer has a pretty big market share - then they don't care as much about these spillovers - or from Medicare who doesn't care as much about spillovers because they're not a profit-based company. And it's why, I think, in the ACA, we had these accountable care organizations through things like the Medicare Shared Savings program. Why they started with Medicare was this idea that that could then seed the rest of the market, that people will shift their behavior to comply with Medicare, and it'll benefit everyone else.
Bush: At this point, are there any implications that these models should be taking into account regarding potential changes to Medicare and the Medicare for All that's kind of on the horizon?
Garthwaite: I mean, listen, Medicare for All, to the extent this happens, is going to be the regulation of basically all healthcare prices in The United States. That sort of shift in a payment model is going to dwarf any sort of move from volume to value. If we get to a point where we have Medicare for All, or even Medicare Advantage for All, which is just a slightly different version of fully-regulated prices, I think that the providers are going to have much bigger fish to fry than thinking about how we deal with volume to value. It's going to be how we keep the doors open at that payment rate.
Bush: Great. Well, Craig, this has been extremely informative. I'm wondering if you have any closing thoughts about vertical integration in healthcare that you'd like our audience to go away with today?
Garthwaite: I thought it was really great that you asked me about United as the example. Too often I hear people say, well, CVS is buying Aetna because of Amazon, and everyone likes to say that Amazon is driving everything. I think that the model of United Healthcare is causing a lot of the movement of aligning PBMs and payers, and payers and providers. And part of that is United has been very profitable implementing this model. If you want prices to come down and you want spending to come down in such a model, what you really need is you need to stand up three or four national players that are using this model to try and lower costs. Because if it's just United or it's just United and Aetna, they're going to capture a lot of the value internally of the lower cost. We still fundamentally need some competition to discharge this back to the customers. The concern we're going to have is how many of these large, vertically integrated national insurers can we have? It's going to be interesting to keep your eye on how these firms deal with this payer/provider mix. They're all taking slightly different tracks on it. OptumCare is different from MinuteClinics and that's different from hospices.
Bush: Great. Craig, thanks a lot for your time today.
Garthwaite: Thank you.
Thanks for listening to this edition of New Ideas.