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.
- CVS to roll out co-located Oak Street Health clinics amid reduced profit outlook. Late last week, CVS shared its plans to open 25 new Oak Street Health centers “side-by-side” to CVS pharmacies by the end of this year. It also intends to open almost a dozen co-located clinics in 2025. Oak Street, which CVS purchased for $10.6B in 2023, already operates more than 200 stand-alone centers in 25 states and is also slated to open another 25 of these centers this year. After revealing these plans, CVS released its Q2 2024 earnings report this past Wednesday, in which it lowered its 2024 earnings outlook due to rising medical costs as well as Aetna’s lowered Medicare Advantage (MA) star ratings. In response to these results, CVS announced a $2B cost-cutting initiative and the departure of Aetna president Brian Kane, who had been in that role for less than a year.
- The Gist: CVS purchased Oak Street with an eye for the synergies it could generate between its retail pharmacy, primary care, and insurance businesses, which makes co-locating Oak Street and CVS retail offerings a somewhat expected move. Unlike Walmart’s recent unsuccessful push into retail healthcare delivery, CVS can use its Aetna network to funnel patients into its primary care and pharmacy services. However, the company’s broader financial struggles will add urgency to its reported search for a private equity investor to help fuel its Oak Street expansion plans. Meanwhile CVS competitor Walgreens announced this week that it’s “currently evaluating a variety of options” in regard to its VillageMD business, including selling its entire majority stake in the primary care provider.
- CMS finalizes inpatient payment rule that includes new mandatory bundled payment model. Late last week, the Centers for Medicare & Medicaid Services (CMS) issued its 2025 Medicare Inpatient Prospective Payment System (IPPS) final rule, headlined by a 2.9% payment increase, up from 2.6% in the proposed rule. In addition to also revising quality data reporting standards and increasing funding for graduate medical education, the rule finalizes the Transforming Episode Accountability Model (TEAM). TEAM is a mandatory, episode-based bundled payment model in which acute care hospitals in specific geographic regions will be accountable for the cost of care during and through the first 30 days post-discharge for traditional Medicare patients undergoing one of five surgical procedures: lower extremity joint replacement, surgical hip femur fracture treatment, spinal fusion, coronary artery bypass graft, and major bowel procedure. The model will have three participation tracks of varying levels of downside risk and reward, but all TEAM participants will be eligible for a one-year glide path to allow them to ease into full financial risk. Hospitals participating in the Bundled Payments for Care Improvement (BPCI) Advanced Model or the Comprehensive Care for Joint Replacement (CJR) Model may voluntarily opt in to TEAM. TEAM is a five-year model and is slated to start in 2026.
- The Gist: The American Hospital Association released a statement opposing the IPPS final rule, calling the payment update “inadequate.” It also claims that TEAM is “extremely similar to other bundled payment approaches that have failed to meet the statutory criteria for expansion,” and that TEAM “puts at particular risk many hospitals” that lack the size or resources to succeed in the model. To date, CMS’ various bundled payment initiatives involving hospital-initiated episodes of care have demonstrated mixed success, with the evidence suggesting that bundled payments may slow cost growth relative to fee-for-service contracting, rather than reducing absolute costs, while not affecting key patient quality outcomes.
- Appeals court gives providers another win in No Surprises Act litigation. Last Friday, the 5th Circuit Court of Appeals upheld a lower court ruling that sided with the Texas Medical Association and other provider plaintiffs on how federal regulators should interpret payment disagreements in the independent dispute resolution (IDR) process created under the No Surprises Act. The case hinged on federal rules that instruct arbitrators to first consider the qualified payment amount, which is a health plan’s median contracted rate for providers in a given region, when resolving payment disputes. Plaintiffs argued that this treats providers unfairly by reducing their reimbursement. The initial district court decision, now affirmed by the appeals court, vacates the qualified payment amount directions and instructs the Department of Health and Human Services (HHS) to revisit the provision. Federal regulators may once again have to pause the IDR process while modifying the rules to align with this decision.
- The Gist: The IDR process has suffered a difficult roll-out, with the federal government having to pause it multiple times, amid several legal challenges, since it launched two years ago. This case is one of four suits brought by the Texas Medical Association against HHS concerning the No Surprises Act, each of which have achieved at least a partial victory for providers. IDR data from the first half of 2023 shows that providers have won more than three-quarters of resolved payment determinations coming out of the IDR, and that the federal government received 13 times as many disputes in the first half of 2023 as was expected for the full year. Despite complaints from both providers and payers, an analysis (sponsored by the insurance industry) found that the No Surprises Act prevents more than one million surprise bills per month.
Plus—what we’ve been reading.
- Consumers rolling the dice with compounded GLP-1s. Recently published in KFF Health News, this article looks at compounding pharmacies’ increasing prominence in the GLP-1 market. Compounded drugs, which mimic name-brand drugs by using the same active ingredients but not necessarily the same formulations, are permitted by the Food and Drug Administration (FDA) if a drug is in short supply. Historically, compounding has mostly been used for older generic drugs, but once semaglutide and tirzepatide were added to the drug shortage list in 2022, many compounding pharmacies began producing and selling GLP-1s. Industry experts estimate that up to two million Americans are currently obtaining compounded GLP-1s. Many are driven to compounds due to lacking insurance coverage for the medication as well as by their substantially lower cost. While both Congress and the FDA have strengthened oversight of compounding pharmacies after a major 2012 event concerning a contaminated drug from a compound pharmacy that killed at least 64 people, the FDA has issued warnings to patients about their safety and efficacy of compounded GLP-1s, most recently in regards to dosing errors.
- The Gist: The GLP-1 market size was estimated at $36.8B in 2023 and is slated to surpass $125B by 2033. Shortages created by this surge in demand, especially for weight loss, have unlocked a new market for compounding pharmacies. But both Eli Lilly and Novo Nordisk are racing to ramp up production, with Lilly claiming shortages of its GLP-1 drugs will end “very soon.” Should all GLP-1 shortages be declared over, the pharmacies profiting off compounded GLP-1 sales would have to stop selling them, and patients who have enjoyed access to lower-cost GLP-1s would have to try to access them through more official channels or go off the drugs. In the meantime, providers should be aware that, at least for the time being, more and more of their patients might be accessing compounded GLP-1s on their own, and providers can try to help these patients navigate the tradeoffs of safety, efficacy, and price.
Graphic of the Week
A key insight illustrated in infographic form.
The state of American medical debt
Amid increased bipartisan interest from policymakers on the nation’s increasing medical debt burden (estimated to total at least $220B), this week’s graphic examines who holds medical debt and how recent changes to credit reporting have affected them. About 8% of American adults have at least some medical debt, although this percentage is much higher among certain populations including those in poor health, the uninsured, and Black Americans. The 14% of Americans who owe over $10K carry over three-quarters of the nation’s total medical debt burden. In contrast, the nearly 50% of Americans who owe less than $2K are responsible for just 5% of the medical debt total. Reporting changes recently implemented by the three major credit rating agencies have reduced the impact of medical debt on other aspects of consumers’ financial health, but mostly for smaller medical debtholders. By excluding medical debt in collections for less than a year as well as medical debt of less than $500 from appearing on credit reports, the share of Americans whose medical debt affects their credit score has dropped to 5%. The Consumer Financial Protection Bureau proposed a rule in June that would ban the inclusion of almost all medical debt from credit reports, effectively reducing this number to zero. Although removal from credit reports offers a reprieve from the knock-on effects of medical debt, policymakers are increasingly experimenting with direct relief. Much of this activity was spurred by the $7B in American Rescue Plan funds provided to states, counties, and cities to eliminate medical debt, but North Carolina just received federal approval to use its Medicaid program to incentivize hospitals to forgive up to $4B in medical debt for eligible state residents as well as prevent the accumulation of new debt.
On the Road
What we learned from our work in the real world. This week from Gavin McDermott, Managing Director, at Kaufman Hall.
Updating capital allocation processes
A health system CFO I’ve worked with over the years recently shared something with me that I’m sure many other CFOs are feeling. She shared: “I’ve gone through four straight years of basically saying no to our system’s leaders, telling them why we couldn’t afford their various proposals as we addressed crisis after crisis. Although our operating margin is finally improving, it remains volatile compared to pre-2020. As our system shifts back to embracing a growth mindset, I’m worried we no longer have the right processes in place for making investment decisions.”
During times of operational crisis, the dynamic tension that CFOs must navigate between risk and long-term growth swings to decisions to preserve precious financial resources to be deployed when the time is right. For many organizations, that time is now. But their playbook for doing so—the processes they have developed over time to make investment decisions—may be out of date. Systems need to update these processes in light of the changed, post-Covid environment. This involves developing a new consensus across leaders on the system’s current financial aspirations and embarking on a resocialization plan of what that will mean for financial reserves and other key indicators of financial health. CFOs who resist getting back into a growth mindset risk holding their organization back and may also marginalize themselves among executive team members embracing growth. If your organization is struggling with updating your processes for making investment decisions after years focused on financial preservation, 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 now lists all doses of Eli Lilly’s Mounjaro and Zepbound GLP-1 drugs as “available”
- Tenet Healthcare selling its majority stake in Birmingham, AL-based Brookwood Baptist Health to Orlando Health
- CMS finalizes reimbursement rule for breakthrough medical devices
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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
