Entries in Finance (10)


The Los Angeles Times Reports on The Most Litigious Doctor

Clive Riddle, August 24, 2012

The Los Angeles Times recently ran a feature story, State suing doctor over billing tactics regarding “Jeannette Martello's aggressive tactics to collect fees from emergency room patients — including lawsuits and taking out liens on their homes — prompt unprecedented court case by state officials. “

The article notes that “the state's lawsuit against Martello, however, is the first of its kind, according to Marta Green, California Department of Managed Health Care spokeswoman. State officials allege in court papers that Martello collected or attempted to collect more from patients than insurance companies paid, a practice known as balance billing.”

The story about Doctor Martello’s very unique, aggressive tactics to pursue balance bills for contracted patients first broke months ago in MCOL affiliated Payers & Providers.  The Payers & Providers weekly California Edition reported on her activities, and then released a twelve page white paper,  The Many Stories Of One Highly Litigious Physician, with the sub-heading: “Surgeon Treats Patients at Southern California ERs – Then Sues Them” that details account of her 46 small claims and 23 superior court claims filed against her ER patients during the past several years, and the impact upon a number of the patients and their families.

The Times article cites Payers & Providers Publisher Ron Shinkman: “Ron Shinkman, who wrote about Martello and her tactics in the trade publication Payers & Providers, said he had never seen a more litigious doctor in 19 years of healthcare reporting.”


Three ‘Brutal Facts’ That Provide Strategic Direction for Healthcare Delivery Systems- Preparing for the End of the Healthcare Bubble

By Nate Kaufman, April 10, 2012

In August 2005, David Lereah, chief economist of the National Association of Realtors stated “All of the doom-and-gloom forecasts of a housing debacle are not only irresponsible, but downright  wrong” Lereah was not alone,  economists from Goldman Sachs, National Association of Home Builders and the Mortgage Bankers Association all stated similar opinions. Wall Street firms such as Lehman Brothers and Bear Sterns bet their companies on the strength of the housing market. Eventually the lack of financial sustainability inherent in sub-prime mortgages burst the housing bubble and the industry collapsed. (shilling)

 The lack of acceptance of the housing bubble by industry leaders is a clear example of “cognitive dissonance”.  The theory behind cognitive dissonance is “the more we are committed to believe something is true, the less likely we are to believe its opposite is true, even in the face of clear evidence that shows that we are wrong.”  (Marshall Goldsmith)  Refusal to recognize new market realities is a fundamental strategic flaw that has lead to the demise of many organizations. As Admiral Stockdale noted in his discussion with Jim Collins:  “You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be” (see Collins web site)

The recent passage of the Patient Protection and Affordable Care Act (PPACA) has created uncertainty about the future of the nation’s healthcare delivery system.  Regardless of how PPACA is implemented, or funded or modified, there are certain ‘brutal facts’ regarding the future of healthcare delivery in the United States.  In order to prepare for the ultimate impact of these ‘brutal facts,’ healthcare organizations must begin today to modify both their core beliefs and clinical practices.  By focusing strategy on these new market realities (regardless how brutal they may be), a healthcare organization can begin to position itself for success in the future.

Our Healthcare Bubble Will Eventually Burst

In their open letter to the American people published in November 2010, several months after PPACA became law, the bi-partisan Debt Reduction Task Force:

“The federal budget is on a dangerous, unsustainable path. Federal debt will rise to unmanageable levels, which will push interest rates up, endanger our prosperity, and make us increasingly vulnerable to the dictates of our creditors, including nations whose interests may differ from ours…. we must take immediate steps to reduce the unsustainable debt that will be driven [in part] by the aging of the population and the rapid growth of healthcare costs...”

Even the Congressional Budget Office (CBO) appears to be skeptical about PPACA’s ability to reduce the deficit as was reflected their original ‘base line’ projections. As a result, the CBO produced an “alternative fiscal scenario” using the more realistic assumptions that: 1) tax revenues would remain at historical levels (i.e., 19% of GDP) and 2) cost control features of the new law would only have a moderate impact. (Frakt)  This more realistic scenario further supports the Debt Reduction Task Force’s assertion that healthcare costs will contribute to the destabilization of the economy.

 Richard Foster, the Chief Actuary for CMS supported this concern when he testified before congress that the new law will increase the nation's overall spending on healthcare by $289 billion through 2019. (Modern Healthcare)

The State Budgets are in no position to absorb the cost of PPACA.  According the Wall Street Journal,

“PPACA puts cash-strapped states in a tenuous position, forcing them into one or more unattractive policy choices: cut spending in crucial areas, such as public safety and education, to compensate for the additional health care costs, raise taxes to fund the new spending, or borrow money to pay the bill and sink further into debt. (WSJ)

Thus it is a brutal reality that we are in an economic healthcare bubble that will eventually burst.  Out of necessity, both State and Federally-funded healthcare programs will intensify their pressure on providers to reduce the per capita cost of care. In the immediate term this pressure will take the form of draconian reductions in fee schedules (as we are currently seeing from some states Medicaid programs.) Over the longer term, government-funded healthcare will move from the fee for service reimbursement methodology to either bundled/episodic or population based payments. Given the historical pace with which government implements changes in payment methodologies, one  can expect these new payment systems to be phasing in between 2016-2018.

Both the Shared Savings ACO Program and ‘First Generation’ Clinically Integrated Networks Will Not Produce Desired Results - Buyer Beware 

An Accountable Care Organization (ACO) is a group of providers (physicians, hospitals etc.) that share accountability for the cost and quality of care they provide. PPACA established a “ Shared Savings Program” for Medicare fee for service patients in which ACO providers would share in cost savings should the ACO meet certain quality and cost benchmarks.

The ACO concept has been pilot tested under the “Physician Group Practice Demonstration Project.” (PGP.)  Ten of the nation’s most integrated medical groups participated in the PGP demonstration. The demonstration provided groups the “opportunity to earn performance payments derived from savings for improving quality and efficiency of delivering health care services through better coordination of care and investment in care.” (CMS fact sheet)

After four years, these ‘all star’ group practices achieved a 40% success rate. That is, during the first year only two groups received a shared savings payment. By the fourth year five groups received a payout. Ultimately, over the four years, only sixteen shared savings payments were distributed out of a possible 40. (i.e., 10 groups times 4 years.) Among the brutal facts from the PGP demonstration project are:


  1. It is difficult for even the most integrated medical groups to generate significant savings on Medicare fee for service patients
  2. When a group received shared savings payments, the magnitude of these payments were not sufficient to cover the infrastructure cost associated with operating an ACO.

The Center of Studying Health System Change recently noted:

"the economic and market rewards [for ACOs] may not materialize for a long time, if ever,"… "None of the organizations [in the PGP] indicated positive return on investments related to improvement activities,"  (Modern Healthcare)

There is little hard data documenting the primary source(s) of the cost savings that generated the shared savings payments. Both the PGP participants and CMS reported anecdotally that the savings came from reductions in both admissions and high cost procedures e.g., imaging. It is a brutal fact that ROI for the ‘successful’ PGP participants was negative even before accounting for the loss of admissions and procedural revenue.  From a financial perspective, the PGP participants would have been much better off not participating in this ACO-like demonstration.  From the PGP experience it appears that the only parties that will receive financial benefit from the establishment of a Medicare-ACO are the lawyers and consultants retained for this purpose- buy beware!

Many physicians and hospitals have formed ‘clinically integrated’ networks which they believe will evolve into ACOs. While these networks have noble goals and some have positive results, few have demonstrated the competency to significantly lower the cost of care. Even Advocate Physician Partners, a joint venture clinically integrated network in operation for over 15 years could not document “medical cost savings” in real green dollars but stated that improvements in the cost of care are “inferred.” (see health affairs)

One could argue that even though it is unlikely that ACOs and first generation clinically integrated networks will fail to achieve cost saving benchmarks, these ACOs will eventually evolve into an effective delivery model. However, as the noted futurist Jeff Goldsmith points out, the track record for past efforts for physician-hospital collaboration has been ‘dismal’ and there is no reason to assume that this time it will be different. (goldsmith)

Based on the brutal fact that ACOs and ‘first generation’ clinically integrated networks’ will not generate sufficient cost savings to be relevant, it is recommended that healthcare organizations skip the first generation models and move towards the creation of ‘second generation clinically integrated networks’ capable of managing risk and targeting the 20% of the population that consume 80% of the cost. The most current research on reducing the per capita cost of treating Medicare patients conclude:

Health reform policies currently envisioned to improve care and lower costs may have small effects on high-cost patients who consume most resources. Instead, developing interventions tailored to improve care and lowering cost for specific types of complex and costly patients may hold greater potential for “bending the cost curve.” (Reschovsky)

 Also, rather than pilot test an ACO model on Medicare and/or commercial fee for service patients where reductions in admissions will impact the revenue of the health system, it is recommended that these networks ‘cut their teeth’ on the self-funded pool of hospital employees and dependents, where a reduction in admissions/cost results in savings for the organization.

Critical elements for a successful ‘second generation’ clinically integrated network include: primary care-based medical homes, digitally connected electronic medical records with point of care protocols, disease management programs and a culture committed to improving the cost and quality of care for a population of patients vs. maintaining individual provider income and autonomy. (Kaufman)

Physician Autonomy and the Organized Medical Staff Will Become Less Relevant

On January 13, 2011 CMS published the proposed rule for the Value-Based Purchasing Program for Medicare inpatient services (VBP.) Starting October, 1 2012, hospitals can earn incentive payments based on the care they deliver to Medicare inpatients. These incentive payments will be funded by a one percent reduction in the base DRG payment. Thus hospitals that underperform will see a relative reduction in their Medicare payment rate. The VBP incentive will be based on adherence to clinical processes, (e.g., Aspirin prescribed at discharge for AMI patients) and patient experience ( e.g. communication with doctors, responsiveness of staff etc.) CMS will eventually include mortality-related measures in VBP as well. In addition, as part of the National Patient Safety Initiative, by 2015 9% of a hospital’s Medicare reimbursement will be “tied to public reporting of errors and provision of safer more reliable care with particular focus on hospital acquired infections and readmissions.” (cms proposed regs)

Traditionally the  medical staff had the responsibility for monitoring and maintaining high quality care within a hospital. While hospitals have always borne the financial risk for the cost of care ordered by its physicians, VBP now puts a hospital’s revenue at risk for their physicians’ clinical practices and communication skills. The evidence is clear from Geisinger, Thedacare, Virginia Mason and others that the standardizing care through thoughtful process redesign can improve efficiency, quality, safety and patient satisfaction. Most medical staffs have been unwilling to tackle an issue associated with the variability of cost and quality of care unless it exceeds broad limits.

It is a brutal fact that hospitals can no longer afford to delegate the responsibility and accountability of the cost and quality of care to the independent medical staff composed of physicians practicing and promoting the traditional autonomous, highly variable model of care. Hospitals will have to develop a work with the members of their medical staffs to:

1) modify bylaws to require conformance to patient safety, patient satisfaction, process and quality metrics as a condition of keeping hospital priveleges, and

2) develop the clinical infrastructure with a new breed of physician leaders in which medical directors will have the authority and accountability for cost, quality and patient satisfaction in their serviceline.

Not If But When

The nation’s rate of spending on healthcare is unsustainable. As with the housing bubble, the fundamental economics cannot support the status quo and yet many healthcare thought leaders and politicians dismiss claims of a healthcare bubble as “doom-and –gloom.” Others choose to ignore the brutal fact that AAPACA may exacerbate the cost crisis rather than moderate it.

Those that recognize the existence of a bubble and prepare for its brutal realities can actually benefit when the bubble bursts. This was clearly the case with the housing bubble where Michael Burry and his investors earned hundreds of millions of dollars betting against mortgage-backed securities (Wikapedia.) Healthcare organizations that believe in the brutal realities of the healthcare bubble can also position themselves for success when the bubble bursts. These organizations will dismiss the incremental approaches such as Medicare Shared Service ACOs, first generation clinical integration, physician co-management and focus on meaningful transformation into a provider system that is comprised of data driven, digitally connected, physician-lead TEAMS consistently delivering  evidence-based, patient-centered health care, able to treat higher volumes of patients, at lower predictable costs per episode, demonstrating measurable high quality and providing an exceptional patient experience.. As Don Berwick stated Healthcare is hungry for something truly new, less a fad than a new way to be. (VA Mason) 



Walgreens and Express Scripts: The PBM-Pharmacy Feud

By Clive Riddle, March 16, 2012

Once upon a time, pharmacies and PBMs seemed like one happy family – experiencing minimal conflict in the health benefits arena while hospitals and health plans duked it out.  But as the marketplace pressures matured, a full blown family feud  - or pharmacy feud – has erupted in the form of the ongoing WalgreensExpress Scripts saga.

Walgreens walked away from their Express Scripts contract effective January 1st, due to an impasse over low reimbursement.  Stock analysts so far say the loss of volume does not bode well for Walgreens. But will Walgreens, and other major pharmacies for that matter attempt to turn the table through the merger & acquisition arena, consolidating to improve their contracting clout just as hospitals somewhat successfully did to health plans at the dawn of the new millennium.  Or is it that PBMs will out merge them?

Here’s what’s been expressed in this saga’s script during the past year:

Walgreen’s owned their own PBM, but decided to get out of the business (just as many hospitals shed their regional health plans before going into consolidation mode in the late 90’s and subsequently). Express Scripts was a strong suitor to purchase Walgreen’s PBM, but then Walgreens sold to Catalyst Rx in March last year.

Express Scripts and Medco Health Solutions entered into a Definitive Merger Agreement for the two PBM giants in July 2011, which is still undergoing regulatory scrutiny and thus under a veil of uncertainty.

Walgreens couldn’t re-negotiate a PBM contract with Express Scripts to their satisfaction for 2012 and beyond, so as of January 1st, they were no longer a participating pharmacy provider.  Walgreens touted its Prescription Savings Club was helping them keep Express Scripts patients, but Reuters reported earlier this month that Walgreen Co's comparable sales fell more than expected in February, the second month that the largest U.S. drugstore chain did not fill prescriptions for patients in the Express Scripts Inc.  pharmacy benefits network.  Reuters cited that the “number of prescriptions filled at Walgreen's comparable stores decreased 9.5 percent during the first 28 days of February after falling 8.6 percent in January. No longer being part of the Express Scripts pharmacy network slashed 10.7 percentage points from comparable prescriptions filled in February, Walgreen said. In February 2011, 12.6 percent of Walgreen's prescriptions were for Express Scripts.”

Adding fuel to this fire were various articles across the country, such as in the March 6th Oregonian, that Express Scripts users settle in with new pharmacies.  Then this week PCMA, the PBM association, released survey results that tout the headline: New Survey: Walgreens’ Customers Flock to Independent Pharmacies.

But the future may not be so gloomy for holders of Walgreens stock, despite a rash of analysts saying “sell” earlier this year.  Now a possible Rite Aid – Walgreens merger is rumored with the New York Times reporting that a major motive must be that “a merger could create a big new drug store company capable of pushing back against increasingly strong pharmacy benefit managers like Express Scripts.”

Stay tuned. 


Kaiser by the Numbers - 4th Qtr 2011

By Clive Riddle, February 17, 2012

Kaiser Permanente, the nation’s largest integrated health care delivery system, last week released fourth quarter and year-end 2011 financial results.  Here’s some highlights, as well as comparison to their fourth quarter and year-end 2010 and 2009 financial results:

Full Year End Results

  • Combined total operating revenue:  2011 $47.9 billion  |  2010 $44.2 billion  |  2009  $42.1 billion
  • Operating income:   2011 $1.6 billion  |  2010 $1.2 billion  | 2009 $1.6 billion
  • Operating Income % of Operating Revenue:  2011 3.3%  | 2010 2.7%   |  2009 3.8%
  • Net non-operating income:  2011  $426 million  |  2010 $789 million |  2009 $524 million
  • Net income:  2011 $2.0 billion | 2010 $2.0 billion  | 2009 2.1 billion
  • Capital spending :  2011 $3.2 billion  |  2010  $2.9 billion  |  2009 $2.6 billion
  • Total Membership:  2011 8.9 million  |  2010 8.7 million  |  2009 8.6 million

Fourth Quarter Results

Combined total operating revenue:  2011 $12.1 billion  |  2010 $11.1 billion | 2009 $10.6 billion

Operating income:  2011 $247 million  |  2010 $42 million |  2009 $214 million

Net non-operating income:  2011 $227 million  |  2010 $205 million  | 2009 $276 million

Net income:  2011 $474 million  |  2010 $247 million  |  2009 $490 million

Capital spending:   2011 $1.0 billion  |  2010 $1.2 billion  |  2009 $900 million

More Numbers

High level browsing of KP’s financial results can be given a little more perspective by touring through some key information about the close to 9 million member not-for-profit health plan:

  • Founded in 1945
  • Headquarters in Oakland, Calif.
  • Three main operating entities:  (1) Kaiser Foundation Hospitals and their subsidiaries;  (2) Kaiser Foundation Health Plan, Inc.; (3) The Permanente Medical Groups.
  • 2010 Health Plan Membership, by Region:  Colorado: 526,258; Georgia: 222,074; Hawaii: 229,186; Mid-Atlantic States (VA, MD, DC): 488,171; Northern California: 3,263,619; Northwest (Oregon/Washington): 476,345;  Ohio: 122,342; Southern California: 3,341,646
  • 2010 Medical facilities and physicians: 36 Hospitals; 533 Medical Offices; 15,853 Physicians;  167, 178 medical facility employees

Kaiser Permanente by the Numbers -2nd Qtr 2011

By Clive Riddle, August 19, 2011

Kaiser Permanente earlier this month released highlights from their quarterly financial operating results.  Not being a for-profit publicly held plan, Kaiser’s numbers don’t always get the same level of attention as their national counterparts. Here’s some selected figures worth reviewing. Please note as an integrated system, they are combined results for Kaiser Foundation Hospitals, the Health Plan, and various subsidiaries.

  • Combined operating revenue was $11.9 billion for the second quarter 2011, compared to $11.0 billion in 2Q 2010. For the six months ending June 30, 2011, total operating revenue was $23.9 billion, compared to $22.0 billion for the six months in 2010.
  • Operating income was $390 million in the second quarter of 2011, compared to $313 million in the same quarter last year.  Year-to-date (thru June) operating income was $1.0 billion, compared to $794 million for the same period in 2010.
  • Net non-operating income was $273 million in the second quarter of 2011, compared to $91 million in the same quarter last year.  Net non-operating income was $564 million in the first six months of the year, compared to $316 million in the same period last year.
  • Net income for the second quarter was $663 million versus net income of $404 million in the same period last year.  Year-to-date net income (thru June) was approximately $1.6 billion, compared to $1.1 billion for the same period in 2010.
  • Capital spending in the second quarter of 2011 was $735 million, versus $576 million in the same quarter of last year. Capital spending for the first six months of 2011 was approximately $1.4 billion, compared to $1.0 billion in the same period last year.  Kaiser notes they have opened 13 new and replacement hospitals and 86 medical office buildings in California over the last five years.
  • Kaiser Permanente membership increased 208,000 members during the first six months of 2011, now totaling more than 8.8 million overall.
  • Currently, kp.org serves over 100 million visitors each year. Year-to-date in 2011, members have securely viewed 34.8 million laboratory results, exchanged 6.2 million emails with their Kaiser Permanente caregivers and refilled 4.6 million prescriptions online.

Not a bad showing. Operating revenue for the first half year is $1.9 billion more than the first half of 2010;  net income is $0.5 billion more over last year for the first six month, and membership went up, not down.

 Executive Vice President and Chief Financial Officer Kathy Lancaster shared in a statement that “our year-to-date operating margin of 4.3 percent was in line with our financial plan. Our operating results, coupled with a sound investment strategy, enable us to reinvest in health care facilities, technology and programs that are essential in continuing to meet the needs of our members, patients and the communities we serve.” 

Should you want to check out how the major publicly held health plans performed in the second quarter of 2011, listen to the MCOL Quarterly Reports Podcast (August 2011) featuring Doug Sherlock, of Sherlock Company.