Hello, and welcome to this week’s edition of the Gist Weekly. As always, we appreciate your continued readership and invite you to forward this email to friends and colleagues—please encourage them to subscribe as well!
In the News
What happened in healthcare recently—and what we think about it.
- CMS to raise cut points for 2025 MA star ratings. According to previews of 2025 guidelines, the Centers for Medicare & Medicaid Services (CMS) will be raising the bar on the cut points used to calculate Medicare Advantage (MA) plan star ratings in 2025. As a result, fewer plans will earn the four or more stars required to receive bonus payments, which could reduce payer revenues by billions of dollars. As for beneficiaries, CMS announced that the average MA plan premium will decrease by 6.7% in 2025, while plan choice and benefit offerings will remain stable and robust. During Medicare’s 2025 open enrollment period, which runs from Oct. 15 to Dec. 7, CMS projects that 51% of beneficiaries will select MA plans, a slight increase from last year.
- The Gist: Following years of immense profitability from MA for payers, CMS appears to have entered a belt-tightening phase for the program. Humana’s stock price dropped more than 10% after it shared that these rating changes will drastically reduce its estimated share of MA enrollees in bonus-eligible plans from 94% in 2024 to 25% in 2025. Although Humana is particularly dependent on its MA business, it is not the only payer that is struggling, as CVS joined Humana in announcing cutbacks to MA plan offerings and benefits for 2025. Payers may appeal these ratings downgrades, having challenged them successfully this year, but higher utilization among MA enrollees will continue to hurt their margins regardless of their appeal efforts.
- CVS announces almost 3K layoffs amid $2B cost reduction plan. On Tuesday, CVS Health shared its plan to cut 2,900 jobs, focused on corporate staff and amounting to less than 1% of its workforce, as part of its attempts to achieve $2B in cost savings over the coming years. CVS revealed this cost reduction plan in August, following the third consecutive quarter in which the company lowered its 2024 earnings outlook. CVS has pointed to rising medical costs and a challenging MA environment as key contributors to its revised guidance, saying it hopes to correct course by streamlining operations, increasing the use of automation, and potentially even “rationaliz[ing]” its business portfolio.
- The Gist: The rumor of the week, as credibly reported by the Wall Street Journal, is that CVS Health may be exploring a significant breakup of its business units, with its hedge fund investor Glenview Capital Management leading calls for change. Between its retail pharmacy business, Aetna insurance arm, Oak Street provider services, and CarelonRx pharmacy benefit manager (PBM), CVS has become a model of vertical integration in healthcare. The divesture of any of these assets would represent a monumental shift in its strategy. Spinning off business units is also expected to be quite complicated, especially concerning its PBM arm, which provides synergies to both its pharmacy and insurance services. If CVS ultimately decides that the benefits of a simplified portfolio could outweigh the costs of abandoning its vertical integration strategy, it would send shockwaves throughout the healthcare industry.
- California governor signs several AI bills impacting healthcare into law. Across the month of September, California Gov. Gavin Newsom signed 17 AI-related bills into law, including two specifically regulating AI’s applications in healthcare. One law, AB 3030, targets healthcare providers, requiring them to disclose the use of generative AI when communicating clinical information to patients in California. Another law, SB 1120, limits California insurers’ abilities to use AI for utilization management and coverage decisions such that AI does not supplant the final decision-making of providers. A third, non-healthcare-specific law, SB 942, mandates that websites accessible to Californians and with over one million monthly visitors must clearly disclose any AI-generated content and provide a tool for users to detect if any content is made by that AI system.
- The Gist: With Congress so far unable to agree to any comprehensive AI policy (for healthcare or otherwise), state governments have been stepping up to fill the void in which AI developers have been expected to regulate themselves. California often sets policy standards in absence of stronger federal action, both because other states tend to follow its example and because it’s a large enough market that companies can feel compelled to adopt its standards nationwide. Developers and users of healthcare AI can therefore take this as a sign that the first wave of regulation will likely focus on transparency and disclosure, rather than more restrictive or aggressive measures.
Plus—what we’ve been reading.
- Drug distributors are vertically integrating. Published last week in the Wall Street Journal, this article details a burgeoning acquisition trend among the three largest drug distributors. McKesson, Cencora, and Cardinal Health have been aggressively acquiring oncology practices throughout the last year to cement the business of the providers to whom they sell medications. Although this is not new practice for them, the author argues that “what was once a side hustle has now expanded into an all-out turf war,” with all three spending billions on a limited number of provider assets. Some of these wholesalers are transforming from drug distributors into vertically integrated oncology services, using their providers to expand their clinical trial and oncology technology services, channeling a strategy akin to that of vertically integrated payers.
- The Gist: Vertical integration is not a surprising tactic for these wholesalers to pursue, inspired by the similar strategies of payers and the projected increases in oncology spending. However, distributors may struggle to replicate payers’ (now diminishing) success, given that their bidding wars for these assets resulted in high price tags, and most of the remaining oncology practices are relatively small. Although distributors are not primarily targeting hospital-employed oncologists—a specialty in which hospitals enjoy a significant employment edge—the presence of large, vertically integrated oncologist-distributor networks in their markets could prove challenging for many systems. Drug distributors have become yet another force targeting traditional health system services, leaving them at risk of being reduced to their cores.
Graphic of the Week
A key insight illustrated in infographic form.
Another year of increasing ESI costs
As open enrollment approaches for those with employer-sponsored insurance (ESI), this week’s graphic dives into some of the challenges facing the ESI market. Despite many employers’ planned cost-reduction measures, the average benefit cost per employee is projected to increase by nearly 6% in 2025. Although general inflation is a prominent contributor to this growth, ESI cost increases have outpaced inflation nearly every year for more than a decade. This trend is largely due to rising unit prices and prescription drug costs as well as employers’ limited market power in contract negotiations. Amid this pressure, interest in value-based care strategies is expanding despite slow uptake. About one third of employers are utilizing at least one value-based care strategy and up to a third more want to add at least one of these measures to their plans. Employers may be signaling a shift to more sophisticated value-based strategies, but one of the most common responses to ESI cost growth so far has been to steer employees toward high-deductible plans, which are becoming increasingly unaffordable for workers.
This Week at Kaufman Hall
What our experts are saying about key issues in healthcare.
Publicly owned hospitals comprise a significant percentage of not-for-profit hospitals in the United States. According to American Hospital Association statistics, there are 923 hospitals owned by city or county healthcare districts or state or local governments, compared with 2,987 non-governmental, not-for-profit community hospitals.
While there are certain advantages to a public ownership model, it may also place these hospitals at a disadvantage as they pursue growth to combat the industry’s fundamental financial challenges. In a recent article, Rob Gialessas discusses the pros and cons of a public ownership model and outlines alternatives for organizations that may be considering a change in status. By going through a thoughtful and open analysis of the alternatives, executive teams and board members will help ensure that they are protecting the best interests of the hospital and the community by testing how the hospital’s strategic goals and long-term viability align with various ownership models.
On Our Podcast
The Gist Healthcare Podcast—all the headlines in healthcare policy, business, and more, in ten minutes or less every other weekday morning.
In addition to the news discussed above, our Gist Healthcare Podcast covered many of the week’s other big stories, including:
- The vice-presidential candidates discuss healthcare in their debate
- Johnson & Johnson cancels its proposed 340B rebate program
- The Biden administration abandons its Medicaid drug transparency plan
To stay up to date, be sure to tune in every Monday, Wednesday, and Friday morning. 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.
Best regards,
The Gist Weekly team at Kaufman Hall
