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Equity Perspectives

While America struggles to fix its broken healthcare system, consolidation and innovation have created a number of investment opportunities.  


In Brief:

  • Healthcare spending in the United States is still far greater than it is in the rest of the developed world, but the rate of increase appears to be slowing.
  • A number of companies have switched to new delivery and payment models aimed at increasing efficiency and decreasing errors that kill or injure patients.
  • Among the more innovative approaches are employing patient remote-monitoring tools, directing patients to lower-cost alternative sites of care, and improving coordination of care.
  • Paying for health care remains a thorny national challenge. If bundled payments are to drive better care, then more hospitalists (physicians that specialize in treating hospitalized patients of other physicians in order to minimize the number of hospital visits by other physicians), nurse coordinators, and navigators will need to be employed.


No matter what you think about healthcare reform (public opinion remains quite polarized), the United States still spends 17.5% of its gross domestic product on health care, which is far more than other developed countries spend (see Chart 1). Governments (federal, state, and local) currently foot 45% of the bill.1 Yet since 2010, when the Affordable Care Act (ACA) was passed, the number of uninsured has dropped, from 49 million to 29 million.2 Further, overall spending is not growing as quickly as it had in the years before that landmark legislation.3 (See Chart 2.)

According to a recent study by the Urban Institute, healthcare spending between 2014 and 2019 may decrease by $2.6 trillion.4 Part of that reflects new economies of scale following dramatic consolidation in certain industries. Another part reflects a concerted push for cost containment in the form of alternative delivery and payment models. Even so, medical errors in hospitals and other healthcare facilities may now be the third-leading cause of death in the United States.5 (See Chart 3.)

"Few players in the healthcare arena—whether patients, providers, or payers—are satisfied,” said Dartmouth-Hitchcock physicians William B. Weeks and James N. Weinstein. “Most find the current construct of healthcare delivery inconvenient, incoherent, and even scary.” 6

Clearly, much more work needs to be done. While the patient population increases, especially the elderly, the numbers of doctors and nurses are declining. Insurance premiums, co-pays, and deductibles have risen. Mental health and substance-abuse coverage remains a gaping hole. But Congress likely will not tackle reforms until after the presidential election in November.   

For insight into this vortex of competing interests, active managers rely on rigorous industry research to assess which companies stand to gain and lose most. Enter Lord Abbett research analysts Heidi Lawrence (who covers tools, diagnostics, outsourcers, contract research organizations, and vet/dental) and Devesh Karandikar (hospitals, HMOs, pharmaceutical distributors, devices, and benefit managers). 

Both analysts believe cost containment will arise from the changing reimbursement environment. The older fee-for-service reimbursement methodology incentivized providers to over-utilize health care, whereas newer, value-based, outcomes methodologies rewards providing care in a cost-effective and efficient manner. Among the more innovative tools to lower a patient’s cost of care includes keeping patients out of the expensive hospital and utilizing patient remote-monitoring tools, alternative sites of care, and care coordination/continuum models. 


Chart 1. U.S. Healthcare Spending Is More Than Twice That of Other Developed Countries’
Annual healthcare costs (in dollars) per capita 

Source: Organization for Economic Cooperation and Development, OECD Health Statistics 2015. Compiled by Peter G. Petersen Foundation. Data are for 2013, the latest available. Chart uses purchasing power parities to convert data into U.S. dollars.


Chart 2. The Rate of Healthcare Spending Is Expected to Slow
Projected declines in national health expenditure, 2010–19 ($ in billions)

Source: Urban Institute analysis of Centers for Medicare and Medicaid Services national health expenditure projections.  Adjusted forecasts reflect alternative scenarios that assume the cuts to physician payments under the sustainable growth rate system are replaced with a rate freeze.  The 2015 forecast reflects permanent fixes under the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015.


Chart 3.  Amid Innovation and Cost Cutting, Medical Error Takes Its Toll
Ranking by yearly deaths, as of 2013*

Source: National Center for Health Statistics, The BMJ medical journal.
*  According to Dr. Martin Makary, a professor of surgery at the Johns Hopkins University School of Medicine and an authority on health reform, the medical coding system was designed to maximize billing for physician services, not to collect national health statistics, as it is currently being used.  Johns Hopkins researchers examined four separate studies that analyzed medical death rate data from 2000 to 2008. Then, using hospital admission rates from 2013, they extrapolated that based on a total of 35,416,020 hospitalizations, 251,454 deaths stemmed from a medical error, which the researchers say now translates to 9.5% of all deaths each year in the U.S.


The Move Toward New Delivery and Payment Models
Like other major legislation, the Affordable Care Act produced a lot of abbreviations.  Among the more notable were ACO (accountable care organization), CJR (collaboration for comprehensive joint replacement), and BPCI (bundled payments for care improvement).

The Centers for Medicaid and Medicare Services, which administers several key federal healthcare programs, defines ACOs as groups of doctors, hospitals, and other healthcare providers who come together voluntarily to give coordinated, high-quality care to their patients. The goal of coordinated care is to ensure that patients, especially the chronically ill, get the right care at the right time, while avoiding unnecessary duplication of services and preventing medical errors.  When an ACO succeeds both in delivering high-quality care and spending healthcare dollars more wisely, it will share in the savings it achieves for the Medicare program.

The CJR model aims to support better and more efficient care for Medicare beneficiaries undergoing the most common inpatient surgeries, particularly hip and knee replacements, by encouraging hospitals, physicians, and post-acute care providers to work together from the initial hospitalization through recovery.

The BPCI initiative is more physician-centric than CJR. Under the BPCI initiative, organizations enter into payment arrangements that are predicated upon achieving certain cost-savings performance measures within an episode of care.

Post-acute care has the widest variation of outcomes and the most room for cost reduction, Lawrence said. As a result, Lawrence is favoring companies in her universe leveraged to coordinating care across the patient continuum (i.e., companies that will participate in the bundles by staffing physicians in the hospital, the post-acute care, and home setting). The doctors will ultimately monitor the patients, ensure drug compliance, and prevent readmissions back to the hospital among other costly events. 

Lawrence believes there are  many variables involved in determining whether or not a company or provider will be successful/profitable working under these bundles. Imagine the questions that must arise: Does the company or the provider have the access to real-time data to understand the risk profile of the patient? Will the company/provider get retrospective or upfront payment? Which services will the company/provider choose to include in the bundle? 

“We think this is the way health care is going,” Lawrence said. In fact, by 2019, physicians’ reimbursement for Medicare patients will be under a new methodology dictated by MACRA (Medicare Access and CHIP Reauthorization Act). This act does away with the old sustainable growth-rate formula to determine reimbursement and implements performance-based reimbursement, which starts in 2017.

Lawrence added: “This should lead to physician practice consolidation, which also benefits some companies that acquire large physician practices. The companies in my analyst universe will give smaller doctor practices the capability they need to perform care coordination. Solo doctor practices lack real-time data analytics and, most important, lack the presence in post-acute and home settings, where the variation in outcomes occurs that can lead to costly outcomes.” 

While Lawrence and Karandikar are not fans of these reimbursement models, which will decrease utilization of health care and put pressure on vendor pricing, they believe there will be a handful of winners and losers. The winners include companies that have the balance-sheet capability to acquire the smaller physician groups, have the data analytics, and have the access to lower-cost networks, i.e., ambulatory surgery facilities.

Bundle or Bungle?
After sitting in on a number of presentations and speaking to various doctors, Lawrence and Karandikar believe only certain procedures currently can fit into a bundle. Chronic diseases fit more in a capitation model, which pays healthcare providers a fixed amount of money per patient, per unit of time, in advance, thus spreading out the risk. Bundles are typically shorter in duration, which is to say 90 days or less.7  A very obvious example would be someone with Parkinson’s disease. You cannot treat someone with Parkinson’s disease in a bundle because it is a progressive disease that occurs over a period of time and is not episodic in nature.

“I think a lot of fixes need to occur with bundles for a full move away from capitation/ACO-type payment models, specifically in terms of a mechanism of an incentive system to pay doctors more to take on higher-risk, high-morbidity disease states,” Lawrence said.

One doctor participating in bundles told Lawrence that he is rejecting care to very sick patients to ensure that he is successful in his bundle.  The government may be looking into creating centers for high-risk/disease state patients and a separate reimbursement system for that. 

In any case, it is possible that other interventions covered by government programs may also fall into the bundled payment system.  These include maternity/caesarian sections, basic surgical eye procedures, treatment of Crohn’s and irritable bowel disease, and stenting.  Procedures like these will be successful in a bundle as they are episodic in nature and have less variation in outcomes.

Headwinds and Headaches
Our topic of course will have to include whoever wins the presidential election in November, because he or she will have to grapple with how to pay for health care.

Will the move toward bundled payments continue to accelerate? Or will capitation, in which healthcare organizations received a fixed sum per patient each year, prevail? The outcome will have profound consequences on the healthcare system and the profitability of the companies involved. 

While capitation can achieve modest savings in the short run, Harvard Business School professors Michael Porter and Robert S. Kaplan argue that “it threatens patient choice and competition and will fail to fundamentally change the trajectory of a broken system. A bundled payment system, however, would truly transform the way we deliver care and finally put health care on the right path.”8

In a recent presentation, Lawrence and Karandikar discussed a few things that they believe will make bundled payments successful. One is that the programs should be mandatory. In the case of the Comprehensive Care for Joint Replacement (CJR), Medicare is forcing providers, patients, and physicians into the bundled payment.

“We believe the system will move to bundled payments gradually, but early successes in the mandatory programs make it inevitable,” Karandikar said. But contrary to a recent Harvard Business Review article by Porter and Kaplan, he has reservations regarding bundled care in areas like cancer care [wherein the price of the bundles may not change fast enough to keep up with technology] and in certain terminal illnesses.  Cancer care is a disease state where bundled payments would be impractical given the progressive nature of the disease and the rapidly changing treatment options,” Karandikar added. 

While Porter and Kaplan suggested risk adjustment contributed to the failure of capitation, Karandikar argued that “upcoding” [i.e., billing that is higher than the service actually provided or documented] would occur in a bundled payment structure as well. And if bundled payments are to drive better integrated, multidisciplinary care, he said more hospitalists, nurse coordinators, and “navigators” will need to be employed.    

Will bundled payments unleash a new kind of competition that improves value for patients, informs and expands patient choice, lowers system cost, reshapes provider strategy, and alters industry structure for the better, as Porter and Kaplan have argued?

“Unleashing new kinds of competition is questionable, since the fee-for-service model9 was supposed to create competition among payers, providers and physicians, but didn’t quite reach that goal, since health care is delivered locally and local disparities exist,”  Karandikar said. “With continued process innovation, however, prices should fall, but will take many years to do so.”  

The bottom line is that bundled payment is likely here to stay, and will change the delivery of health care, Karandikar concluded. Mandatory bundles will create the change, but will take training and time to execute.

“Most companies I talk to discuss how they are testing different delivery and payment models to be relevant in the bundled payment world,” he added. “On the other hand, payers [e.g., HMOs] are cautiously moving to these models because hospitals and employers are slow in accepting payment change. Hospitals are concerned with taking risk on care delivery where they do not control care vis-à-vis physicians. Employers are reticent to make changes to employee benefits given the uncertainty, lack of transparency, and education hurdles the bundled payments present.”

Reported by Steve Govoni


1 Source: Centers for Medicaid and Medicare Services, U.S. Department of Health and Human Services.
2 The New York Times, July 12, 2016.
3 Catherine Rampell, “A Checkup for Obamacare Reveals a Positive Prognosis,” The Washington Post, January 7, 2016.
4 Jeffrey Young, “We’re Spending Less on Health Care than We Thought We Would  Before  Obamacare,” The Huffington Post, June 20, 2016.
5 Ariana Eunjung Cha, “Researchers: Medical Errors Now Third Leading Cause of Death in United States,” The Washington Post, May 3, 2016.>
6 William B. Weeks and James N. Weinstein, Unraveled: Prescriptions to Repair a Broken Health Care System (Create Space Independent Publishing Platform, February 2016).
7 Procedures that work in a bundle include discrete or short period of times to treat the condition.  Examples would include joint replacement, Crohn’s disease, gastric bypass surgery, hysterectomy, or stenting, among others.
Michael Porter and Robert S. Kaplan, “How to Pay for Healthcare,” Harvard Business Review (July–August 2016).
In a fee-for-service delivery system, healthcare providers are paid for each service (like an office visit, test, or procedure).



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