“Most people think that of the USD3tn we spend on healthcare in the US, USD1tn is wasted. If we succeeded in taking out that waste and were paid 20 per cent of the cost savings, it’s a USD200bn annual revenue opportunity for. It’s massive,” says Richard A Kimball, Jr, co-founder and CEO of HEXL, a healthcare technology business focused on designing beneficial programs to change the industry incentives and leverage tele-health, home healthcare, preventative care and chronic disease management.
The US healthcare system is dysfunctional and not delivering the value that our society needs. More than two times per capita is spent on healthcare compared to the UK and other European countries and generally ranks last in key healthcare outcomes: life expectancy, infant mortality, incidence of obesity, diabetes.
“We spend all this money, we have all these well trained doctors, state of the art hospitals, drugs and devices, but somehow we don’t deliver value with that capability. In the UK people sometimes get frustrated with the NHS but the difference in cost and outcomes within the NHS versus the US healthcare is remarkable. We spend around USD18,000 on Medicare to the over-65s, whereas in the UK the average spend is around USD5,000,” says Kimball. OECD Health Statistics
These costs continue to rise, to the detriment of the US government, employers and individuals. What Kimball is aiming to do with HEXL is change the way that healthcare is delivered to patients, in particular those with chronic conditions, and put in place steps to move away from the existing “fee for service” model, to a capitated risk model. The aim is to reduce costs, to the tune of around 20 per cent, generating not only upside returns for HEXL’s investors but greater efficiencies for the entire health delivery system.
HEXL stands for “Health times Longevity”. The premise, says Kimball, is “how do we keep people healthy longer and enjoy a better quality of life”. There are three components to this.
1. Change the reimbursement paradigm and take capitated risk from Medicare Advantage members.
2. Be able to use data to better understand the population and proactively manage how to care for those patients – who are the high-risk patients in a given population? Who needs home care? Effectively, design a process that rather than waiting for someone to suffer an acute event and wind up in a hospital, proactively figure out how that patient needs to be cared for.
3. Leveraging devices in the home – weighing scales, glucose monitors, heart-rate monitors. To have these devices in the home, which you can then use to monitor patients via telemedicine to keep close tabs on the patient, keep them stable, in the comfort of their own home and out of the hospital.
There are two primary groups of payors in the US healthcare system Government (e.g. Medicare, Medicaid) and private insurance through employers or directly to individuals –. According to the Department for Professional Employees, in 2012 263m people (85 per cent of the population) had some type of health insurance, 32 per cent of whom received coverage through the US government via Medicare or Medicaid.
“Politically, we are never going to get rid of those multiple payors, it’s too difficult to revert to a fully nationalised system but there are ways to take certain populations and create a capitated reimbursement paradigm, which would help us to start to fundamentally change how we care for people; that is, provide stability with their chronic diseases. Just keeping somebody stable with their diabetes, for example, would dramatically change outcomes and lower costs,” says Kimball.
Where the US healthcare system needs to evolve is by creating this capitated reimbursement paradigm that Kimball refers to, where hospitals and doctors are paid a fixed price for keeping people healthier. There needs to be a shift away from over-reliance on costly care venues like hospitals towards more clinic and home-based healthcare. On average, under the FFS model, Medicare users spend 743 hospital days out of every 1000, compared to 595 under a capitated model. That’s a 20 per cent saving. 2013 HEDIS Utilization Report; Robert Margolis, MD, CAPG, Summary of Statement.
“We need to send nurses to patients’ homes, use telemedicine or other means to stay in contact with that person and figure out how to create social groups to help support people with their health issues. We need to hold people’s hands through their chronic conditions and the system needs to be incentivised to do that.
“This is how I see things changing over the next five to 10 years. At the moment, under the fee-for-service system, doctors and hospitals get paid for every visit and every procedure. In my judgment, we need to move to a fully capitated system where the doctors and hospitals get paid a fixed price for all the healthcare provided to an individual or a population of individuals. If you are on the hook for the whole price, you’re going to be fully focused on how to keep the individual stable in their chronic condition and avoid acute events such as hearts attacks or foot amputations,” says Kimball.
Medicare is split in to two parts – Medicare fee for service, which is available for everyone in the US over the age of 65. The government pays for all of the patient’s appointments, hospital procedures and drugs. And then there’s Medicare Advantage, which offers additional benefits such as dental, vision etc. The insurance company, United for instance, will manage that program and place certain restrictions on what hospitals one can go to, what specialists can be offered. Basically, United is taking the financial risk.
To explain what Kimball is trying to achieve with HEXL, he continues:
Our plan is to subcontract with the major payors on their Medicare Advantage lives sharing in the risk on these patients or taking the fully capitated risk on them. The payors are required to pay out 85% of the insurance premium to the healthcare providers so their revenues are capped at 15% of the premium. Hence, they can reduce their risk by sharing some or giving all of the risk to HEXL and be guaranteed to generate their maximum revenues. HEXL then benefits if it can deliver care for a cost less than the capitated rate (85%). We expect we can deliver care for 10-20% less through our coordinated care model.
Medicare is doing some work to try new forms of reimbursement. There are now accountable care organisations formed by hospitals or physician groups whereby if the hospitals are able to lower costs they get some of those savings paid back to them as financial incentives. It’s not a big enough incentive, however, to make them really re-engineer all of what they do because as Kimball notes, “costs have been lowered by 1 or 2 per cent only, it’s very modest”.
Other forms of reimbursement are being experimented with in the US i.e. bundled payments where the government, for example, will pay one price for knee surgery – all the drugs, the doctors, the surgery. This requires the hospital system to figure out, on that one episode of care, how to do it more cheaply.
“That’s a move in the right direction,” says Kimball.
To help move away from over-reliance of the hospital system is a complex and difficult issue to resolve.
“Right now, you have all these doctors who are trained to solve problems. You go into hospital with a pain in your stomach and they will pull out all the stops to figure out what that is. They will do MRIs, CAT scans, surgery; whatever it takes with no regard whatsoever for cost or quality of life for the patient.
“Dartmouth College has done some interesting research on the geographic variation of healthcare within the US. Where there are more doctors, and more hospital beds, there is demonstrably more healthcare delivered,” comments Kimball.
Perversely, what’s happening is that the supply of healthcare in the US is driving the demand for healthcare – rather than the other way around. Doctors are filling their schedules, and hospitals are filling their beds. Indeed, according to Kimball, “Doctors in the US are very economically-driven people.
“We’ve had too many visits and hospital procedures and it is causing costs to rise in the system. They (government and insurance companies) are increasingly cutting the reimbursement per visit and per procedure. The doctors and hospitals, in order to keep making their income are just increasing the number of those visits and procedures. We are chasing our tails here with ever more volume and lower price while the overall total cost continues to rise.”
A classic example of where patients are being treated in a misguided fashion is if one compares the approach that paediatricians and geriatricians take. Here, they look at the patient as the ‘whole patient’; what are the issues for this patient’s quality of life? That’s just not the case for everyone else in between, aged 18 to 65. They go to the family doctor, and the minute they see an issue with heart disease, diabetes, they dispatch that person to a specialist.
“So you have a 60-year who has five different doctors who aren’t speaking to each other, receiving five different sets of medication. There are too many potentially conflicting medications being taken and it’s a huge problem in our system. To stabilise the patient, one needs to look at the whole person and think about ‘whole person health’,” stresses Kimball.
The incentive structure needs to change such that hospitals and doctors get paid for keeping people healthy not just for providing health repair, as it were. Kimball thinks it is absolutely doable.
In the UK, the government takes on all the financial risk of the healthcare system. They are incentivised to bring system-level costs down, to keep people healthy and avoid unnecessary care. If someone has terminal cancer, chances are the doctors will tell the patient’s family it’s time for them to go home and die with dignity.
“In the US, the oncologist will turn to yet another experimental and costly drug to try, which might extend the patient’s life by two months. They are pumping patients with drugs, they are stuck in hospital and ultimately they pass away in that unpleasant setting. In the US, 65 per cent of patients die in an institutional setting; that number falls to 7 per cent for US doctors,” adds Kimball.
Certainly, there are lessons that the US can learn from the UK, where the nationalised health service is structured such that hospitals have to reduce costs wherever possible; it is a form of healthcare rationing, where patients don’t necessarily get access to a specialist, or receive an MRI scan, or have a surgical procedure, if the assessment deems it unworthy.
“We spend USD3tn a year on healthcare in the US. Eighty per cent of that, or USD2.4tn, goes on treating people with chronic diseases: heart disease, diabetes etc. We know exactly what their disease is, we give them a bunch of medicine, we send them home, and yet there is a less than 60 per cent compliance rate on taking the medicine.
“They are unlikely to change their diet, their lifestyle and in five or 10 years’ time those same people will be turning back up at the hospital with a heart attack or a foot amputation. The system has really let these people down. To just send them home with the drugs and hope that something is going to change is unrealistic.
“With the reimbursement paradigm that gets paid for keeping people stable in their diseases I believe we could reduce hospitalisations by 20 to 30 per cent. What we want to do is keep people out of hospitals as much as possible.
“We need to reconfigure our healthcare system with much more capability in outpatient clinics and in the home,” says Kimball.
HEXL is currently in negotiations with two smaller insurance companies to run a six-month pilot to show the improvements and cost savings that could be available by focusing on stabilising patients with chronic conditions through home-health and telemedicine. If successful, the plan would be to establish a long-term contract with the insurers and take on tens of thousands of their members.
“We would take on the capitated risk stage by stage; it would probably take us three to five years to assume all the risk. We will probably do a seed round in the next couple of months and do our Series A funding towards the end of 2015 on the back of our pilot results.
“This is undoubtedly the biggest opportunity I’ve ever seen in my business career,” concludes Kimball.
Richard A Kimball, Jr is a financial executive with deep proficiency in the healthcare industry and has experience in various capacities e.g. investment banking, venture capital and public policy. Richard is currently a Fellow in Stanford’s Distinguished Careers Institute and building a healthcare technology start up HEXL.COM. Richard graduated from Yale University with a B.A. in Economics.
To learn more about Richard (Rick) Kimball please visit his WIKI.
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