What you need to know about the forces reshaping our industry.


December 26, 2018

The 8 biggest health care stories of 2018

Daily Briefing

    This year, the health care industry experienced a wealth of change from the ever-evolving M&A activity to renewed focus on the country's opioid misuse epidemic. Our experts reflect on 2018 to bring you the eight most important stories of the year, why they matter, and how you should respond.

    1. Moody's maintains negative growth outlook for hospitals—necessitating a change from leaders

    David Willis, Executive Director

    I spent this summer traveling around the United States speaking with C-level executives about the importance of cost control as health systems navigate through challenging financial times. In 2018, the trend of expense growth exceeding revenue growth continued; expense growth slowed, but not as fast as revenue growth did, and margins for U.S. hospitals continue to be at historically low levels. The answer to this challenge is not, as many seem to assume, ever-increasing size and scale. The health systems that will be best poised to succeed in this environment are those who can execute most effectively at taking cost out of the system, including restructuring their expensive fixed asset base. 

    It is also worth noting something unique about the current margin pressures. In contrast to the previous years when health system margins have been squeezed—almost all of which have occurred when the overall U.S. economy was struggling—this current episode is happening with economic tailwinds. It is reasonable to expect that when the next inevitable economic downturn occurs, the problem is only going to get worse. I believe that Moody's continued negative outlook for the industry is as much about this future expectation as it is about the current reality. There is no other issue more important than this one for health system executives as we enter the New Year. If we can't solve the cost problem, all of our other ambitions will likely be rendered irrelevant.

    Rob Lazerow, Managing Director, Health Care Advisory Board

    From my perspective working with hospital and health system executives on a daily basis, Moody's recent report on nonprofit hospitals—which maintains their negative financial outlook for 2019—is the most important story of the year. Moody's expects that expense growth will outpace revenue growth for the third consecutive year despite hospitals making improvements in slowing their expense growth. In our annual survey of health care executives, leaders ranked margin management as their top priority in 2018, and I expect this intense focus on financial sustainability will continue into 2019.

    In order to right their economics, hospital and health system leaders will need to achieve two critical goals—at the same time. First, they need to continue and sustain their cost reduction efforts. But temporary cost-cutting campaigns won't suffice—leaders need to make structural changes to avoid future spending. Second, leaders must reignite their revenue growth engine. The rapid slowdown of topline revenue growth is at the heart of today's margin management challenge, and organizations need to address this reality head on. I invite hospital and health system leaders to join us at the 2018-2019 Health Care Advisory Board National Meeting to learn how to secure future growth. Our new research shows how to size, prioritize, and pursue the top growth opportunities as part of a comprehensive margin management strategy.

    2. The spate of cross-industry mega mergers will likely prove disruptive for the industry

    Brandi Greenberg, Managing Director

    It's impossible to reflect on 2018 without acknowledging the many massive cross-industry vertical integration deals announced or approved this year. Between CVS' acquisition of Aetna, Optum's acquisition of DaVita Medical Group, Humana's acquisition of Kindred Healthcare, and Cigna's acquisition of Express Scripts—to just name a few—the integration we experienced this year was anything but typical.

    I see these moves as highly disruptive for the industry. In particular, they reflect the creation of a very different type of integrated delivery network than we've seen in the past. Notably, they don't include hospitals— which unquestionably served as the anchor of the first-generation integrated delivery networks of the 1990's. Rather, these new networks are seeking to build low-cost ambulatory and home health networks aimed at keeping patients out of the hospital. This will likely accelerate the outmigration of care, not just to ambulatory sites and medical offices, but to retail, urgent care, and new virtual platforms.

    These new networks will have tremendous market power across the health care value chain. This power will likely allow them to invest in new ventures, dramatically shift local market share, and demand more of the employers, doctors, and other providers they work with. Even more so, they'll be able to amass tons of quality and cost data that, if mined and managed well, could dramatically inform access, coverage, and care pathway decisions. Although the data aggregation advantage received less press than other aspects of these mergers, it may ultimately prove to be the most transformative aspect of all.

    3. The Trump administration doubles down on payment reform—with a few twists.

    Yulan Egan

    Yulan Egan, Practice Manager, Health Care Advisory Board

    HHS Secretary Alex Azar and CMS Administrator Seema Verma in 2018 demonstrated that while they share the Obama administration's commitment to value-based care, they're not afraid to shake up the status quo. Azar and Verma's approach to payment transformation differs from the Obama-era reforms in a couple important ways.

    First, it's clear that this administration prioritizes results over participation numbers. For example, CMS' overhaul of the Medicare Shared Savings Program would likely lead to financial savings for Medicare but would decrease the number of organizations participating in the program (or at the very least, slow the growth in the number of new participants every year).

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    Second, where the Obama administration focused heavily on programs targeted at large hospitals and health systems, Azar and Verma seem to have a particular interest in designing new models (and adapting current ones) to appeal to smaller physician practices. For example, we're awaiting details on a direct provider contracting model that would represent a new value-based model for independent physicians. One area where the two administrations may agree? Mandatory bundles. We're keeping an eye out for new mandatory oncology bundle in 2019 and expect that others may follow.

    4. Amazon ramps up its health care activity; Amazon, JPM and Berkshire Hathaway launch a mystery health care venture

    Amanda Berra, Senior Research Partner

    Gallons of ink have been spilled on Amazon and health care, reaching tidal wave proportions this year with the acquisition of PillPack and the launch of the Amazon-JP Morgan Chase-Berkshire Hathaway combination.  At this point, Amazon's push into health care is not so much a single story as it is a genre. 

    How can you—as someone with any kind of stake in health care—make sense of it all in ways that are useful?  Try these two steps:

    1. Maintain general situational awareness by periodically reading updated, credible (and ideally succinct!) summaries:  It's impossible to track each market development, and individual headlines don't add up to a useful map. Invest time instead on scanning smart summaries of the different ways Amazon (and/or its partners) could alter the health care market. I like our own Yulan Egan's piece about five visions for Amazon in five years, which explores the possible ways Amazon could disrupt the health care sector as a:
        • Employer aggregator; 
        • Next-generation retail pharmacy; 
        • Global health care logistics specialist; 
        • Consumer-focused technologies; and/or
        • Primary care operator. 

    In non-Advisory Board reporting, I liked this sector-by-sector roundup by CB Insights. 

    1. Get ahead of 'disruption' by zeroing in on the hot spots of inconvenience and low-value, avoidable spending in your back yard.  Any player (not just Amazon) can cause disruption by attracting customers to services that are more attractive, and (usually) more affordable.  The industry shakeups that ride along with disruption include loss of share among complacent incumbents, and the squeezing out of middlepersons whose margins rely on protecting inefficiencies in the value chain. (Note: this latter lever is what Gawande has directly said is his start point for reducing cost and raising health care quality for Amazon-JP Morgan Chase-Berkshire Hathaway employees and families). For you and your team, disruption will tee up different challenges and opportunities depending on where in the vast health care ecosystem you are.

    But the challenge isn't understanding that the delivery system needs to be more accessible and more affordable—it's making it happen. I worry that executive teams are spending a lot of time engaging in long-range speculation about what Amazon might do—and not enough time relentlessly driving fixable problems out of their delivery system. I'm talking reducing cost (which gives you strategic pricing flexibility); standardizing high-volume, high-variability episodes around clinical right answer; and reworking the delivery model to make services more accessible and patient-centered. Everything I just listed is simple in concept and tremendously complicated to execute—it's going to take a lot of lining up goals, executive incentives, reporting structures, action plans, and accountability to make progress in any of these terrains, let alone all of them.

    So, sure, keep track of what's happening with Amazon and other national-level disruptors in 2019—but also, keep your team focused on what it can do to lay the groundwork for the "amazonification" of your organization today.

    5. Stories on surprise billing reinforce the need to move from opaque pricing

    Russell Davis, Executive Director

    Sarah Kliff of Vox spent much of the year analyzing 1,600 patient ED bills. No surprise, she found a lot of surprise billing. The stories highlight the sort of technically legitimate but mostly unflattering examples that cause public outrage: a $629 Band-Aid, an $18,836 bottle of formula, a $5,751 ice pack. Her project focuses on the intersection of principled cost recovery, high prices, and a nuanced definition of "in-network." She explores how these bills complicate patients' lives. 

    The series will make anyone in the health care business wince, but we shouldn't look away. Kliff's reporting shines a spotlight on an underlying explanation for the lack of real consumerism in health care—opaque pricing. It's hard to imagine that a genuinely positive customer experience can ever exist until health systems and payers address the root causes of the problem. We need consumers to be more positively engaged with their health care decisions. That will only happen when we identify, explore, and improve the very worst parts of today's patient journey. Or, if we fail, when congress gets involved.

    6. Government, providers create new interventions as opioid epidemic rages on

    Gillian Michaelson, Consultant, Health Care Advisory Board and Colleen Keenan, Senior Analyst, Pharmacy Executive Forum

    Hospitals, health systems, communities, and individuals nationwide are experiencing the damaging effects of the opioid epidemic on a daily basis. EDs and inpatient beds have been flooded with those suffering the devastating consequences of opioid use disorder and overdose. From 2000 to 2017, fatal opioid overdoses increased by 478%—with an increase of 15% just from 2016 to 2017—bringing the CDC's projected 2017 fatality total to about 48,000 people.

    In light of the unprecedented urgency of this situation, stakeholders from across the health care industry have a clear imperative to act quickly to mitigate the harms of the epidemic. In October, Congress began this process by passing a bipartisan, bicameral legislative package to address the opioid epidemic through a variety of public health initiatives.

    Hospitals and health systems have also stepped up to the plate to work to appropriately rightsize physician opioid prescribing habits, reduce harmful health care worker drug diversion, and expand access to medication assisted treatment and alternative treatments for pain. Organizations will have to continue to double down on these efforts across the coming year to reduce the rising tide of overdose fatalities, identify and treat existing cases of substance use disorder, and mitigate the spread of further harm. 

    7. The frequency and size of health care data breaches and hacks expands

    Allyson VicarsAllyson Vicars, Consultant, Health Care IT Advisor

    This year saw an increase in the frequency and size of data breaches in the health care industry—with the data of 6.1 million people having been put in jeopardy through August alone. Therefore, as we reflect on 2018, it's imperative that we focus on the cybersecurity problem as a major story—and one that won't be going away.

    Going into 2019, we expect that cyber criminals will continue to become increasingly sophisticated and develop new attack vectors and capabilities health systems are not prepared for. Many health systems have spent the past few years playing catch-up on cybersecurity. That will no longer suffice. Your organization's work and investment in cybersecurity must continue year round. In particular, we encourage health system leadership to:

    1. Focus on your third parties. You're only as safe as the partners you decide to do business with (and the partners they do business with, and so on). Each organization needs a comprehensive plan to monitor and manage relationships with all third parties, from major system vendors, niche software suppliers, medical device vendors, and anyone with physical or network access to any part of your organization. Remember, addressing third-party risk is a continual process—not a one-time event or even a once a year event.
    2. Continually support and fund cybersecurity advancements. The bad guys will advance quickly and unceasingly—so should your defensive and offensive cyber capabilities. But don't just think about technology– your security governance, policies, procedures, and education efforts require attention as well (and often require little to no funding, just your time and attention).
    3. Continually reinforce your human firewall. Help enforce your 'human firewall' through awareness training, frequent testing, and an accountability policy that your organization is willing to support. Take things to the next level and consider gamifying your security awareness program to reward good security citizens and grow grassroots leaders.

    Executive leadership must prioritize security even when the latest attack isn't making the news. Your organization could be the one in the next headline.

    8. Medicare expands the definition of supplemental benefits in MA—increasing the power of plans to impact social determinants

    Rachel Sokol, Practice Manager

    I believe CMS' decision this year to expand the definition of supplemental benefits to allow for those that "have a reasonable expectation of improving or maintaining the health or overall function of the enrollee," but are not expressly health-related, marks a significant shift. The new definition allows plans to design benefits that address the social determinants of health—and therefore signals a greater acceptance of their role in managing health spend. While plans (and providers) have known for some time that they make a difference, changing regulations will allow their impact to spread to a broader audience.

    In addition, this broader definition will allow plans to move more outside of hospital settings in seeking to manage their members' spend. This change, along with a number of deals this year (like Humana's acquisition of Kindred Healthcare and Anthem's acquisition of Aspire Health), point to the growing recognition that care should be managed not only outside the hospital, but outside the health care community entirely—even in members' homes.

    It will be interesting to watch how this change spills over into other parts of the health care industry, how it impacts Medicare as a whole, and how it expands next year. Given the timing of CMS' release in April, we saw fewer plans take advantages of this change for the 2019 benefit year, but expect many more will in future filings.

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