Friday, December 31, 2010

We Shall Meet In A Place Where There Is No Darkness

Big Brother. Facebook. One and the same? Or completely different?

Facebook, as Time Magazine recently put it, is now the third largest country on earth, and, like Orwell's Oceania, transcontinental, omnipresent and amorphous. Some might argue that the more family and friends use it, the more involuntary it becomes.

Still, it's a commercial entity. To survive, it needs to generate profits that provide a sufficient return to its owners.

Read our latest Perspectives article on privacy and Internet regulation here.

Government as the gatekeeper
Broadband Internet did not become ubiquitous until after 2000. The mobile, social networking Internet we use today has only existed for about the time it takes a person to complete high school. (Okay, an eternity for a young person, but a blink of the eye for the rest of us.)

And yet, because the urge to regulate is endemic, many believe it cannot exist without oversight.

Whether Facebook's walled-garden or Google's open platform, different business models are competing for the consumer's wallet. Not unlike the bricks and mortar world, these and other models will succeed and fail based on how well they incorporate customer knowledge.

Most consumers, as we know, are more than happy to share extremely private information in both the real and virtual worlds, which begs the question what exactly is private information?

One regulatory strategy is to view the Internet as a communication—not an information—service. Recently, the FCC, in the name of neutrality, issued an order that makes it the traffic cop of Internet access providers: a move that the new Congress, if not the courts, will surely test soon enough.

Our article points out that the Internet is still a massive information service. Think of all those YouTube videos and digital photos we so willingly share.

At least with Facebook we have some sense of what we're dealing with. Its users have revolted on privacy issues before, and the company has responded.

Government as the Internet gatekeeper is an altogether different proposition. Accountability—the Fannie Mae and Freddie Mac fiascoes demonstrated—does not occur in the same way it does in the private sector. Transparency might as well be a brick wall.

Big Brother would indeed be watching.

Monday, December 20, 2010

What Our Readers Are Reading

Throughout 2010, Lyceum has featured more than 200 articles and postings in the newsletter Perspectives, the Talking Transitions blog, and ChatterSmart, our short format news forum. We list below the ten most viewed commentaries in each publication.

In aggregate, our three lists boast more than 6,000 views. They span three broad categories—health care, financial systems and entrepreneurship—and encompass multiple topics, including:
  • Health Policy and Reform, ICD-10, Drug Discovery and Development, Clinical Pathways, Standardized Care, Integrated Care Delivery, Information Technology, Employer-Based Health Care, and Pharmacy Benefit Management in Health Care;
  • Too-Big-To-Fail, Investment Time Horizons and Alternative Investing in Financial Systems;
  • Venture Capital, Customer Experience and Business Model Analysis in Entrepreneurship.
Transparency, accountability and innovation appear frequently as common themes—perhaps not surprising given Lyceum's emphasis on dynamic transition. Lyceum participants and their businesses not only respond to market shifts, they will often instigate them.

As always, we encourage our readers to join our discussions and debates, and submit detailed thoughts to Perspectives and quick observations to ChatterSmart. We believe that group problem-solving offers the best route to valuable information gain and needs to involve a variety of stakeholders, large and small.

Most viewed Perspectives (Newsletter) articles

10. "Fixing Health Care's Value Deficit: The Problem of Unexplained Geographic Variation"
9. "Short-Term Trading is a Growing Threat to Capital Markets" *
8. "Simple Strategies to Defeat Incumbent Inertia in Health Care"
7. "Fixing Health Care's Value Deficit: The Solution in Clinical Pathways"
6. "Reform Legislation Aside, ICD-10 Could be Health Care's Biggest Challenge"
5. "The Long Fight is Over for Follow On Biologics" *
4. "Anticipating New Strategies to Gain FDA Approval of Biologics" *
3. "ICD-10 Impact on Provider Reimbursement"
2. "We Can No Longer Afford To Retire"
1. "What Payers and Physicians Need to Look for in Clinical Pathways"
 * Membership or subscription required to view

Most viewed Talking Transitions (Blog) posts

10. "In Health Care, It's David Versus Goliath"
9. "Reform Legislation Aside, ICD-10 Could Be Health Care's Biggest Challenge"
8. "Paper: Cost Shifting No Longer an Option"
7. "Book Review: More Money than God"
6. "'Not My Problem!'"
5. "Clinical Pathways Lessen Geographic Variation, Reduce Costs"
4. "Biggest Wave of IPOs since 2007—Or Not"
3. "Promising Business Model Targets Traditional PBMs"
2. "Not Just Access. Understanding."
1. "Finding a New Way in Accountable Care Organizations"

Most viewed ChatterSmart (News Forum) posts

10. "Something New in Drug Discovery"
9. "Dartmouth Atlas Under Fire"
8. "What Happens if Employer-Based Health Insurance Goes Away"
7. "Report Finds Employers at Risk of Not Making Health Plans Affordable"
6. "Government Opts for the Cloud"
5. "Washington Politics Ruin Reform"
4. "States: No Choice But to Reform Health Care"
3. "Venture-Backed Health Care Companies Selling for Less Than Total Raised"
2. "Same Problems for HIEs as for RHIOs"
1. "ICD-10: The Biggest Health Care Event Not Discussed"

Tuesday, December 14, 2010

Promising Business Model Targets Traditional PBMs

Four years ago, Walmart launched its four dollar generic drug program. Target, Costco, K-Mart, and others implemented similar plans soon after.

Many experts expected a direct challenge to mail-order pharmacies, and head-to-head price competition. Some believed the pricing initiative doomed the traditional pharmacy benefit management ("PBM") business model.

Not only have the major PBMs survived, they've thrived—and once again deflected a substantial market challenge. Shares in Medco Health Solutions and Express Scripts have more than doubled. Both now trade at or near all-time highs. (The CVS Caremark price is flat, but the company has navigated an unfulfilling merger that has so far diluted the value of the legacy Caremark operation.)

Traditional PBMs, however, should not rest too comfortably, according to a recent white paper by Milliman, the actuarial consultancy. The paper, entitled "The Value of Alternative Pharmacy Networks and Pass-Through Pricing", explores the emergence of transparent retail pharmacy networks that build on Walmart's and other large retailers' aggressive cost-cutting capabilities.

Milliman calls these new business models Alternative Pharmacy Networks, or "APNs". The paper presents analysis that estimates cost savings of between four and 13 percent beyond a traditional PBM service for an average employer with 10,000 lives.

The Milliman white paper thoroughly considers the traditional PBM business model, how APNs function, and what the implications are in terms of contract pricing, transparency and the distribution chain. Read it here.

Restat, a privately-held pharmacy benefit management company, commissioned the paper. Restat deploys an APN model called Align.

Even though pharmacy costs are small as a percentage of total employer health care costs (medical benefit costs can be at least four times as great), the savings are real, especially against a tough economic environment. For large corporations employing tens of thousands, scale advantages could produce even bigger percentage savings.

Because the APN creates a transparent marketplace, it bestows employers, or plan sponsors, an intangible benefit of eliminating the traditional PBM's information advantage. The APN takes away what the PBM knows about drug pricing and how it leverages this.

Most important, the APN is an emerging model. Only a few large employers such as Caterpillar utilize it. One catalyst—beyond sponsors seeking additional savings—could be small PBMs reinventing themselves. The three big PBMs—Medco, Caremark and Express Scripts—are powerful players. Their aggressive strategies and market consolidation leave little room for others to compete.

APNs, Miliman states, feature two characteristics: one, substantially lower drug prices and dispensing fees than traditional pharmacies; two, 'pass-through' attributes including rebates that flow from manufacturer to employer and a PBM that collects no spread or drug cost differentials. (Instead of rebates and spreads, the PBM makes money on a flat administrative fee.)

Whereas, in the traditional model, PBMs negotiate price with plan sponsors, the APN model allows in-network pharmacies to compete for consumers on price and service. Control, in effect, shifts to the employer (the payer), and, depending on how the employer arranges the APN, the consumer.

So why haven't APNs gained greater momentum? There are several reasons. Perhaps the most important is the resilience of mail order, the traditional PBM's core franchise. Mail order is a distinct class of trade, the Milliman paper notes, which means PBMs can purchase drugs from manufacturers at prices lower than wholesalers or retail pharmacies. It also allows for price arbitrage strategies not available to retailers.

The traditional model also wins on market inertia. While the APN does offer real savings, traditional PBMs can argue that they too create savings, and have been doing so for years. Sponsors focus more on trend than details anyway, and new contracting means hassle. Moreover, sponsors care much more about the medical side of the ledger, since it's the principle contributor to price inflation.

No doubt, if the number of employers weighing the APN option accelerates, then the PBM universe could rebalance. The odds of the traditional model collapsing appear slim, however.

For small PBMs and new entrants, the APN model does finally establish a vehicle that can compete against the big three PBMs.

More than existing share, revenue that the APN does claim will likely constitute new share in a growing marketplace of aging baby boomers and new-to-market oral specialty pharmaceuticals.

The big three PBMs have consistently shaped and dominated the pharmacy distribution chain. As time passes, their biggest risk may not be the APN, but their own success in building behemoth businesses that ultimately limit maneuverability.

Thursday, December 9, 2010

'Value' and the End of Health Care as a Right

A surprising new word is making its way into the health care lexicon: value. Its emergence ends the health-care-is-a-fundamental-right argument, and advances the debate over what needs to change.

Value, an economic term, defines health care as an economic good. It emphasizes the rules of supply and demand, and basic strategies targeting efficiency, outcomes and cost.

Michael Porter, the Harvard Business School professor, states in the New England Journal of Medicine:



Value—neither an abstract ideal nor a code word for cost reduction—should define the framework for performance improvement in health care. Rigorous, disciplined measurement and improvement of value is the best way to drive system progress. Yet value in health care remains largely unmeasured and misunderstood.

He goes on to argue that value should be defined around the customer, and that the creation of value should determine the rewards for all other actors in the system.  For several years now, right-leaning strategists and economists have addressed value as the essential mechanism for true reform. Folks on the left have argued that because health care is a fundamental right, traditional economics don't apply in the same way they do in other industries. And because they don't apply (private industry will always fail, for example), only a single payer system can deliver that right.

Thanks to the health reform bill and its complexity, the budget deficit and economic malaise, the health care debate has continued. The arguments, though, have shifted.

Like any other service, quality and price vary in health care. Unlike other services, however, no one's quite sure exactly how these factors vary, or, for that matter, what each is. Instead of government's role in providing a right, the left side of the aisle now seems more focused on elevating government's role in defining quality and price, and therefore value.

An altogether different conversation is taking place.

Ultimately, agreeing that health care is an economic good is a huge step forward—and in just one year. From 'value', opposing views can finally address core issues such as the care delivery system in a more constructive fashion. For once, the debate features a common language.

Take Professor Porter and his NEJM article. He calls for an integrated delivery system that combines efforts by providers over the full cycle of care. It's what the health reform bill defines in terms of an accountable care organization, though Porter doesn't use this expression. His HBS colleague, Regina Herzlinger, meanwhile, has long argued for focus factories, a concept that Porter pointedly dismisses.

Like Porter, Herzlinger's factories also center on value and customer experience, and, to an extent, integrated care. While Porter calls for broad-scale change, Herzlinger aims at incremental change.

Her force of change is entrepreneurial drive, where lawmakers empower the private sector to discover best practices for itself. Porter, on the other hand, finely details what the end goal should be. He does not explain the process to make this happen, at least not in this article.

Progress can't happen without debate. And meaningful debate can't occur until there's a common language.

The emergence of 'value' marks a crucial step forward.

Monday, December 6, 2010

Another Holiday Season, Another Prediction

It's that time of year again, and everyone seems to be in the business of forecasting, especially on Wall Street. According to a recent article in Perspectives, we're just witness to human nature at its most basic: "We all face forward. Ergo, we make predictions."

No different than a Mennonite studying anomalies in an animal's entrails, a modern-day Wall Street analyst slices and dices spreadsheets to predict future events. In some cases he's even deferred his predictive judgment to an algorithm or computer model. (A scary thought, indeed.)

Are we any better off? Yes. No.

It doesn't really matter, because it's who we are.

The best we can do in making and receiving these outlooks is to know our own context. Think of predictions not as absolutes in and of themselves, but as composites of a bigger picture.

Socrates was right. "Know thyself."

Read "Trust Me, I Predict the Future" in Perspectives here.

Friday, December 3, 2010

Focus on Focus Questions

Lyceum's GatherSmart® website features a news blog called ChatterSmart. We've designed it as an open forum for folks to highlight news stories relevant to Lyceum discussions.

Postings are formatted to include a short description of the issue at-hand: normally a sentence or two. They also include a focus question to encourage the reader to consider a broader context.

Often, we take these questions and explore them in roundtables and events. Listed below are ChatterSmart's ten most recent postings and their associated focus questions.

"Emboldened Opponents Ready to Open New Fronts Against Health Reform" December 3, 2010
  • Focus Question: To what extent will state and local governments block the health reform bill from taking effect?
"Employee Health Premiums Soar" December 2, 2010
  • Focus Question: What's the breaking point in employee health premiums? Are consumers now demanding taking control away from government and employers?
"Why Rolling Back the Health Reform Bill Will Be Difficult" November 30, 2010
  • Focus Question: If the federal government cannot revise even the least favored provisions, how much will it slow its implementation? How much control will state and local governments possess?
"Drug Marketing & Social Media" November 26, 2010
  • Focus Question: As much as social media marketing could put docs and consumers at informational risk, how does its feedback loop alter the risk profile of drugmakers?
"Summary of Medial Loss Regulations" November 22, 2010
  • Focus Question: How does the MLR provision affect investment capital in commercial health plans? How does this impact innovation?
"How to Define Quality in End of Life Cancer Care" November 17, 2010
  • Focus Question: How effective would integrated care delivery systems—or accountable care organizations—be at addressing palliative care?
"Who's Better at Leading ACOs: Physicians or Hospitals?" November 12, 2010
  • Focus Question: Why couldn't a shareholding structure apply where shareholders control the ACO?
"What's the Role of Patients in ACOs" November 12, 2010
  • Focus Question: To what extent could ACOs emerge from concierge medicine, where patients and payers are one and the same?
"CFOs Stressing More Than Ever About Health Care" November 2, 2010
  • Focus Question: As insurance exchanges emerge as alternative markets to purchase coverage, how quickly will employers shift to a defined contribution model?
"McKesson Purchases US Oncology" November 1, 2010
  • Focus Questions: How does this transaction impact oncology business practices including standardization of care and clinical pathways? What's the impact on strategic positioning in specialty pharmacy—specifically the large PBMs (Caremark, Medco, ESI)? What effect does this have on drug development and demand for lower cost treatments? Should we expect further consolidation among providers?

Thursday, December 2, 2010

The Big Bank Coin Flip

The 2008 crisis paralyzed the global capital markets. It produced shock waves that we will navigate for sometime.

And yet, despite colossal mismanagement, the nation's biggest banks not only survived, but in fact have expanded their share of market activity.

The Federal Reserve's December 1 release of 21,000 credit transactions conducted to stabilize markets reveals just how badly the big guys' business models failed.

We quote the Thought of the Day blog:



Documents from the Federal Reserve indicate that Goldman Sachs (despite claims from CEO Lloyd Blankfein that they were doing “God’s work” and that the firm could have survived without help from the Fed) tapped the Fed’s Primary Dealer Credit Facility (PDCF) 84 times and Morgan Stanley 212 times between March 2008 and March 2009. Citigroup used the facility almost daily, tapering off in April 2009. Bank of America, between September 18, 2008 and May 12, 2009 used the facility more than 1000 times. Other lending facilities made available include the Term Asset-Backed Securities Loan Facility (TALF); Commercial Paper Funding Facility (CPFF) – used by industrial companies in need of over-night financing, with GE borrowing $15 billion a dozen times; Term Securities Lending Facility (TSLF) – providing loans up to 28 days, and the Term Auction Facility (TAF) which allowed banks to bid for loans without the stigma associated with the Fed’s discount window.

As the Thought of the Day concludes, government action avoided a total meltdown.

But where's the fix? If highly concentrated capital and distortions in risk and return (in particular, management accountability) contributed to the original problem, then why do the same business models persist?

Entrepreneurs know that individual success and failure are two sides of the same coin. The same odds, however, don't seem to apply to banks too-big-to-fail.

Maybe that's because when senior management flips the coin, it only half realizes the consequences.

Tuesday, November 23, 2010

How the Oncology Business Model is Changing and What Drugmakers Need to Do About It

Since its inception in 2005, Lyceum roundtables and events have addressed industry transition and business innovation among different components of the health value chain. Perhaps no aspect is shifting more significantly than delivery of care, and the business of oncology in particular.

In keeping with our roundtable format, we invited three thought-leaders to explore some of these dynamics. We created the question list below to capture not just the way in which the oncology business model is evolving, but also how the drug manufacturing industry needs to respond:
  • List and describe the three biggest issues impacting the oncology business model.
  • How are biopharmaceutical makers responding to these shifts? List and describe three essential strategies.
  • What is the outlook for access to and quality of care over the next five years?
Longstanding participants in Lyceum, our commentators contribute unrivaled expertise and experience. They are Bruce Cutter, Dawn Holcombe and John Engel.

Bruce Cutter, MD, MMM. After many years of both patient care and leadership, Bruce is now a health care consultant. Key leadership accomplishments over the past ten years have included design and implementation of a community-based, integrated oncology delivery system, together with development, in close collaboration with a health plan, of a comprehensive quality initiative combined with a pay-for-quality contractual arrangement. Bruce is based in Spokane, WA.

Dawn Holcombe. Dawn, a private consultant, was recently Senior Vice President for Payer Relations and Quality Programs for both Supportive Oncology Services and its large network of affiliated oncology practices and the Cancer Clinics of Excellence, as well as Executive Director for the Oncology Network of Connecticut, LLC. Dawn's twenty-nine years in health care have included executive, strategic, financial, and marketing positions in academic and private health systems and physician practices. Dawn is based in South Windsor, CT.

John Engel, Esq
. A founding partner of Engel & Novitt, LLP, John specializes in food and drug, public health, and administrative law, and health information technology and science policy and legislation. He provides strategic counseling on a wide range of legal and regulatory, intellectual property, and marketing initiatives affecting pharmaceutical, biotechnology, and medical device companies, as well as organizations representing health care professionals and their patients. John is based in Washington, DC.

Read article here.

Monday, November 8, 2010

State Legislatures Will Decide Health Reform

Pick your metaphor: hurricane, tidal wave, avalanche, earthquake. However you label the midterm election, it has radically altered the political landscape—though with no greater effect than at the state and local level.

Consider this report from the National Conference of State Legislatures:



Republicans picked up 680 seats in state legislatures—the most in the modern era. The previous record was in the post-Watergate election of 1974, when Democrats picked up 628 seats...

The Alabama House and Senate, Indiana House, Iowa House, Maine House and Senate, Michigan House, Minnesota House and Senate, Montana House, New Hampshire House and Senate, North Carolina House and Senate, Ohio House, the Pennsylvania House, and the Wisconsin Assembly and Senate all have flipped from Democrat to Republican...
This is the first time in Alabama that Republicans have controlled the legislature since reconstruction. The North Carolina Senate has not been Republican since 1870. And Republicans have reportedly taken over 100 seats in the New Hampshire House. For the first time in history, the Minnesota Senate will be controlled by the GOP.

While front page news stories highlight big shifts on Capitol Hill, gridlock is the likely outcome of the next two years—or, at the very least, vigorous ideological posturing.

Not so in the state capitals where constituents challenge elected officials face-to-face on a daily basis. No longer will these officials delay resolving high unemployment and burgeoning benefit obligations.

Budgets are a mess, and there's little hope for improvement.

According to the policy organization Center of Budget and Policy Priorities: "States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs."

The organization notes that 39 states have already projected gaps that total $112 billion for fiscal year 2012. It expects that, once all states have prepared estimates, these gaps will likely expand to about $140 billion.

After education, the biggest outlay for states is health care—and Medicaid specifically. As the Kaiser Family Foundation explains, individuals tend to lose employer‐sponsored health coverage during recessions, which increases Medicaid enrollment and spending. Meantime, recessions shrink state revenues, making it more difficult for states to afford their share of the increased spending.

What's more, the federal government, facing a huge deficit itself, won't be able to support expanded Medicaid outlays as it might under stronger economic growth. At 44 percent of all grants to states, Medicaid funding is the single largest source of federal support.

Since the start of the recession unemployment has doubled, while Medicaid enrollment has increased by 6 million people. Already this year, 44 states say they will exceed enrollment and spending growth, according to Kaiser. A dozen states have experienced double-digit annual enrollment increases. In California and New York, Medicaid spending growth has increased by 24 percent and 16 percent, respectively.

And it gets worse. The October payroll report showed labor force participation dropping to 64.5 percent, its lowest percentage in a generation. Millions of potential workers simply have given up on finding a job, and are no longer accounted for in employment statistics.

While, short-term, commercial health plans such as WellPoint and UnitedHealthcare might benefit from lower medical costs on fewer employees in employer-sponsored health care, longer-term they face considerable business risk as this reduced workforce jeopardizes premium income.

For state governments, this means not just an even bigger Medicaid population in the months to come, but fewer revenues to service it. It also means confronting a commercial marketplace turning towards consolidation to sustain topline growth, and the likelihood of higher prices on less competition, as a result.

The health reform bill forces even more spending requirements on states, exacerbating a heavily strained situation. Legislatures and their constituents can't afford it.

Nor can they afford to wait for Washington to fix it.

In July, Ed Haislmaier, a senior fellow at the Heritage Foundation, proposed that state officials target a more competitive private-sector insurance marketplace. He writes:



The best response for state lawmakers is to immediately move in the opposite direction of the new federal legislation by first determining their state’s needs and priorities, and then enacting their own reforms that increase health insurance choice, competition, and coverage while also reducing costs.

Haislmaier believes officials could establish this marketplace by creating a defined contribution option for employer-sponsored health insurance coverage; repealing unnecessary state-mandated health insurance benefit requirements; lowering barriers to market entry through statewide risk adjustment mechanisms; creating a premium aggregation mechanism that enables individuals to buy coverage using contributions from multiple employers; and providing consumers with greater price and quality transparency with respect to insurance coverage and physician and hospital services.

The health insurance exchange, Haislmaier argues, offers one of biggest opportunities for establishing consumer choice and reducing state commitments, if developed outside health reform's regulatory framework and its rigid benefit requirements.

A competitive exchange allowing consumers to choose plans best suited to their needs would help stem excessive spending and limit the accelerating trend toward a concentrated commercial marketplace, at the same time.

In fact, Congress's most effective action could be stalling the implementation of health reform to give states time to design insurance exchanges and set their own houses in order.

Just as a grassroots movement repositioned the political landscape, expect the same effect on state budget deficits. For governors and state lawmakers, as challenging as Medicaid and insurance reform will be, the obstacles are far less severe than taking on the education system.

Health care is priority number one.

Monday, October 18, 2010

Midterm Elections and Health Care Reform

One thing's for sure: the midterm election will mark the beginning of a new and different political period. Just how new and different we'll know in the days and weeks that follow.

RealClearPolitics, a polling data aggregator, shows Republicans securing a majority in the House and among governors, and possibly even the Senate.

After the economy and jobs, voters cite health care reform and dissatisfaction with government as the most important issues to their vote, according to the Kaiser Family Foundation.

Three factors will shape what happens after November 2nd:
  1. the degree to which Republicans 'win', including not just the total number of seats but also the individual seats themselves, in particular those now held by high-profile Democrats;
  2. the cohesiveness of the Republican AND Democratic agendas, including the administration's response to the new Congress;
  3. the speed of economic recovery and restoration of job growth.
For a great overview of seats won and lost in midterm elections, we recommend visiting USMidtermElections. This site allows you to view and sort midterm results back to the very first one in 1790, for both chambers.

Should, for example, the Republicans win control of both Houses, a majority of governorships, and deliver a consistent and coherent post-victory agenda, while the economy continues to teeter, expect party leaders to attempt dramatic legislative action.

Should the Democrats maintain Senate control and quickly refashion their image, expect softer Republican action, even if economic recovery stagnates.

At this point, odds favor a dramatic momentum shift in favor of Republicans. As of October 18th, RealClearPolitics shows the Republicans securing 212 seats and the Democrats 180 seats, with 43 undecided. The Senate divides between 46 Republicans and 48 Democrats, with six seats too close to call.

The biggest battlefield
Perhaps the biggest political battlefield—and display of these three factors at work—will be health care, and the fight to dismantle the Patient Protection and Affordable Care Act, President Obama's defining legislation.

Republicans have three strategies from which to choose:
  1. a swing-for-the-fences outright repeal;
  2. a house-of-cards killing of key provisions;
  3. a foot-dragging delay of its implementation.
Repeal, while a low probability, is not improbable. If the three factors identified above strongly favor Republicans, then Congress's ability to override a certain presidential veto would depend on how many Democrats choose to vote against the administration. Let's not forget: the Democratic party will feature folks not tethered to the 111th Congress and the 2008 election.

Foot-dragging, on the other hand, would likely happen if our three factors and their dynamics underwhelm. Rather than surprises at the polls, it would be Republicans badly flubbing their message that most likely spawns this reactive strategy—a situation where Republican momentum stalls.

The most likely strategy will be an attempt to kill key provisions, with the goal of forcing the bill to collapse like a house of cards. According to a recent article in the Financial Times, Republicans may seek to defund the scores of agencies that the bill requires the Department of Health and Human Services to set up for implementation. (Depending on the number of seats won, the Republicans could also use reconciliation as a legislative tool to advance this plan of attack, as the Democrats did to force through their agenda.)

Such a house-of-cards strategy, the FT notes, would still require substantial reputational risk just as the next election cycle commences.

To be sure, opposition to health reform won't take place on Capital Hill alone. The constitutional fight over the individual mandate is already making its way to the US Supreme Court. With many of the bill's key provisions—including the individual mandate—taking effect in 2014, the plaintiffs are seeking to accelerate the suit's journey, while the defendants are aiming to slow it down.

Moreover, states and their newly elected governors and local leaders will need to address massive health care obligations right away. Earlier this month, the New York Times reported a first-time disclosure of $200 billion in unfunded liabilities among the cities, counties and authorities of New York.

Many state officials are likely to consider the design and use of insurance exchanges. Until 2014, these officials will enjoy considerable free rein, and could build systems that effectively reduce government commitments by emphasizing market-based solutions. In fact, some conservative thought-leaders argue that state action on the exchanges could do more to curtail the bill than Congress itself. A viewpoint, for example, Scott Gottlieb and Tom Miller recently expressed in the Wall Street Journal.

The stakes are high for both parties, and for the administration and its legacy. Watch for a fierce—and potentially complex—fight to erupt immediately after the 112th Congress takes its seat.

Monday, September 27, 2010

Not just access. Understanding.

Anyone can access significant players. Lyceum Associates fosters deep, multilayered interaction that creates extraordinary business relationships.

These days, rapport matters more than ever. In a world of instantaneous information, a company's ability to create and execute strategic objectives depends on a thorough appreciation of not just what knowledge it's getting, but also from whom.

Too often, we turn to 'experts' without truly understanding their motives and framework, let alone their expertise. And this can occur within an onslaught of information, in which we don't allow ourselves adequate time to evaluate sources, and rely more than we should on assumptions.

Over its five and a half years, Lyceum has delivered more than 80 roundtables—each one an exclusive event of 10 to 12 participants representing diverse expertise and viewpoints and, collectively, entire industry value chains.

The GatherSmart® website features profiles on each of these participants, allowing for thousands of individual interactions to take place beyond the events themselves. In addition to discussion topics and related commentary, members can search events to identify every participant and his or her professional profile.

They can also chose among different outlets to contribute their own thoughts and opinions: Perspectives (the Lyceum newsletter), ChatterSmart (a short-format newsblog), and a discussion forum.

We have showcased business innovation and industry transition in a variety of industries, and focused in recent years on the intricacies of the United States health care system. By selectively inviting a variety of stakeholders for participation, we utilize group problem-solving as the most effective means of defining and understanding value, whether in terms of business model shifts or workflow redesign.

Members—professionals who continue to participate in our events—gain familiarity and a sense of trust that can otherwise be impossible to attain even in a private, one-on-one meeting or a social interaction. For the better part of a day, a member will analyze and discuss hot-button topics with other key players. Conversations begin as arrays of common interest, and end as discoveries of common ground and likes and dislikes.

Quite simply, there's no better way for one individual to access another individual. It's the advantage of a shared experience rooted in informal exchange and business-centered topics.

A round of golf or a dinner might open new doors for vendors in pursuit of clients, but neither compares to the opportunity of vendors, clients and other subject matter experts jointly analyzing a point of common interest. Vendors won't just discover more about clients: clients will be better able to screen what vendors are offering.

Most important, the opportunity presents itself equally to each person at the table. With participants individually invested in the discussion, the group gains exponentially, compounding the return on that investment.

To extend Lyceum's reach to professionals who might not be able to contribute the same resources, but who contribute valuable expertise and experience, we encourage sponsored events and series. In contrast to a member, a sponsor functions as a partner in Lyceum, and helps to shape roundtable series, including content, locations and participants.

Users include entrepreneurs, corporate executives, industry consultants and experts, institutional investors, and many others. We believe a carefully-arranged assembly of stakeholders will surpass any one person in expertise, and that members will be better able to ascertain their own strengths and weaknesses and to engage others as they strive for personal success.

Not just access. Understanding.

Friday, August 27, 2010

'Not My Problem!'

What would you do if your employees demanded benefit increases and you had no money to pay for it? Unless you could somehow increase revenues, you'd probably explain an increase simply wasn't possible.

Not so in the fuzzy world of public sector finances.

On June 29th 2001, the New Jersey state legislature approved legislation that revalued the state's pension assets to their June 1999 level. State unions had demanded benefit increases, and officials—not wanting to disappoint key constituents—opted to raise the needed funds in the capital markets, instead of imposing higher taxes.

Problem was, pension assets by mid 2001 were already severely underfunded. In order to entice investors, the state had to show a strong balance sheet, and 1999 was a banner year.

Subsequent bond offering documents not only did not disclose the revaluation until two years later, but also never disclosed the 1999 mark, a date not coincidentally near the peak of the bull market.

By 2007, when the New York Times exposed the state's breathtaking fraud, the State Treasury had issued $26 billion in debt in 79 different offerings.

A recent Lyceum Perspectives article explores the New Jersey debacle—the first ever SEC suit against a state—and the question of how much accountability taxpayers can truly expect of elected officials. Read article here. (And, yes, it took the SEC three years to complete its suit.)

At the most basic level, this extraordinary case reveals the extent to which public officials play by rules completely different than corporate executives—not that the private sector has produced a flawless track record, either.

In the meantime, the federal government continues to create and expand entitlement programs requiring state funding.  The question of accountability and investor trust will loom large in the months and years ahead.

Bottom-line: cost of capital will rise as higher interest rates reflect not just sullied finances, but also deep distrust.

Health reform will test this precarious environment almost immediately. Already, according to the Wall Street Journal, many states are demanding that employees make first-ever contributions to their benefits, something private sector employees have always done.

However, employee unions in Michigan—and, yes, New Jersey—are filing lawsuits against such demands, putting even more pressure on elected officials.

The same Journal article cites a report by the Pew Center that calculates state retiree health care and other non-pension benefits as a $587 billion long-term liability for state governments. As of fiscal year 2008, less than six percent of that amount was funded.

New Jersey immediately consented to the SEC's cease-and-desist order, but did not admit wrongdoing. At this point, the SEC has issued no further penalty, and has not cited individuals for prosecution.

If you are an elected official—or, indeed, an employee—of the state, you might say, "Not my problem."

For investors and taxpayers, already confronting a challenging environment, 'not my problem' is the worst possible utterance, a complete voiding of trust.

And if there's no trust, there's no confidence, and no recovery.

Tuesday, August 10, 2010

Finding a New Way in Accountable Care Organizations

Docs need better business skills, and fast.

Blame it on the medical education system. Medical schools train students to become world-class clinicians, but most graduates haven't the faintest idea how to manage a business—yet many do just that, establish their own practices.

Blame it also on America's peculiar health care system, which distorts basic economics so familiar to any other industry.

Up until the past few years, business acumen wasn't necessary. Most docs had it easy, a flow of patients as steady as reimbursement. Okay, maybe some aggravation in reimbursement, but whatever the government ratcheted down, the doc could ratchet up through cost shifting, or more generous payments from commercial payers.

That comfortable world is changing rapidly. With or without health reform, the current system can no longer sustain itself. Financial resources are shrinking just as demographics are shifting—a population mix giving way to a larger percentage of health-care-consuming retired people than ever before.

For the first time, many physicians—beyond just primary care docs—are having to spend more time at their desks stressing over the wherewithal of their businesses. Their anxiety: patient flows rising just as pricing power shrinks.

And it's not like no one's seen it coming. Examples abound of docs implementing creative business models, whether simple networks or more elaborate integrated delivery systems.

Still, the majority haven't been that clever.  They face certain shock when market dynamics force practices to merge, sell into large organizations, or, worse, shut down. Many docs simply will give up, retire and let someone else worry about the 'new way'.

According to March 2010 survey published in the New England Journal of Medicine, nearly a third of docs said they plan to quit if Congress passed health reform.

Perhaps in the lusher days of more certain economics, we could have viewed health care as a right. No longer. Fundamentally, as we're now learning, it's an economic good. Supply, simply, is finite, and not very good at matching demand.

The more business-focused MDs will discover the new way in integrated care. Health reform addresses this concept in the accountable care organization. An ACO unifies different types of organizations in the delivery of a broad continuum of care, while bearing financial risk for the care provided. Think of it as different tax IDs buying into an economic opportunity.

Risk, a component of every business, will now become a core component of the provider practice—just like its clinical services. And so will information technology, which the ACO's different members will need to share in order to measure performance and assess business risk.

But how exactly does an ACO function? As written in health reform, a government-sponsored ACO is a voluntary formation. It links hospitals and physician practices, different practice specialties, independent practitioners, and more. The Centers for Medicare and Medicaid Services ("CMS") establishes an overall fixed budget, and the ACO must achieve more efficient utilization to remain viable.

If it cannot achieve better utilization, the ensuing budget squeeze could force paycuts on its members.

Utilization refers to how physicians choose to deliver care, taking into account the cost of procedures such as emergency room use, radiology, and specialty visits. It could also feature a more standardized care delivery process, for example, implementation of clinical pathways. The ACO will focus initially on outpatient services, which, according to the actuarial consultancy Milliman, amount to 70 percent of all health care costs.

A July 2010 article in Health Affairs sorts the ACO into five categories by degree of provider risk-taking:
  1. Integrated Delivery System
  2. Multispecialty Group Practice
  3. Physician-Hospital Organization
  4. Independent Practice Association
  5. Virtual Physician Organization
The article's authors argue that an integrated delivery system and multispecialty group practice should consider capitation or bundled payments, because they assume a higher degree of risk than a less structurally integrated system such as a virtual physician organization, which should implement a limited or partial capitation payment program.

In a recent briefing paper [PDF], Milliman highlights the importance of basic risk assessment.  It states:



[T]he ACO must preach and practice two challenging and often-overlooked imperatives: establish actuarial cost and utilization targets appropriate the ACO's designated business, and provide medical management to achieve those targets

No doubt, actuarial assumptions will play a key role, and Milliman describes how the ACO might go about making these assumptions. This means building cost models based on population data and the ACO's own utilization capabilities. If the budget targets are generous, the ACO could realize a substantial commercial opportunity.

If the targets are narrow, its leaders might not want to form an ACO in the first place.

Provider services such as medical oncology that depend heavily on Medicare might form ACOs in partnership with CMS. Others such as primary care might form ACOs in partnership with commercial payers—or, to the extent they capture out-of-pocket payments, with patients themselves or their employers. Many might partner with a combination of payers.

MDs can expect substantial displacement in the months and years ahead. Many will lose their independence, either willingly or unwillingly. In addition to the usual clinical challenges, they will also have to overcome business challenges for which they are completely unprepared.

Those docs wanting a voice in the new way will need to come to terms with direct ownership in organizations that integrate and coordinate care across multiple silos.

If better business skills drive better clinical outcomes, we could soon realize major benefits in a health care system based on value.

Tuesday, August 3, 2010

Clinical Pathways Lessen Geographic Variation, Reduce Costs

Because physicians often treat patients differently for the same condition, outcomes vary—as do the costs. For government and commercial payers, these variations can result in substantial differences across physician practices and hospitals, and geographic regions.

Even before health reform, many constituents had been targeting variation in care as a leading opportunity for efficiency gains.

In a March and April article series in the Lyceum newsletter Perspectives, Dr. Bruce Cutter describes the solution to geographic variation in clinical pathways. He writes:



Clinical pathways are an agreed-upon, standardized way to treat patients with certain diseases, including cancer and other complex diseases. While they can be thought of as a subset of the better known term clinical guidelines, there are many differences.

The intent of a clinical pathway is to standardize care, and to do so in a way that is evidence-based, patient-centered, and value-focused. Standardizing care in such a fashion decreases unexplained and unwarranted variation and enhances the value equation.

Dr. Cutter, a Spokane-based medical oncologist, goes on to define basic characteristics that constitute an effective pathway, and gives examples of successful demonstration projects. "Critically," he notes, "they shift value creation responsibility to the people who have the most influence over quality and costs, and who have an ethical and fiduciary responsibility to patients: physicians and other members of the health care team."

Read Dr. Cutter's articles here.

In an August 2nd Perspectives article, Dawn Holcombe echoes Dr. Cutter's thoughts with additional insight on a pathway's key characteristics. She segments these characteristics into five areas:
  • Clinical Source and Maintenance
  • Pathway Definition
  • Point of Clinical Decision-Making
  • Tracking and Monitoring
  • Documented Ease of Physician Use
Ms. Holcombe, a long-time consultant to oncology providers, argues that not every pathway is a true pathway. Many, in fact, are not much more than tightly defined guidelines. "How those pathways are defined and executed," she observes, "makes an enormous difference."

Once physicians and payers understand what makes up a viable pathway, they can then ask the right questions to make informed decisions. She states:



By asking the right questions, physicians and payers alike will utilize true clinical pathways programs.

They will also avoid programs mistakenly labeled as pathways, which focus more on preferred treatment menus and less on detailed care and reporting—a more tightly controlled way of defining guidelines.

Read Ms. Holcombe's article here.

Clinical pathways are gaining traction in oncology. Dr. Cutter projects that in time we could witness broader adoption in care coordination and integration:



Standardization would allow experts and practitioners to measure a wide range of clinical, quality, outcome, and operational metrics at multiple population levels, and to compare one group to another.

Saturday, July 24, 2010

When Docs Take On Economic Risk

Misaligned incentives distort how health care's participants interact with each other, aggravating patient frustration and worsening trends in care delivery.

Payers reimburse physicians based on volume, not value. Payer risk pools, in turn, favor well beneficiaries over sick beneficiaries. And employers, instead of employees, decide how to consume health care.

At no point do supply and demand actually transact. Rarely are consumers able to make informed decisions.

To the extent that health reform legislation realigns incentives where at least payers and providers operate closer to the same page, efficiency levels could rise.

According to the actuarial consultancy Milliman, the force driving this could be provider risk-sharing.  In a recent briefing paper, the consultancy describes this as a process of re-adjusting "health plan payments, provider payments, and individual or group premiums to reflect the health status of plan members".

Think of it as two entities, normally opposed to each other, owning an economic opportunity, in this case a better, more cost effective patient outcome. By owning it, they both share in the upside—and the downside—while utilizing resources more efficiently.

"Instead of fee-for-service," write the paper's authors, "compensation may come in the form of a per-member basis, with bonuses paid depending on the provider's achievement of specified targets and goals. Savings will be shared between providers and payers according to their effectiveness and efficiency. Pay-for-performance components within this overall approach will reward improved patient outcomes as well as straightforward savings." Read paper here (PDF).

By endorsing programs such as accountable care organizations and evidence-based medicine, health reform legislation potentially eases the restraints on factors necessary for risk-sharing to take place. And with advancements in electronic health records providing key technological support, provider risk-sharing stands a reasonable—if not excellent—chance of revival after faring poorly in the 1990s.

(For information about Medicaid risk-sharing projects in the 90s, read here. These projects followed a capitation, or set fee-per-patient, payment model where health plans transferred percentages of government payments to providers based risk assumption.)

As the authors note, failure resulted from:
  • poor quality measures
  • insufficient documentation and coding procedures
  • non-pervasive best practices
  • weak information technology
  • unsophisticated risk assessment techniques
Many of these factors, however, have improved considerably.

Regardless, risk-sharing faces a big challenge in overcoming entrenched inertia and the fear of another disappointing failure. Both providers and payers will need to trust the new system before shedding the old one, and any number of successful demonstration projects may not motivate wide enough adoption to bend the cost curve.

Risk sharing, though, is an intriguing concept, and could easily apply to provider practices beyond the scope of government programs: concierge and retail-based care delivery, for example, where consumers align their own dollars with providers' dollars to ensure the best possible care.

Not matter what, it comes down basic economics. At this point, we can expect large government deficits and profit constraints on payers and providers to overwhelm trust and fear issues, and motivate consideration of alternative systems.

Any economic improvement or good standing, especially among providers, would likely diminish risk-sharing's chances for adoption.

Tuesday, July 20, 2010

In Health Care, It's David Versus Goliath

"You can't teach an old dog new tricks," so the saying goes. And for incumbent business models in health care, nothing could be more true.

If anything, federal health reform is a catalyst for industry consolidation, where increased regulation will force payers and providers to seek scale advantages as profits decline.

While government subsidies might target alternative payment models such as bundled fees and care delivery platforms such as accountable care organizations ("ACOs"), business leaders will have to utilize external—non-government tethered—strategies for sustained organic growth.

Writing in the Lyceum newsletter Perspectives, health care consultant Erik Swanson notes:



In order to survive, existing participants in the health care system need to change how they make money. Smart new entrants stand to capture substantial profits if they can achieve disruptive change.

The biggest opportunity is in customer experience. Make it better, and your product or service will do just fine, thank you.

Swanson, who cut his teeth running corporate strategy for WellPoint and advising the health care industry as a partner at Accenture, observes:



The introduction of insurance exchanges and a newly accessible individual market, for example, could ignite a consumer-driven revolution in how health care is financed and delivered by emphasizing retail-based models and customer experience.

Another opportunity is in information and advice. Health care data is already plentiful, and will continue to grow exponentially. Until businesses can move beyond just selling formatted data, and turn it into interactive advice, data will only clog space in some vast server farm.

Swanson points to efforts by Walgreens and Averde Health that target improved customer experience. He also gives the example of Blue Shield of California, CALPERS (a large employer), Hill (a physician group) and Catholic Healthcare West (a large hospital system) partnering to create an integrated system, which other participants elsewhere in the country might seek to imitate.

Read his article here.

Despite the challenges of health reform, innovators enjoy a massive advantage unlike any other industry: incumbent inertia. Whether big insurance, big pharma or big hospital, the strategic goal of existing players is to do the same thing, just in a bigger way.

Like David and Goliath, it could only take a smartly aimed slingshot to take down a lethargic leviathan.

Consumers will be there to lavish the rewards.

Friday, July 16, 2010

Financial Market Time Periods Have Compressed, Don't Expect It To Last

Whatever happened to long term investing?

Turnover on the New York Stock Exchange is now annualizing at 110%, where the total volume of individual shares bought and sold is 10% greater than the total shares listed the exchange. 10 years ago it was 88%; 20 years ago, 46%.

In 1980, turnover amounted to one-third of shares listed.

To put this in terms of a holding period, today's market participants buy and sell the entire Big Board once every 11 months, versus once every three years 30 years ago.

And with algorithmic, or computer-driven, trading propelling most of the volume (about two-thirds of total), it would seem unlikely that portfolio-churning abates anytime soon.

For corporate management, a 100% turnover rate effectively means confronting an entirely new shareholder list every 12 months.  For some companies, this list could change even more frequently, every nine, six or—gasp!—three months. And sometimes more often.

No wonder time horizons for strategic planning continue to shrink. Expectations simply aren't what they used to be. According to a recent study by Booz Allen, the global mean tenure of departing CEOs has dropped from 8.1 years to 6.3 years between 2000 and 2009, and the forced turnover rate for CEOs is 36.7%.

Maybe we should view time compression as symptomatic of machines taking over.  Investing and code writing, after all, now appear synonymous.

Just the other day, the Wall Street Journal profiled a group of twenty-somethings trading on Artificial Intelligence. While not boasting the seconds- or milliseconds-long holding periods of the high frequency variety, this fund still claims a 300% turnover rate, suggesting a primary (if not exclusive) emphasis on technical factors.

Perhaps, a 100 years from now, machines will even operate corporate C-suites, with A.I. guiding expansive enterprise resource planning ("ERP") systems.

What about the more immediate future? Is the market heading towards such extreme time compression that company and industry fundamentals disintegrate into irrelevancy?

Don't bet on it.

Back in February 2007, we wrote a lengthy article for the Lyceum newsletter Perspectives called "A Return to Long Horizons". It considered the overriding impact of technological advancements, and how they're manifesting in reduced transaction costs.

We argued that rapid-fire traders would crowd short-term strategies and create new opportunities for more patient investors. We pointed to advancements in information technology as causing the market to shift to short-termism, and their commoditization as causing the market to rebalance—eventually—to adopt longer time frames. Read it here.

Later that year, all hell broke loose, and market turmoil waylaid any sense of measured thinking among investor classes. Panic—don't we know—begets panic, and all money runs for cover.

Now, we think our thesis (outlined below) deserves another look—especially as financial regulation courses its way across market participants. (Regulators could do much better than the infinitely complex financial reform legislation to encourage a healthier marketplace and allow different investment strategies to compete. For example, they might simply have considered forcing banks to capitalize bonuses to foster greater ownership of risk-taking.)

From "A Return to Long Horizons":



The information revolution fundamentally altered the practice of money management, with commission reductions and the rise of absolute return investing becoming its consequences, rather than its drivers. Simultaneously connected, portfolio managers could better assess a data point’s validity, especially those who could act on its immediacy. Imagine a world without your Blackberry – now imagine it without any form of electronic communication.

Better performance on better information attracted shareholder dollars. Greater buy-side power, whether under the guise of alpha or absolute return, then augmented market liquidity: sell-side transparency rose and transaction (or trading) costs declined.

While the Internet unexpectedly advanced the quality and quantity of information, its success is now commoditizing information as access points proliferate and costs decline. Together with government regulation (fair disclosure and Sarbanes-Oxley), information’s evolutionary surge has turned to level the playing field – at least for those playing the trading game.

Here's a graph we drafted to illustrate our viewpoint.

© Lyceum Associates, Inc. All Rights Reserved.

In keeping with our theme, we're thinking long term. Short-termism could continue to compress financial markets even more tightly, but at some point the long-term folks will regain the edge.

And that's what matters most: that edge, where one investor class is able to achieve better returns at less risk to capital relative to other classes.

At the very least, the 2007-8 time period made it absolutely clear that absolute return is an absolute fallacy. Investing is a relative game, and we were right about that:



As prospective shareholders begin to rank money managers more by peer performance and risk-return conditions continue shifting against portfolio churning, margin-of-safety will replace absolute return as the buzz-phrase of the next five years.

So long as policy makers and regulators don't completely warp the marketplace, long-term folks will have their day once more.

Okay, we admit that might be an awfully large qualification.

For the market's stake, we're going to take it.

Saturday, July 10, 2010

Noted Health Economist Ignores the Bigger Picture

Writing in the Health Affairs blog, Uwe Reinhardt states:



The bulk of the medical benefits procured by an insurer for residents in a given market area are produced by providers within that market area. In general, both private and public insurers have only limited, if any, control over the volume of the medical benefits that local clinical decision makers ask insurers to purchase for the insured. Furthermore, the larger the number of insurance companies active in a local market, the smaller any insurer’s market share will be — other things being equal — and the less leverage any insurer will have in bargaining with area providers over the prices of health care.

His posting addresses the question of insurance concentration, and the need for larger numbers of independent insurers to compete in local markets. Read here.

He concludes:



Ideally, in my view, the market for health insurance would be oligopolistic, which means that only a few insurers — each with some market clout vis à vis providers — would compete for enrollees in a local market. What the ideal number would be is an interesting question on which economists can have a lively debate.

For such an acclaimed health economist, Prof. Reinhardt misses the bigger picture. His analysis completely ignores the unrealized economic impact of folks who actually consume health care: patients, caregivers, taxpayers—the consumer.

Health care is unlike any other industry in that buyers don't consume, and consumers don't purchase (at least not directly). And with no market-based force counterbalancing supply, value—on a transaction basis—is indeterminate. Value, instead, is something that actuaries, academics and government officials determine.

Of course, he has a point. If health care persists as is—and as health reform intends—markets will become more concentrated.

Friday, July 9, 2010

Expect States to Take Control of Health Reform

According to the Center on Budget and Policy Priorities, 46 states face budget shortfalls. With the unemployment rate averaging close to 10% nationwide and economic recovery pacing gingerly, additional spending requirements could devastate an already precarious condition.

For many states, health reform could not have come at a worse time. In the Lyceum newsletter Perspectives, Ed Haislmaier writes:

The broad effects of health reform legislation, if implemented as enacted, will be to impose significant new Medicaid costs on state taxpayers, disrupt state health insurance markets and the current coverage of tens of millions of Americans, and usurp state authority. (Read article here.)

In response, states should pursue aggressive strategies that protect their citizens and take control of health reform. Haislmaier, a senior research fellow at the Heritage Foundation in Washington DC, proposes six approaches:

  • Shift non-elderly Medicaid and CHIP enrollees into premium support.
  • Refuse to administer the new federal high-risk pools.
  • Decline federal “premium review” grants.
  • Implement state health insurance market reforms and exchanges based on state, not federal, designs.
  • Insist that federal officials explain publicly how they will administer health reform.
  • Conduct and publicize “benchmark” analyses.
Haislmaier’s article, excerpted from a longer study published on July 1st (read here), could provide an important roadmap for states as they tackle crushing budget deficits. He argues, for example, that states possess an immediate opportunity in designing their own insurance exchanges:

By enacting their own insurance market reforms and creating their own exchanges, or similar administrative mechanisms, based on their own designs now, states can make it politically more difficult for federal officials to implement provisions of the new federal legislation (such as minimum federal benefit standards) that will drive up premiums and reduce coverage choices.

Strategically, states should assume one of two scenarios: a new Congress that repeals health reform or a protected fight against implementing the legislation as enacted.

In either case, states would be wise to apply their own reform while they can. If the latter, harsh economic reality will likely force aggressive action, regardless of political intent.

Although few believe the former, political climates can shift quickly. All eyes will focus on the mid-term election.

Wednesday, July 7, 2010

Biggest Wave of IPOs Since 2007—Or Not

Despite market uncertainty, 91 companies filed with the SEC in the second quarter to sell $24 billion of shares, according to Bloomberg. The news agency reports:




Investors in U.S. IPOs lost 7.2 percent so far this year as the Standard & Poor’s 500 Index fell to an almost nine-month low. Leveraged-buyout firms, which spent $2 trillion on takeovers during the credit-market bubble, announced the biggest stock sales and accounted for at least 50 percent of the deals filed with the SEC in April through June.

KKR itself will list on the NYSE on July 15th, and later this year, together with Bain, will sell shares in the hospital operator HCA. The HCA transaction will be the largest IPO since Visa, and total nearly $5 billion in shares. Proceeds will be used to pay down $26 billion in debt, or 80% of its purchase price. At $3.5 billion market cap, Universal Health Systems is currently the largest listed hospital operator.

Since their listing in June 2007, shares in Blackstone Group, the latest major private equity firm to go public, are down 75%—40% worse than the S&P 500. See chart here.

Among the 90 other companies seeking a listing is Zipcar, a car sharing firm that rents cars by the hour. Reminiscent of the dot-com era, it hasn't earned a profit since its founding in 2000.

Complicating any IPO are uncertain conditions. The S&P, for example, is down 9% from the beginning of the year, while the VIX is 40% higher at a level near 30. And with IPOs loss-making thus far this year, investor appetite would not appear sufficient enough to swallow the entire pipeline.

The question then is: If not the entire pipeline, then how much—or little—of it?

Don't expect any easy exits for debt-financed acquisitions, especially if corporate debt costs rise.