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As we head towards the end of 2018, now feels like a good time to stop and reflect on some of the US population health management (PHM) trends which 2018 will be remembered for. While 2017 was a year of turmoil with legislative uncertainty over the potential ACA reforms, vendors entered 2018 with optimism that providers would accelerate their shift towards value-based care (VBC) and risk-sharing contracts.
However, this optimism seems to have subsided as the year has progressed, with many now painting a bleaker picture for the remainder of the year. So, what changed during 2018 and what should vendors be looking out for in the final quarter of the year?
After a lull in the market in 2017 where the PHM market saw single digit Y-o-Y growth for the first time, we came into 2018 with a sense of optimism that the market could continue to grow in line with its historical rates. However, the market has suffered to some extent due to the proposed changes to the CMS Medicare Shared Savings Program (MSSP) via the introduction of the ‘Pathways to Success’ proposed rule.
MSSP has been a key driver for the PHM market with the formation of risk-adopting ACOs. Initially the CMS offered an MSSP “Track” where an ACO could start its transition from a fee-for-service (FFS) model to a value-based care (VBC) model without taking on downside financial risk – known as Track 1. ACOs were initially permitted six years in Track 1. Whilst in Track 1, if an ACO made savings against benchmarked spending targets, it shared those savings with the CMS (assuming quality was maintained), while overspending was not penalised. However, with no downside risk being taken by the providers on this track, incentives for innovation to reduce costs were limited.
While analysing 2016 ACO performance data two things became apparent:
- As a group, ACOs in Track 1 increased their Medicare spending relative to their cost targets, with the exception of lower-revenue physician led networks.
- ACOs on the two-sided risk tracks (where there were financial penalties for overspending versus the benchmark) were able to drive cost savings as a group.
This has prompted the CMS to introduce the new ‘Pathways to Success’ reform, reducing the time an ACO can spend on the first track from six to two years, forcing them into rapidly taking on two-sided risk models. Around 82% (460 of 561) of the ACOs are currently on this first track, with the majority of those now having to implement a two-sided risk model by mid-2019.
This could have two major impacts on the PHM landscape as we know it and it has left these networks with a difficult decision to make:
- An ACO could choose to adopt the new model, knowing that the shift to VBC is inevitable in the medium-term. This could drive additional spending on PHM IT or performance and optimisation solutions to drive efficiency and preventative healthcare. ACOs following this process are forecast to focus more on managing the health of their highest risk patients which account for the majority of expenditure, driving higher average revenue per life managed for PHM platform vendors, particularly those offering clinical care management, care coordination and patient engagement solutions.
- The alternative is an ACO decides it won’t be able to meet the targets set by the CMS or feels the downside risk is too much of a gamble and so it leaves the initiative all together. This is a major concern for digital health IT vendors, particularly as many of their PHM customers are continuing to delay their health IT purchasing decisions as they decide on their future VBC strategy.
Below I have broken down the financial performance of some of the major public PHM players and examined their YTD performance in the context of this change in legislation.
Cerner
- Overall company growth for first three quarters of the year was 4.5%. Down on 8.2% in 2017 and 8.9% in 2016.
- 30% increase in bookings coming from customers outside of its Millennium (EHR) installed base in Q3, with ‚Äòsolid quarters’ quoted for PHM, RCM and ITWorks.
- Made an investment into Lumeris to grow its business within the clinical payer model space. Lumeris will adopt the Millennium platform and integrate its clinical methodology and analytics, as well as providing further admin/ support for Cerner providers.
Cerner Q3 Earnings Call (25/10/18)
“Our clients are all at different stages of experience with value-based payments. Many have had modest success with upside-only agreements such as an Accountable Care Organization or Medicare Shared Savings Programs. They are now considering expansions into contracts where they can capture a more significant portion of the premium dollar through value they provide through care delivery.”
Cerner has taken a positive outlook on the above despite a slowdown in overall company growth in 2018. Cerner has an extremely large customer base, and the challenge for it going forward will be driving higher per-member-per-month (PMPM) revenue through upselling its HealtheIntent (PHM solution) to its Millennium customers. Assuming its ACO customers take on more risk, they are more likely to need those higher maturity PHM modules such as care management workflows and patient engagement solutions. Combining this with the potential for additional support and client interaction with Lumeris, and the need for these risk-bearing providers to better manage those high acuity patients, the MSSP changes could help Cerner increase PMPM rates assuming its ACO clients stay with the scheme.
Allscripts
For a deep-dive into the Allscripts business and our take on their recent acquisitions and portfolio development, click here.
- YTD growth for the first three quarters of the year was 21% on the same period in the previous year. Up from 15% in 2017 and 8% in 2016.
- Majority of growth driven through acquisition, as opposed to organic growth from legacy business.
- Its PHM business grew faster than the market average, again largely owing to acquisitions.
Allscripts Q3 Earnings Call (1/11/18)
“Five years ago, it was clear to us that the regulatory purchasing environment we saw during the Meaningful Use era would not continue indefinitely. As a result, we made the decision to expand and pursue other avenues of growth such as Population Health, Payer & Life Sciences and consumer services. This has resulted in a Payer & Life Sciences business that is now approaching 10% of our revenues and is growing at a rapid clip. We have compelling offerings in the consumer and patient engagement space, particularly with the recent addition of HealthGrid. Our Population Health offerings are gaining traction and we look forward to driving further growth through these solutions.”
Recent acquisitions of the McKesson EIS and Healthgrid businesses have driven growth for Allscripts’ PHM reporting segment. Bringing together the various solutions it has obtained from its acquisitions into a single platform PHM offering and proving its potential cost savings to its customers will become increasingly important when selling to ACOs that have taken on upside and downside risk.
athenahealth
While shareholders may be disappointed at the final offer for athenahealth (down from $160 to $135), the final outcome arguably gives athenahealth a better outlook. With the new deal, Veritas and Evergreen (Elliot Management subsidiary) have taken the company private. While Elliot has a reputation for cutting costs and stripping businesses, Veritas takes a more conservative approach through good management and strategic planning.
Veritas has made a number of high-profile digital health vendor acquisitions over the past few years such as Verscend, Cotiviti and the VBC arm of GE (Virence Health). In addition, it had previously acquired Truven Health for $1.25B (then known as Thomason Reuters Healthcare) before selling it to IBM in 2016 for $2.6B.
It will be interesting to see how the trade-off between the two investors develops in the athenahealth organisation. Early developments include Veritas merging the Virence Health business into athenahealth. Compared to some other EHR vendors, athenahealth has one of the lowest proportions of its business accounted for by PHM (estimated at <3% for YTD 2018), meaning there’s potentially some upside opportunity emulating the business models adopted by some of its competitors. At present, the deal is expected to close in Q1 2019.
Evolent
- Growth for the first three quarters up 35% Y-o-Y. Substantial growth but down from 93% in 2017 and 48% in 2016
- Business driven through high acuity risk-sharing contracts (mostly focused on next-gen ACOs that are already on two-sided MSSP tracks)
- Acquisition of New Century Health to diversify business into high-acuity managed care for complex populations in oncology and cardiology for payers and providers
- Previous acquisition of Valence Health drove significant increase in lives managed in 2017
Evolent Q3 Earning Call (6/11/18)
“We’ve been very encouraged by recent actions that the administration has taken to accelerate market adoption of performance-based risk arrangements. As we shared in our public comments to CMS, Evolent supports the redesign of MSSP to accelerate the ACO transition to performance-based risk, and we also support time limiting the proposed basic track and requiring all MSSP participants to accept two-sided risk by 2021. We expect these changes will provide greater stability and predictability and will help more providers benefit from qualifying as advanced alternative payment models.”
Evolent is seeing the shift towards two-sided ACO risk as a positive for driving risk sharing contracts for high acuity populations where it continues to focus its efforts. Evolent does not have an existing EHR customer base to leverage business from. Instead, Evolent targets these high-risk ACOs with managed services and a PHM portfolio targeted at high-acuity populations. From this, Evolent drives an average PMPM of >$10 within its current population of around 3.1M lives, much higher than some of the EHR vendors who also cover lower-acuity populations.
Special mentions
- United Health/ Optum’s investment into Medicare Advantage is paying off and overall the business grew 12% Y-o-Y in Q3, to $56.6B. The Optum Insights segment (containing its PHM portfolio) is currently up 12% Y-o-Y YTD in 2018, up from 11% the same period last year as its internal customer based continues to grow.
- IBM’s acquisition of Red Hat highlights its intentions to grow within the hybrid cloud space. This could show a divide in the company between its apparent future growth strategy (cloud) vs its Watson health business. “Growth” was quoted for Watson in Q3.
Closing thoughts
While many vendors have taken a positive view of the MSSP changes, the challenging environment in the US EHR market and a slowdown in ACO decision making until next year is likely to create tough conditions in Q4. It’s difficult to see all of the current ACOs remaining in the revised MSSP tracks, particularly while most have struggled to drive cost-savings in their first trial of the initiative. That said, Q4 has historically been the strongest quarter for PHM vendors, accounting for 27%, 28% and 26% of annual revenues in 2015, 2016 and 2017 respectively, so some bounce-back is still expected due to this seasonality.
Vendors’ focus over the next quarter should be on highlighting the benefits of their solutions to their ACO clients, potentially entering their own risk-sharing contracts with their customers to help balance that first step into two-sided risk.
Related Reports from Signify Research
Signify Research has been tracking the population health management market for several years and has recently published market reports on the North American PHM Market and the PHM Market in EMEA, Asia and Latin America. Last week Signify Research published its PHM North America 2018 interim update report where the market impact of the CMS proposed rule is examined in detail.
About Signify Research
Signify Research is an independent supplier of market intelligence and consultancy to the global healthcare technology industry. Our major coverage areas are Healthcare IT, Medical Imaging and Digital Health. Our clients include technology vendors, healthcare providers and payers, management consultants and investors. Signify Research is headquartered in Cranfield, UK.