Executive Briefing: 13 Key Trends Affecting the Health Economy

With more than 110 data-driven analyses, our second annual Trends Shaping the Health Economy report sheds light on the past, contextualizes the present, and predicts the future of the $4.3T health economy, highlighting 13 macro trends that the pandemic has significantly amplified or accelerated.  

Introduction

Hal Andrews: For the next few minutes, we'll go through the Trends Shaping the Health Economy. The US health economy is $4.3T, which is larger than all the economies in the world except for China and Japan. There are a number of other facts here. Medicare is growing by almost 10%. Medicaid is growing by almost 10%. Commercial insurance is growing by 6%. The only thing that grows like the health economy in this country is the higher education economy. Both of those have been growing at almost 2x the rate of inflation for the last 10 or 15 years.

The reason to talk about the trends is that the US health economy affects everybody. It affects every American; it affects every stakeholder in the health economy. Understanding where we are is important to understand what it means for what the trends are.

Our research team has pulled together a number of trends that are affecting the health economy. We'll talk briefly about 13 key trends, and we'll talk about the conclusion that's fairly inevitable once you get through the trends. The thing to think about here is most of what that I will go over today are things that everybody in the health economy knows. Every hospital executive, every pharma executive, every payer and every medical device executive knows that these things are true. What we'll try to do over the course of the next few minutes is snap those things together. Maybe introduce a couple of things that people don't know, and then think about the implications of those things.

Trend 1: The Total Available Market (TAM) of Commercially Insured Patients Is Shrinking
The first thing: the total available market of commercially insured patients is declining. The US health economy lives and breathes on the commercially insured patient. As a general rule, the average reimbursement for a commercially insured patient is 250% of Medicare, and Medicare is a better payer than Medicaid. If you think about a dollar being equal to a Medicare dollar, a Medicaid reimbursement is about 70 cents on the dollar. A commercial reimbursement is about $2.50 on the dollar. 

The number of commercially insured patients has been declining for years because of the silver tsunami. The silver tsunami is that 10,000 people in the country become eligible for Medicare every day. They're replaced by about 10,000 births in this country every day; about half of those births are Medicaid-eligible. So, every day the US loses about 5,000 or so commercially insured patients to Medicare. It's a net reduction every day, 365 days a year. This has been going on for years. The pandemic has accelerated that, and that's really the most important thing for anybody in the health economy to understand. 

The pandemic also brought another complication, which is declining life expectancy. You see that the US has had an increasing life expectancy consistently going back to 1980 and after the pandemic, we went all the way back to 1995.
Basically, post-pandemic, the US has gone back 30 years in terms of life expectancy. As you see a declining number of commercially-insured patients and you see a declining age of mortality, has an impact on every health economy stakeholder. In addition, during the pandemic, what we've seen, what we continue to see even now in the fourth quarter of 2022, is excess mortality in the 15 to 64 cohort.

Roughly 80% of the people who died in the US during the pandemic were over 65, but what we've seen in addition to those deaths from COVID-19 is excess mortality. Some of those things may be delayed screenings, some of them are drug overdoses, some of them are suicides and some of them seem to be other things that we'll talk about later in terms of increasing acuity.

If you think about it from the perspective of any health economy stakeholder, the commercially insured is the lifeblood of the system. If you think about people who become commercially insured, that usually happens in their mid-twenties, maybe their early twenties. So, if you're a stakeholder in the health economy, you're looking at those people as patients for 40 or 50, or 60 years.

If you get commercial insurance when you're 22 and until the pandemic life expectancy in the country was 78, then you'd assume that person would have commercial insurance from the time they were 21 until they were 65. So there's a 40-year expectancy value for a commercially insured patient and the number of people who have died in their twenties and thirties and forties effectively are eliminated from the system forever. When you couple that with a declining birth rate and with a declining age mortality and people aging into Medicare, there are fewer and fewer patients who are commercially insured in the US.

Trend 2: Care Forgone During the Pandemic Is Permanently Lost and the Observed Rebound is Illusory
The second key trend is that the care that was foregone during the pandemic is gone; it's not coming back. One of the first questions asked was ‘the dip that everybody saw in April and May of 2020, would that come back or was it forever gone?’ There was a reason that for that dip on March 15th, 2020, CMS told the healthcare providers not to do anything that was elective and so ambulatory procedures were shut immediately. Essentially, the government told the healthcare economy to only treat people in hospitals, don't do anything else.

Taken together with the incessant media messaging, people complied. They didn't go see doctors. So you see this incredible dip, unprecedented in the US health economy in the second quarter of 2020. People hoped, people who are health economy stakeholders, hoped that it would come back.

As you can see, it hasn't, only in, in this quarter of 2022 have we gotten back to an even level with the peak of utilization in this country, which happened to have been in October of 2019. Now, the illusory part of this is, it's a different kind of care. What people have come back to is not the care they were using before.

They've come back to less primary care. What they have done, a lot of, and we'll talk more about later, is they've gone to behavioral health. The other piece is: that from a total utilization perspective, a significant portion of this is COVID testing. What appears on the previous slide to be sort of back to even is overstated because of the sheer volume of COVID testing and the increase in behavioral health, as against the previous baseline.

Trend 3: Higher Patient Acuity Is Likely to Materialize Eventually
Maybe in connection with the volume not coming back, higher patient acuity should come back. One of the things that most health economy stakeholders think about is the severity of the patient equates to more revenue for that patient. In a fee-for-service environment, people are motivated to provide more acute services if needed.

That's just the way the system has worked since Medicare was introduced in 1965. Logically, if you have fewer screenings, you're going to detect fewer diseases at an early stage where you can treat them and when those things finally present, they will be more acute. You can see in this graph that because of the pandemic and maybe because of other factors, people have particularly changed the way they do preventive screening for cancer care.

The number one killer in the country is heart disease, but cancer aggregated together is the second largest. So you see that from 2019 to 2020, there was a sharp decrease in all major cancer screenings and that is both in terms of, colorectal, cervical, breast and lung. You'll see that it was slightly better, in the 2020 to 2021 period. Not surprisingly, you see that the number of diagnoses has gone down.

Now, anecdotally, what is starting to happen is that we're hearing the diagnoses are going up. Much like life expectancy where we made great progress in increasing life expectancy in this country, we've also made amazing progress in the past 20 years in decreasing the mortality from cancer; but a lot of that decreasing mortality is from early intervention from therapeutics, particularly from diagnosing things where they're stage one as opposed to stage two or stage three, and you can see that from the first quarter of 2020 to the first quarter of 2022, we've seen an uptick in diagnoses, which is, again, not surprising giving those screenings declined during that period.

You can also see a signal in what the pharmaceutical companies themselves are doing. If you understand the way that drugs are approved in this country, there is a process that drugs go through for approval where there's an amazing amount of data generated and submitted to the FDA, but there's also an amazing amount of data that's not submitted to the FDA that the drug manufacturers have themselves. So, they get sort of an early warning sign about what's really happening and, not surprisingly, they use that in terms of their merger and acquisition activity. So, if you look at what the major drug companies have been investing in and you believe that they know more than the rest of us know about the acuity that's likely to materialize, then this is a signal.

Perhaps the biggest signal is Pfizer. Pfizer has had unprecedented record results from selling the COVID vaccine and it is probably not a coincidence that they have poured those resources into buying drugs and oncology and cardiology. You could start to see the spike in cardiology in the fall of 2021, July, August, September and October of 2021.

Cardiac visits to emergency departments in US hospitals spiked in a way that is completely countercyclical to the way that healthcare works for anybody who knows the hospital business. That was also countercyclical to any year going all the way back to 1950, which is when the records were kept. So, it's not surprising to see that Pfizer has invested in cardiology and oncology drugs.

It's not surprising to see that Merck has another one that is sort of a recent addition: immunology. You can see that Merck made two acquisitions in immunology. Earlier this week, Amgen announced that they're buying Horizon, which is a company making an immunology drug. If you think about that, it's clear that the pharma manufacturers think that the acuity is coming back.

Finally, it's not just what we see in the data. There are several clinical studies about myocarditis, as of November 30, 2021. So, a year ago, there were 159 peer-reviewed studies about myocarditis. There have been dozens more this year. Those studies are starting to come out about cancer as well. So even though the care that was lost during April, May and June of 2020 didn't come back, it's probably going to come back differently. It'll probably come back with patients who are sicker when they are initially present and are first diagnosed.

Trend 4: Projected Growth in Demand for Healthcare Services Is Tepid
So, how does that affect demand? Well, demand has been flat to declining in this country for years. If you think about demand in terms of the biggest driver of the health economy, a $4.3T health economy, $1.2T or so of that is hospitals. Hospitals have been declining in terms of what hospitals do uniquely, inpatient admissions, since 2008. Everybody who knows anything about the health economy knows that hospital admissions in this country have been flat to declining since 2008.

What most of them probably don't know is that outpatient surgeries have also been fairly flat, even when you skip the dip from 2019 to 2020, which is related to the pandemic. This is a flat line, it's a flat line for outpatient surgeries. It's an actual slight decline for inpatient surgeries.

From the revenue drivers of the health economy, the hospital is a quarter of the health economy. The revenue driver for hospitals is surgery, and it's also the main revenue driver for surgery centers. Now, the demand is not equal to the burden of disease. One of the things that people have miscalculated for years in the health economy is they equate the burden of disease with demand.

Now America is going to set a world record in obesity, it's been headed that way. America is - I think there may be some islands in the South Pacific, I think Tonga is, ahead of the US in obesity, you know, French Polynesia - other than that, we win and we've been winning for years. Not surprisingly, the number of Americans with chronic conditions has been increasing.

Now 118 million to 171 million is a big jump. That’s not as big a percentage jump because America's gone from about 265 million people in ‘95 to about 330 million people today. But obesity, congestive heart failure, and diabetes sort of hang out together from a pathological standpoint. But the medical community doesn't treat all those things equally.
The medical community picks a primary diagnosis, and they treat that and they sort of manage the other stuff.  So, even though there are 50 million more Americans with chronic disease, we're not managing all of those things at once. We're managing one of those things and then sort of trying to keep the other two under control.

Even as we are increasing obesity, and this is just obesity - when you take overweight plus obesity, plus severe obesity based upon BMI measures - 70% of America is fat or worse. These trends are probably going to continue yet inpatient admissions where we treat the most complicated things are declining.

Another thing about demand is a function of disease incidence and then population characteristics. In markets that look the same in terms of a pure population standpoint, the demand for healthcare services can be radically different. If you look at this example of Atlanta versus Philadelphia, Atlanta has about 6.3 million people. Philadelphia has about 6.5 million people, but the demand for different services in those two large US cities is completely different. That manifests also in terms of population growth. These are some of the highest-growing populations in the US but you'll see that the demand for surgery in those markets doesn't track the population growth at all.

Sometimes it's counterintuitive. If you look at San Francisco where you have a declining population compared to Austin, which is one of the fastest growing markets in the country, the demand for services doesn't make any sense if you're only looking at population again because you have to factor in the population characteristics to understand the incidence of disease.

So, an older, fatter population will consume more healthcare than a younger, healthier population. Finally, and this is important for people who are making strategic plans, the notion in the industry, the rumor, the anecdote, the belief, has been that demand is increasing by 3% to 5% a year. That's been on the water table of healthcare executives since the mid-80s.

So, there are a whole bunch of strategic plans floating around in the healthcare economy that say demand next year is going to be 3% or 4% or 5%. Now the laws of compound interest apply to healthcare too, and the difference between a 1% growth rate over 10 years and a 5% growth rate over 10 years are massive, just like it is in terms of interest rates on your savings account or the return on your investments.

The biggest challenge for the health economy is that they've been modeling 3% to 5% growth for 40 years, and they don't look back and see, did that happen?  As we've shown, it hasn't been happening. Hospital admissions have been declining.  So if you've built a business, particularly a business that's capital intensive on 4% or 5% growth, because these assets that people build in healthcare are 30 and 40 and 50-year assets, well then you've probably grossly miscalculated your capital allocation.

Trend 5: How Individuals Access the Healthcare System Differs
The next trend is how individuals access the healthcare system differs. Now show of hands, how many of you shop at only one grocery store? Wow, okay. Three of you say you only shop at one grocery store. How many of you shop at three or more grocery stores? Okay, that's the majority of the people in the room.

Now, the thing about grocery stores is they know that they don't have a 100% of your loyalty because they are doing enough with data analytics to figure out that if you only shopped there, you must have starved to death. After all, you're not coming around enough to live. They know that they are working on a competitive playing field and that they have to compete with others for your services.

Healthcare people don't think like that. Healthcare people think that if you've come through the door once you're their patient for life and they think about that in every setting. Your primary care physician assumes that you never go to urgent care. Your urgent care assumes that you only come to their urgent care. The hospital you go to assumes that you'd never go to the hospital across town. The home health agency assumes that you must be loyal to them. That's not the case. Back to the return to care, one of the things the pandemic has done is it has not only shifted how much care people get, but where they get care.

If you think back to the early days of the pandemic, if any of you were watching CNN, all you saw for days, for hours on end, on a loop was a crisis in New York City around the hospitals in Queens primarily. It looked like a war zone; for the people who were in those hospitals, during that 30 and 60-day period, it felt like a war zone. It was a war zone, but that wasn't the experience for everybody else in America. But that's what seared in the mind of people.

One of the impacts of that is we have scared people away from the most acute parts of the healthcare setting. How many of you remember any of those images, right? You saw them on CNN, right? All of you. Well, that either very consciously or subconsciously affects how you think. What people have done is say ‘I probably don't want to be there unless I've got to be there.’  That has had a ripple effect through the way that people access healthcare, so you see this massive spike in urgent care utilization.

Our colleague, Sanjula Jain, wrote an article that was printed in The Hill this week about accessing care. She’s been surprised and I've been surprised by the feedback that she has received from consumers who read the article. She has people from all over the country emailing her about their experience with the primary care system and she's been sharing some of those emails with me. Two of them last night said ‘my primary care physician won't even see me unless I first show up with a test from an urgent care center that says I have a negative PCR test for COVID.’ Stunning, not the Hippocratic Oath, right? But what the public sees as consumers have trickled into how healthcare providers think.

So we have a massive move away from the most acute things, the ED. The ED's always a scary place, right? We have now burned into people's heads that the ED's even scarier than I thought. So people are voting with their feet. Home health, right? Home health is usually something that you get after you've had something else.

More acute home health declines are a result of the acute care not being discharged to the next setting or treated at home. So, the home health volume is correlated in some way to what you see for hospital demand and emergency department demand. Between a hospital outpatient department or a surgery center, people rather go to a surgery center.
Over and over again, people are picking the lowest possible acuity setting to get their healthcare needs met.

The other thing about consumers that everybody who's not in the healthcare business understands is that consumers are different. Each of you is different. Each of you has a different kind of car, a different color car, a different package of options on your car: leather seats, cloth seats, leather steering wheels, heated seats, power windows, whatever those things are. Those things are based on your attributes as a consumer. Everybody in the health economy forgets that. Everybody in the rest of the economy, grocery stores, gas stations, whatever it is, Netflix, Amazon, a shopping mall, all know that you're different and they all tailor their goods and services to your preferences.

They know a lot about you. The reality is that psychology is maybe more important in healthcare than it is in the regular retail parts of your life. There are some people whose psychology is going to force them to go to a convenient care setting because they're oriented to convenience. Others are going to go to a quality setting.

So, the way to think about this, it seems like an extreme example, is some people were so oriented to a retail experience, to convenience, to on-demand care, that they would drive past a university emergency department at the end of their driveway and go to Walgreens. Other people are so oriented to quality and to brand and to the notion that the academic medical center has the highest quality that they would drive past 10 places more convenient on their way to the academic medical center to sit in the emergency department for seven hours. Psychology is a key consideration for healthcare. It's also a key consideration in terms of the way that people interact. There are some people direction takers, who, as the name implies, will do what they're told.

Those are sort of the dream characteristic of a healthcare patient. There are a lot of people who aren't direction takers. There are a lot of people who are going to do what they want to do. There are a lot of people who know what to do and are going to go to McDonald's and get a Big Mac at lunch.

That's consumer psychology. One of the things that are driven by the pandemic is that behavioral health demand has gone through the roof. Now, if you think about people in a general sense, most of you probably think that people are made for communities. People are not made to be isolated.  From a government perspective, we isolated people for 3, 6 and 9 months.

There are still people who are afraid to leave their apartments in parts of the East coast.  Isolation leads to a lot of challenges and one of those challenges is mental health. It's not surprising to see that the mental health demand in this country has rapidly accelerated during the pandemic. Recently, the government has recommended that every adult be screened for behavioral health issues once a year. There aren't enough behavioral health providers to do that, but clearly, policymakers see that behavioral health is a thing that's here to stay. 

The last thing in terms of thinking about population variation: Consumer variation is that demand for surgery, which again is the real driver of revenue for hospitals and surgery centers, is being heavily driven by the Medicare cohort. Now, what is sort of an ideal state for the healthcare economy is that it be driven by the commercially insured patient.

I am a dream patient, I'm between 45 and 64 and I'm breaking down. I've had multiple joint replacements and I have commercial insurance. I am like the gold star, five-star, diamond, platinum executive patient, but there aren't that many of me. If you think about what these trends show and then the trend of scaring people away from these services, unless they need them, those things are negative for anybody in the health economy, whether it's the hospital that is serving as the operating theater or the surgeon delivering the case, or the medical device company putting the implant in the body.

Trend 6: Individuals Are Increasingly Making Healthcare Decisions Like Consumers
For many years people have talked about healthcare consumerism without knowing what in the hell they were talking about. They've said that we want there to be healthcare consumerism, we want people to act like consumers. There's been so much of that that people are now offended and say, well, they're not consumers; they're not consuming healthcare, whatever.

We have tried and we have emphasized and we've delivered loyalty programs to talk about loyalty as consumers. You see that a few systems are good at that now. In our recent analysis, these are the 10 health systems that have the most loyalty; you see that only eight health systems out of a hundred surveyed have a loyalty of over 70%. Back to the grocery store analogy, right? Some of you have that sort of loyalty with a grocery store, but most of you have a much lower loyalty rate than that to a grocery store. To think that only eight systems have greater than 70% loyalty, a couple of those names are the most famous names in healthcare. The Cleveland Clinic and Mayo Clinic are the best doctors, they're renowned around the world and they're just barely over 70% and nobody is at 80%. Now, the other thing about those is none of those markets are very competitive. 

Cleveland is not a competitive market from a healthcare delivery standpoint. Virginia Beach is not a very competitive market. Boston, that's competitive. New Orleans, Ann Arbor, and Corpus Christi are not competitive markets. So, it's perhaps not surprising that less competitive markets have better loyalty because more competitive markets have less loyalty.

So maybe, because consumers are consumers and they vote with their feet, or maybe because we've been telling them for 20 years that they should act like consumers -they are. The more competitive the market, the more likely they are to wander. Now, this is based on a study. Over time, you'll see that there was an interesting little thing where they've gotten slightly more loyal throughout the pandemic but they've also gotten a lot less trusting. From April 20', we'll call that sort of the realization throughout the whole country that the pandemic was a thing to December 2021, you'll see that American consumer trust in the healthcare system has declined across the board. It is perhaps least likely that it has declined, for nurses the least, right?

Meaning that we trust nurses the most. It's not surprising that we trust health insurance companies a little less cause we didn't like them before. The marked changes are the changes in the government and then notably the changes in doctors, right? We now have, about 38% of Americans who trust their doctors.

So, if we want people to be loyal, loyalty is built on a lot of things, but trust is maybe the most important component. You're not going to be very loyal to somebody you don't trust, and so this is a real challenge for anybody and for all the people whose business depends on the livelihood of the hospital, they sort of ride the tail of this consumer trust.
Back to psychographics, psychographics means consumer psychology. Different people make different decisions based on their psychology.

The way to think about this from a healthcare perspective is there can be a group of people who are clinically identical but are psychologically very different. You could have a hundred people who are 50 years old who have diabetes, and they will access the healthcare system differently based on psychology. Conversely, you can have people who are identical in psychology but have different pathology and they will access the healthcare system differently.
Without understanding both of those things, you can never have a true consumer strategy.

Not surprisingly, the psychology of consumers differs by market. Different people live in different places. The people who live in Minneapolis are different than the people who live in Orlando who are different than the people who live in Albuquerque. There are all sorts of reasons that they may live in those places, but those things that make them move to those places live in those places are also things that make them change the way they think about the healthcare system.

Trend 7: Increasing Unaffordability Is Suppressing Healthcare Demand
Unaffordability. Part of healthcare consumerism was the notion that we would change benefit design. The thought was that if we change the way that we design benefits, we could change the cost curve. It doesn't look like we're doing very well with that. So, HSAs and things like it are a thing that sort of manifested in the early 2000s.

The notion was we would drive down our per capita healthcare spend. You can see that, just like obesity, we are winning and winning big. We are outpacing not only in absolute dollars but in terms of absolute percentage against a higher base, which is hard to do. At the same time, we have worse mortality.

This is something that everybody knows and everybody talks about, everybody in Washington talks about this and every consultant talks about this. Everybody who is a healthcare strategist talks about this, and yet, as we'll get to later, we don't do anything about it. The real numbers at the individual level and the consumer level, are startling.

If you just look back from 2006, which is when high deductible health plans and HSAs really sort of took off, the notion was that if we make the consumer responsible for their healthcare choices, they will choose based on price and we will spend less money. You'll see that this has been a boon for health insurance brokers who have sold lots of high-deductible health plans that shift the burden from the employer to the employee.

You can see the trends and deductibles in the early days, back in the early 2000s, an individual deductible was in the low hundreds. It's now at almost $2,500 for the individual. It is $4,700 on average for a family. For people at Trilliant Health, the family deductible for one of the plans is $6,000.

That's just for the in-network piece, the out-of-network is $10,000. So, the way that health insurance is working in the country today is that the employer or the employee is on the hook for $1,500, $2,000 and $2,500 themselves coming out of copays and, out of their monthly insurance premiums and deductibles before the insurance companies really on the hook for anything.

In a system like that, there's no incentive for the health insurance companies to clamp down on cost so it's not surprising to see these trends. $23 to $42, is that a lot? Well, yeah, it's almost a hundred percent and if that's every time you go and you've got a family of four or family of six, those things add up.

Medical spending is also growing as a percentage of sort of US spending, right? You don't get to be $4.2T, $4.3T, which is 20% of the US economy, without affecting all the other parts of the economy. So, the federal government, in addition to its Medicare spending allocates money to the states for Medicaid programs.

You'll see that, on average, we have 24 of the states spending 25% of their state budget on Medicaid; you see that Ohio's leading the way, $4 out of every $10 in the Ohio budget goes to Medicaid spending. You see that it's almost 40% in Louisiana, you can see New York and Pennsylvania almost in that dark blue range and at this point, the way that states allocate dollars is healthcare through Medicaid education and then everything else. It looks like the federal government where it's defense spending, social security and Medicare, and then everything else. At some point this is unsustainable. I don't know at what point the Ohio legislature will decide that there's a limit on what we can spend.

Is it $5 out of 10? Is it $6 out of 10? I don't know. But there's both the effect of what the absolute spend is and then there's the effect of what we can't spend other money on, whether it's education or roads or whatever those things are.

Trend 8: Migration of Care Delivery to Lower-Acuity Ambulatory Settings Is Accelerating
Not surprisingly, amid the incentives around deductibles, amid the pandemic and in the midst of the loss of trust, the utilization of care settings in this country is moving again to non-hospital settings. What's setting the pace? Urgent care, again, is driven mostly by COVID testing.

For anything that has to be done outpatient, don't do it in a hospital unless you have to. If you can have surgery in an ambulatory surgery center instead of a hospital surgery center, go to the ambulatory surgery center. If you can get a flu shot in an urgent care center instead of the primary care office, go to an urgent care center.

Then the other piece is behavioral health. Again, utilization through the roof since the pandemic. Now, this brings to the fore something that everybody else knows, everybody in the healthcare industry knows that you can get the same equivalent service at a vastly different price, depending on the location.

You can get a cardiac catheter in a hospital and they'll get paid about $50,000 or you can get it done outpatient and it'll be about $7,000. So, if you, the consumer have to pay co-insurance, say your co-insurance is 10%, 10% of $50,000 is a lot more than 10% of $7,000. These are just a handful of examples. There are thousands of examples of this in the health economy. 

Not surprisingly, an increasing number of surgical cases are done in surgery centers. You see in, in Maryland, almost 50% of surgeries are done in outpatient settings. The reason Maryland is interesting is that Maryland has been an anomaly from a state spending perspective for decades.

Maryland has a cost commission, and so Maryland's had rate setting for decades. They’re the only state in the country that has had that. So, it's not surprising that in a regulatory environment that is focused on rate setting for decades, care can be delivered in a lower-cost setting, and maybe that's a preview of coming attractions for others. The other piece of this is the things that are done in surgery centers are almost by definition things that can be done at equivalent quality. The more things that you can do at equivalent quality, irrespective of setting, the more commodity-like those things become. Probably the best examples are cataract surgeries.

Cataract surgeries at this point are so efficient from a technical perspective, from the technology that the surgeon uses, that it's very inefficient to do it in a hospital. The most effective way, and you'll see if you've ever had cataract surgery or how many of you have had LASIK surgery?

Okay. The notion, which we don't like to talk about because we're focused on consumers, is that they rack and stack them, right? You give an eye surgeon, you put them in a surgery center with 8 or 12 rooms and they are going room to room every eight minutes, literally every eight minutes.

The nurses can barely turn the rooms fast enough before the surgeon's ready to come back.  That's because the procedure itself is a commodity-like procedure, either because it's become simpler through technology or because it was fairly simple, to begin with. So, the more that technology introduces efficiency and the more things that you can do rapidly in an outpatient setting, well the more things from a cost perspective you would.

Trend 9: Low Acuity Commoditization
So, what happens? Things that can be commoditized according to economic principles will, and so, one of the big changes over the past 2 or 3 years in this country is that the large retailers have decided that they're going to enter the primary care business. This has long been rumored and Walmart started to think about this in the mid-2000s. In 2005 and 2006, CVS got into this business when they bought Minute Clinic probably a decade ago.

People have been sort of dipping their toe in this, and now all of a sudden the largest retailers in the country have decided that they're in. The challenge for traditional stakeholders of the health economy is that these large retailers have deep and long-lasting relationships with consumers.

To the extent that we're going to have consumerism in healthcare, well, the people who are good at retail consumption might have a leg up. If you think about the sheer number of people they have relationships with. CVS - has 74M loyalty members, Walgreens - has 100M and 220M people go through a Walmart every week.

Amazon - 150- 160 million prime members. By contrast, the typical health system might have 3M, 4M, or 5M patients all-time in their electronic medical record, meaning they saw somebody once, twice or maybe three times. So, the sheer depth of relationships of these retailers is insurmountable for traditional health economy stakeholders, where they're entering in terms of a competitive standpoint, again, all of these retailers are oriented toward competition. 

They compete every day with each other, all the time. One of the things they compete on is convenience and one of the things they compete on is price. They are competing at basically a quarter or 50% of the cost. One is that's sort of their mindset, particularly Walmart's mindset.

Perhaps more importantly, they have the scale to do it. One of the things that Walmart knows, that one of you in the room told me, is that for people who come into Walmart and see a primary care physician, Walmart knows that while they're also at Walmart, they buy more children's toys than the average consumer.

If you think about that, you think about the typical Walmart customer, you think they probably brought their kids with them, right? They placated their child by buying them a toy if they just sat in the waiting room and were patient and didn't cry. Walmart knows those things. Walmart can also allocate that cost in a way that a traditional health economy stakeholder can't.

They're also competing with each other on service, service offering, service hours, convenience, on bundling of those services. Perhaps, the most frightening thing for traditional health economy stakeholders is this suggests they're not even worried about the traditional stakeholders; they're worried about each other. 

The level of detail at which they compete with each other is way beyond the primary care physician, the traditional urgent care retailer who just opens the door and waits for the patients to come in. The lack of competition that truly exists among traditional health economy stakeholders is the thing that ultimately handicaps them.

The difference between what the FTC and DOJ think about competition and how providers think about competition couldn't be starker. It's like the light in the morning and darkness at night, and that disconnect will ultimately sort of be the death knell of some traditional health economy stakeholders.

The other thing, not surprisingly, for people who understand markets, is that where these retailers are competing with each other is where all the people are moving, and so they are in the largest markets, the most dynamic, the most valuable markets from a consumer standpoint in the country. In a sense, it's almost like they're not even worried about the status quo that's been entrenched for 10, 100, or 250 years. They're just worried about each other and out-competing each other.

Trend 10: The Impacts of Commoditization Are Predictable
What happens when commoditization strikes? Well, one thing is if consumers don't like it, they do less of it. Another is that as they have more options, the price goes down. So there are a lot of people actually in Washington today lobbying for the changes that were made in the pandemic about telehealth to be made permanent.

There is a belief, a wish, a fantasy that telehealth is awesome. Telehealth is awesome for a few things, but the consumers have decided it's not awesome for that much. What is it awesome for? It's awesome for behavioral health. Now, I get to say this because in the mid-1990s, I managed a radiology practice that was on the cutting edge of doing teleradiology, and it was before things like Google Fiber, and it was before things like wireless technology.

It was even before things like frame relays. For some of you of a certain age, we were moving images on phone lines in the middle of the night from all across the country. For any of you who know anything about technology, to move an MRI across the phone line from Hulton, Maine to Nashville, Tennessee in 1995 was hard. Almost impossible. It broke a lot.

Telehealth is good for radiology because it's asynchronous and because there is no consumer interaction in teleradiology. The consumer is only interacting with the tech who says, hold still while I push the button. They don't meet the radiologist usually, which is a good thing. Radiologists are not good with people. 

They're a little better than pathologists. Just a little, right? But the radiologists don't want to talk to you and you don't want to talk to the radiologists. I know a bunch of them, but there's no consumer involvement. So, the distance is a benefit. The distance from a behavioral health standpoint is also a benefit. In this country, we have this strange thing where we'll share on Facebook all of our physical ailments, right? I've told y'all about some of mine, right? We dare not speak of our emotional health. We don't want to talk about that at all because we think it's perceived as weak. So, you can sit next to somebody on a plane who'll tell you about their quadruple heart bypass, but they'll never tell you that they actually might be bipolar because that's just not how we do things in the US.

From a telehealth perspective, that distance is attractive, right? Technology creates an artificial barrier between you and the person with whom you're spilling your guts. The fact that telehealth is good for behavioral health, it's not surprising when you think about it. Now, the other thing that people don't want to talk about is that because telehealth is so useless for so many things, the introduction of telehealth is friction cost.

Go back to the consumer emailing Sanjula about having to go to an urgent care center to get a PCR test to go to the primary care physician. Telehealth is a lot like that unless the visit is ‘do I have strep throat’ stick at your tongue, I can see your tonsils are swollen. I write you a prescription for that.

What happens a lot with telehealth is to say, well, ‘I think you're going to have to come in.’ So I just paid $40 or $50 or $100 or $150 for friction. To go to have an in-person visit that I preferred anyway because the consumer surveys prove that people prefer in-person interaction. So, the notion that telehealth is the solution to the US healthcare problems is a complete fantasy.

If you're focused on your digital front door, you need to think about whether you can compete with Amazon and Walmart. If you're brave enough to think that you have the scale of Amazon and Walmart - game on, and if not, you might want to think about other stuff because they can do it for free.

One of the things about commoditization is that the people who have scale can ultimately do things at effectively a marginal cost of zero. If you think about the cost today to run a telehealth service, which is not very much, I need a computer monitor, I need an internet connection, I need the person on the other end to have a phone or a camera and then I need to have a professional sitting in front of that screen.

The incremental cost of a physician sitting in front of a screen in a suburban office park to see one more visit is about zero. If any of these providers, or traditional health economy stakeholders, God forbid all of them decide that they want to do this for free, they can. It can just be part of your Amazon Prime membership - free telehealth. So, the threat to traditional providers is stark.

Trend 11: Provider Burnout is Exacerbating the Long-Standing Physician Supply Shortage

So now, we have more people who want to be delivering healthcare to American consumers and the same number of suppliers, because of Medieval-Guild-like principles, we limit the number of doctors that we let be licensed in this country. It's gone on for years, it's rational from the law of economic supply and demand. If I can suppress the supply of physicians, I can let the price of those go up. Anesthesia is a great example. Radiology is a great example. Dermatology is a great example.

So the United States for years, for decades, has artificially put a clamp on the number of people that could practice medicine. We have an increasing population, a limit on how many MDs we produce and an orientation in today's world that people want to be employed, right? They don't want to do medicine the old way, where you're on call 24 hours a day, where you have to see train wrecks in the emergency department on Saturday at 3:00 AM people want to work from nine to five and then go to soccer practice, which as consumers - understandable.

From a healthcare delivery system standpoint, that's sort of a problem for the rest of us. Not surprisingly, a lot of physicians are throwing in the towel. They've had enough of dealing with insurance companies, they've had enough of dealing with administrative burdens from the government, more paperwork, more training, more this, more that, less time with the patient.

Physicians are not confused that EMRs are billing systems that had templates built in to record things that we diagnose patients with so that we can drop a bill. EMRs are not provider-friendly in the least, and so they've had enough.
The pandemic was an accelerant and we've capped how many we produce and more are deciding to leave than are coming in to provide care. New Entrants: Walmart, Optum, more people trying to employ a declining number of people who want to render care. That's a problem from the laws of economics.

We'll touch more on this a little bit later about the Congressional Budget Office. The one sure thing to motivate physicians to leave practice is to lower their income and the CBO has put out an analysis that suggests that they should cap the reimbursement from commercial insurance. If we want to accelerate the exodus of providers from the industry, this is a sure way to do it.

Trend 12: Losing Monopolies 
Speaking of Washington, only in healthcare does a monopoly lose money. Monopolies are supposed to make money, monopolies are supposed to make lots of money. In healthcare, monopolies as defined by the Federal Trade Commission and the Department of Justice, a bunch of them lose money. The government says that a monopoly is an entity with a score of 10,000 on the HHI index so that means that there is no competition for healthcare services in the market and there are about 2,700 hospitals that are scored here, and you'll see that the average operating margin of a hospital that the United States government says is a monopoly is negative.

So one problem with this is that the US government is measuring competition solely based on hospital services. Inpatient hospital services. Now, in the beginning, we talked about the fact that for years, hospital admissions in this country have been at basically 34 million a year. When you look in aggregate at the number of things that are billed for in healthcare in the United States, it's 1.6 billion a year.

Don't answer the question if you meet the metric, I'll put it this way, how many of you have spent fewer than 10 nights in a hospital in your life? You had to think, but like most of you, right? Most of you have been alive for at least 10,000 days and you've spent 10 of those nights in a hospital.

Well, it's sort of silly to measure healthcare competition based on something that consumes less than 1% of your life, and in fact, probably less than a 10th of a percent of your life. But that's the way the government does it. If you think more thoughtfully about how to measure competition and look at it across different service lines, you see that you have a radically different view of what competition looks like.

Back to the places that have high loyalty scores, none of them were in New York, the most competitive market in the country and none of them were in Los Angeles, one of the most competitive markets in the country. It's not surprising to see that where there is more competition, there is less loyalty.

It’s not surprising to see that as you expand the definition of what counts as a healthcare delivery service provider in a community, you see more competition. The key thing is that even in the current environment, the historical environment, the hospitals weren't doing very well, and so you see that health system operating margins have been below 4% since 2017.

They were below 4% before that. We just didn't put that on the graph. You see that the health insurers have a much larger margin, and I say much larger because it's a percentage that's almost, it's 50% to 100% larger depending on the year against a much larger revenue base and yet we have a silver tsunami.

We have 10,000 people becoming Medicare eligible every day. These are the Medicare margins for hospitals. So we've been clicking along rather consistently at -10% margins for years, and that's on Medicare. Remember, we pay less for Medicaid. So, you can imagine that those numbers are worse.

We're sort of stuck. We have, have limitations on mergers for assets that lose money. Now, in a true market economy, we would drive economies of scale by eliminating excess capacity and consolidating operations to make them more efficient so that you had less supply serving and more demand and then we could make money.

Now, we don't have a true market economy in healthcare. There's way too much regulation for that, but the government's approach to competition is completely illogical from just a base economic standpoint, much less from policy considerations that say we need to lower costs. Well, if we can't merge things to eliminate duplicative services, to rationalize the supply of care, how can we do that?

Yet, the US government is trying to block competition. The most recent, hospital examples are on the page the irony of the HCA/Steward thing is that in 1995, I was the attorney who did the paperwork for HCA to sell those hospitals. HCA is trying to buy back hospitals that they sold 30 years ago and the government won't let them. I can promise you that nothing will happen to any of you if HCA owns three or four more hospitals in Northern Utah.

Audience Question: How do you respond when you do see markets where there is consolidation? There's, at least in these studies, a lack of empirical proof that prices come down and options come up for consumers. When you see big systems merge, they're seeing the overall kind of cost rise. How do you think about that or respond to that type of research?

Hal Andrews: The first thing is when those mergers happen, the price goes up, right? and that's monopoly behavior, right? If we eliminate a competitor, we increase the price. I think that happens, I think the difference is most of those studies talk about price and not actual reimbursement which, you know, is, is vastly different. I think the other part is when we look at the data, we see that certain people are good at driving their market position through price to higher reimbursement. Most people don't get higher reimbursement.

The other thing is the expenses have been exceeding the rate of the price increase. I think if you don't look at the context of ‘what's my expense curve’ versus ‘what's my rate increase curve’, it looks like it's only right when in fact the rate's not even covering the deficit.

Back to the Medicare piece, if you think about hospitals as essential community assets, and you remember that the reason that hospitals survive is that every hospital has a representative in congress, the real reason that we don't get more efficient in healthcare is that hospitals are the largest employers or a top three employer in every market they're in.
People who are in Congress understand who the largest employers in their market are. The hospital will always get their calls answered when they call their congressman or congresswoman or senator. The studies about prices going up are undeniably true. William Cleverly has been writing about price and price increases for 20 years.

Now that is certainly true. I think what hasn't been given enough attention is whether that increase is even enough to cover the cost. The operating margin suggests that they're not. So where do we end up? We have more entrants in the system competing for a declining number of physicians and nurses, and also a declining number of commercially insured patients, and they're fighting an unfair fight. There is not a single health system in the country that saw more than 2% of Americans last year.

There's only one health system that saw more than 1% of Americans last year. None of the other systems had interactions with even 3 million Americans last year, yet Amazon and Walmart and Optum, right? Optum is the laggard there with just, you know, about 110 million.

I wrote a recent blog post called The Four Horsemen of the Healthcare Apocalypse and Amazon and Walmart and Optum are three of them. The other one is the status quo. What startles me is how many people in the health economy don't understand what they're dealing with, with Optum. Optum is the most dominant member of the health economy and it's not even a close second. Now, in my view, the most compelling force is the status quo, the lack of doing anything. But the one that's doing the most and has been doing it for years is Optum. 

Trend 13: More Provider Competition
70,000 employed or aligned to physicians. That's more than 10% of all practicing physicians in the United States who are taking orders from the people in Minneapolis. Some of y'all are taking orders from Minneapolis, you just don't know it because they don't go out and advertise themselves as I'm an Optum doctor. They have 3 million people. They have as many people under a full-risk relationship as HCA saw last year, and they served over a hundred million consumers.
One in three Americans had some interaction with Optum last year, and that is something that for everybody who's not Optum, all the other payers, all the providers, all the medical device companies, if you're not thinking about Optum, you're just asleep.

Conclusion: Every Stakeholder Will Be Impacted by Reduced Yield
So, what does that mean? Ultimately, everybody will see a lower yield.

Let's start with sort of the basics of economics. If demand is declining, then rising prices can't continue forever so the blue line is hospital missions since 1980. We peaked back there in 1981 or 82 at almost 38 million and we've gone down to 34 million until the pandemic got us down to 31 million.

The average daily census has only slightly moved down. How many Americans are actually in a hospital bed today? How is it possible that number hasn't changed in 40 years given the population growth in the United States? Well, the answer is technology, diagnostics, therapeutics, and treating people outside of hospital settings, and yet what this country spends on hospitals has gone up a lot.

Unless we take the position that healthcare doesn't have to follow the laws of economics, eventually we fly this plane into a mountain. I don't know when that has been forecast by lots of people smarter than me for even longer than I've been doing this. But at some point, it's just not sustainable.

The problem for every health economy stakeholder is that the Congressional Budget Office agrees, and this is less than 60 days old. The Congressional Budget Office is a pretty important shop in Washington DC and when they speak people in Washington listen, and what they have said is none of the stuff we've been doing for the past 20 years moves the needle.

We've been talking about price transparency for years. There are cases where an employer can say, yes, our effort around price transparency has slowed our cost curve. There is nobody who can say that over a multi-year period, their costs have declined based on price transparency. The Congressional Budget Office says that all things considered, price transparency doesn't move the needle on our $4.3T health economy.

They've also said that limiting competition doesn't do anything. Despite all the efforts to limit competition, the data says, well, even when we limit competition, it doesn't do anything. If we think that some competition makes it worse and limiting it doesn't do anything, well then why are we doing that?

What they've come out and said is we should regulate price. Okay, well that's sort of a big hammer that affects everybody. Now, the obvious place to start is the hospitals, because hospitals are the biggest part of the economy. But everything that goes on in a hospital comes from some other part of the health economy, whether it's a band-aid or an aspirin or a mask or an implant or food service, right?

To the extent that we cap prices that hospitals and physicians receive, well, there's a downstream effect for everybody. The only people who maybe win, maybe they're not affected, or the health insurance, because they don't really take the risk anymore they just manage programs. If you read this report, which is about 60 pages and I recommend you do, you'll see that it presents health insurance as sort of the traditional sisters of the poor. It's the poor health insurers who just are helpless to fight against the mighty providers. I'm a lawyer and I'm for the First Amendment too but sometimes advocacy is fantasy and the notion that insurers can't move the needle is a fantasy. They've just sort of thrown in the towel and they're asking the government to do for them.

One of the first things that happens in Washington before something becomes law is that a policy shop writes a paper, shop it around to people in Congress and Senate and gets them to pass laws. So, this is probably the most frightening 60 pages I've ever read from a business perspective.

What does it look like? Well, if we artificially constrain price, there will be some consequences. I already alluded to the fact that there'll be some physicians who say, I'm out. I've been hanging on, I've put up with all this stuff. The fact that they hate Epic. The fact that they hate pre-certification and prior authorization and they hate filing all this paperwork and they hate CME and they hate the drug reps calling on them, but the money's too good.

But if you take the money away, some of them are going to say, I'm out. I don't have to do this anymore. Some of them have said it already before the money changed. But if you want to change physician behavior, take away their money. You will change physician behavior. You want to change the way that hospitals deliver services and change reimbursement.
Hospitals have operated for years as the entity that is all things to all people 24 hours a day. There are limits on what you can do, which is why you don't see a trauma center in every hospital in the country because there aren't enough neurosurgeons to go around the staff 24 hours a day. But if you limit reimbursement for hospitals, you will see fewer trauma centers.

You'll see fewer cancer centers, you will see fewer cardiac centers. You will see fewer burn centers because they'll have to make sacrifices on the margin. They'll be forced to make choices. You will see the price of implants come down. You will see the price of drugs come down. The payers don't care, right?

They're getting paid to move dollars around. They take all the risk, they allocate risk. It's sort of like being the house in Vegas, right? They're always going to win and they're so big. 1% margin for an insurer next year, United Forecasts that they will generate 1 billion in revenue a day, 360 billion of revenue, 1% margin on 360 billion of revenue, is sort of enough to go around.

They'll probably generate 4% or 5% or 7% on $360 billion of revenue. So, they don't get hurt by this. Everybody else gets hit by something. These are a few of the trends, more trends are affecting the health economy but these are the things that we think are most impactful.

I hope that this has helped you connect the dots on how some of these trends relate to each other. I think most of these things everybody knows, it doesn't appear to me that everybody's connected the dots on what they mean when or perhaps more importantly, on what they could mean.

Thank you.