This document summarizes the opportunities, challenges, and implications for key health industries under the Affordable Care Act, including hospitals, health insurers, physicians, pharmaceutical companies, and medical device manufacturers. It notes that while coverage expansions create new opportunities for revenue growth, these industries will also face pressure on profits from payment cuts, new taxes and fees, tighter regulation, and a shift toward public program reimbursement. Overall the industries will need to adapt to new delivery system and payment reforms that emphasize quality and value over volume.

1. Health Reform and Key Health Industries: Implications, Challenges, and OpportunitiesMay 28, 2010 Kip Piper, MA, FACHE Senior Counselor

2. Briefing Agenda Hospitals and Health Systems Opportunities Challenges Implications Health Insurers / Health Plans Opportunities Challenges Implications Physicians and Clinics Opportunities Challenges Implications Pharma and Biotech Industries Opportunities Challenges Implications Medical Technology Industry Opportunities Challenges Implications 2

3. Hospitals and Health Systems 3

5. Around 2014-2018, significant increase in volume, particularly for elective procedures. Pent-up demand from newly insured.

6. Short-term bargaining power as insurers try to secure adequate capacity for 32 million new enrollees.

7. New payment methods create major opportunities – Bundled payment, global fees, Accountable Care Organizations.

8. Tapping $10 billion for Medicare / Medicaid demonstrations. New Center for Medicare and Medicaid Innovation (CMI) at CMS.

9. Protection against increased competition from physician-owned hospitals.4

11. Major increase in Medicaid volume. Medicaid is typically lowest payor.

12. Increasing financial pressure to move away from traditional revenue optimization model to operational efficiency.

13. Major new, expanding compliance risks. More audits, etc.

14. Coverage expansion raises questions about need uncompensated care payments and other special Medicaid financing.

15. Public hospitals may lose patient volume as newly insured “trade-up” to newer, better facilities.

16. Lower payments from commercial and Medicaid plans likely in long range. Insurers far less likely to cross subsidize Medicare and Medicaid.5

18. Rate pressure from health insurers, as the insurers face tougher competition, lower profits and increase market power via consolidation, enrollment.

19. About 42% of uninsured will remain uninsured. Not solution to costs of unauthorized immigrants.

20. Significant consolidation likely. Of hospitals, health systems, physician group practices. Hospitals buying or partnering with physician groups.

21. Significant pressure on increasing operating efficiency, reducing readmissions and infection rates.

22. Heavy interest in demos, new payment methods, and delivery system reforms. Major advantages to early adopters. 6

23. Health Insurers / Health Plans 7

25. 25% increase in Medicaid market, 50%+ in many states.

26. Likely 75%+ will enroll in Medicaid health plans under contract with states.

27. New Health Insurance Exchange market, with ~26 million enrollees (16 million newly covered).

28. New opportunities in specialized markets:

29. $300 billion+ Medicare-Medicaid dual eligibles market

30. $170 billion long-term care market

31. Federal support to create “co-op” health plans – $6 billion.

32. New $5 billion temporary federal high-risk pool.

33. Savings potential from comparative effectiveness research, new provider payment models, biosimilars, and electronic health records.

34. More uniform insurance regulatory framework across US. 8

36. New federal taxes – $70 billion.

37. Requirement on Medical Loss Ratios – mandate limiting amount of premiums available for marketing, administration, profit. Minimum MLR of 85% or 80%.

38. In Medicare Advantage market, lower payments and fewer enrollees or slow growth.

39. Traditionally profitably individual and small group markets will shrink dramatically as Exchanges begin. Employer-sponsored market will also shrink. At least 10 million, likely far more due to “crowd out.”

40. Newly insured likely challenging to serve.

41. Covering patients with pre-existing conditions will be costly.

42. New provider payment methods, delivery reforms favor providers over plans. 9

44. Significant pressure on profit margins due to combination of factors: floor on medical spending, Medicare Advantage cuts, loss of profitable segments.

45. With pressure on profit margins and need to grow revenue, insurers will consolidate and look for ways to grow in untapped markets (dual eligibles).

46. Federal and state government continue to grow as the dominate customer – more need to understand, navigate, influence, comply with government. 10

47. Physicians and Clinics 11

49. In Medicaid, Medicaid primary care physicians paid minimum of 100% of Medicare rates in 2013 and 2014.

50. More federal funding for community health centers: $10 billion.

51. New payment methods and delivery reforms empower high-performing providers. Major opportunities via new pilots and demos in Medicare and Medicaid.

52. Easier access to patient records, easier to coordinate and track care. 12

54. Unless Congress acts, Medicare will cut physician rates by 21.3% on June 1.

55. Cost of another extension of current rates will cost about $98 billion or more. Permanent fix to Medicare doc rate problem will cost minimum of $275 billion.

56. Implementation of EHRs, meaningful use, and new workflow.

57. Pressure to follow evidenced-based medicine, improve safety and efficiency.

58. New Value Index will adjust Medicare payments on the physician’s relative cost and quality.

59. Continued increase in quality measurement and reporting, with payment penalties for not reporting. 13

61. Government programs will continue to grow as dominate payor.

62. Low rates. Medicare rate problem continue for years. Payment rates unlikely to keep up with costs. Increases for primary care may come from cuts to specialty rates.

63. Physician practices will see increased competition from health systems, retail health clinics, federally subsidized community health centers.

64. Small practices will become increasingly difficult to operate, financially unviable. Pressure to consolidate and partner.

65. Continued decrease in market influence, autonomy. 14

66. Pharma / Biotech Industry 15

68. New pathway for biosimilars. Opportunity for some manufacturers, hit for others.

69. New policies promoting prevention, chronic care management, medication management.

70. Center for Medicare and Medicaid Innovation, demos, pilots – opportunities to influence, partner.

71. Increased use of HIT may increase compliance and thus volume of certain drugs. New data may decrease cost of clinical trials.

72. Market opportunities for makers of “value” drugs – drugs adding value, not merely novel. 16

74. Mandatory 50% discounts in Medicare donut hole – $32 billion cost.

75. Minimum Medicaid rebate of 23%, up from 15%.

76. Mandatory rebates extended to Medicaid health plans

77. 25% increase in Medicaid market.

78. New federal fees on manufacturers – $27 billion over 10 years. Tighter profits.

79. Comparative effectiveness research!

80. New payment methods will change roles, incentives for physicians and hospitals.

81. New pathway for biosimilars. Long-range hit to brand biologics.

82. Increased compliance risks.17

84. Lower profit margins for many brand products.

85. Higher proportion of business from public programs – with all the associated implications.

86. Significant pressure from comparative effectiveness research and value-based benefit designs. Must incorporate into clinical trial design, market strategy.

87. Biosimilars will have impact but will roll out over several years. Payors will be eager to use biosimilars.

88. Imperative to leverage, adapt to new policy environment – payment reforms, delivery reforms.

89. States will increase as legislative battle ground.

90. Extension of Medicaid-style rebates to Medicare Part D likely inevitable.18

91. Medical Technology Industry 19

93. Emphasis on prevention and chronic care management likely to increase demand for screening, testing.

94. PPACA reflects strong federal interest in technologies, e.g., to support seniors and the disabled in their homes, reduce readmissions, support medical homes.

95. Opportunities to leverage an array of new initiatives to demonstrate the value of technologies – Medicare and Medicaid demos, Accountable Care Organizations.

96. Major expansion of federal funding for Medicaid home-based care for seniors and disabled – need for home monitoring, etc. $20+ billion.

97. Increase use of HIT will likely drive further investments in medical technologies, need for clinical support systems, and technology at point of care. 20

99. Likely consolidation of hospitals / health systems and health insurers will change market dynamics.

100. Comparative effectiveness research. Increased number of technology assessments. Mix of opportunities and risks depending on evidence and offerings.

101. New payment methods will dramatically change roles, incentives for physicians and hospitals.

102. Larger portion of market covered by public programs with tight budgets and a penchant for regulation.21

104. Pressure on margins from mix of new federal tax, higher public payor mix, and consolidation of health systems and health insurers.

105. Influence of comparative effectiveness research and value-based benefit designs will grow.

106. Imperative to leverage, adapt to new policy environment – payment reforms, delivery reforms, Medicare and Medicaid demos, interest in episodes of care and reducing readmissions, increasing hospital operating efficiency.22

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