About the author: @DanGebremedhin is a Senior Associate at Flare Capital Partners, an early stage Health Technology and Services focused VC Firm. He is a practicing physician at the Massachusetts General Hospital, and previously served as an Associate Medical Director at the Harvard Pilgrim Health Plan, and spent five years as an entrepreneur in the Health IT Industry.
1. 2016 is the year when we finally pay attention to Vulnerable Populations to lower medical costs
Vulnerable populations are defined as groups at risk of negative health outcomes because of demographic or physiological characteristics such age, race/ethnicity, income, geography, or chronic behavioral or medical conditions. These characteristics correlate with social factors such as education, health literacy, and poverty which ultimately affect access to quality healthcare. Because of gaps in care, these populations have medical costs that are two to three times that of the broader population. As health systems and payers begin to dramatically attack costs in the system, these vulnerable populations will become a prime focus as a way to improve the overall health and cost of populations. I will highlight two sub-populations where I believe disparities in care have been identified and will be targeted by health systems, payers, and tech companies in 2016.
Miliman estimates that medical costs for patients with behavioral/mental health conditionns are 2-3x greater than patients without mental health conditions. Miliman estimates that as much as $48B of these costs were potentially avoidable through improved integration of mental and medical health.
A number of health tech start-ups have formed to attempt to tackle this disparity. These businesses range in their offerings from employer/payer screening and treatment for behavioral health conditions (Lyra Health, Quartet Health), telehealth treatments for patients medical and behavioral co-morbidities (AbilTo), to personalized behavioral health solutions for at-risk patients (Valera Health). Through better screening, coordination, and delivery of care for behavioral health patients – especially for those who have medical co-morbidities – early stage companies can help at-risk entities improve the health and cost of this vulnerable population.
Low Income Populations
Research from the Commonwealth Fund shows that in low income populations, a lack of access to care (particularly primary care) is undermining health outcomes and contributing to higher medical costs. The data shows that these populations have rates of readmission as high as 4x compared to well performing populations. This data also shows that low income populations have higher rates of high-risk medical conditions and lower rates of preventative care and screenings. Although the reasons for these disparities are multi-factorial, two areas show promise for potentially bending the cost curve in this population: social determinants and increased engagement.
A report from the Commonwealth Fund indicates that these social determinants (access to food, housing, childcare, employment) can affect up to 40 percent of health outcomes. A survey of Medicaid directors performed by the Kaiser Family Foundation found that focusing on social determinants of care will be a key priority in controlling costs in 2016 and beyond. A handful of start-ups have entered the social determinants space: working to aggregate, coordinate, and streamline access to these valuable safety-net services. Among them are Blueprint Health graduate Healthify, Matter accelerator company Purple Binder, and Austin-based Aunt Bertha.
Engagement of low income populations around health has been particularly challenging. Most Managed Medicaid plans use nurse call centers to manage and coordinate care of their populations. Two interesting early stage companies Sense Health and Care Message, have developed text based platforms that engage with patients and attempt to improve health literacy. Big businesses will be built by companies who can better understand and anticipate the needs of this population, then coordinate delivery of these services in a manner that is consumable and compatible with their lifestyles.
2. Patients will experience the downside of the consumerism of healthcare: medically related consumer debt
Consumerism in healthcare is largely seen as a positive force: empowering patients with choice in healthcare services. The stimulus that drives consumerism in healthcare though is the shifting of responsibility of a significant portion of healthcare costs from payers to the patient. According to a Kaiser Family Foundation report, over the last 10 years, out of pocket cost levels have risen 230%. In 2016, Healthpocket estimates that the average deductibles of a Bronze and Silver Plan will be $5,731 and $3,117, respectively. A study by SCIO showed that 4 out of 10 patients did not understand their health plan cost sharing policies, with 1 out of 5 patients avoiding care because of this confusion. Kaiser notes that as of 2012, more than 30 percent of patients had trouble paying their medical bills. Provider systems are ultimately on the losing end of this phenomenon. A report by ACA International, estimated that hospitals provided $46B of uncompensated care in 2012, with average debt recovery rates of 15 percent.
A number of businesses are beginning to tackle the problem of medical debt. There have been established players such as Care Credit and Lending Club who have significant market share in the cosmetic procedure financing industry. There have been companies such as Connance who pioneered predictive analytics to optimize patient payment and collection. Care Payment was an early entrant into patient financing and have significant traction in the hospital market.
There remains significant opportunity in the ambulatory care market in multiple verticals. Key challenges in this business will be largely twofold: optimizing provider priorities while delivering an outstanding patient experience. For providers, workflow optimization, maximum debt recovery, and maintaining brand value will be paramount. For patients, verification of charges, convenient payment options, and great customer service will likely lead to increased traction in this fragmented market. A handful of start-ups have entered the market to deliver solutions along this value chain. To name a few, verification of and management of charges (Simplee, CoPatient), optimizing financing and debt collection (Crediyo, Parasail).
The market for out of pocket cost management and financing is still evolving, but large businesses will be built in optimizing the patient financial experience while maximizing provider recovery of medical debt.
3. Individual insurance markets will continue to churn: Member Engagement and Risk Adjustment will be key differentiators for market leaders and new entrants
The ACA and creation of insurance exchanges have dramatically decreased the barriers to entry for new health plans marketing to individuals and small groups. The ACA itself paved the way for federally sponsored new insurance companies called Co-Ops (Consumer Oriented and Operated Plan). Of the 23 Co-Ops that were launched, more than half have failed, forcing more than 700,000 members to go back to market and select a new health plan. Overall, 50 carriers will be leaving the ACA exchanges in 2016, with United providing a notable threat to leave the exchange in 2017. The creation of insurance exchanges (both public and private) has provided a convenient way for individuals and groups to purchase insurance. Given the recent market fluctuation, consumers are being trained to shop annually for insurance products. In this new climate of increased patient mobility on insurance exchanges, two competencies will be extremely important for payers, and this creates an opportunity tech-enabled service providers to deliver best of breed solutions.
In the post-ACA world, many insurance products will look very similar due to standardized metal tiers and required essential benefits. Insurers will need to look for other strategies to differentiate themselves and keep members engaged and top of mind when annual open enrollment rolls around. There are several strategies around member engagement, but one that has quickly gained traction is the concept of wellness. Wellness solutions providers such as Welltok (Disclosure: Flare portfolio company) and Redbrick Health attempt to engage with healthy members as well as those with chronic conditions. Initially focused on biometric screenings and health assessments, these companies have broadened their offerings to provide solutions for incentive and behavior change programs, cost transparency, and digital health app integration. It has become clear that these early stage companies have evolved from Wellness companies to engagement companies and will continue to gain traction from both payers and employers as these offerings become must haves in 2016.
Of the ACA risk balancing mechanisms known as the 3 R’s (Risk Adjustment, Risk Corridors, Re-insurance), Risk adjustment is the only program that is permanent. The risk adjustment program is a way to make sure that all insurers are evenly sharing the medical risk in a population. Insurers with less than average documented medical risk in their population will make transfer payments to carriers with higher than average risk. Because of this annual mechanism, a health plan cannot afford to have a lag of a year to document the medical risk of a newly acquired population that they are paying claims for throughout the year.
A number of tech enabled service companies have entered the risk adjustment space to provide best of breed services to payers and other risk-based entities. There were many legacy companies who had previously provided this service to Medicare Advantage plans where HCC (Hierarchical Condition Categories) coding has been a main priority for over a decade. Inovalon, a prominent company in this category, went public in 2015, in part, based on the success of this coding optimization business. Earlier stage companies have also entered the space with new algorithms to identify uncoded risk in populations: Apixio, Pulse8, and Lumiata to name a few.
As the documentation of risk continues to be paramount for risk-stratified payments, big businesses will be built by companies with innovative solutions that not only improve detection of retrospective uncoded risk, but actually improve forward looking documentation by integrating with provider workflow.
4. Insurance Provider Networks go back to the future in 2016 -- The Narrow Network makes a major comeback and forces some Providers to go direct to consumers and employers
In 2015, we saw significant provider system evolution with health systems partnering with tech-enabled service companies such as Evolent Health and Valence Health (Disclosure: Flare portfolio company) to take on financial risk, and go so far as to launch their own health plans. Many industry observers point to these health systems as emulating more established integrated health delivery systems that have both provider and payer arms (e.g. Kaiser Permanente, Geisinger – co-founder of xG, UPMC – a co-founder of Evolent). I would counter, and say the transformation is more an evolution of and response to the concept of the narrow network.
The narrow network health plan is an insurance product that limits the number of provider systems that a member/patient can receive services from. After falling out of favor in the 1980s and 1990s, narrow networks have made a dramatic comeback. McKinsey estimates that in 2015, more than half of all ACA exchange products in major metropolitan areas will feature a narrow network product. Analysis from the Robert Wood Johnson Foundation finds that in four states (GA, FL, OK, CA) 75 percent or more of the exchange products are narrow network plans. The main drivers of this resurgence are the rising premiums due to increased coverage requirements and rating standards and increased demand for low cost coverage as traditionally uninsured populations are mandated to purchase coverage.
An important consideration of the increasing number of narrow networks on the exchanges, is that they often exclude the highest cost provider systems. These high cost health systems are usually those with the best brand recognition in a particular market, and therefore have the leverage to charge higher prices. Thus in reaction, many of these name-brand, often academic medical center institutions, have been pushed to create their own branded narrow network plans and have been looking for various channels to do so. Enter tech-enabled service companies such as Evolent and Valence, who provide the insurance backbone to market directly to consumers and bypass insurance carriers. An alternate version of this model is provided by another exciting early stage company Imagine Health. Imagine is sourcing interested employers who want to contract directly with large provider systems, also bypassing insurance carriers.
Not to be left out, many insurance carriers are developing joint entities to co-brand narrow network offerings with these name-brand health systems. Some examples are Benevera Health – a joint venture between Dartmouth-Hitchcock and Harvard Pilgrim Health Plan (my former employer) and the Aetna-INOVA ACO. Notable about both of these systems is that Providers systems were the dominant players in their respective markets, yet were compelled to enter into these arrangements with a marketing and pricing partner.
In many ways, large provider systems must have a narrow network strategy to prevent disintermediation by the market forces that are happening on the exchanges. There are a large number of services in this provider risk-enablement value chain that will create opportunities for tech-enabled early stage companies to create sustainable businesses.
5. Because of ACA employer mandates, Small and Medium Sized Employers will crave the high-touch big broker experience to manage healthcare costs and coverage
In its mission to improve coverage of individuals and small groups, the ACA mandated that employers with more than 50 employees would have to provide health benefits starting in the years 2015 (groups 100+) and 2016 (groups 50-100). The initial legislation also stipulated that groups of 50-100 would be defined as “small groups” and would have to move to pricing scheme known as “community rating.” Community rating means that previous health status is not taken into account, and relatively few factors can be used to price the products (local pricing factors, age, tobacco use). Thus, employers made up of youthful, generally healthy populations (e.g. tech or biotech company), would have to pay the same higher insurance rates as less healthy employee populations (e.g. municipality made up of primarily city and public works employees).
When the above ACA regulations were announced, many medium sized employers and their brokers had long strategy sessions about how to avoid these changes, which would lead to double digit premium increases. One tangible option was moving to become self-insured, thus avoiding a number of ACA regulations on fully insured populations. Rapidly growing, early stage company Collective Health capitalized on this option by helping employers shift from fully insured to self-insured by providing scalable tech solutions for benefit design, claims analysis, and claims payment services.
Although employer outcry at the small group rating change led to President Obama backtracking slightly by allowing individual states determine whether or not to re-define the small group category, the damage was done to the employer consciousness. Worsening employer fears is the Cadillac Tax (an excise tax on expensive benefit plans) which was originally set to take hold in 2018. This aspect of the ACA too was recently amended – the tax will now not take effect until 2020.
The last two years have been a regulatory rollercoaster for small and medium sized employers, and it has resulted in significant anxiety about increasing healthcare costs. Because of their size, these employers do not have the resources to hire high powered advisory services and brokers such as Aon Hewitt, Mercer, and Towers Watson to negotiate the best deal with large carriers. This employer market is in desperate need of tech tools that level the playing field and remove the information asymmetry between payers and smaller employers that provide health benefits to their employees. Many early stage companies are entering this space to provide solutions to help employers manage healthcare costs through Medical Cost analytics (Obeo, Zakipoint), Benefit design automation (Benefittr, Benefitfocus), and eligibility navigation tools (Accolade, Zest Health).
Given the increased responsibility placed on employers in 2016, I believe this market will continue to grow, and the large brokerage businesses will pay close attention at this downstream activity and potentially look for a way to play a role of the figurative base of the “employer pyramid.”