Christopher Kerns:
From Advisory Board, we're bringing you a radio advisory. My name is Christopher Kerns. You can call me Christopher. I'm filling in for Rae Woods, who was recently deposed as Danish Prime Minister in a military coup for reasons this unbiased reporter would classify as entirely justified. If you're an Advisory Board fan, and if you, you evidently be you'll know that our most requested presentation that we do here at Advisory Board by far is our regularly updated State of the Union, where we outline the major forces, the big challenges that are shaping and reshaping the healthcare industry. The goal of course, is to help our members see a little bit farther down the road so they can make the best decision available to them. What many of you might not know is that for several years now, Yulan Egan and I have led that research. Regular viewers of my webcast, Stay Up to Date, will recognize Yulan as a voice of reason in a mad mad world. And so I am delighted she joined me today to talk about what healthcare CEOs need to know in 2022. Yulan, welcome as always.

Yulan Egan:
Thanks for having me Christopher and to talk about my very favorite research, no less.

Christopher Kerns:
How long have you been working on the SOU now?

Yulan Egan:
I took over right after the 2016 presidential elections. It's been a good five years at this point.

Christopher Kerns:
I don't know if anyone has ever done the State of Union for five years in a row, other than maybe you so I'm so glad you could join us today because we're going to be talking about all of the insights that came out of that research. And for many of you who have seen either myself or Ford Koles deliver this presentation, some of this might be familiar to you. But for those who haven't, we'll be breaking this topic into two parts. The first focus will look at the big macro trends, the forces that are remaking the entire industry, albeit quite unequally across different parts of the industry. So we're going to be really focusing on how the pandemic has upended, nearly every aspect of healthcare. Part two will delve into the implications these forces have on the key sectors within the healthcare space. So specific impacts on specific parts of the industry and how decisions leaders make today are going to reverberate across the entire industry and shape the future of healthcare.

Christopher Kerns:
Let's start with some pretty basic info and how the pandemic has impacted financial performance across the healthcare industry. Something that has frequently struck me, and I know this has struck Rae Woods as well too, is that there are two narratives out there battling for dominance in the public mind. One says that healthcare was battered and bruised, plummeting revenues, skyrocketing costs, catastrophic all around. Others say, hold up Cares Act and all of its related legislation and regulation more than made up for any of those losses. So much damn so that healthcare is sitting pretty pretty right now. So Yulan, first question for you and hopefully the easiest one, which of those narratives is correct?

Yulan Egan:
Yeah. We spent a couple of months delving into that question and initially I thought we were going to come down on one side or the other, but I think what we found is that perhaps somewhat frustratingly, both of those narratives have elements of truth. What we saw in the wake of the pandemic is lots and lots of variation in performance. So essentially a widening of the gap between the industry's haves and have nots.

Christopher Kerns:
Well, let's talk about how each of that might have impacted different parts of the industry. Let's start with health plans. This is the sector that got a lot of attention, just because of the huge declines in expensive utilization that we saw across the past two years. So surely health plans must be flush with cash right now. Is that fair?

Yulan Egan:
Well, most of the headlines would have you believing that narrative, but we actually think that it's more useful to look at enrollment trends rather than some of the more obvious financial metrics, like profits or our revenues or margins. And when you look at enrollment trends, what you see is a pretty clear dichotomy, which is that the big national health plans did a much better job of growing their memberships amid the pandemic than smaller regional plans or many of the blues. And we saw that dynamic particularly within the Medicare Advantage space. So the big plans saw huge, huge growth in MA and outsized growth relative to their other competitors in the market.

Christopher Kerns:
In some ways that makes sense though, because the blues have a lot more exposure to the commercial markets, which saw big increases in unemployment.

Yulan Egan:
Exactly. Yes.

Christopher Kerns:
What about the hospitals and health systems? One thing that I remember us talking about a little bit earlier in the year was just how wide the divergence in performance was between the haves and the have nots. How has that manifested itself across the past 20 months?

Yulan Egan:
Yeah. And this is something that you wouldn't necessarily notice if you were just looking at average margins or median margins across the industry. Because if you look at the averages, it really looks like hospital margins have essentially stabilized and sort of returned to pre pandemic norms. If you look at the spread in performance though, the range in performance, so the difference for example, between those who are at the 25th percentile of performance, and those who are at the 75th percentile, that gap grew significantly pretty much immediately following the onset of COVID-19. And we've continued to see that gap maintained even as the average has returned to normal.

Christopher Kerns:
And one of the things that I've noticed is those that were able to succeed and actually thrive during the pandemic are those that really embraced systemness. It tends to be the larger organizations and the ones that built out certain types of systemness aspects that enabled them to thrive. Effectively it allowed them to move staff around, allowed them to move supplies around, allowed them to move physicians around as necessary. And they didn't suffer as much as some of the others that weren't able to do that.

Yulan Egan:
Yeah, it's certainly not a universal rule, but I think we did see that scale tended to be an advantage. So the bigger you were, the better off you tended to be. And some of the smaller standalone community hospitals struggled a lot more because they couldn't take advantage of that same type of systemness that you're describing.

Christopher Kerns:
And I think you're talking about something we really important there. It's not just being big, it's being big and knowing how to use that scale effectively. It wasn't a magic bullet, but it certainly helped.

Yulan Egan:
Exactly.

Christopher Kerns:
Physicians on the other hand, got a lot of attention early on because of the huge amount of support that they were expected to need. But I think you showed me some data a little bit earlier in the year that showed that physicians seemed to be okay, financially speaking, at least in aggregate, is that fair?

Yulan Egan:
Yeah. Physician income actually held steady between 2019 and 2020. I think as with hospitals, there was obviously some variations. So there were some physicians and some physician practices that did incredibly well and others who struggled. But I think by and large, what we're seeing on the physician side is that the big challenge is not necessarily financial sustainability, but workforce sustainability. They're dealing with trauma, they're dealing with burnout. We'll talk a lot more about those trends in part two of this conversation.

Christopher Kerns:
Last, let's talk about suppliers, how have they done? A lot of attention given to the drug companies in particular at the beginning of the pandemic, especially as they were so instrumental in developing the vaccine. How did they fare financially overall?

Yulan Egan:
Yeah. So I would say that suppliers are maybe the one exception to that have, and have not dynamic that I described earlier on. What we saw on the supplier side was actually a pretty rapid return to the norm. So they didn't face particularly monumental financial challenges. They also didn't get a particularly big financial boost out of the pandemic or a big political halo coming out of the pandemic either. So when you think about pharma and med device, I would sort of describe it as back to business. The one exception I would flag is probably digital health and that's kind of the obvious one, but huge, huge amounts of investment and dollars that flowed into that sector of the industry across the past year and a half.

Christopher Kerns:
What about the most important aspect of healthcare that we have not talked about yet, which is patients? How did their finances hold up? The last time that healthcare received a shock, anything resembling the pandemic of course, was the financial crisis of 2008 and nine when uninsured rate shot up, but that didn't really have this time around, did it?

Yulan Egan:
Yeah, this was the first time I would say that the Affordable Care Acts insurance safety net was really put to the test in a big way. And although we did see big temporary spikes in unemployment and some drops in employer sponsored coverage as a result, what we saw was that the new safety net largely worked as it was designed to. And so overall the uninsured rate actually hasn't increased all that much, which is pretty remarkable given what we've seen on the employment side of the equation.

Christopher Kerns:
Recently, I asked a lot of my colleagues to submit a few ideas for a piece that we did for the daily briefing on what about the pandemic most surprised you in terms of the industry's response and our colleague, Amanda Berra pointed out that it was the safety net working as designed, that really surprised her most. And it really says a lot about our time today, that working as designed is big surprise, but here we are, 2021.

Christopher Kerns:
Going back to 2008 and nine, the financial crisis. That unemployment spike that we saw was of course one of the reasons why the Affordable Care Act was put in place to begin with. During that crisis employers needed to cut costs by any means necessary. Now some of that was achieved through layoffs, but a big bet was made on high deductible plans also with the hope of using them to encourage a lot more price shopping and decrease a lot of unnecessary utilization. But the pandemic did the latter job for employers this time around. Is that fair?

Yulan Egan:
Yeah, I think that's fair. I think what we saw on the employer side is that healthcare budgets were something of a bright spot actually for many employers in 2020, and even in 2021, because of those declines in utilization. The big concern on the part of employers is that they know that that decline is probably going to be temporary. And they're in fact afraid that a lot of that deferred care is going to lead to big spikes in utilization down the line. So their concern is not so much the current reality, but what might happen in the next two to three years.

Christopher Kerns:
So where are we expecting jumps in utilization and how are employers likely to address it? I think we can agree at this point that deductibles alone have a limited set of incentives for patients to shop for lower prices. So if that's not going to be enough, what are employers going to be doing about the jumps in utilization that we're seeing? And of course, where do we expect to see those jumps?

Yulan Egan:
I would say that we were actually seeing a decline in interest in high deductible health plans, even before the pandemic. And I don't think the pandemic has shifted that dynamic at all. So I agree with you. I definitely don't think we're going to see a resurgence in that strategy. In terms of what's on the table, I think employers are very, very interested in the concept of steerage. So how do they nudge their employees toward lower cost care settings and lower cost providers? So lots of interest in strategies like centers of excellence, for example.

Christopher Kerns:
How much do you expect there to be a resurgence in things such as employer led clinics or employer based clinics, as a means of being able to take down the cost of utilization for any given service?

Yulan Egan:
We were definitely seeing a growth in interest in onsite clinics and not traditional occupational health type clinics, but full blown primary care clinics prior to the pandemic. With the shift toward remote work and the emphasis on virtual, some of that has changed a little bit, but employers are very, very interested in the concept of virtual primary care and essentially taking a lot of that, a lot of those services that they were previously planning to bring on site and really promoting them through virtual channels, which have obviously grown quite significantly during the pandemic.

Christopher Kerns:
For much of the pandemic, there was a great deal of reticence among the population to use hospital based care. And we know for a long time now purchasers have been trying to move more and more patients into lower cost sites of care, ambulatory settings and whatnot. And I think the pandemic gave a giant shot in the arm to a lot of those efforts. How do you expect that site of care shift to accelerate going forward?

Yulan Egan:
Well, I definitely do think it's going to accelerate and I think it's important to emphasize that because we're not actually anticipating huge changes in aggregate demand coming out of the pandemic. We model hospital volumes and try to project out hospital volumes every single year. When we did our five year projections as usual this year, overall demand actually didn't change all that much, but it's once you dig that layer below the surface and look at what's happening to individual service lines and individual sites of care that you start to see some much bigger shifts.

Christopher Kerns:
And last, for part one, let's talk about the world of health policy, Medicare and Medicaid. Let's start with the latter one. We've talked before about how a lot of the initial fears around Medicaid cuts never really came to pass. In fact, at the very beginning of the pandemic, there was a huge amount of fear that we would see massive cuts to Medicaid, and they just didn't happen. So what are some of the big changes that we can expect within the Medicaid space going forward?

Yulan Egan:
This was another, I think big surprise that we saw last year, which is that Medicaid didn't end up taking a big hit. If we were thinking back to the 08, 09 financial crisis, as you mentioned, we saw massive Medicaid cuts. Nearly every single state either froze or cut Medicaid reimbursement rates. We didn't see that this time around, in fact, a lot of Medicaid programs and a lot of states are making enhancements to their Medicaid programs. And that's because tax revenue actually ended up performing quite a bit better than originally expected. So states are really taking the opportunity to reinvest in their programs.

Christopher Kerns:
But I've been struck by the number of states that are really embracing health equity as a part of the incentives that they're looking at. That's something that we have not seen to this degree really ever, is it?

Yulan Egan:
Yeah, I think some of the enhancements we're seeing are kind of the things you would expect, right? So we're seeing an expansion in a lot of benefits, for example, a postpartum coverage, but you're right. We're also seeing this enhanced focus on health equity, which is really a long term strategy, not a short term one. So states are sort of taking the financial breathing room that they have right now to think about the long term.

Christopher Kerns:
And then last let's talk about Medicare. Medicare is something that has been inching closer to insolvency for some time, or at least the Medicare hospital trust fund has been inching closer through to solvency for some time right now. Based on the numbers, it looks like Congress is almost certainly going to have to act sometime in the next two to four years. So either within this administration or within the next administration, whether that is president Biden or somebody else. And one of the questions that we get often is what are the options that are going to be available to Congress when that actually happens? Let's talk a little bit about that. What do you think are some of the biggest options that are going to be on the table?

Yulan Egan:
I think it's important to recognize that we have actually never been this close to insolvency with the hospital insurance trust fund before. And what that means is that the options set is getting narrower and narrower over time because we can't really bet on changes that are going to take a long time to take effects. So things like site of care shifts or value based care shifts, where I think there's a lot of bipartisan support and to a certain extent, a lot of industry support behind those shifts as well. With time running short, you're looking at much more painful strategies for the healthcare industry. So you're talking about things like reimbursement cuts for providers, potential changes to Medicare Advantage and of course, drug pricing continues to be a big conversation as well.

Christopher Kerns:
And Medicare Advantage for quite some time was thought of as protected, just because it has a lot of bipartisan support and it has a lot of popularity across the population. But the problem for policy makers is that Medicare Advantage is now so large that it can't be ignored as a source of savings for the future. So I think it's something we need to keep a close eye on going forward. Drug pricing is another one. It's something that for a variety of reasons, Congress has not been willing to touch, but we're seeing right now with the debate that's coming through with the Build Back Better legislation, that drug pricing is very much on the table in a way that it really hasn't ever been before. So I think this is something for us to keep a very close eye on in 2022.

Yulan Egan:
Exactly. Providers have always been the perennial targets and past efforts to boost trust fund solvency. But I think we should definitely be keeping a close eye on Medicare Advantage and drug pricing this time as well.

Christopher Kerns:
So that's the State of the Union of the healthcare industry today. The big question is what's coming next. Advisory Board has always been known for being able to see around corners. We can see a little bit farther down the road because of our cross industry vantage point that we've got. And typically we have managed to do that by making predictions about where we expect different parts of the industry to go. But this year that was a real challenge. Wasn't it, Yulan? we couldn't just say this the future, this is what it's going to be. You took a very different approach to the State of the Union this year. You want to just give us a quick preview of what to expect in part two, by looking at the ways in which we've been looking at the future?

Yulan Egan:
Yeah, I think the reality is that right now we're grappling with a lot of open questions as an industry. And they're big questions, questions that will really dictate what this industry is going to look like for years to come. So in the second part of our conversation, what I think we can talk about is what sorts of forks in the road we might be approaching. So what are those big questions? What different realities could we see coming true, so to speak? And what will push us in wonder action versus another? So really, really interesting conversation. And as you said, very different from our typical State of the Industry type conversation.

Christopher Kerns:
What I also like about it is that it really shows how different parts of the industry have a lot of agency and they have a lot of influence in a way that they often discount. So in part two, we're going to be talking a lot more, more about what are the decisions on the table and how can each of us shape the future that we want.