Welcome to another edition of the Gist Weekly. Please feel free to forward this edition to friends and colleagues, and encourage them to subscribe as well.
In the News
What happened in healthcare recently—and what we think about it.
- CMS releases negotiated prices for first ten Medicare drugs. On Thursday, the Centers for Medicare & Medicaid Services (CMS) shared the results of the first cycle of the new Medicare Drug Price Negotiation Program, created by the Inflation Reduction Act. CMS reached agreements with the makers of all ten drugs—which are used to treat conditions including diabetes, heart disease, and cancer—for discounts ranging from 38% to 79% of 2023 list prices. Had these prices been in effect for 2023, Medicare estimates it would have saved $6B, and the 8.8M Medicare Part D beneficiaries who received these drugs would have saved an additional $1.5B in out-of-pocket spending. For five of the ten drugs, negotiations progressed until a final written offer from CMS, which if rejected by drugmakers would have resulted in severe financial penalties. The negotiated prices will go into effect in 2026, and CMS will select up to 15 more drugs for 2027 Part D price negotiations by Feb. 1, 2025.
- The Gist: CMS can consider this a successful trial phase for a program that is set to expand rapidly in the coming years, having achieved full participation from drugmakers and earned discounts above the statutory minimum. However, these results come with various caveats: net price savings will look very different than list price savings, some of the drugs are set to go off patent soon, and it remains to be seen how these new prices will affect Medicare Part D premiums or the commercial market. As for the drugmakers involved in this first cycle, they have reportedly signaled to investors that these negotiations won’t have a significant effect on their bottom lines, but they expressed concerns about a chilling effect on drug development in the long-term and continue to fight the program in court (to no avail so far).
- Steward signs definitive agreement to sell physician group. On Monday, for-profit health system Steward Health Care announced the sale of Stewardship Health, its physician group, to Rural Healthcare Group (RHG), a primary care provider organization owned by private equity firm Kinderhook Industries. RHG agreed to pay $245M for the network of about 5,000 employed or affiliated providers across nine states, a cash infusion which Steward can use to sustain operations as it navigates Chapter 11 bankruptcy proceedings. RHG, which operates 17 clinics in Tennessee and North Carolina, said it intends to invest in Stewardship’s infrastructure to ensure care continuity for patients, while transitioning Stewardship, which encompasses Steward Medical Group and Steward Health Care Network, from being health system-owned to independently operated. In addition to standard regulatory review, the transaction must be approved by the U.S. Bankruptcy Court for the Southern District of Texas, where Dallas-based Steward Health Care filed its Chapter 11 bankruptcy petition in early May.
- The Gist: Should this deal be approved, it will secure Steward some much needed liquidity, after a tentative deal with Optum to purchase Stewardship fell through in June. However, splitting off its physician group could further complicate the operations of Steward’s hospitals, for which Steward has struggled to find qualified bidders. Two of Steward’s MA-based hospitals are slated to close on or around Aug. 31, including Carney Hospital in the Dorchester neighborhood of Boston, with city officials recently confirming that they lack “the regulatory authority, the licensure ability, or most importantly the money” to prevent its closure by taking over operations.
- Price transparency data fueling Aetna lawsuits. A recent slate of lawsuits filed by large employers against CVS Health’s insurance subsidiary Aetna are using new price transparency data to argue that Aetna violated its fiduciary duties as the contracted administrator of their health plans under the Employee Retirement Income Security Act of 1974 (ERISA). As first reported by Bloomberg Law, the employers, including Kraft Heinz, Aramark Services, W.W. Grainger, and Huntsman International, have alleged that Aetna mismanaged their plans by withholding cost data and illegally repricing medical services. Huntsman’s suit claims that “Aetna regularly and repeatedly used Huntsman funds to pay providers more than the contracted rate.” The company only discovered this discrepancy after comparing its payments to Aetna’s published rates, which recently implemented price transparency rules have made publicly available. The cases appear to hinge on the interpretation of ensuring “reasonable” compensation to service providers, a new standard created by the Consolidated Appropriations Act of 2021 that strengthened the fiduciary duties of health plans.
- The Gist: Although price transparency rules were heralded as a boon for consumer choice in healthcare, employers are far more likely to have the resources and financial stake required to act on this information, such as by pursuing legal remedy. Should the plaintiffs find success with these suits, all insurers—Aetna’s behavior here is not unique—could be obligated to reduce the variance in the rates they pay to providers. Importantly, not all claims of overpayments necessarily benefited providers, as these employers have also accused Aetna of underpaying physicians and pocketing the difference.
Plus—what we’ve been reading.
- Learning from the pandemic’s effect on nursing homes. Published last month in Health Affairs, this piece analyzes the ever-evolving approach to managing COVID in long-term care (LTC) facilities from 2020 through 2023. The COVID virus was particularly devastating in nursing homes, which ultimately accounted for at least 40% of all COVID-19 deaths in the US. From infection control to vaccination policies, this article details the relative effectiveness of nursing homes’ attempts to contain the virus. But given that even the highest-quality facilities deploying best practices to mitigate virus transmission saw outbreaks, the authors discuss how COVID uncovered larger systemic problems with nursing homes. They argue that LTC facilities need to be better integrated into public health planning and that they ultimately require a shift in physical structure in order to avoid similar outcomes from a future pandemic.
- The Gist: Although COVID mitigation efforts varied widely across LTC facilities, the prevalence of COVID in the community was by far the most predictive factor of nursing home deaths, emphasizing the importance of broader public health efforts, especially around vaccination. Resident vaccination campaigns and staff vaccine mandates were also found to save lives, but the evidence for infection control practices, higher staffing levels, and visitor bans was inconclusive at best. Nursing home residency levels took a significant hit during COVID, from which they have yet to recover, and most older Americans say they want to age in place. COVID exposed the need for structural reforms to the way we care for aging Americans, not only in case of another pandemic, but also for the “silver tsunami” that is beginning to crest.
Graphic of the Week
A key insight illustrated in infographic form.
A historical view of hospital operating margins
Although the first half of 2024 is shaping up to be a positive one for median hospital operating margins, the industry is still reeling from a period of unprecedented financial difficulty. In this week’s graphic, we highlight nearly 30 years of historical data from Kaufman Hall and the American Hospital Association to provide a broader perspective on hospital operating margins. 40% of hospitals operated in the red in 2023, which is an improvement from 2022 when 53% of hospitals posted a negative operating margin, but still a sign that many hospitals have yet to recover from the financial challenges prompted by the pandemic. During previous periods of recent economic hardship, including the “dot-com bubble burst” of the late 1990s and the 2008-09 Great Recession, the share of hospitals with negative operating margins amounted to 42% and 32%, respectively. The median hospital margin in 2023 of 2.3% was lower than the median operating margin of 3.3% in 2008. In the first half of 2024, operating margins are just getting back above the 4% level—the level needed for health systems to not only sustain operations but also invest in growth. But post-pandemic recovery has been uneven, and we expect the spread between the highest- and lowest-performing hospitals to continue to widen, as hospitals with stronger financials explore pathways to advance their success and those with weaker financials struggle to maintain operations.
On the Road
What we learned from our work in the real world. This week from Lauren Gorski, Senior Vice President, at Kaufman Hall.
Futureproofing 340B strategy
A health system CEO reached out to me to talk through a perennial concern among industry leaders: “We keep waiting for the other shoe to drop with 340B. I can’t keep track of all the lawsuits anymore, but pharma is racking up wins, and now state legislatures are getting involved. Meanwhile Congress also keeps discussing ways to change the program. It’s absolutely essential to our margin, so what should we be doing now to prepare for changes, either good or bad, that could be coming down the road?”
As much of drugmakers’ opposition to the 340B Drug Pricing Program has centered around restricting the use of contract pharmacies, a safe investment 340B hospitals can make is to establish, or continue to invest in, their own internal retail or specialty pharmacy. In addition to providing a new revenue generation opportunity, internal pharmacies allow hospitals to better manage patient care, including streamlining prescription access for patients. Internal pharmacies also allow systems to gain greater insight into drug usage patterns among the patients they serve, which will be especially helpful should Congress end up passing legislation focused on increased 340B program transparency, something that appears to be a rising consensus among lawmakers. As for contract pharmacies, 340B hospital participants should use them strategically and ensure they’re properly registered. These pharmacy networks are particularly suited for specialty drugs, as internal pharmacies may face barriers from drugmakers around accessing specific, limited-distribution drugs or from payers around entering their networks for specialty drug coverage. If your organization is rethinking its 340B or pharmacy strategy, I’m happy to chat more.
On Our Podcast
Gist Healthcare Daily—all the headlines in healthcare policy, business, and more, in ten minutes or less every weekday morning.
In addition to the news discussed above, our Gist Healthcare Daily podcast covered many of the week’s other big stories, including:
- FDA approves the first anaphylaxis nasal spray
- WHO declares mpox a global health emergency
- President Biden announces $150M of “cancer moonshot” awards
Subscribe on Apple, Spotify, Google, or wherever fine podcasts are available.
Thanks for reading! We’ll see you next Friday with a new edition. In the meantime, check out our Gist Weekly archive if you’d like to peruse past editions. We also have all of our recent “Graphics of the Week” available here.
Kind regards,
The Gist Weekly team at Kaufman Hall
