The ACA and Changes in the Healthcare Industry

Orlando—By now, more than 4 years since the passage of the Patient Protection and Affordable Care Act (ACA), patients, providers, payers, and pharmaceutical companies have become accustomed to an evolving healthcare industry. Michael Lovdal, partner, health and life sciences group, Oliver Wyman, expects even more change and upheaval to become the norm for the foreseeable future.

Mr. Lovdal, who spoke during a keynote general session at the NAMCP forum, anticipates consolidation, integration, and new entrants in the industry. For instance, there are now 211 health insurance companies in the United States. The top 20 companies account for nearly 70% of the market, and the top 50 account for nearly 90% of the market. Thus, he believes there will be an increase in mergers, acquisitions, and closings.

There is also a trend with hospitals consolidating into health systems and physicians becoming employees of hospitals and health systems. In 2012, 39% of physicians worked in private practice, down from 57% in 2000, according to Mr. Lovdal. Instead of getting paid in the fee-for-service method, they are now adopting more of a value-based model that compensates doctors for providing high quality care, efficient delivery, coordinated care, and measurable results.

A Changing Structure

With spending on healthcare approaching $3 trillion annually, Mr. Lovdal said the consequences of the changes will have a major affect on everyone in the industry.

“Never in the history of the US economy has such a large sector been up for grabs. I call it the $3 trillion jump ball,” said Mr. Lovdal. “The ACA is driving it, but basically all the ACA has done is unleash a set of market forces that are unstoppable. It is going to radically change the landscape.”

By 2025, Oliver Wyman projects 70% of healthcare spending will be value-based. Mr. Lovdal said Aetna, Optum, and other insurers are selling ACOs, signing long-term contracts and outsourcing them to third-party vendors. There are also population health management companies focused on keeping patients healthy and out of hospitals and limiting their tests and procedures.

Within the next few years, more than a trillion dollars in healthcare spending will shift to value-based payments, according to Mr. Lovdal. Companies are now preparing and hoping to earn some of that business.

“Who gets the trillion dollars in the next handful of years is a big, big deal,” Mr. Lovdal said. “Never in the history of the US economy has so much money moved around so quickly and had such a big impact. It is a huge issue.”

Last year, there were 40.8 million covered lives in the United States for people enrolled in individual plans, the Small Business Health Options Program, private exchanges, Medicare Advantage, and managed Medicaid, according to Mr. Lovdal. By 2018, Oliver Wyman projects that number will increase to 91.4 million.

However, Mr. Lovdal said the estimates may change depending on upcoming elections. For instance, if Republicans gain control of the White House and Congress, he anticipates a move toward Medicare vouchers in which senior citizens receive checks to purchase insurance on the exchanges and block grant Medicaid in which states receive lump sum payments from the federal government to run their Medicaid programs as they see fit.

Employer-Based Insurance

The projections depend on how many companies move their health insurance plans to a defined contribution and provide their employees with money and subsidies to buy coverage on private exchanges. Sears Holdings, Corp., Darden Restaurants, Inc., IBM, and Time Warner, Inc., are among the companies that have already forced some of their employees to the exchanges.

“I guarantee you every major employer, including the organizations you work for, has a defined contribution health plan sitting on the shelf just ready to pull it off,” Mr. Lovdal said. “It is going to explode over the next year or 2.” If numerous large companies decide to adopt a defined contribution approach, Oliver Wyman projects as many as 175 million people will have insurance in the consumer market.

So far, the private exchanges have seemed to change consumer behaviors. Aon Hewitt, which runs the exchange used by Sears Holdings Corp., and Darden Restaurants, Inc., reported that 42% of employees opted for a cheaper plan when their companies joined the exchange. In 2012, before the exchanges, 70% of employees enrolled in a preferred provider organization (PPO), 18% enrolled in a health maintenance organization (HMO), and 12% enrolled in a consumer-directed health plan (CDHP). In 2013, there were 47% in a PPO, 14% in an HMO, and 39% in a CDHP.

Employers are implementing more cost shifting to employees to control healthcare costs and adopting higher deductible plans. From 2006 to 2013, the average annual deductible for employer-sponsored single coverage increased from $584 to $1135, according to Kaiser Family Foundation data. During that same time period, the percentage of covered lives in high deductible plans increased from 4% to 20%.

For now, most employers are offering generous healthcare benefits. Mr. Lovdal cited data from Mercer that found the typical employer-sponsored plan has a 79% actuarial value, far above the 60% minimum mandated in the ACA. However, Mr. Lovdal said more companies would have more cost shifting and move toward a 60% actuarial value, which is defined as a $2000 deductible, 50% hospital coinsurance/copay, and $6000 out-of-pocket maximum.

Employers are also concerned with the excise tax that begins in 2018 and penalizes companies for offering high-cost health plans. Last year, a Mercer poll found that 31% of employers said avoiding the excise tax influenced their health plan decisions for 2014. If there are no changes to the excise tax legislation or companies do not change their policies, 55% of employers in 2022 could be subject to the excise tax. “[Employers] are not going to pay the tax,” Mr. Lovdal said. “They are going to move down the actuarial value or cost shift to employees.”

A Need for Transparency

With individuals making more of their healthcare decisions, Mr. Lovdal expects an increased focus on price transparency and the varying costs for the same procedure. He cited an article published in January in the New York Times that found the same outpatient Mohs surgeries for skin cancer ranged from $474 to $7594. He also mentioned a report from the Healthcare Financial Management Association that found “the lack of transparency in healthcare threatens to erode public trust in our healthcare system.”

The state and federal governments have already been more open with regard to costs and prices. The Centers for Medicare & Medicaid Services released Medicare payment data, provided public access to physician quality and utilization data, and proposed broader access to Medicare Part D data. Meanwhile, Massachusetts and North Carolina have passed price transparency regulation. “Transparency is here, and it is not going to go away,” Mr. Lovdal said.

Preferred networks are another way to control healthcare costs, particularly for small businesses. However, Mr. Lovdal said that state officials and hospitals that are not part of the networks have complained about excluding providers from caring for some patients.

Mr. Lovdal expects the implementation of “sculpted” networks and an increasing use of reference prices in the future, in which large payers offer to pay a set amount for procedures. For instance, the California Public Employees’ Retirement System set a reference price of $30,000 for orthopedic joint replacement surgery, Kroger Co., capped prices for certain magnetic resonance imaging exams and computed tomography exams at $800, and Safeway set a reference price of $1250 for diagnostic colonoscopies. Meanwhile, Walmart identified 6 healthcare organizations throughout the country where employees are sent for heart, spine, and transplant surgeries with no out-of-pocket costs.

“This model has gotten a lot of attention in the employer community,” Mr. Lovdal said. “This concept of the big employers sculpting their networks is going to be the new normal. The idea of narrow networks, leaving folks out, has just been politically a real hot potato in the last year or so. [Narrow networks] are probably going to fade as [sculpted networks] increases.”