December 15, 2017
Interviewed by: Matt Malone
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What’s wrong with U.S. health care

Roger Holstein of Vestar Capital Partners, Adam Dolder of Great Point Partners, and Carole Faig of EY discuss the challenges facing the U.S. health care system, and what that means for investors.

Roger Holstein of Vestar Capital Partners, Adam Dolder of Great Point Partners, and Carole Faig of EY discuss the challenges facing the U.S. health care system, and what that means for investors.

What’s Wrong with U.S. Healthcare

Matthew Malone, Privcap:

Hi. I’m Matt Malone from Privcap. I’m very happy to be joined today by Carole Faig of EY, Roger Holstein of Vestar Capital Partners, and Adam Dolder of Great Point Partners. Welcome, everyone.

Unison: Thank you.

Malone: Today, we’re talking about healthcare in the context of private equity investing. It is clearly an issue with significant political and economic impact, as we all know.

Carole, what are some of the issues facing the U.S. healthcare system today?

Carole Faig, EY: The thing that is most often talked about is obviously the unsustainable cost trend. I think it is currently 18% of GDP, between an increase of 5.8%, approximately $10,000 per person. That cost trend can’t continue. If you look at the other issues we are dealing with, we have physician burnout, which is the talent issue within healthcare. Cost and talent are two of the key things.

Malone: What’s driving the cost equation here? If you had to pick the one thing that’s the greatest illness, so to speak, in the healthcare system from a cost perspective, what would that be?

Roger Holstein, Vestar Capital Partners:

What I find interesting is that, as a nation, we spend 2.4 times per capita, all other industrialized nations. And yet, despite that, we rank 35th basically in terms of things like life expectancy, obesity, infant mortality. What’s interesting to me is what’s driving that.

As a nation, we don’t see the doctor more often relative to other countries: 40% less often. We don’t discharge more people from hospitals: 25% less often. What we really have is an overutilization of expensive procedures. We have three times the number of MRIs. We have twice as many CABGs. We have, I think, two and a half times the number of heart-valve replacements and knee replacements as all other industrialized nations.

What’s driving it really is a system that’s focused on driving utilization as opposed to driving the best outcome. Until we change the behavior on two sides—both the provider community and their incentives have to align, and the consumer, whose lifestyle choices have a huge influence, probably at 80% of healthcare costs bound up in the lifestyle choices we make. Until we change that behavior, we’re not going to move from a volume to a value-based system.

Adam Dolder, Great Point Partners:
Carole and Roger have hit on a lot of the central chords here. I think a couple of things: one, while the inefficiency of the U.S. healthcare system is legion that there is an underlying strength of the U.S. healthcare system, which is if you were going to get ill, and you had the means, you would choose to get ill here, where the access to the best care in the world still exists here. It is incredibly less efficient.

Ultimately, you have to make people rational. Everyone in a fee for service system is acting rational. The patient is not really a consumer, because he or she largely hasn’t borne a significant amount of the cost of the healthcare systems, so why wouldn’t I go maximize utilization in the system? See the GP, then go to the specialist, go to the second specialist, largely without massive economic consequence to me.

Secondly, the physician who is compensated through both carrots and sticks. The “carrots” are: “The more things I administer, the more money I make.” I’m not saying there’s some perverse thing going on in a physician’s mind when we present ourselves to them. But then, there’s the “sticks” side of it, which is, “If I don’t run through this gambit of tests, I’m exposed from a tort situation in the U.S.,” which also needs reform, right? It’s not just about healthcare policy, whether it be the Affordable Care Act, there are other pieces of legislation that need to be addressed as well.

Then, finally, what is a positive to me and I think we’ll spend a lot of time talking about today, is how do you change those incentives so that everyone acts rationally, in a different manner?

Malone: You talked about the notion of value, right? Value-based care. What does that mean in practice and where are we in that evolution today?

Dolder: I think the second question is easier—we are at the earliest stages. The commercial carriers understand [that] bundles are going to deliver value. You’ve got shared risks. You’ve got shared savings and the ultimate at the fare end of it is capitation. Capitation would be a rewind from 25 or 30 years ago, but again, we are only at the beginning phases of that cycle today.

As far as what value-based care means, I’d go back to a lot of things Roger was talking about. It’s the marriage of the economic incentives or disincentives with an outcomes and quality overlay, and you’ve to marry those to have the appropriate amount of care to deliver the best possible outcome for that patient population.

Faig: Even more simply said, it’s moving from volume to value. So it really is that. The outcome is based on the value of the care being provided.

Holstein: I would reinforce that. It is a system that reinforces and rewards efficiency, effectiveness and best outcomes. In a system like that, it’s about driving appropriate utilization of healthcare resources.

I think one of the driving issues to address there is we’re never going to get to it without transparency, and we live in a world that potentially, almost intentionally attempts to obfuscate, if you will, all issues in healthcare system with regard to transparent information.

Dolder: I think Roger is talking about something that is fundamentally important. For Americans, people have treated healthcare policy like the average American is not smart enough to understand what they need out of their healthcare coverage, which has created this lack of transparency.

The power that’s going to be ultimately placed—again, we’re first or second inning to where we need to get to a nine-inning game. The power that’s going to be placed in the American consumer’s hand. No longer are they just patients, they are consumer patients.

Holstein: In reinforcing your point, I spent a career studying decision-making in healthcare, and the one opposite point I’d make would just be this: Unlike many decisions we make, healthcare decisions are infrequent, they require research and they require trade-offs. Those are three things that, as consumers, we’re not always great at, meaning if something doesn’t happen frequently, we don’t really know what would we do when it happens, and often times healthcare decisions need to be made immediately, right? They require research and we know that, when consumers have access to the right information, they make informed decisions, but that information isn’t readily available.

In the end, what we have to wrestle with is the issue that these are infrequent decisions. They require research. They require trade-offs and who’s going to help the consumer through that? I think those are real issues where, in the absence of transparency, consumers will continue to make poor decisions.

Faig: Roger, one of the points you’re making—that the discussion that we’re having in regulatory today is focused so much on who’s going to pay for the healthcare. We’ve had so much dialogue around that, and we’re not having any dialogue—again, very little dialogue around responsibility, wellness, those sort of discussions. Again, the ACA was all focused on who’s going to pay for it, not how are we going to deal with systemic issues of the consumption of healthcare. We’ve got to turn that dialogue around and start talking more about the consumption of healthcare versus just how are we going to pay for it.

Malone: Carole, in the context of the consumerization of healthcare, what role does political and regulatory change play relative to the market providing solutions that will drive consumer behavior?

Faig: I think that the legislative side of it has very little impact on it. It’s kind of annoying—it’s white noise out there. It’s really the consumer driving it and a desire to access the system in a different manner and that drives the opportunities for investments in that sort of disruption to the existing system.

Holstein: I think the legislative makes a huge impact and it’s interesting. I share your viewpoint. I think that, at one level, health systems are dramatically addressing this issue regardless of the political situation as best they can, but remember: that legislative environment creates the guidelines, if you will, and the incentives to some extent by how their behavior is.

Dolder: To marry some of these comments, I agree. Ultimately, the consumer will affect where we go and how fast cost escalates, etc. I’ve got a great deal of faith in the American consumer to be able to make informed decisions with research even though they may be less frequent. I just can’t find an analogy that doesn’t exist where there has been overhaul that give power to that informed person.

I would wholeheartedly agree there’s a challenge with America broadly that extends beyond healthcare. We have an inconsistent industrial policy almost globally. Whether it be foreign trade, whether it be immigration, whether it be our healthcare policy, whether it be investment in infrastructure. And until America figures this out—what did Churchill say about America will ultimately make the right decision, but only after exhausting every other one? In that we need to set a consistent set of guardrails that then will allow capital to form and drive ideas that will help the consumer make better decisions.

One thing I’d say, no matter what happens, when this all does settle, is the fact is, the infrastructure in the United States—we would not choose today to serve 360 million people with 6,000 acute care hospitals as our primary delivery vehicle. That just doesn’t make sense. It’s why you see formation continued in the urgent care space.

So, I’m excited. I do think we’re on the way, but the next five to seven years of investing in the healthcare universe are going to be great. We just have to be very selective.

Holstein: I think that consumerism is a driving force and I’ve spent a lot of my career thinking about the issue, but I think that physicians are also in the spotlight here as well. Physician decision-making suffers from some of the same issues that consumers do, which is they too lack information to make informed decisions from.

Faig: Along that point, there’s not data, so we’re going to get much more into the predictive analytics of how to care and how to deliver the best outcomes. It’s just going to continue to create again other opportunities to invest in this space, because that information is going to be critical to a physician, critical to a health system, and critical to a payer to reduce the cost of care.

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