​What Washington Insiders Are Saying About Healthcare Reform Under Trump

April 2017

Scott Gottlieb Joins BDO to Talk Industry Trends

By Patrick Pilch and David Friend

We recently hosted a breakfast panel, “Healthcare Reform: Insights from Inside the Beltway,” during the 2017 J.P. Morgan Healthcare Conference, featuring Dr. Scott Gottlieb, FDA commissioner nominee and former BDO senior fellow, and Dave Tamasi of lobbying firm Rasky Partners. Our discussion ranged from alternative payment models and their implications for the business of health, to the future of healthcare reform, and new drugs and reimbursement risk.

Here are some of the top highlights of our discussion, as told by our panelists, the audience and BDO.
Affordable Care Act (ACA)

When will Congress take substantive action to repeal the ACA?

Tamasi:
As a common phrase on the Hill goes, “We’re playing with live bullets now.” This is no longer just a political exercise; it’s also a policy exercise. Expect greater tension within each party than between them. Within the Republican caucus, look for friction between moderates and hardline conservatives. Within the Democratic caucus, expect tension between the 10 Democratic senators who are up for re-election in 2018 in the states that Trump won, versus the more progressive blue-state senators who want to be perceived as saving Obamacare.

Though repeal of the Affordable Care Act (ACA) has moved forward, replacement is still up in the air. In the Senate, Republicans will face some pieces of the legislation outside of the reconciliation process, and that will require 60 votes. Some issues can be won on party lines, but they don’t want to poison the political well so much that they then can’t go back and pass the items that require a 60-vote threshold.

Trump is not a Republican through and through, so to a certain extent, he’s negotiating with his own party and staking out stances. It’s all about the deal. He wants to get the ACA out of the way and get it done. Does that ultimately mean he’s going to get what he wants? No. But if he doesn’t keep driving that, then there’s no political pressure. The congressional process takes over and goes on and on. It becomes more about legislative process than an outcome.

What is the impact of ACA repeal or replacement on investors? What is the timing?

Gottlieb:
MACRA (Medicare Access and CHIP Reauthorization Act of 2015) and payment reform are more important to investors than the ACA. There’s not much services innovation and investment behind the ACA.

MACRA is the driving force behind what’s happening in the reimbursement environment. MACRA was a broadly bipartisan bill that has been championed in Washington for well over a decade now. Concepts like capitation, pay for performance and measuring outcomes were first talked about during the Bush administration.

The most important investable theme is consolidation and the movement toward vertical integration as integrated delivery systems become more accountable toward the post-acute episode of care.

MACRA will not change substantially. Investors will still feel very comfortable with investments in the services space. Consolidation has slowed down as hospitals step back, uncertain about their budget outlook. But cross-market consolidation continues, and hospitals will enter the market and continue consolidating, for better or worse.

Most venture capital has been working capital intensive, around the IT-types of plays. I still see a lot of activity in that and not a lot of concern around the ACA. I think the market is looking much more attractive going forward. I think you’ll see more physicians trying to transition their patients into Medicare Advantage plans to move them out of Medicare. I think there’s a lot of opportunity for investing and entrepreneurship in healthcare services.

Friend:
Reimbursement will drive the value of everyone’s business, so it’s imperative to understand current value and what will drive that value. Regulation, competition, innovation and pricing will all affect how much money you’ll make.

Five inescapable forces will continue to reshape healthcare investing regardless of near-term political pressures:
  1. Computer science and molecular biology are converging. The ability to harvest data and look at illness and, at the same time, manipulate the genetic code. This science is not going to stop. The only question is, will it be faster or slower based on policy?
  2. Mobile technologies are coming into their own. In the not-too-distant future, a smart watch will be able to monitor every word you say and detect the early signs of Alzheimer’s disease by changes in your language patterns.
  3. Integrated supply chains are becoming the norm. Every part of the system–from pharmacy benefit managers to hospitals to physicians–is repositioning itself.
  4. As patient care moves away from hospitals, what does their future look like? What is their role? They may well be the convener of care, but patients will not spend significant time there. In that case, how many do you really need? Who will pay for them? How will they manage their debt?
  5. We think for the first time that people will lose money in healthcare. Most healthcare businesses over the past 30 years have been safe, moneymaking investments, but value-based payments introduce significant new risks and raise the specter of negative returns on capital. We believe that $10 trillion of wealth will be created if you’re invested in the right areas, but $4 trillion will be lost by investing in the wrong areas. 

Pilch:
Remember that everything has reimbursement risk. Don’t assume you’re investing in companies that don’t have it.


Healthcare Reform and Risk

What are some of the most challenging risks healthcare organizations face today?

Pilch:

Healthcare reform is going to be an amorphous, continuing process. We’ll need to be able to manage risk and help providers understand how to manage risk. That’s a big challenge and also a great opportunity.

Gottlieb:
Insurers are largely out of the market. I’m not sure how they can win or lose with respect to changes in the market that they weren’t participating in.

United’s book of business has been declining each year. It has largely abandoned fully insured products. I think insurers are morphing into entities that provide services to other client services. Their job in the future is to provide services to delivery systems that are taking risks; the insurers don’t want to take risks.

Who is taking the risk in the market? It will be the government, and it will be large employers that continue to be self-insured. By and large, it will be providers and provider systems that are taking the risk. Insurers will try to position themselves as service providers to those entities where someone else is backstopping the risk.

Tamasi:
What is your risk for the next two years and the next four years? Regardless of what happens this year, you’ve got the implementation piece, which is significant.

Don’t rely totally on legislation. A regulatory process exists as well. What are all the other parts of healthcare reform that will be dealt with by the U.S. Department of Health and Human Services (HHS) in the normal course of business?

Pilch:
An existing law in place outside the ACA gives incredible power to the Centers for Medicare & Medicaid Services (CMS) and to HHS to change reimbursement, change products and change reporting very quickly. Think about your objectives and risk from a two-year perspective and determine your milestones within that timeframe.


New Drugs and Reimbursement Risk

How is reimbursement risk for new drugs evolving?

Pilch:
Before, we had to deal with newer/better drugs replacing existing ones. Now it’s becoming newer/better protocols replacing existing ones for care that are much more expensive.

For example, the Office of Inspector General (OIG) identifies new drugs now, like for Hepatitis C, which are expensive. But compare these costs against the alternative of making sure that someone is not in a hospital for the next 20 years, and it’s good savings. So, $80,000 doesn’t look like a lot of money compared to $300,000, $400,000 or $500,000.

Gottlieb:
In the old system, it was hard to capture those savings. An innovation on the drug side was going to offset costs on the process services side. It was hard for insurers to capture that, for taking the risk and paying for the drugs.

In a system where providers consolidated their local markets, for better or worse, they’re taking capitated risks; they own that risk in perpetuity. Insurers have a lot of churn, but you don’t have a lot of churn in the local market. People who do therapy don’t move around that much. You know your local morbidity the way you should.

So, coming in, say you’re an integrated delivery network (IDN) that has consolidated your local market and insured your entire local population against Hepatitis C in year one. Economically, it might look a lot different than it does to the insurer—maybe even the employers—because you’re reducing the factor of morbidity in a local community substantially.

There will be a different selling model. Managed markets groups used to go in and talk to employers and IDNs. They need to reconstitute that. They also need analytics on local markets to make these arguments. They don’t have it right now. You don’t have these systems taking full capitation yet, or global capitation, but it’s moving in that direction. Right now, you have those capitated areas with bundled payments, but it’s moving toward more global cap. From the drug side, being able to make the arguments will require the old system and might be easier.

Tamasi:
PDUFA (Prescription Drug User Fee Act) must be reauthorized this year. Trump is generating political momentum to reduce drug pricing, so PDUFA could get weighed down in pricing issues.

Friend:
That’s an important point, because the total cost of care must be viewed holistically. If a $100,000 drug can save $1 million in hospitalization, that’s a pretty good return. Different stakeholders take the same event and view it very differently. It’s a long-duration event for patients, but payers may see it as short duration. For the provider, it depends on what the incentives are and what MACRAs are. For the device companies that market and sell to Wall Street, how do they show that their products create more value?

Drug companies have an unintended value creation event in collecting data. The data can create more value than the tests or the product could. In many cases, there will be new ways to create value and make money.
Anything we can do to allow more innovation and more ways to create value is a good thing that should promote and accelerate the improvement of the system. It’s important to view innovation holistically—looking at clinical issues, financial issues, market issues, legal and regulatory issues.


Audience Q&A

What will happen to the mandated side of alternative payment models?

Gottlieb:
The Obama administration took a very narrow view and made it very hard to get out from the Merit-based Incentive Payment System (MIPS). I think it’s inevitable that providers will look to get out from MIPS, because most won’t be able to take the financial risk of staying in MIPS or manage the reporting requirements.
There’s a lot of opportunity to look at different arrangements, including bundles, that would qualify as alternative payment models for providers taking certain elements of risk.

Friend:
Bundled payments are an unstoppable force because we have the wrong incentives now. Look at the hospital readmission rate today for cardiac patients. It’s like a car mechanic who has an incentive not to fix your car because every time you bring it back, he gets paid again–versus if he doesn’t fix it right the first time, he doesn’t get paid.

We believe that bundles are going to take off dramatically and that you must be either the shaper or the adapter. If you’re cut out, you’re not going to do well. While the legislative issues are interesting, the economics overwhelm them.

Bundled payments are the biggest economic change in healthcare, and we are just at the very first stage. Every other part of the economy works this way.

Do you think CMMI (Center for Medicare and Medicaid Innovation) money will be at risk to fund alternative payment models?

Tamasi:
People should be aware of the benefits conveyed to constituencies. The trick is always to align a [Tom] Price constituency, which is now the president’s, with where your issue is and make them understand the political upsides to preservation.

It’s not clear yet how that all plays out. On the legislative side, if you know what you want to say, you must have a road map for doing it. Start making those arguments now, not just with people around Price inside HHS, but also with the concentric circles that are around the incoming administration separate from HHS. That’s where there’s more support now.

What does healthcare of the future look like if it’s not hospital-centric?

Friend:
The move toward personalized medicine will radically change the way we take care of people. We’re moving from an analog system to a digital one. The technology is exploding daily. Start looking at the smartphone as a device to provide care.

Look at all the changes in telehealth, pharmacy and advanced medicine. There will be a technology piece, a regulatory piece and a financial incentive piece.

We spend so much money on the wrong care, and we provide such a lousy experience that we are ripe for disruption. Facebook and Google have huge valuations and a total advertising spend of $150 billion. But we spend $3 trillion in healthcare—20 times that.

There is no Facebook or Google yet in healthcare, but I think there will be because the financial incentive is so gigantic.

Universities are poised to be either big partners or a big part of technology. But they’ll be bypassed if they get too ossified.

The field is wide open. My biggest fear is that regulation slows it down. I’m a huge optimist. It’s not going to be central planning on down. It will be smart people coming up.
 

Patrick Pilch is a managing director and the national co-leader of The BDO Center for Healthcare Excellence & Innovation. He can be reached at ppilch@bdo.com.

David Friend is the chief transformation officer and a managing director of The BDO Center for Healthcare Excellence & Innovation. He can be reached at dfriend@bdo.com.

Read next article, "How Innovations, Payment Models Seek to Tie Drug Pricing to Patient Outcomes"

Return to BDO Life Sciences Letter - Spring 2017