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Annual investment summary

Key disruptors affecting health care amp life sciences

January 2017

Executive summary

Health care is now at an inflection point with key disruptors that will profoundly impact the market and create new opportunities A better understanding of health care disruptors is imperative to successfully navigating the impending legalregulatory economic and technological forces that are reshaping the market We have identified five key market disruptors and analyzed the impact upon providers payors and healthcare products and drug and device makers

mdash Affordable Care Act (ACA) transition

mdash Medicare Access and CHIP Reauthorization Act (MACRA) implementation

mdash Bundled payment programs

mdash Income repatriation

mdash Healthcare IT saturation and interoperability

Payors providers and life sciences companies need to understand and quickly adapt to these disruptors to avoid failure in the market These disruptors are expected to spark MampA activity and lead to potential changes in valuations as the competitive climate changes

In the midst of these changes opportunities are emerging to capitalize ldquoonrdquo the shift from ldquovolume to valuerdquo The demand for more value from health care spending transcends political parties and which one is in power in Washington As healthcare accounts for a growing role in the economy policy shifts and marketplace demands are looking to upend fee-for-service models (volume) to new payment models emphasizing generated health outcomes (value) Life sciences companies which once banked upon a foundation of patents that offered some competitive barriers in the market are not immune from these shifts These dynamics are fueling MampA among drug and device makers but potential US tax policy changes for cash held overseas could act as a catalyst for deals Technology and new data amp analytic tools are underpinning many of these marketplace shifts opening the door to competition and new service models in delivering care and increasing patient engagement

Payors will find refuge in the predictability of group business and Medicare Advantage Market confidence in the governmentrsquos capacity to administer stable programs in the individual and Medicaid managed care markets will be a critical element of payor success

1

3Key disruptors affecting health care amp life sciences

Providers continue to slowly assume different modes of reimbursement with corresponding investments in delivery transformation Potential systemic funding challenges continued regulatory pressure and ongoing pressure on the revenue cycle will continue to drag on earnings Non-institutional care settings technology and services designed to simplify clinical and administrative management will see healthy growth

Regulatory factors will drive uncertainty in healthcare in 2017 The continued market transition in defining and pricing value consumer-centric activity technological innovation and improvements to managing care will collectively act as mitigants in providing a stable outlook while political forces align with policy driving the sector

3Key disruptors affecting health care amp life sciences 3

5 key market disruptors2

The pending ldquoRepeal amp Replacerdquo of the Affordable Care Act (ACA) is at the forefront of health care discussions Both President-elect Trump and the new Republican Congress have set an objective of repealing and replacing major provisions to address what critics deem an expensive government-driven system Congress has yet to forge a consensus on a new framework for replacing a law that expanded coverage for millions of Americans Even more time may be needed to implement the changes The incoming administration will need to carefully balance this reality with its plans to alter health insurance markets across the country This dynamic is evolving in real time In the first week of the 115th Congress legislation was introduced to partially repeal the ACA through the budget reconciliation process While we will soon know more about the scope of the Republican repeal legislation it is still not clear when we will know more about what will replace those provisions repealed and when Thus the timeframe for the implementation of coming ACA changes is unknown but the impact will be felt well beyond 2017

The Medicare Access and CHIP Reauthorization Act (MACRA) was signed into law in 2015 with strong bipartisan support The program fundamentally alters the reimbursement of Medicare to physicians and other providers by rewarding quality-based care and furthers the HHS aim of shifting healthcare from volume to value-based payments Although some provider payments under MACRA are still built on a fee-for-service framework CMS will adjust them based on performance within a set of identified performance categories As implementation of MACRA will drive value-based payment models providers will need to rethink their payor contracts and reevaluate their volume-focused business models It also provides avenues for payors and the medical products sector to modify current practices to partner effectively with providers impacted by MACRA

Bundled payments also known as episode-based payment programs fall in the middle of the value-based care continuum between fee-for-service and assumption of provider risk Bundles encourage providers to effectively manage resources both internally and with others involved in the patientrsquos care Under bundled payments hospitals physicians and post-acute providers are incented to develop and maintain interoperability of electronic health records and transparency to maximize patient outcomes CMS views bundled payment programs as a vital part of their transition to alternative payment models The new administration may end some mandatory Medicare bundlesmdashor convert them to voluntary programs Voluntary bundles are still being tested and in some cases are in need of technical reforms to ensure stable pricing and payments We anticipate wider adoption of bundled payments by commercial payors and employer-sponsored health plans seeking to promote better cost control

ACA Transition MACRA Implementation Bundled Payment Programs

1 2 3

Proposals to reduce the taxation on repatriated income will provide drug and device companies significant funds to pursue acquisitions to increase their pipelines diversify their portfolio and move into adjacent spaces The Joint Committee on Taxation estimates that there now is $26 trillion in ldquoearnings of foreign subsidiaries of US Corporations held offshorerdquomdashup from $23 trillion in 2012 With the proposal to reduce tax on repatriated income there will likely be a continued focus on MampA within the life sciences sector This market consolidation drives companies toward new opportunities which lead to market disruption Despite uncertainty surrounding the direction of healthcare post-election life science companies are contending with significant headwinds and executives are looking to MampA to solve them

CMSrsquos focus on value-based care is dependent on the use of certified EHR technology which facilitates interoperability and information sharing Facilities providers and manufacturers are encouraged to enhance and utilize their technology platforms optimally Under the Meaningful Use program which will be transitioning to the Advancing Care Information performance category in Merit-based Incentive Payment System (MIPS) under MACRA players are rewarded or penalized based on the implementation and use of EHRs As nearly all hospitals and physician groups have adopted EHR technology vendors will be forced to switch their tactics toward selling replacement platforms or focusing on other products such as population health management systems 21st Century Cures passed by the 114th Congress and its interoperability guidelines will force vendors to end closed systems opening the space to additional competition Those healthcare businesses whose value is linked to the possession of patient data (through any assortment of means) will come under economic pressure to diversify their business or increase their footprint in a domain that will be increasingly commoditized

Income Repatriation HIT Saturation and Interoperability

i House Ways amp Means Committee press release ldquoBrady Neal Highlight Another Reason for Pro-Growth Tax Reformrdquo Sept 29 2016 httpswaysandmeanshousegovbrady-neal-highlight-another-reason-pro-growth-tax-reform

4 5


Sector ACA Transition MACRABundled Payment

ProgramsIncome Repatriation HIT Saturation amp Interoperability

Hospitals amp Health Systems

Physician Groups

Surgical Hospitals and ASCs

Practice management

Skilled NursingLong Term Care

Home Health

National Carriers

Start-up Health Plans

Private Exchanges

Pharmacy Benefit Managers

Medical Devices

Pharmaceutical MakersBiotech

Healthcare IT

Key Positive Mildly positive NeutralMarginal Impact Mildly negative Negative

Industry and disruptor overview3




Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT


Industry OverviewThe provider landscape continues to evolve with continuing reimbursement pressures Providers are generally embracing the shift from volume to value and are establishing new reimbursement and delivery models that are hastening this transition New challenges are emerging for providers to manage patients across the continuum of care while new care delivery models emphasize mid-level practitioners (eg nurse practitioners physicians assistants) and treatment outside the hospital Investments are likely to continue in new care platforms that shift care to lower cost venues Additional efforts will be made to improve capabilities for providers to take on greater financial risk

On the public policy front the incoming Trump Administration and nomination of Chairman Dr Tom Price as HHS Secretary could alter the pace of this transition

As discussed earlier great uncertainty exists about the replacement of ACA Past proposals that were vetoed didnrsquot offer any replacement for the coverage provided by ACA or how it is funded Under these conditions any loss of coverage will add to the associated challenges of revenue management for providersii The American Hospital Association estimates the repeal of ACA without any replacement coverage would reduce the sectorrsquos net income by $1658 billion over the 2018-2026 periodiii

Providers particularly hospital and hospital systems have benefited from lower uncompensated care resulting from broader individual market and Medicaid coverage from ACA However this rising tide has varied from state to state The market faces unknown shifts with prospective changes to ACA and the exchanges the individual mandate Medicare financing and Medicaid funding mechanisms Repeal and any corresponding coverage changes (Medicare Medicaid and individual insurance) creates a high degree of uncertainty for providers

Even the nature of how people are insured adds pressure to providers making revenue-cycle a serious issue High-deductible health plans are leaving patients with unpaid balances at providers placing a renewed focus on collections

Providers4

ii American Hospital Association ldquoEstimating the Impact of Repealing the Affordable Care Act on Hospitalsrdquo page 12 httpwwwahaorgcontent16impact-repeal-aca-reportpdf


Sub-Industry Hospitals amp Health SystemsAny ACA changes will take time to implement leaving a great deal of uncertainty MACRA will encourage hospitals to move toward alternative payment models where there will be winners and losers

ACA Transition MACRABundled Payment Programs

Income Repatriation

HIT Saturation amp Interoperability

Hospitals have recently dealt with a whirlwind of policy and payment changes including ACArsquos expansion of Medicaid in many states and decreases in the number of uninsured The HITECH Act led to rapid adoption of electronic medical records Reimbursement changes have come from value-based purchasing hospital readmission reductions and efforts to reduce hospital-acquired conditions Many hospitals and health systems have chosen to participate in a variety of Medicare and commercial accountable care organizations (ACO) In some markets mandatory bundled payments through the comprehensive joint replacement (CJR) program have been implemented Hospitals have also been subjected to public reporting through the Hospital Compare website In many markets hospital consolidation has continued However the FTC and other authorities have monitored -- and blocked -- other proposed mergers

In the short term the uncertainty around ldquoRepeal and Replacerdquo may result in additional patient volumes as exchange participants may fear a loss of coverage Nearly 88 million people signed up for coverage for 2017

on the healthcaregov exchange during the open enrollment period ended Dec 31 an increase from 86 million the prior yeariv MACRA-driven alternative payment models (APMs) will move hospitals to risk-bearing arrangements as they enter models that will allow their employed physicians to qualify for advanced alternative payment models or maximize their scoring under the Merit-based Incentive Payment System (MIPS) a performance scoring system that went into effect January 1 2017 but influences reimbursement in 2019 and later

Hospitals would face uncertainty from an investment standpoint especially during the ACA transition The existing trend of health systems needing to create a post-fee-for-service strategy will continue and those that move beyond the volume-based mindset may continue to be good long-term investments

iv CNBCcom ldquoObamacare signups on federal exchange HealthCaregov hit almost 88 million amid repeal effortsrdquo httpwwwcnbccom20170104obamacare-signups-on-federal-exchange-healthcaregov-hit-almost-88-million-amid-repeal-effortshtml

Sub-Industry Physician GroupsMACRA will drive physicians to make substantive changes including investments in quality reporting capabilities but continued uncertainty means that predicting winners and losers is difficult


Income Repatriation


Physicians groups have significantly evolved in recent years as administrative and technology requirements including those mandated by meaningful use have driven independent physicians to affiliate with groups and smaller groups to merge into larger groups Physicians have begun to accept risk for defined populations through the Medicare Shared Savings Program and commercial accountable care arrangements Physicians have also been reporting on quality outcomes through the Physician Quality Reporting System (PQRS) Going forward physicians will be subject to the Quality Payment Program (QPP) in MACRA and will see significant changes that connect reimbursement to quality measures

MACRArsquos implementation over the coming years will likely continue to drive consolidation in the physician industry and will heighten the need to work with practice management

companies or other vendors that will help them modernize their workflows and enhance their ability to coordinate care across locations of service Effectively reporting high-quality care will create value for those able to quickly assimilate into an Alternate Payment Model environment or bring value to virtual groups Physician practices able to capitalize on improved clinical information will be at an advantage

There remains a great deal of uncertainty about financial performance under MACRA especially as the differences between the ldquowinners and losersrdquo become more pronounced Due to this uncertainty investment in this space is fraught with more concerns than some other sectors and must be evaluated on a case by case basis

Sub-Industry Surgical Hospitals and ASCsTraditional fundamentals will allow this subsector to weather and prosper from imminent rate and volume pressure


Income Repatriation


This industry has enjoyed strong and stable valuations largely because of changing demographics that have increased patient volume such as obesity co-morbidities and complex care needs In aggregate quality has been at parity with acute care hospitals with lower resource requirements and costsv

Changes to Medicaid and Medicare reimbursement could put pressure on rates (fee-for-service and managed care) A paring back of the ACArsquos Medicaid expansion could also curtail volumes Giving ASCs disproportionately low cost structure they will remain a mainstay over any market turbulence and rate pressures though maintaining a stable operating earnings may require contract diversification depending on the degree of change in government programs

v Ambulatory Surgery Center Association httpwwwascassociationorgadvancingsurgicalcarereducinghealthcarecostspaymentdisparitiesbetweenascsandhopds Today procedures performed in the ASC cost Medicare just 53 of the amount paid to HOPDs


Sub-Industry Practice Management CompaniesThe complexity associated with MACRA will increase the burden on smaller specialty and primary care practices increasing the need for centralized resources and management


Income Repatriation


Managed services organizations have historically been leveraged for billing coding and other core administrative services The value of third parties executing these services have ebbed and flowed over the years typically a function of physician consolidation the advent of new technology and regulatory complexity and uncertainty

MACRArsquos significant quality reporting and technology requirements as well as the attendant alternative payment models increase the compliance reporting and performance burden of practices in material ways A wider distribution of clinical data and cyber-threats

abounding will require improved IT security A rapidly changing and diversifying payor landscape will require assistance in contract and price management Hence the core value competency of practice management will begin to transcend commodity administrative functions toward driving clinical improvements and resource efficiency

A natural headwind for practice management valuation is the consolidation of practices by larger groups or systems Nevertheless managed services organizations can serve as a valuable resource to maintain a robust fragmented physician group market

Sub-Industry Skilled Nursing Assisted Living and Long-Term Acute Care FacilitiesContinuation of bundles could lead to exclusion of underperforming SNFs from networks and a continued focus on reducing length of stays


Income Repatriation


The continued shift from fee-for-service to value-based models will hurt the finances of facility-based post-acute care providers if they do not adjust their business models or rethink about how to address alternative payment models Skilled nursing and long term care facilities have struggled under ACA since ACOs increased their focus on population health and total cost of care and CJR hospitals and hospitalmedical group favoring patient referrals to home health Skilled nursing facilities and long-term care providers have been slow to adopt healthcare IT and have struggled with reporting quality measures and connection with acute-care providersrsquo EMRs

Skilled nursing and long-term acute care facilities heavily employ physical therapists and occupational therapists who will be considered Eligible Providers (EPs) in 2019 under MACRA These providers may face difficulty making the necessary improvements in reporting infrastructure since technology investments will be required Individual providers may make good investments but collectively the post-acute care sector has more difficult prospects than others

Sub-Industry Home HealthEnhanced focus on alternative payment models including population-based and bundles will focus on managing patients after hospital admissions in the home


Income Repatriation


Recent trends have been more favorable for home health providers than their facility-based post-acute care counterparts The ACA has benefited home health agencies as ACOs have increased their focus on population health and total cost of care Medicaid reforms favor the promotion of Long-Term Services amp Supports (LTSS) which by nature favor non-institutional settings and have been positive for home health providers However the sector has been slow to adopt healthcare IT

Home health providers are well-positioned to succeed under value-based payment models as acute-care providers look for lower-cost post-acute care options As more physicians pursue advanced alternative payment models under MACRA home health agencies could see increased volume and prioritized referrals relative to SNFs and LTACs Reporting challenges for these providers will exist but they are well positioned to become the partner of choice or to become prime acquisition targets for health systems looking to expand their home health presence


Payors5

Industry OverviewBetween regulatory pressures and the evolution of the overall healthcare industry the payor sector will continue on its volatile path The group and Medicare Advantage markets have boasted relative stability while the individual market has yielded significant losses for the industry Much remains to be seen about what will emerge from ldquoRepeal amp Replacerdquo

The state of the exchanges Medicaid expansion and coverage changes remain unclear Some in Congress favor a shift toward moving more Medicare and Medicaid beneficiaries to the private sector through direct managed care offerings along with an increase of outsourcing of operations to private companies

Medicare Advantage is likely to remain strong Other forms of managed care particularly those prevalent in state Medicaid programs will likely also remain strong however states wanting greater competition in managed care in Medicaid will likely want or need a bridge to new models

In the commercial market employers will increasingly shift costs to employees through higher deductibles and premiums Annual premiums for employer-sponsored family health coverage reached $18142 this year up 3 percent from last year with workers on average paying $5277 towards the cost of their coverage according to the Kaiser Family FoundationHealth Research amp Education Trust 2016 Employer Health Benefits Survey The same survey also found the average worker contributions for single and family coverage have increased 80 and 78 respectively over the last 10 years and 23 and 28 respectively over the last five yearsvi

Technology and regulatory forces are altering how health plans are marketed Sales of health plans have dramatically been reshaped by the Internet offering technology that better matches products with customer preferences This dynamic will pressure the legacy broker business Republicans are suggesting that interstate health insurance markets products could lower costs and allow for more efficient use of capital Some speculate this could lead to greater mergers and acquisitions among regional payors across the sector However the wild card about interstate insurance remains about how to reconcile health insurance laws across state borders

vi Kaiser Family Foundation 2016 Employer Health Insurance Survey httpkfforgreport-sectionehbs-2016-section-six-worker-and-employer-contributions-for-premiums


As payors look to control the cost curve more effectively we expect payors to continue investments in providers particularly primary care physicians At this stage payors have learned that the best way to control costs for a population is to have partnerships with the physicians in

achieving that goal That mutual alignment can come in one of several ways including various risk sharing models with independent physician associations or direct employment of the physicians by the plan though the latter is less common practice

Sub-Industry National CarriersDespite troubles in individual exchanges and MampA impediments national health plans are poised to take advantage of growing managed care markets


Income Repatriation


Some of the largest national carriers left the individual insurance exchanges established under the ACA after claiming substantial losses Complexities associated with appropriate pricing premium stabilization programs and higher-risk populations presented challenges for health plans from the influx of the newly insured population ldquoRisk corridors were intended to reduce overall financial uncertainty for insurers though they largely did not fulfill that goal following Congressional changes to the program Reinsurance compensated plans for their high-cost enrollees and by the nature of its financing provided a subsidy for individual market premiums generally over a three-year periodrdquo which contributed to higher premiums for 2017 a Kaiser Family Foundation report saidvii Managed Medicaid organizations benefitted from increased enrollees from ACA

Some of the largest carriers felt compelled to merge in this new environment Regulators are suing to block two major insurer mergers (HumanaAetna AnthemCigna) The legal proceedings that the governmentrsquos approach in arguing against these mergers has focused on the definition of a

ldquomarketrdquo Despite the outcome of the legal proceedings or a new legislative framework through health reform there remains much to like about commercial health plans Most are heavily weighted in group business which is likely to see a period of stability in the months ahead Medicare Advantage will likely strengthen as a stable growing market for seniors to access health services Any changes to the individual or Medicaid markets will present new challenges and new opportunities for this group Confidence in such government-sponsored programming may have ebbed in the national health plan community but a path to legitimate profitability will create value for enrollees and shareholders

However future value will be contingent on plansrsquo ability to share and collaborate with providers while maintaining value-added resources that improve care and lower cost National health plans will need to innovate out of their traditional four pillars of service -- networks risk management lives aggregation and member administration -- to drive value

vii Cox Cynthia Ashley Semanskee Gary Claxton and Larry Levitt Explaining Healthcare Reform Risk Adjustment Reinsurance and Risk Corridors August 17 2017 Kaiser Family Foundation httpkfforghealth-reformissue-briefexplaining-health-care-reform-risk-adjustment-reinsurance-and-risk-corridors

Sub-Industry Start Up Health PlansTailwinds in managed care opportunities and the continuing changes to the locus of risk will promote new opportunities for innovative start-up health plans


Income Repatriation


The last several years have witnessed the advent of new health plans ranging from provider-sponsored organizations ACA-established Consumer Operated and Oriented Plans (CO-OPs) and other venture capital-backed plans All but five of the CO-OPs are in receivership and the venture capital backed plans have not yet generated profitability Some health systems have either divested or have made significant changes to their health plan investments

However there is still much to like about this sector Managed care volumes are likely to grow and providers will increasingly be accountable and at-risk for certain

populations The intersection of these market forces with an increasingly engaged consumer are likely to reward innovators who simplify the purchasing process closely manage the cost and experience of members and pursue low cost ways to administer plans

Further much of the growth in this sector has been pegged to the individual market and the framework of the ACA Amendments to this infrastructure in line with expanding managed Medicaid Medicare Advantage and a more predictable group market will create new spaces for start-up carriers

Sub-Industry Private ExchangesThe current policy environment will breathe new life into private exchanges Consolidation will continue well into 2017


Income Repatriation


Following the passage of the ACA new investment poured in to modernize benefit administration platforms and to establish technology platforms that facilitated eligibility determination (across lines of business) enrollment choice architecture and other administrative services However employers (self-funded and fully-insured) have been slow to adopt private exchanges

Opportunities that might be created in the shadow of ACA transitioning and the growth of risk-bearing providers and employer groups could be catalysts for this subsector

to come roaring back to life Contingent on policy that promotes enrollment and payorprovider confidence some proponents believe these exchanges offer the potential to lower cost improve choice and provide the ability to obtain ancillary health services The recently passed 21st Century Cares Act could boost the individual health plan market and provide private exchanges a means to enroll small groups

Sub-Industry Pharmacy Benefit ManagersContinued scrutiny of drug costs and value present an opportunity for PBMs


Income Repatriation


The shifting payor landscape may aid pharmacy benefit managers who are seeing growing Medicare Advantage and managed Medicaid business from the cost advantages they can provide Any loss of covered lives in the ACA transition will hurt business PBMs can benefit from bridging the gap between payors risk-bearing providers and pharmaceutical manufacturers Beyond formulary design and extracting efficiencies from buying medications PBMs can offer clinical services to improve medication

adherence and prevent adverse drug events Headwinds for PBMs come from life science MampA activity which may challenge the traditional PBM role (as manufacturers gain market power) In additional healthcare IT interoperability could bridge some of the gaps between payors risk-bearing providers and manufacturersmdashPBMs will need to leverage those advancements to their advantage


Life sciences6

Industry Overview

ACA Transition

MACRABundled Payment Programs

Income Repatriation


Pharmaceutical and medical device manufacturers will benefit from possible tax law changes from the new administration that could make it easier for global device and drug makers to repatriate cash from overseas providing an additional catalyst for MampA activity in the consolidating life sciences sector Two diverging factors are driving acquisitions Some acquirers are looking to build a deeper product pipeline in a therapeutic area with products at various stages of development as well as additional product offerings to better engage their end customers ndash prescribers and patients Another approach involves investing in diverse product lines expanding to new therapeutic areas or building out generic drug or biosimilar capabilities Consolidation in the device world will be driven through offering ldquomarket basketrdquo products to provide additional value to consumers

These changes come as life sciences companies face considerable political and economic headwinds regarding the pricing of their products and new demands associated with value-based health care Drug manufacturers (innovators and generic) are facing considerable pressure to substantiate the value of their products driven at least in part by higher patient out-of-pocket costs in high-deductible health plans Payors are also using their clout to extract concessions from drug makers for formulary access Medical device makers are facing similar constraints from providers looking to cut costs on substitutable and non-substitutable products Sophisticated drug and device manufacturers are evaluating risk-sharing arrangements with providers such as bundled payment programs or ldquovalue-based pricingrdquo to mitigate pricing pressures


Specialty drugs have driven much of the industryrsquos growth while generating some of the attention generated by drug prices with many of the products in this category costing tens of thousands of dollars annually The ACA created a regulatory pathway for biosimilar products to enter the market and the incoming administration has expressed a desire to hasten the pathway for approvals to increase competition in biosimilars generally

In a similar vein the life sciences industry is facing expiration of the fee package that supports FDA product reviews by Sept 30 The package which needs Congressional approval includes user fees for the FDA to review for innovator pharmaceuticals and medical devices generic drugs and biosimilars

Industry Healthcare ITA saturated market will equate to lower collective growth for EMR vendors but opportunities abound in pursuing valuable use cases with an increasingly accessible data environment for health IT application and product vendors


Income Repatriation


Value-based health care requires measurement and healthcare IT makes it possible The healthcare IT sector has received a boost from HITECH 21st Century Cures and now MACRA However many clinicians are dissatisfied with EHRs because they do not improve workflow due to poor usability time consuming data entry interference with the patientprovider relationship and a lack of interoperabilityviii Growth in managed care and the increasing pace of payment and delivery system reform will place new demands upon interoperability between electronic health records

Vendors in this sector are starting to ship product upgrades this year to be ready for certifying Meaningful Use Stage 3 which will enable greater sharing of patient data between parties and enable population health management with the patient at the center The increased portability of information will be disruptive to the sector but poses opportunities especially in the field of population health tools

Beyond investments in EHRs healthcare organizations need to think of data protection after the waves of cyber-attacks against healthcare providers and health plans in recent years Additional opportunities in healthcare IT can be found as healthcare organizations move their organizations to cloud-based computing to lower IT administration costs Increased mobility and the ldquoInternet of Thingsrdquo create new avenues for patient engagement especially when combined with telemedicine Meanwhile back office operations could become more efficient from robotic process automation that uses technology to complete repetitive tasks

viii Street RL Liu L Farber NJ Chen Y Calvitti A Zuest D Gabuzda MT Bell K Gray B Rick S Ashfaq S and Agha Z Provider interaction with the electronic health record The effects on patient centered communication in medical encounters (Sept 2014)httpswwwncbinlmnihgovpubmed24882086

While the election and anticipated changes to ACA garner headlines the wave of other regulatory and market-driven disruptors in healthcare are opening up new market opportunities and increasing risks Individual exchanges received a great deal of attention after leading plans withdrew from many exchanges and the CO-OP failures but federal funding of Medicaid to the states is a more substantial economic issue in health care Congressional Republicans and the incoming Trump Administration now have the task of reforming health care which has its own calculus of balancing patient access costs to the public and the government

What has not changed as a result of the election is the fundamental pressure across the entire industry to lower the cost of care as health care reached $32 trillion in 2015 and veers toward 18 percent of GDPix ldquoBending the cost curverdquo in health care has been a struggle for decades and the direction now is to shift the financial risk to providers under new payment models of bundled contracts quality incentives and capitation

These approaches also require technological investment to lower costs increase efficiency and provide a foundation to measure quality and outcomes This shift to value has also started to affect life sciences companies that are facing pressures around transparency and pricing as specialty drugs fuel much of the sectorrsquos growth

The public policy technological and economic forces in healthcare can be seen as accelerators and decelerators of changes or certain investment priorities Many of these investment priorities should be centered on how to help the chronically ill that drive 86 percent of Americarsquos medical spending since that is where the curve can be bentx This will entail greater sophistication around risk stratification of patients to ensure that they get the most appropriate level of care Disease management and patient engagement programs could have a big role in preventing unneeded hospitalizations and driving care to lower-cost less acute settings

While there is not expected to be a ldquobig bangrdquo moment that reshapes health care amp life sciences overnight opportunities are emerging in this field The resources technology and political will are driving at health care reform in the face of the five market disruptors The question remains about how quickly we can capitalize upon it

ix CMS httpswwwcmsgovResearch-Statistics-Data-and-SystemsStatistics-Trends-and-ReportsNationalHealthExpendDataNationalHealthAccountsHistoricalhtml

x CDC httpswwwcdcgovchronicdiseaseoverview

Conclusion7

21Key disruptors affecting health care amp life sciences 21Key disruptors affecting health care amp life sciences

Contact usLeavitt Partners David E Smith Principal Leavitt Partners Consulting Chicago Twitter ChiDavidSmith 801-473-4669 davidsmithleavittpartnerscom Susan WincklerPrincipal Susanwincklerleavittpartenrscom 801-707-1735 David MuhlesteinVP of ResearchDavidmuhlesteinleavittpartnerscom

KPMG LLP Bill Baker Carole Streicher and Brett Glover Leavitt Partners David E Smith Alex Anderson and David Muhlestein

KPMG

Bill Baker Partner Advisory Financial Due Diligence billbakerkpmgcom214-840-2519

Carole StreicherPartner Advisory Financial Due Diligencecstreicherkpmgcom312-665-2138 Brett GloverPartner Advisory Financial Due Diligencebgloverkpmgcom 214-840-8579

Authors


kpmgcomsocialmedia

copy 2017 KPMG LLP a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (ldquoKPMG Internationalrdquo) a Swiss entity All rights reserved Printed in the USA The KPMG name and logo are registered trademarks or trademarks of KPMG International NDPPS 635162

Executive summary

Health care is now at an inflection point with key disruptors that will profoundly impact the market and create new opportunities A better understanding of health care disruptors is imperative to successfully navigating the impending legalregulatory economic and technological forces that are reshaping the market We have identified five key market disruptors and analyzed the impact upon providers payors and healthcare products and drug and device makers

mdash Affordable Care Act (ACA) transition

mdash Medicare Access and CHIP Reauthorization Act (MACRA) implementation

mdash Bundled payment programs

mdash Income repatriation

mdash Healthcare IT saturation and interoperability

Payors providers and life sciences companies need to understand and quickly adapt to these disruptors to avoid failure in the market These disruptors are expected to spark MampA activity and lead to potential changes in valuations as the competitive climate changes

In the midst of these changes opportunities are emerging to capitalize ldquoonrdquo the shift from ldquovolume to valuerdquo The demand for more value from health care spending transcends political parties and which one is in power in Washington As healthcare accounts for a growing role in the economy policy shifts and marketplace demands are looking to upend fee-for-service models (volume) to new payment models emphasizing generated health outcomes (value) Life sciences companies which once banked upon a foundation of patents that offered some competitive barriers in the market are not immune from these shifts These dynamics are fueling MampA among drug and device makers but potential US tax policy changes for cash held overseas could act as a catalyst for deals Technology and new data amp analytic tools are underpinning many of these marketplace shifts opening the door to competition and new service models in delivering care and increasing patient engagement

Payors will find refuge in the predictability of group business and Medicare Advantage Market confidence in the governmentrsquos capacity to administer stable programs in the individual and Medicaid managed care markets will be a critical element of payor success

1










1 2 3





4 5





Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT






Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT







Providers4





Income Repatriation









Income Repatriation








Income Repatriation








Income Repatriation








Income Repatriation






Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia











1 2 3





4 5





Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT






Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT







Providers4





Income Repatriation









Income Repatriation








Income Repatriation








Income Repatriation








Income Repatriation






Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia






4 5





Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT






Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT







Providers4





Income Repatriation









Income Repatriation








Income Repatriation








Income Repatriation








Income Repatriation






Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia





Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT






Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT







Providers4





Income Repatriation









Income Repatriation








Income Repatriation








Income Repatriation








Income Repatriation






Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia





Physician Groups


Practice management


Home Health

National Carriers


Private Exchanges


Medical Devices


Healthcare IT







Providers4





Income Repatriation









Income Repatriation








Income Repatriation








Income Repatriation








Income Repatriation






Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia







Providers4





Income Repatriation









Income Repatriation








Income Repatriation








Income Repatriation








Income Repatriation






Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia





Income Repatriation









Income Repatriation








Income Repatriation








Income Repatriation








Income Repatriation






Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia




Income Repatriation








Income Repatriation








Income Repatriation








Income Repatriation






Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia





Income Repatriation








Income Repatriation






Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia




Income Repatriation





Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia



Payors5












Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia







Income Repatriation









Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia




Income Repatriation








Income Repatriation







Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia




Income Repatriation





Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia


Life sciences6

Industry Overview

ACA Transition


Income Repatriation









Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia







Income Repatriation













Conclusion7




KPMG



Authors


kpmgcomsocialmedia









Conclusion7




KPMG



Authors


kpmgcomsocialmedia





KPMG



Authors


kpmgcomsocialmedia


kpmgcomsocialmedia


key disruptors affecting health care & life sciences · 2020-02-27 · key disruptors affecting...

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