SEEING BEYOND

REFORM: A
LEADERSHIP GUIDE
TO THE EMERGING
TRENDS IN HEALTH
CARE
by
Jamie Orlikoff
President,
Orlikoff & Associates, Inc.
4800 S. Chicago Beach Drive
Suite 307N
Chicago Il 60615-2054
773-268-8009
j.orlikoff@att.net

© Copyright Orlikoff & Associates, Inc. 2014

 Well Known U.S. Healthcare Crisis
8,000 Average spending on health per capita • In 2010 we spent $2.6 trillion on
United States health care, or $8,402 per
7,000 Canada person.
Germany
France
• The share of economic activity
6,000 Australia (GDP) devoted to health care
United Kingdom has increased from 7.2% in 1970
5,000 to 17.9% in 2009 and 2010.
• Health care costs per capita have
4,000 grown an average 2.4 % faster
than the GDP since 1970.
3,000 • Half of health care spending is
used to treat just 5% of the
2,000 population.

1,000

0
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2011.
Benefit for the Cost?

*Graph: OECD (2011), Health at a Glance 2011: OECD Indicators, OECD Publishing.
 Why Change?

Dr. Keith Fernandez, Memorial Hermann Physician Group

1960
2025
 BOOM!
U.S. Population growth mostly driven
by the elderly:
• 65+ cohort will grow 28% in the next
decade
– 10,000 baby-boomers turn 65
every day (that’s one every 7
seconds)
– This will continue for the next 18
years

• 65+ cohort will be 15% of total U.S.

population by 2016
• Much higher ED use compared to
other age cohorts
• 25% of Medicare beneficiaries have
five or more chronic conditions, see
an average of 13 physicians and fill 50
prescriptions per year.
What happens at age 57?
 GOOD NEWS: Inpatient Volumes
Stabilized, Trends Positive
• On average, respondents reported an inpatient
volume increase of 0.4 percent for Q2 of 2014.
Hospitals in Medicaid expansion states reported higher
increases in inpatient volumes than states in which
Medicaid has not yet been expanded.
• ED volumes and admissions also increased in Q2 of
2014. Medicaid expansion states were nearly two
times as likely to report volume increases in the ED.

July 21, 2014 Becker’s Hospital Report; Jeffries Investment Bank Survey
 GOOD NEWS! Health Cost
Growth Slowed: CMS
• 2013 health spending growth at
3.6% due to sluggish economic
recovery, sequestration effects, and
continued move to cost sharing with
consumers

Sisko et al “National Health Expenditure Projections, 2013‐23: Faster Growth Expected with Expanded Coverage and Improving Economy” Health Affairs 
September 2014. Published online before print on September 3, 2014, doi:10.1377/hlthalf.2014.0560
 Well Great, BUT Faster Cost Growth
Expected: CMS

• Health costs expected to grow 5.6% in

2014 and 6% per year from 2015-2023,
slower than the 7.2% average growth
experienced between 1990-2008. Due
to ACA coverage expansions, faster
economic growth, and population aging.

Sisko et al “National Health Expenditure Projections, 2013‐23: Faster Growth Expected with Expanded Coverage and Improving Economy” Health Affairs 
September 2014. Published online before print on September 3, 2014, doi:10.1377/hlthalf.2014.0560
 AND…
• Health spending expected to
grow 1.1% faster than
average economic growth
from 2013-2023; growing from
17.2% of GDP in 2012
to19.3% in 2023.
Sisko et al “National Health Expenditure Projections, 2013‐23: Faster Growth Expected with Expanded Coverage and Improving Economy” Health Affairs 
September 2014. Published online before print on September 3, 2014, doi:10.1377/hlthalf.2014.0560
 What is Behind Cost Growth Slowdown?
• Source of the Recent Slowdown in health spending
growth remains unclear.
• But, “the economic slowdown explained
approximately 70% of the slowdown in health
spending growth” suggesting that “the recent
decline is not primarily the result of structural
changes in the health sector or of components of the
Affordable Care Act, and that – absent other
changes in the health care system – an economic
recovery will result in increased health spending.”

Dranove, David; Garthwait, Craig; Ody, Christopher “Health Spending Slowdown is Mostly Due to Economic Factors, Not Structural Change in the health 
Care Sector” Health Affairs August 2014 vol. 33 no.8 1399‐1406
 Four Ways Hospital Performance Declined in 2012
and 2013
1. Margins dropped: Median operating cash flow margin declined to
8.9% in FY 2012, compared with 9.2% in FY 2010 and 2011.

2. Growth in expenses outpaced revenues: For the first time since FY

2008, expense growth outpaced revenue growth. Median operating
revenue growth declined from 5.4% in FY 2011 to 5.2% in FY 2012,
while median expense growth increased from 5.0% to 5.5%.

3. Patient revenue dipped: Median net patient revenue growth rate

slowed from 5.3% in FY 2011 to 4.7% in FY 2012.

4. Volumes declined: Inpatient volumes declined by 0.6% in FY 2012

after flat growth in FY 2011. Meanwhile, observation stay growth rate
increased from 8.8% in FY 2011 to 9% in FY 2012.

Moody’s Investors Service Report.

“US Not-for-Profit Hospital 2012 Medians Show Balance Sheet Stability Despite Weaker Performance”
Aug 21, 2013
. http://moodys.alacra.com/research/moodys-global-credit-research---PBM_PBM157417#sthash.8fbboyGB.dpuf
 Hospital revenue growth slows to
all-time low in 2013
• Revenue at not-for-profit hospitals grew at an all-time low of
3.9% in 2013 with sluggish gains in both inpatient and outpatient
activity.

• In comparison, hospital revenue increased 5.1% in 2012 and

historically has grown about 7% per year.

• Expenses increased by 4.3%; down from an increase of 5.5%

in 2012 but are still growing faster than revenues.

Moodys Investor Services August, 2014
 The Result?

25% of Hospitals in Moody’s sample lost 
money on operations in 2013 
up from 17% in 2012, 
and 13.8% in 2011

Moodys Investor Services August, 2014
 Hopeful Sign?
Health Spending is Flattening Out

In 2009, 2010, 2011, 2012, and 2013 annual

total healthcare spending grew about 4% per
year, the slowest annual pace in more than
five decades.

Why, and Will It Last?

So What is Reform really about?
Healthier population
$/N Lower Use
Lower Prices
Higher quality

2013 Time

Len Nichols, George Mason University

 So sorry to keep bringing
this up, but WHY is Health
Care Cost Growth
Slowing?
 “Patient’s Have More Skin
in the Game”
• Moody's pegged the increased popularity
of high-deductible health plans for leading
people to postpone care or seek out lower
cost retail clinics.

Moodys Investor Services August, 2014
 Rise of High-Deductible Plans Could
Negatively Affect Provider Ratings
• The number of people covered by an employer-sponsored
high-deductible plan skyrocketed from just 4 percent in 2005 to
31 percent in 2011.
• That percentage will keep rising, especially as people sign up
for bronze and silver plans (which are typically classified as
high-deductible plans) through the Affordable Care Act
exchanges.
• This will likely hurt hospital and system financial performance
in the short term and lead to a higher number of negative rating
actions, according to Fitch.

Fitch Ratings February 20, 2014; Kaiser Family Foundation; 
 Problem: Consumers Don’t Have Cash!
• 77 million Americans have defaulted on debt and are in
collection of some kind. The vast majority of the millions
receiving coverage through the Exchanges have deductibles
greater than $2500, and annual out-of-pocket payment
significantly higher than that.
• Forty-four percent of American households are “liquid asset
poor”, meaning that they have three months or less of their
household expenses in savings. And 51% do not have
enough cash to pay off their outstanding credit card balances.

Jeff Goldsmith  “The Death of “Reimbursement” and What It Means for Strategy” Future Scan 2015; 
http://www.urban.org/UploadedPDF/413191‐Delinquent‐Debt‐in‐America.pdf; http://assetsandopportunity.org/assets/pdf/2014_Scorecard_Report.pdf   
http://www.bankrate.com/finance/consumer‐index/financial‐security‐charts‐0214.aspx
 Jobs regained, but pay is down
The U.S. regained the 8.7  Million jobs lost in the Great Recession, 
BUT the average wage of those jobs has dropped 23%!

$61,637

Average wage of jobs  Average wage of jobs 
Source: U.S. Conference of Mayors  lost in 2008 and 2009 gained through Q2 2014
August 12, 2014
A problem for at Least HALF of Americans
• Only 11% of households with $2500 deductibles meet the
deductible in a year, and only 4% of those with $5000
deductibles actually meet theirs.

“Thus, when people have major cost sharing responsibilities,

they shy away from using healthcare if they possibly can, and
they don’t pay their medical bills when care use is unavoidable”
-Jeff Goldsmith

Jeff Goldsmith  “The Death of “Reimbursement” and What It Means for Strategy” Future Scan 2015; 
http://www.managedcaremag.com/archives/2014/3/patient‐liquidity‐time‐service‐big‐new‐problem‐providers‐insurers
$4 PMPM
 Health Cost Growth “Slows” to 5.4% for
Families in 2014
• Cost growth continues a decade-long slowing trend for a
family of four enrolled in an employer-sponsored PPO.
• Yet, healthcare costs for that family will still increase 5.4% in
2014, an average bump of $1,185 per family and a total cost
of $23,215, with employers paying $13,520 and employees
paying $9,695.
• Ninth straight year annual costs have increased by at least
$1,100. In 2013 growth was 6.3%, and in the past decade the
cost of healthcare for that family of four as measured by MMI
has increased by 107%, from $11,192 in 2004 to $23,215 in
2014.
14th Annual Milliman Medical Index, May, 2014 Seattle, WA
 Who Will Determine “Value” Payments?

“The final arbiter of value in a consumer-

driven marketplace is going to be the hard-
pressed American consumer and where
they choose to spend limited family cash.”
-Jeff Goldsmith

Jeff Goldsmith  “The Death of “Reimbursement” and What It Means for Strategy” Future Scan 2015; 
 Who Will Be The Customer?

“In the future employers as buyers of health insurance — our

most lucrative customers — essentially go away.
Employer-backed care is driving inefficiency in the market. As
consumers become the principal buyers of care, true reform will
take place. And with patients in charge of health care spending,
much of the $800 billion a year misused in various segments of
health care would be saved. Much of that entails using
technology to empower the consumer.
This is the new model. This is the only model that works"
-Mark Bertolini, CEO and chairman of Aetna,

HIMSS14  Keynote Presentation, February 25, 2014; Orlando, FL.
 So, what can we expect?
• Growing shift of health care costs to
consumers/patients.
• System, hospital and physician top line revenue
pressure will continue to grow.
• Bad debt migration: from uncompensated care to
patients with insurance (with high deductibles, co-
pays, premium shares) who can’t or won’t pay.
• Patients with increased out of pocket expense will
pull back on demand and look for cheaper
alternatives.
 A Brief Economics Lesson:
Supply and Demand
“If the Supply of any good is
insufficient, and its price is too high,
then demand for that good should
decrease, which should lead to a
decline in its price.”
Thomas Piketty
Capital in the Twenty-First Century
Source: Bureau of Labor Statistics Producer Price Index for Hospitals. Jeff Goldsmith Health Affairs Blog
http://healthaffairs.org/blog/2014/06/12/how-much-market-power-do-hospitals-systems-have/
Market Forces Will Drive Change
Change the INCENTIVES and the BEHAVIORS
will change. Reform the FINANCING system
and the DELIVERY SYSTEM will Change.

Movement from Inefficient to Efficient Markets

characterized by significant change in
PRICING.
From COST-BASED PRICING
TO PRICE-BASED COSTING
 Price Transparency Hurts Hospitals?
• Patients using elective MRIs were informed of price
differences among MRI facilities and given option to
choose.
• Resulted in a cost reduction of $200 or 18.7% per
MRI
• A DECREASE in use of Hospital-Based facilities
from 53% to 45% in 2012.
• Price variation was reduced by 30%; overall imaging
costs reduced significantly. Transparency increased
price competition among providers.
Wu, Sze‐jung; et al “Price Transparency for MRIs Increased Use of Les Costly Providers and Triggered Provider Competition” Health Affairs August 2014 
vol. 33 no.8 1391‐1398
 Narrow Networks
The quickest way for health plans/payers to impact
provider performance is to concentrate patients
among as few providers as possible (i.e., the
narrow network).

This is called provider disruption.

The importance of health cost reduction has led to
more plans and employers offering restricted
networks which usually result in significantly lower
costs.
 Narrow Networks Defined
There are two main types of narrow networks –
tiered and limited Narrow Networks. With a
tiered network, employers can continue to
offer a large provider network to their
employees, but out-of-pocket costs will vary
based on the provider chosen. Under limited
narrow networks, the number of providers
the consumer will have access to is
restricted. If a person seeks care from an
out-of-network provider, he or she will bear
all or most of the cost of care.
 Narrow Networks

By definition, a network can’t be narrow

without leaving some doctors and
hospitals out.

Source: DUH! Journal of the Painfully Obvious

 Reference Pricing Defined

• Reference pricing, a relatively new model in

the American healthcare industry,
establishes a standard price for a drug,
procedure, service or bundled service, and
requires health plan members or employees
to pay any provider charges above that set
amount.
 Reference Pricing

• Reference Pricing shines a spotlight on the

huge price variation in health care, and says
it will no longer be tolerated.

• By thrusting consumers into the equation

reference pricing exerts tremendous market
pressure on providers to lower their prices
 Reference Pricing
California Public Employees' Retirement
System (CalPERS) found the hospital
portion of cost for hip and knee replacement
surgery ranged from $15,000 to $110,000,
with very little difference in quality. CalPERS
set a Reference Price of $30,000.
Its reference pricing program, stated Jan 1,
2011, saved $5.5 million over the first two
years, with the average price charged for a
joint replacement dropping 26 percent, more
than $9,000 per procedure.
 Reference Pricing
The Cincinnati-based retailer Kroger Co. saved
$4.3 million in 2012 after implementing
reference pricing for prescription medication,
and saved another $1.7 million by October
2013. The only concern the company
experienced with reference pricing, was
monitoring employees' adherence to
prescriptions to make sure people didn't
stop buying medication because of cost.

FierceHealthPayer http://www.fiercehealthpayer.com/story/reference-pricing-saves-
insurers-patients-money/2013-11-19#ixzz2ovVjOBU3
The Growth of Systems versus stand alone hospitals

STATUS # of Hospitals % of Hospitals

Stand-alone hospitals 1,796 38%

In multi-hospital systems 2,890 62%

General Acute Hospitals 4,686 100%

 The Largest 12 Systems in the U.S.
System # of Hospitals

HCA - Hospital Corporation of America 149

Community Health Systems, Inc. 128

Ascension Health 98
Catholic Health Initiatives 80
Health Management Associates, Inc. 70
CHE Trinity Health 58
LifePoint Hospitals, Inc. 52
Tenet Healthcare Corporation 48
Dignity Health 37
Adventist Health System 37
Kaiser Permanente 37
Sanford Health 35
Every System is Perfectly
Designed to Achieve Exactly the
Results it Gets
© Orlikoff & Associates Inc., 2014
© Orlikoff & Associates Inc., 2014
© Orlikoff & Associates Inc., 2014
© Orlikoff & Associates Inc., 2014
© Orlikoff & Associates Inc., 2014
© Orlikoff & Associates Inc., 2014
Moody’s Investors Service Special Comment
May 9, 2012
“The most meaningful cost reduction
strategies will involve standardization
of clinical care and elimination of
variation in patient procedures. This
will be a multi-year, ambitious journey
requiring strong physician,
management and board leadership"
 Governance Transformation
Required

The quality of governance that was

sufficient to get your organization
where it is today
will be insufficient to get it
where it needs to be tomorrow.

© 2014 Orlikoff & Associates, Inc.

 What is Disruptive Governance?

Innovations and practices that…

• Change culture, behavior, and the
organization
• Create a collective body of knowledge and
a new set of habits

© 2014 Orlikoff & Associates, Inc.

““THE HARDEST THING IS NOT TO
GET PEOPLE TO ACCEPT NEW
IDEAS, IT IS TO GET THEM TO
FORGET OLD ONES.”
John Meynard Keynes
“In Times of Change, Learners Inherit the
Earth, while the Learned find
themselves beautifully equipped to deal
with a World that no longer Exists"

Eric Hoffer
(Stolen from Gary Kaplan; his Favorite Quote)