2011 - Recon Strategy

“Savings illusion” can become savings reality in the long haul: baby boomers to the rescue

Tory Wolff December 20, 2011

A recent article in the NEJM argues that cost savings from quality improvements are illusory because of the lumpy nature of healthcare capacity. Quality’s impact on utilization is just too small to be captured in a heavily fixed cost environment. Any reduction in utilization results in a trivial savings of direct costs and, more importantly, unchanged fixed costs simply being reallocated across the smaller volume. Cost reduction in a high overhead environment is indeed difficult (ask any of the big process consulting houses). It can be done, though it will

Bubble in acquisition pricing of Medicare Advantage lives?

Tory Wolff December 7, 2011

Several recent acquisitions suggest a rapidly growing valuation on Medicare Advantage (MA) lives. Last August, Healthspring paid about $3.6K per adjusted MA life with its acquisition of Bravo. (My adjustments extract the value of the PDP lives using the CVS acquisition of Universal American PDP lives as a benchmark and for the share of Special Needs Plan or SNP lives which typically have higher utilization levels and higher reimbursement). This past November, there were two major MA acquisitions, both with sharply higher prices. Cigna (CI) bought Healthspring for $3.8B —

XL Health in play: what do the three suitors see?

Tory Wolff November 18, 2011

UPDATE: United buys XL Health! Here’s what we surmised in the original post on this topic: “That leaves United. A leadership position in C-SNPs would fit well with United’s leading position in Medicare Advantage overall, #1 position in D-SNPs and #2 position in I-SNPs. The capabilities would also seem to be readily applicable to the broader Medicare population (given, for example, the potential transfers back and forth across between C-SNP and regular Medicare Advantage). The curious thing is that United dramatically reduced its C-SNP business last year (went from about

Emerging Unintended Consequences of Health Care Reform

Nikhil Bhojwani November 14, 2011

In complex system, even small changes can have big, unexpected consequences. These are occasionally beneficial but more often than not have a negative impact. Over the last year we have started to see some evidence for unintended consequences from the health care reform act. Negative impacts that we see are of two kinds: Perverse effects that directly affect the objectives of the act and side-effects that manifest in seemingly unrelated areas (see figure below). It is not the intent here to comment on the overall merits or demerits of

The CIGNA-Healthspring deal: local share key to top-line synergies but still missing from the equation

Tory Wolff November 10, 2011

Summary Provider discounts are a key priority for national accounts – which puts CIGNA (CI) and Aetna at a disadvantage; CI responding in part by trying to get closer to providers A provider collaboration strategy requires a critical mass of patients and provider mindshare. CI does not have it; nor will the Healthspring (HS) acquisition provide it given the limited geographic overlap between the two companies CI must therefore grow share in key markets to capture the deal’s potential provider collaboration synergies (though other synergies are certainly accessible) If CI

Six strategic choices made by CMS in the final ACO rules

Tory Wolff November 1, 2011

1. The final ACO rules largely maintain the demanding economic parameters for mature ACOs (Track 2) found in the originally proposed version (relative, for example, to the original PGP demonstration project): Potential for both downside and upside reward. Maximum shareable savings of 60% (less than in the original PGP demo); and the rewards are limited to an upper bound of total costs. In this regard, the ACO contract payoff locks a lot like your classic “collar” financial option (see graphic below). The starting cost benchmark based on the ACO’s actual

Narrow networks: adoption growing among smaller groups

Tory Wolff September 30, 2011

Kaiser’s latest employer benefits survey offers some interesting data on the adoption of narrow (or high performance) network products. See chart below: Couple of observations: Overall adoption at the firm level appears to stand at almost 20%. The data probably under-represents the share of firms with a narrow network product: firms which have narrow networks in their second or third most common plan would not appear in this data. However, the share of lives in a narrow network product is probably lower: I would think narrow network products are adopted

Private health insurance exchanges and defined contribution: thoughts on Wellpoint’s acquisition of Bloom Health

Tory Wolff September 23, 2011

Why would a health plan want to buy an exchange? Isn’t the only synergy if the owning plan tilts the exchange in their products favor? And won’t that damage the value proposition of the exchange for buyers and see them flock elsewhere? To understand the Bloom Health acquisition, it is important to recognize that the private health insurance exchange (PHIX) space is quite fluid, consisting of three or four distinct market opportunities. (The fourth — capabilities resell — might not really qualify as a PHIX specific opportunity, it is more

The Steward-Tufts deal and the looming threat of provider-led narrow network insurance

Tory Wolff September 16, 2011

The Stewards-Tufts deal announced today will create a narrow network insurance product targeting the small group segment. As reported, members covered by the plan must get all routine care from Steward providers except for complicated procedures and when authorized by a Steward physician. In return, premiums should be 15-30% below other products. Tufts and Steward will share the premiums. Some local market context: Steward Health Care is owned by Cerberus Capital Management is the only major for profit system in the market. The deal follows at the heels of a

A gradual roll-out of ACOs will minimize disruption and resistance

Tory Wolff September 13, 2011

Part of the theory of ACO value creation is trading off more primary care (resulting in better care coordination, fewer missed time bombs, and use of lower cost care options) against reduced use of specialists, ERs and hospitals (few stays, shorter stays). Early results seem to describe substantial promise (although not for everyone who tries the model). Let’s assume this promise will be realized in broader roll-out for the purposes of this post. One fear that is ACOs will drain volume away from unaffiliated medical specialists and hospitals, leading to

Upping in ante in Pittsburgh: the health information exchange arms race

Tory Wolff September 8, 2011

A few weeks ago, UPMC announced an agreement among nine area systems to spend $4M over the next two years to launch a health information exchange called ClinicalConnect. Reportedly, Highmark (and presumably the West Penn Allegheny hospital system it is in the process of purchasing) requested to be a part of the initiative but was refused. Building electronic connections across hospitals – particularly between community systems (such as the non-UPMC participants in ClinicalConnect) and tertiary centers such as the UPMC facilities – helps make transitioning patients easier by making full

Provider incentives in the commercial ACO: retaining a small share of savings in return for future volme growth

Tory Wolff August 24, 2011

Earlier this month, Blue Shield of California announced 2010 results from an ACO partnership with the Catholic Healthcare West hospital system and Hill Physicians. The ACO achieved savings of $20M on a CalPERS population of 41.5K commercial and Medicare lives (where Blue Shield was the secondary payer) — $480 per person or 13% of sponsor costs (average sponsor premium contribution estimated at $3,735 based on press report that $15.5M equaled to 10% of premiums). These results appear to be significantly better than the results of the Medicare Physician Group Practice

Partners’ acquisition of Neighborhood Health Plan: reinforcing the role of community health centers in the care continuum

Tory Wolff August 18, 2011

Much of the public speculation (for example here and here) regarding the acquisition of a local high quality safety net health plan — is it about locking in Medicaid volume? or about doing a “good deed” before regulators make decisions about Partners market influence? – is not very persuasive. Partners is already under intense scrutiny — a program of pushing Medicaid volume to its own facilities would contradict its public promises, exacerbate regulator suspicion and not be very profitable anyway. And if regulators believed Partners has the market power to

The curious absence of payers in public HIEs

Tory Wolff August 12, 2011

Last week, the National eHealth Collaborative published a study of sustainability strategies for 11 leading health information exchanges (actually 12 including the VA). I’ll call these public HIEs to distinguish them from private HIEs – proprietary exchanges among a select group of providers such as an integrated delivery system. Remarkably, payer funding has a relatively small role across the sample: Only 3 report payer funding as an essential part of their current revenue model: Availity (a joint venture among major Blues and Humana), the Rochester RHIO and the Quality Health

Medicaid going mainstream: thoughts on the IBC / BCBSM / AmeriHealth deal

Tory Wolff August 10, 2011

Historically Blues have shied away from Medicaid. Two thirds of plans do not serve any Medicaid and those that do often have disproportionately small shares. No real surprise: Medicaid specialist plans can fluidly move in and out of markets depending on the rates and redeploy their capabilities wherever are the best returns. Blues on the other hand, are prime “hold-up” targets because they are largely stuck in their assigned states. They can only respond to an offer of low rates with a threat of dismantling their Medicaid operations entirely (and

ESRX-MHS Part 2: mail facility speculations (…or: Indulging my Inner SWAGer)

Tory Wolff August 1, 2011

Summary ESRX was running at close to maximum capacity at its mail facilities while MHS has room to spare. ESRX is facing a scenario of significantly increased demand as greater mail penetration is achieved in the Wellpoint book and lacked the capacity to meet this demand. Similarly, ESRX would not be able to meet increased demand from reform coverage expansion. By combining, ESRX avoided having to build a new facility and the combined entity appears to have enough capacity to close at least one older mail facility. Given that a

ESRX-MHS Part 1: Last stand of the PBM pure play: observations on the Medco-Express combination

Tory Wolff July 29, 2011

UNH’s decision to take the commercial PBM business in-house did not force MHS into ESRX’s arms: I would argue that it removed the major roadblock to what the companies wanted to do anyway. MHS and ESRX had been talking about a merger off and on for few years (per WSJ reporting) and the logic (laid out below) is compelling but FTC concerns must have kept getting in the way. UNH’s decision doubled the size of its PBM subsidiary in terms of lives (somewhat less in terms of scripts because the

Consumerism bulk-up: Quick thoughts on Aetna’s acquisition of PayFlex

Tory Wolff July 20, 2011

Payflex is an administrator of account-based benefits including HSAs, HRAs, FSAs and COBRA benefits. The company has $58M in revenues, 1M individual consumer accounts and 3,300 employer customers. On Monday, Aetna accounced plans to acquire the company for $202M. The acquisition pricing looks rich relative to the other benchmark out there: Wageworks is a competitor about 2x the size of Payflex and which recently filed an IPO to sell 23% of the company for $75M (in the works at least since April and described in detail in the registration statement

Highmark and West Penn: it’s about mitigating consolidation, not transforming the system

Tory Wolff June 30, 2011

Highmark will invest up to $475M in the West Penn Allegheny Health System, a move characterized as a prelude to purchase. This is no bold move to drive closer integration of information flows and care decisions or align incentives in a transformative vertically integrated model. My take: this is about desperately propping up the last competing provider standing in a highly concentrated hospital market. Highmark’s hand was forced by West Penn’s financial bleed out. But, in response, UPMC has thrown down the gauntlet in a move that will reshape the

Did Wellpoint overpay for Caremore? No….not yet anyway

Tory Wolff June 28, 2011

Summary Wellpoint probably paid full value for Caremore (if that company’s performance is as powerful as limited data suggests) but did not overpay. In addition, Caremore offers several powerful upsides if Wellpoint can continue to grow the model. However, Wellpoint will need to tread carefully to avoid damaging its purchase, given an uncertain record with vertical models (NextRx) and the inherent challenges in integrating fast-growing, PE-fueled innovators into large, mature businesses. Some indicator of Wellpoint’s strategy for Caremore will be given by its approach to Arizona — a key market

Year: 2011

Recon takes an analytical look behind select developments in healthcare