Innovative Provider Models Reveal Glimpse into Future of Care Delivery

A new topic we’ve been monitoring in the debate over healthcare spending has been the alarming shift from traditional cost centers such as inpatient care, pharmaceuticals and administration to outpatient care.

While outpatient settings appear on the surface as  more cost-effective alternatives, the limitations of the healthcare system  to establish incentives limiting utilization negates any potential for cost savings. Arguments in support of and against the shift have merit and must be considered as outpatient care is among largest and fastest growing healthcare spending categories.

In an attempt to limit the cost drivers of overutilization and overuse, various initiatives to balance care costs, quality and efficiency have been introduced. The most likely transition that will occur over the next few years will be the continued build-out of a provider capitation system designed to limit cost and utilization yet maintain quality. As the outpatient market braces for this shift, all eyes are on a few of the more progressive models where cost savings and outcome improvement under a provider capitation model are being demonstrated.

Over the past ten years, CareMorehas established itself as among the most vertically integrated Medicare Advantage plans in the country. Through its network of employed physicians and outpatient primary clinic care centers,  they are essentially “at risk” and therefore incentivized to efficiently deliver care – thus shifting the risk from health plans as in  traditional network models. Through a system of care coordination spearheaded by individual care managers who monitor primary and follow up care, Caremore has been able to generate outcomes far superior and more profitable than traditional Medicare Advantage plans.  CareMore has validated that the provider capitation model has potential to generate cost savings if operated effectively.

Perhaps the most comprehensive example of a system that has implemented a provider capitation model is the Department of Veterans Affairs (VA) health system through its network of Community-Based Outpatient Clinics (CBOCs). Over the past 20 years, the VA system has transitioned away from a pure hospital-based system to an ambulatory and primary care based model. In doing so, the VA has established CBOCs in order to improve care access and control spending by minimizing instances where non-acute conditions are treated in an ambulatory setting. Over the course of this transition, the VA has begun a process of soliciting outside groups to provide primary care to veterans in non-VA facilities on an individual capitated basis through the CBOC program. Valor Healthcare (Valor) has established itself as the leader in the contract CBOC market, both in terms of market share and clinical excellence.  Much like CareMore, key to the success of Valor has been their provider incentive system. Valor employs a robust pay-for-performance system for its physicians based on evidence-based guidelines and clinical performance. This program has driven clinical outcomes that exceed the benchmarks established by the VA. In addition to performance incentives, Valor’s use of several innovative care approaches to increase patient engagement and adoption contributed to consistent utilization levels.

With cost continuing to be a key issue across the healthcare system, it is likely that payers will continue to experiment with new incentive models aimed to improve the distribution of care yet maintain quality. As this occurs, innovative care models like CareMore and Valor will serve as building blocks as we continue to refine our delivery approaches to more effectively balance care quality, efficiency, safety, and cost.

Let us know what you think.

Joe Long

Joe Long is a Senior Analyst at TripleTree covering the healthcare industry, covering payer-focused healthcare software and service providers. You can email him at jlong@triple-tree.com.

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Behavioral Healthcare: Five Key Factors Are Driving Sector Consolidation

Mergers and acquisitions, public equity financings and private equity investments in the Behavioral Healthcare industry closed with a bang in 2011, and the momentum has continued into 2012. Demand and access to behavioral healthcare services, including treatment for mental health and substance abuse disorders, has accelerated in recent years due to a number of favorable industry and legislative trends.

Within this highly fragmented industry, Acadia Healthcare Company, Inc. (NASDAQ: ACHA) has pursued an aggressive growth strategy in the last twelve months, executing a number transformative strategic decisions:

• Equity Offering: On December 15^th, Acadia completed a public equity offering of 9.5 million shares at $7.50 per share for total net proceeds of $67.5 million. Acadia plans to use the offering proceeds principally to fund its acquisition strategy. The Company certainly did not waste much time, announcing on January 5^th that is has signed a definitive agree to acquire three inpatient hospitals from Haven Behavioral Healthcare for $91 million in cash.
• Reverse Merger: On November 11^th, Acadia completed its merger with PHC, Inc., d/b/a Pioneer Behavioral Health (AMEX: PHC) and as a result became the leading publicly traded pure-play provider of inpatient behavioral healthcare services, based upon licensed beds.
• Add-on Acquisitions: Acadia purchased MeadowWood Behavioral Health System, an acute care psychiatric hospital, and Youth and Family Centered Services, Inc., an operator of 13 inpatient and outpatient psychiatric and behavioral health facilities, in July and April of 2011, respectively.

Private equity investors are also playing a meaningful role in this sector, accounting for roughly 30% of overall activity during 2010 and 2011. Just prior to the new year, Cressey & Co, a healthcare-focused private equity firm, acquired a majority stake in InnerChange, a residential treatment provider offering therapeutic services and accredited academics to young women with behavioral, emotional and substance abuse problems. This is investment marks the Cressey’s second investment in the behavioral healthcare sector; Cressey invested in Haven Behavioral Healthcare Inc. in 2008.

So what industry dynamics are catching the attention of both the public and private equity investors?

The following are a few of the more compelling attributes that in our view, will fuel the growth, investment and consolidation in the market.

1. Large and Growing Market. National expenditures on mental health and substance abuse treatment are expected to reach $239 billion in 2014, up from $121 billion in 2003, representing a compound annual growth rate of nearly 7%.The demand for behavioral health services has increased in recent years due to earlier and more accurate diagnosis of mental health conditions and the de-stigmatization of seeking treatment. It is estimated that approximately 6% of people in the US suffer from a seriously debilitating mental illness and over 20% of children either currently or at some point in their life, have had a seriously debility mental disorder. Moreover, the influx of returning US veterans from Iraq and Afghanistan will result in a growing percentage of veterans with serious mental and substance abuse disorders including schizophrenia, bipolar I disorder, PTSD and major depression.
2. Favorable Legislative Initiatives.  Recent legislative trends are increasing access to industry services as more individuals obtain insurance coverage in 2014. The Mental Health Parity and Addiction Equity Act (“MHPAEA”) of 2008, which went into effect in January 2010, requires health plans to provide coverage for mental health services on par with conventional medical health services and forbids employers and insurance companies from placing greater restrictions on mental healthcare compared to other conditions. This legislation not only expands coverage for the existing insured population, but also for the newly insured in 2014, a meaningful percentage of which are said to suffer from a mental health conditions.
3. Diverse Payor Mix. Compared to other healthcare services sectors, behavioral health is reimbursed by a diverse mix of public and private payors. With the exception of a few segments within behavioral health, no single payor type (state/local/federal, Medicaid, Medicare, commercial, private pay) dominates that market. That said, Medicaid represents a significant source of funds, so potential cuts to Medicaid funding should be watched closely.
4. Attractive Financial Model. Compared to general acute care hospitals, which typically generate mid-teens margins, inpatient behavioral healthcare enjoy margins in the range of 20-40% for acute hospitalization and 15-25% for residential treatment. Maintenance capital expenditures are minimal at approximately 2% of revenue.
5. Niche markets / delivery models… Downsize fitness. The behavioral healthcare industry includes a number of different sub-segments defined on multiple dimensions, including age, gender, illness severity, diagnosis, delivery model and payors. As a result, tremendous opportunity exists for providers to expand into attractive niche/specialty markets. Companies such as, Downsize Fitness, are pursuing the obesity and eating disorder market(s) by developing niche-specialized facilities. Downsize fitness is new to the fitness center scene and is designed specifically for the chronically overweight and obese individuals. Trim men and women are not allowed as members, providing a more welcoming environment than in most conventional gyms.

With healthcare reform just around the corner, TripleTree expects the barrage of M&A and investment activity to continue and even accelerate. We look forward to sharing our thoughts as this market continues to evolve – let us know what you think.

Jon Hill

Jonathan Hill is a Vice President with TripleTree covering the healthcare industry and specializing in population health management and facility-based services.  You can contact him at jhill@triple-tree.com.

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Ramping up for HIMSS 2012

It’s hard to believe that HIMSS 2012 is just around the corner.  As we look ahead amid the consolidation and investment opportunities in healthcare, if you are at HIMSS this year and would like to exchange perspectives on the industry or bring us up to speed on your progress for the year, please let us know.

Here is what’s on our radar related to our research and advisor agenda for the year.

• Why ‘consumerism’ is impacting healthcare delivery models at an unprecedented pace
• How mobile applications are key tools for navigating a ‘B2C shift’ in healthcare
• Where innovations are evolving quickly to meet the demographic shift of seniors
• How productivity tied to health is a growing focus for employers
• Why compliance-centric issues ranging from payment integrity to improved patient outcomes are dominating many health care cost debates
• How the shift toward ACOs and Medical homes is radically altering care delivery models
• The impacts of ‘life beyond the EMR’ as more granular clinical documentation will substantially increase risks associated with reimbursement, compliance, and productivity.
• How healthcare is being driven by data and analytics to build a more complete picture of a patient
• Where the pharma market is shifting away from paper-based systems and processes and calling for innovations that reduce cost across the clinical development landscape

Let us know what you’re thinking about…see you at HIMSS in a few weeks!

Chris Hoffmann

Chris Hoffmann is a Senior Director at TripleTree covering ‘consumerism’ and where legacy and edge technologies are impacting healthcare. Follow Chris on Twitter or e-mail him at choffmann@triple-tree.com.

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Insurance Exchange Enablement Heats Up as the Clock Ticks Down

Today’s news that Wellpoint and two other Blues (HCSC and BCSB MI) acquired a 78% stake in Health Insurance Exchange vendor Bloom Health is not the first – and won’t be the last – move in what is sure to be a consolidating market.

The Accountable Care Act (ACA or Obamacare) requires each state to establish an online shopping portal, known as a Health Insurance Exchange (HIX) for individuals and small groups to purchase health insurance no later than January 1 2014. We have written and blogged extensively on the topic. In our estimates, HHS and the states will need to spend in the neighborhood of $4-$6 billion dollars on technologies order to create these exchanges. In addition to the ACA HIX, there is perhaps a bigger market opportunity in the private sector to create non-government sponsored insurance exchanges, creating even a bigger market opportunity. Bloom Health is one of many vendors specializing in the private exchange market.

Wellpoint, the Blues, and in fact all health insurance companies are making the individual and small group markets a top priority for new business and growth initiatives. These markets will explode in growth due to the Obamacare legislation and the carriers recognize the opportunity and the challenge with tapping this market.

The insurance exchanges, both public and private, will be the primary vehicles to reach into the individual and small group markets. Wellpoint’s move on Bloom, and Optum’s acquisition of Connextions, is recognition of this fact.

In addition to the Connextions and Bloom transactions, the vendor community is also coming together to help create insurance exchanges. Accenture’s acquisition of Duck Creek, announced partnerships from Oracle, Microsoft, CSC and others such as Maximus’ partnership with Connecture, portend of additional transactions to come in the space.

Insurance companies need help in positioning into the individual market, and also need technology to help them more effectively participate in the public and private exchanges.  Several vendors are positioning into the market but only a few have broad, proven experience with exchanges.

Companies like eHealth and Extend Health, which have consumer engagement and online shopping capabilities from market adjacencies (a leading online brokerage for eHealth and a robust Medicare exchange from Extend) will be important players in the new world of insurance exchanges. Other players like DestinationRx are similarly active in the exchange marketplace, working with HHS and multiple insurance plans, and will have a meaningful impact on the public and private HIX marketplace.  These vendors already have a head start in exchange operations, plan comparison features and tools to help consumers sort through the confusing world of insurance costs and coverage.

TripleTree’s recent HIX research report lays out a number of vendors that are currently engaged in HIX solutions. The report concludes that no vendor provides a complete solution.  Given the importance of the exchanges and the immediate market opportunity, no doubt consolidation will continue.

Have a good week.

Scott Donahue

Scott Donahue is a Vice President at TripleTree covering infrastructure and application technologies across numerous industries and specializes in assessing the “master brands” of IT and Healthcare. Follow Scott on Twitter or e-mail him at sdonahue@triple-tree.com

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Successful M&A Exits in the Consumer Healthcare Device Market

Consumer healthcare devices are everywhere. They help people track physical activity, measure caloric intake, and play a vital role in personal health and wellness achievements.  Driven by consumer engagement, technology proliferation and a billion dollar-plus market opportunity – investors are pouring millions of dollars into this market with the hopes of a big return (see examples below).  Public exits (IPOs) are tough, so the path to liquidity for many of these firms will be acquisition.

• $70 million raised by Bluetooth headset maker to enter health monitoring market.
• $50 million raised by mobile consumer focused diabetes management system.
• Best Buy invests in mobile fitness ear bud technology.

Few companies have yet reached a size and adoption threshold to be deemed a success, but as the winners emerge product design, value proposition, access to customers, defensible intellectual properly and ability to integrate will factor into their strategic paths. Here is a check list for the CEOs who are considering an exit in the next 8-10 quarters:

• Competition – Separating from the pack of consumer health device companies is difficult.  There are dozens of credible companies and scores of wannabes (100+ according to our market definition).  While most of companies in this category are below $15 million in annual revenue, the strongest players have venture backing, cash reserves and relevant consumer and healthcare experience sitting on their Board.

• Customer Adoption – Consumers are tough critics and prone to device abandonment.  Winners in this category with figure out how to provide a consumer health device that is easy to use, convenient, and effective.  Also, given that consumer health devices today attract a narrow user based, successful vendors will figure out a way to expand adoption and find a broader audience of which to market and sell its product.

• Distribution – Signing a big distribution deal can be the best way to gain quick, sustainable market exposure. For these vendors it can be a great way to develop a strong, sustainable partnership that could lead to M&A down the road if the partnership is successful. Especially in the consumer market these major distribution channels can make or break a business in the early innings.  Acquirers will look for devices that can be sold effectively through multiple channels. Winners will maintain a broader sales strategy and not become dependent on a single distributor, which makes the business susceptible to channel risk and unattractive for a premium M&A event.

• Finding the Right Business Model – This is the biggest stumbling block for most consumer healthcare device companies.   In most cases, larger companies are less acquisitive when a business cannot demonstrate a scaleable business model.  Many vendors in this space simply want to achieve user adoption at the expense of a longer-term revenue plan, when they should be thinking about keeping customers over a five year (or longer) period.

• Recurring R&D costs – Companies in this market must continuously re-invent themselves with smaller, sleeker devices.  This can be the most taxing aspect of the market and certainly hurts a company’s chances of becoming highly profitable, especially when they are investing in growth.  Manageable cost structures, vertically integrated manufacturing models, web-based user interfaces and other features are all relevant to a complete product experience.

TripleTree has monitored the consumer health devices space for years and we’re bullish about the prospects for continued innovation and growth.  We’re watching the emerging companies address consumerism in thoughtful and innovative ways and look forward to watching the evolving strategic relationships between these innovators and global players.

Let us know if you have additional thoughts on this market or a different perspective.

Michael Boardman

Michael Boardman is an associate at TripleTree covering the healthcare and technology industries, specializing in clinical software solutions.  Follow Michael on Twitter or e-mail him at mboardman@triple-tree.com.

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Consumerism in Healthcare

The U.S. healthcare system is entering a new era for consumers.  Consumers have become engaged ‘healthcare stakeholders’ and are demanding greater understanding of their options around care and costs.  As a result, consumers (aka patients, employees, and health plan members), are starting to realize that their influence (which has been steadily building over the last decade) have meaningful clout in the healthcare economy.  Below are four relevant initiatives we assessing:

• Health programs, care reminders, and incentives.  Consumers want easy access to online tools and resources that enable care direction and lifestyle management including programs like:
  • Medication Therapy Management tools that connect patients with physicians and pharmacists.
  • Care reminders that can be securely pushed to consumers through electronic messaging mediums such as phone, email, and text message.
  • Incentives can be a strong driver towards encouraging healthy behavior with insurance discounts for health and wellness activities like joining a health club.
• Better options, access to care, and transparency
  • Allowing patients to take more control of their care options and reviewing the costs associated with those procedures is a major factor in healthcare consumerism.
  • By providing education, pricing data, and easily accessible online content, patients can make more informed decision about care, which drives patient awareness, improves adherence, and transparency.
• A ‘retail-like’ healthcare experience
  • Customer satisfaction surveys typically rank ‘shopping for health insurance’ at or near the bottom of most industries.
  •  Traditional consumer expansion about a ‘retail’ shopping experience has been lost in health insurance, and consumers need online tools such as portals, comparison engines and programs for population health management (PHM). Opening this business-to-consumer (B2C) channel will create more clarity around cost, treatment options, and alternatives.
• Flexible payment options and improved customer service.  Most consumers would agree that managing the payment process for healthcare related expenses can be a nightmare. 
  • Wouldn’t it be great if a single trip the hospital resulted in one bill that included all charges and a single explanation of benefits (EOB)?   The lack of quality and continuity in customer service and support creates additional consumer frustration. Traditional customer relationship management (CRM) software tools that provide a 360 degree view of the customer in other verticals such as retail and financial services are only beginning to penetrate the healthcare market. Consumers want tools that provide more flexible payment options, simplicity around billing and cost, and an improved experience with customer service.

As consumers become more engaged healthcare stakeholders, the demand will increase for greater understanding of their care options, access, transparency, and costs.  Until recently there was little incentive for insurance companies and provider groups to change the model, and holding healthcare organizations accountable for these changes now is engendering consumer choice via competition, not legislation.  For more, check out our recent Principals Forum interview on the drivers of consumerism in healthcare and let us know what you think.

Michael Boardman

Michael Boardman is an associate at TripleTree covering the healthcare and technology industries, specializing in clinical software solutions.  Follow Michael on Twitter or e-mail him at mboardman@triple-tree.com.

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