Why it matters: Because we’re trying to make healthcare better dang it!

Read time: The time it takes to refill one last mimosa (3 minutes for real though)

When I first started The Healthcare Breakdown, it wasn’t actually The Healthcare Breakdown at all.

It was a newsletter I started called the unBA. The goal of that newsletter was similar to this. I wanted clinicians to know more about the mechanics of the business of healthcare, so that they, could take it back.

Clinicians owning practices and being independent, clinicians running startups, and clinicians in non-clinical leadership.

But since you are reading this and not that, the original newsletter petered out after 6 issues.

Some years later, The Healthcare Breakdown was born. Brought to you by way of my evolution and experiences in healthcare.

And I am honored that you have joined me in reading the irreverent, slightly derisive, occasionally apoplectic, never grammatically correct, (very) periodical.

However, as with all good things, this too must come to an end (for now).

As the years have gone on, I have searched for ways to make an impact in healthcare. My estimation is that my time and energy is best served helping doctors deliver incredible care and be financially successful, while maintaining control.

To that end, you may know that I have been spending most of my time… ok, all of my time building Forward Slash / Health.

The goal of which is in line with all the ramblings, fist wagging, and void shouting of this reality rag. We exist to put the power back in the hands of clinicians to run healthcare.

It is the next evolution and an actualization of what this newsletter has been all about.

Since you have very graciously lent me part of your Sunday mornings, mimosa clutched and Taylor blaring, I wanted to be transparent and share this update with you this fine Sunday.

As this set of musings winds down, I will continue to write the Forward Slash / Health weekly newsletter, which you can find back there at that link. This one too.

There, I write about the finance across the spectrum from solo practice to bustling ASCs and community hospitals.

I also wanted share what I have been working towards and why these missives have not been hitting your inbox regularly.

First, we are building a product to help practices and hospitals run with more financial clarity. It’s called the Forward Slash /CFO (I know, I am so good at naming things).

It is a platform that will unify your financial views and give you the ability to implement financial and managerial accounting in your practice. Whether you are a solo doc or a large multispecialty, multistate group.

It will allow you to build budgets, track variances, manage expenses, view CPT level profitability, forecast cash, and more. All without spending 7 hours every week pulling together 19 different reports and still not getting it quite right.

You can learn more about it here: Forward Slash /CFO.

Second, we remain committed to helping doctors launch practices. It’s been such a privilege to help launch practices across multiple sates and specialties.

Lastly, we are a full revenue cycle outfit. We have a crack shot team and love nothing more (as you might surmise) than to wrestle money from insurers that they already owe you.

As you can see we are deep in the finances, which has led naturally to our building of the Forward Slash /CFO.

I can’t wait to bring this product to practices and watch it transform financial insights and management, putting more power back in the hands of those closest to patients.

If you have any questions about that product launch, which is happening January 7th, what else we get up to at Forward Slash / Health, or anything else, just reply.

I read it all!

So for now, thank you for reading The Healthcare Breakdown.

We may cross paths again through this forum, but for now…

See you out there!

Why it matters: Health systems are financial institutions because they have to be, this is why

Read time: The time it takes to decide on a Netflix movie (6 minutes for real though)

Ok, this may be a slightly different episode. A little philosophical perhaps. Mostly because I am not necessarily a systems expert, don’t have the data to completely support what I am going to type-say, and also because if it is long winded and slightly hard to follow, then it must be philosophy.

The health system as it stands today, is a sub-system of something much larger.

You all know it. Some of you love it. It’s our economic system.

There are other systems at play including political and societal. We are going to focus on the economic system, because I could argue that the other two design and influence this system while it has the most salient impact on the healthcare system.

Also the fact that the political system designs the economic system therefore is inherent within it.

See, told you. Philosophy.

Here’s the crux of the matter, we have some version of capitalism in the United States. I can’t really call it pure capitalism, because it’s not truly a free market, considering the regulations in our system.

Our capitalist system sort of sets the tone if you will for any enterprise in America. That includes entities like United Healthcare and CVS, but also Kaiser, Mayo, and Southeast Georgia Medical Center.

Let’s look at “payers” for a moment. These are by and large publicly traded entities who’s sole purpose is to maximize shareholder value. Say what you will, but when shareholders can sue the company they own for poor business decisions that impact the money it makes them, profit maximization becomes the only purpose of the company.

And just look at UHG, they aren’t doing too bad at it.

These companies arguably sit at the top of the pecking order. Deciding how much we all end up paying for healthcare access and how much our wonderful clinicians get paid.

Good for them I guess. But then here’s where it all gets weird and worse. I mean, the insurance thing is bad, but at least it’s obvious. These are for-profit companies that are publicly traded. We shouldn’t expect anything else.

Health systems on the other hand, we do and should hold them to a much higher standard. Most systems and hospitals are non-profit, or more appropriately, tax-exempt.

So, in exchange for not paying taxes, they are to give back to the communities they serve. Part and parcel is the fact that health systems are legally obligated to care for anyone who walks through the door. We all see it and understand it at face value. It’s great.

But, if you have read this newsletter you know there is always more to the story. Multi-billion dollar health systems with private planes, investments in the Caymans and Saudi Arabia, pouring billions into Private Equity, earning revenue from tax-exempt land used for non-healthcare related activities, I could go on.

Here’s a picture though in case you think I am wearing a tinfoil hat right now.

Here are some investments:

Here’s Atrium:

Here’s Mayo:

But, honestly, look at the system they are in. The capitalist system.

The financial design of the system has turned what should be a largely altruistic service, one designed for public good and societal benefit and forced it to act like a financial institution.

Along side the requirement to generate returns for the system, at the heart of that paradigm is the hospital revenue bond.

For a hospital to grow, to compete, to negotiate meaningfully with private, profit driven “payers” they have to have access to capital. Because there can be no investors and not public offering, they issue debt in the form of bonds.

But debt isn’t just a loan out of the goodness of someone’s heart. It is an investment.

Most larger health systems carry billions (that was a “b” back there) in bond liabilities.

Here are some:

That’s like $26B from 5 health systems.

And real quick…

Bonds – a super brief primer

Bonds are debt that a company issues. Non-profits use bonds because they can’t issue stock. It’s how they raise money from investors.

Health systems issue Hospital Revenue Bonds, which are a type of municipal bond. Municipal bonds are tax free. That means that bond holders, the people buying the bonds, are not taxed on the income they earn from the bond.

Real quick side bar, just because you read the part too fast. The bonds that health systems issue are more often than not tax free for investors.

Ok, back to it.

The bond issuer (the company), pays interest to the bond holder. Just like any other debt.

That’s the long and the short of it. No time for how bonds work after market… call your local investment banker for that one. Plus, I’m not over here tryna give investment advice. My cousin Rick is still pissed about the tip I gave him in 2008…

And while this may look like an obsessed love affair, it’s more like an arranged marriage.

Why arranged? Well, frankly, what choice is there?

Say a hospital wants to build a stunning 16 story surgical tower so it can attract all those saucy commercially insured patients for some highly profitable cardiac surgeries.

Well, unless Daddy Warbucks was delivered at your hospital, chances are you ain’t got the $600M to build the thing.

With all these bonds flying around, hospitals need to play the game. And the game is a bond rating. The rating indicates how likely they are to pay what is owed on the bond.

You’ve probably heard of Fitch and Moody’s. Those are the rating folk.

Here is Moody’s rating criteria for hospital revenue bonds:

See anything about patient safety? Patient outcomes? Quality of care? Patient satisfaction?

No.

And why would you? We are talking about finances, investments, and money over here people!

Not that one doesn’t drive the other in my opinion, but no one asked me.

So now we have this wonderful cycle we’ve created.

Hospitals want to expand, buy stuff, build stuff. They also need to have leverage and market power to negotiate with terroris, I mean insurance companies. To do that they issue bonds. To issue bonds, they need a high rating. To get a high rating they need to do well on the rating criteria.

Naturally the focus then goes to finances. Often at the expense of what’s really important.

But back to the point of this missive, this as a macro level systems issue. Hospitals and health systems HAVE to operate like this. It’s the way the system is designed.

Individual motivation, compensation, board seats on your buddy’s company aside, what are we asking when a hospital needs to expand service lines and grow?

We talk about public and community need, but then shift all the responsibility to a private entity to serve those needs with little to no oversight. Along with all the responsibility to operate in a highly complex, financially challenging industry to that entity.

There is little to no planning at county, state, or federal levels.

Imagine a world where we had all the healthcare services we needed, which were appropriately matched to the needs of the communities being served.

If that were happening, a hospital wouldn’t need to issue $139M bond to be used for who knows what, fighting for patients in the name of growth, profitability, and pleasing investors.

Oh wait, I know what that money is going to be used for…

Remember, market position is the highest weighted category for a high bond rating.

My point is, when you place to entire onus on private organizations to grow, serve, flourish, whatever, within the capitalist, profit driven system they operate within they are going to use the means they have. Those means are debt, investments, and operating with financial interests first. They are playing the game.

Bonus feature, now that you know a thing or two about bonds you don’t have to avoid that cousin who’s a bond trader at J.P. Morgan. I mean, you probably should for other reasons, but not about the bonds anymore.

Cheers to you both!

Why it matters: These dynamics are making healthcare less accessible, less independent, and more expensive (you’re shocked, I know)

Read time: The last 6 minutes of your drive back from the lake last weekend that took 86 minutes (7 minutes for real though)

Oh, hi. Missed you too.

I thought it might be nice, since we haven’t seen each other in a while and you are enjoying that lovely mimosa to talk about why all our awesome doctors seem like they are riding the express lane to health system employment. And because of that, why it’s hard for independent practices to hire those bright-eyed bushy tailed newly minted physicians.

You may also know that I have this thing about independent physicians. About happy physicians. About patients getting the care they deserve and allowing their doctors to truly be in charge of that care.

Call me a hopeless romantic.

Here’s a chart we all know and don’t really love:

The question is why? Why are we seeing employment continue to rise?

Another question is what does that mean for the profession overall and specifically my dudes in independent practice?

Most importantly, what are we supposed to do about it?

Well I have some ideas on all of the above since I’ve been at the dock of the bay for the last four months, thinking about this moment. So, let’s get into it.

First, why?

There are a couple of reasons, three big ones in my opinion.

1. The pipeline

Let’s do some fun math real quick. It’s why you’re here after all. That, the jolly humor, and to make a drinking game out of spotting grammatical errors.

Layup.

This is for my cardiology friends out there holding it down.

Between medical school, residency, and fellowship, a cardiologist is about 10 years deep past undergrad and has a fat negative bank balance of about $331,000 according to a random statistic I found on the internet.

Now, the good news is according to some other random internet facts the national average salary of a cardiologist is about $525,000.

Solid.

While that salary is nice, don’t forget all that debt to carry.

I also want to pause here before any of you out there dutifully reading about to decry the amount of money a doctor makes, may I just remind you that physician pay only represents about 9% of total healthcare spending.

Also, consider that these people literally save lives everyday, so the value tradeoff definitely seems to be there.

Sorry, tangent concluded. Don’t come at me.

If we play out the debt equation on a standard, non-refinanced loan at 6.8%, this genial cardiologist is on the hook for about $690,000 in total loan payments over the course of about 25 years.

Just think about that for a minute.

That’s a lot of quiche. And sure, she may be earning a lot, but paying over 2x a loan amount, trying to also make up for the income you had to forgo for 10 years is a deep hole to climb out of.

Not to mention that workload, admin load, moral injury load, and generally the load that our physicians take on a daily basis.

Here’s the kicker. This scenario plays out differently in different settings.

While this scenario may be true in private practice, or a large medical group, things change if you look into the non-profit sector.

Certain positions in large non-profit institutions may also come with loan forgiveness. Whether in the form of signing bonuses, stay bonuses, direct loan forgiveness, or eligibility for Public Service Loan Forgiveness. And while you may not make as much on an annual basis, total payments before loan forgiveness may be as low as $120,000.

That’s a $570,000 difference in payments and decades of time off a loan term.

So, just imagine, you have been grinding for 10 years at one hospital, staring down the barrel of nearly $700K and 25 years of payments, and that hospital sits you down and offers a sweet deal worth over a half a million dollars. What are you gonna do?

Not just that, what options do you think you have?

Because realistically, if you turn to the private practice route, there just isn’t necessarily the same scrooge McDuck money vault swimming pool filled with 340B, private equity, facility fee, and uncontrollable contract rates allowing them to subsidize these a $525,000+ salary, knowing how much return they will be able to make off a single specialist in their system.

Spoiler, it’s about 6x.

If you weren’t defeated enough (I know it’s kinda my thing), let’s move on to the next reason.

2. Insurance is effing around and finding out

All right, let’s give our poor fresh fellows a break. What else is drives the employment model?

Insurance. Duh. It’s always insurance.

When a company can unilaterally control the fees paid to a physician practice and predicates those rates on size, where does that leave most independent practices?

At the mercy of 100% Medicare rates from 5 years ago. And in some cases, 85%. Thank you sir may I have another.

We will leave this discussion for another issue, but know that this unfounded leverage strategy makes no practical sense other than to help line the processors’ pockets and help drive consolidation.

And finally!

3. The exit

Here’s another big one. Imagine you have worked for 30 years, building your practice and feel like you are ready to finally take that trip to Italy you have always dreamed of. But that Lake Como life costs $4,000 a night.

Listen, I am all about wandering around the Italian country side finding a passable hotel with 2 stars, hoping they have a room, and then toughing out the lack of air-conditioning taking turns with you buddy Dave for who has the bed that night, but sometimes you gotta treat yourself.

Not to mention that after that trip, you want to slow down and maybe think about riding off into the sunset of retirement.

So the question becomes: who’s buying?

Your junior partners? How much money do they have? Do they want to run a business? Do they know how?

The health system? They have the vault and all…

Barron and his dad’s private equity group? Everyone hates them, but they’re also cutting 10x EBITDA checks.

These are real issues all reshaping the dynamics of healthcare delivery. All with different calculations, earnouts, restrictions, preferences, requirements, and side effects. But you better believe that it is going to be hard for anyone to turn down the “big payday” from PE or from a health system.

That too is a discussion for another day, as there are about 39 ways they will make the deal look really good and somehow your $10M payday turns into $1.5M. And sometimes your $1M payday turns into you owing money.

Seent it.

Knowing there may be less upside based on loans, instability from being at the mercy or insurance, and a potentially limited long-term path to ownership, it’s not much of a wonder as to why the pipeline is dry.

Okay Debbie downer, what then? Because it seems like the pipeline is broken, not just dry. And even if you do go that route, it still seems like all roads lead back to consolidation.

So glad you asked, thank you. I knew I liked you.

Let’s back it up to the health system.

How do they get that juicy 6x return on salary? Sure, it’s the direct contribution of the physician and making most of your money on facility fees. But it’s all the other things they can make as a result of having a patient stay in their system. MRI, CT scans, procedures, drugs, and yes, more facility fees.

All the dollar signs.

The issue is we have been playing the wrong game.

The game isn’t salary. The game is ownership.

The path is building something.

It’s easy, and don’t get me wrong, important, to talk about, fight for, yell into the void about reimbursement.

But the bigger opportunity and what is going to move the needle is ownership.

Own the ASC. Own the OBL. Own the imaging equipment.

Participate in the fees where CMS and processors are paying the most. Direct contract. Get into value based arrangements after you are positioned to own as much of the continuum for the patient as possible.

Rheumatologist should provide infusions. Ortho, interventional cardiology, urology, go get involved in an ASC. Build one. Invest in one.

Find a physician owned hospital and get in there.

Hospitals and private equity play the game. They own as much as possible.

Now that I have type ranted a little, let’s go back to the pipeline, because realistically ownership isn’t easy. It’s hard, but the payoff is worth it.

But even if you buy it, we are still missing a couple of key ingredients. Like pizza without the sauce and cheese. Bread, that’s just bread.

First, it’s the education. They don’t teach you business in medical school. They don’t teach it in residency. And they definitely don’t teach it in fellowship. In fact, I would argue that it is detrimental to hospitals to have their doctors exposed to business.

Why?

Because then physicians could see that they are getting a short term, decent deal, but long-term raw deal. That the hospital is profiting disproportionately off of their hard work.

Remember: no doctor, no reimbursement. No facility fee. No contract rates.

And big love to every clinician on the team making it happen.

Second, they don’t get shown the outcomes. That at the end of a 30 year career, one which you were in charge of, owned your patient relationship the whole time and unequivocally, were in control of your time, and at the end owned several valuable assets.

We don’t see that outcome enough. But it is out there.

The flip side of that? The worst case scenario… the health system never stops hiring doctors.

So, yes, we have a people problem in healthcare. But really it’s a math problem. Large institution employment makes healthcare more expensive and less accessible.

Independent ownership, makes it less expensive and more accessible.

It’s up to us to show the pathway and the upside.

See you next time!

Here’s what I just said in one sentence: The current financial incentives and economic realities make employment more appealing, while undermining the long-term viability of the practice of medicine. The path forward is physician ownership and better pathways towards that end.

Sorry, for the extra sentence.

It felt important though.

Love you.

Why it matters: This could represent a defining moment where employers are forced to stop enabling the rising costs of healthcare

Read time: About as long as it takes to get to the center of a tootsie pop (9 minutes for real though)

Hello wonderful humans who love understanding the morass of the healthcare industry. It’s me, Preston. Could you tell?

Today, outside of this little intro, I won’t be talk writing.

Today’s episode is brought to you by someone much smarter, with wildly better grammar than me. She is an attorney, consultant, speaker, truth teller, disruptor, and thought leader.

I am talking about the one and only, inimitable, Chris Deacon!

Follow her on the Linky Land and stay tuned for her book coming out soon! Not only that, her daily posts will help you understand the latest developments in healthcare from the ever important legal perspective.

Also real quick, here’s a little primer on some key elements of today’s episode:

ERISA - Employee Retirement Income Security Act of 1974. This act is supposed to protect the financial interests of employees and beneficiaries of employer retirement and health plans. Key elements include: fiduciary duty, coverage, protection of plan assets, and disclosure.

Fiduciary - This is a legal and ethical obligation to act in the best interest of a beneficiary. It’s also real easy to make immature jokes about, but I will refrain.

The Consolidated Appropriations Act of 2021 - a run of the mill $2.3T spending bill that included some key evolutions in healthcare including price transparency, limitations on gag clauses, elimination of surprise billing, and increased fiduciary responsibility for employer sponsored health plans.

With these items in mind, there has been a recent spate of lawsuits whereby employees are claiming their employers are breaching their fiduciary duty (so hard not to…) by paying inordinate prices for coverage.

Without further ado, enter the real brains of today’s episode, Chris Deacon!

Follow her already!

Almost three years ago, I was among the first to publicly predict a wave of ERISA fiduciary litigation aimed not just at 401(k) plans, but at employer-sponsored health plans. The Consolidated Appropriations Act of 2021 had just been signed into law, and it was one of the first congressional acknowledgements that group health plans—routinely the second-largest line item on an employer's income statement—demand the same level of oversight, prudence, and fiduciary care as retirement plans.

Back then, I imagined a near-immediate reckoning. I assumed general counsels and CFOs would begin poring over plan documents, PBM contracts, and data use agreements, asking hard questions about pricing, conflicts of interest, and whether they were truly operating in the best interest of their plan participants.

But unlike most politicians, I can admit when I’m wrong. And boy, was I wrong—at least about the speed.

That reckoning hasn’t happened at scale. Many C-suite leaders remain hesitant, disengaged, or overly deferential to their benefit consultants. And frankly, it’s not hard to see why. Many of the consulting firms most employers rely on for compliance guidance, strategic direction, and fiduciary insight are featured prominently in the allegations of these lawsuits—not as named defendants (yet), but as enablers of the very conflicts and overpayments at issue. So, it’s no wonder they’re not pulling the fire alarm.

If your consultant is a central figure in the alleged wrongdoing, they’re unlikely to wave the red flag and tell you to lawyer up. And yet, here we are. With three high-profile fiduciary lawsuits against household-name employers winding their way through the courts, the business of health benefits has never felt more exposed.

The Big Three Everyone is Talking About: Wells Fargo, Johnson & Johnson, and JP Morgan Chase

Over the past couple of years, three lawsuits have sought to hold large employers accountable under ERISA for the way they manage their pharmacy benefit plans. The core allegation is the same: that plan sponsors failed to act as prudent fiduciaries, resulting in higher costs for employees and the plan itself.

But while the facts are striking, the legal pathway is steep—and the procedural posture of these cases reveals just how hard it is for plaintiffs to establish the standing necessary to get their day in court.

Navarro v. Wells Fargo: The High Bar of Article III

Let’s start with Navarro v. Wells Fargo, filed in August 2024. Plaintiffs, former employees, alleged that the company’s health plan grossly overpaid for certain prescription drugs by selecting Express Scripts as its PBM without a competitive bidding process. The complaint cited drugs that cost the plan over $1,800 per fill when retail pharmacies could acquire them for less than $100.

And yet, the court dismissed the case—not because it found no wrongdoing, but because the plaintiffs lacked Article III standing. In short: the court held that the plaintiffs could not show a concrete injury directly traceable to Wells Fargo’s alleged mismanagement.

Why?

Because the plan operated like a defined benefit plan. Participants were promised access to a defined set of benefits, not cost savings. Even if Wells Fargo overpaid for PBM services, the court reasoned, there was no guarantee those savings would have been passed along to the employees in the form of lower premiums, co-pays, or deductibles. Absent a more direct harm, the injury was deemed too “speculative” and “conjectural” to meet constitutional standing requirements.

In other words: bad PBM deals don’t automatically equal standing.

Lewandowski v. Johnson & Johnson: A Tactical Amendment

Johnson & Johnson was hit with a similar complaint in early 2024. The plaintiff, Ms. Lewandowski, alleged that J&J breached its fiduciary duty by allowing its PBM to overcharge for drugs. The court acknowledged that she may have paid more than necessary, but because she met her out-of-pocket drug maximum each year, any overpayment ultimately accrued back to J&J, not to her. So, she too lacked standing.

Rather than appeal, plaintiffs went back to the drawing board. Just last month, they filed an amended complaint—adding more factual allegations to support the claim that overpayments led to suppressed wages and increased premium contributions. They also added a new named plaintiff who did not reach their out-of-pocket maximum, in an effort to avoid the standing trap that tanked the first round.

That amended complaint is now pending. J&J will almost certainly move to dismiss again, likely pointing to the Wells Fargo ruling as persuasive authority. The question now is whether the court will see the new facts as sufficient to establish standing, or if it will continue to hold the line on what constitutes a redressable injury.

Curtis v. JP Morgan Chase: The Expansive Complaint

Then there’s the newest—and arguably most aggressive—complaint: Curtis v. JP Morgan Chase, filed in March 2025. This lawsuit mirrors many of the themes in the Wells and J&J cases: overpriced drugs, failure to supervise PBMs, and plan participant harm. But it also goes further.

Plaintiffs allege that every generic drug in JP Morgan’s formulary was overpriced. They point to Hyrimoz, a biosimilar to Humira produced by CVS (Caremark’s parent company), as an example of a conflict-laden selection. Several lower-cost biosimilars were excluded from the formulary entirely, which plaintiffs argue was done to preserve a business relationship between JP Morgan and CVS—one in which JP Morgan reportedly earned millions.

Most interestingly, this complaint introduces a new fiduciary theory: that JP Morgan knew better and still failed to act.

The complaint cites JP Morgan’s active membership in the Pacific Business Group on Health (PBGH) and the Health Transformation Alliance (HTA)—organizations that have published clear warnings about the dangers of traditional PBM models. The plaintiffs argue that by knowingly ignoring best practices promoted by the very coalitions JP Morgan belongs to, the company breached its duty of prudence and loyalty.

It’s a novel theory—and potentially explosive. If courts accept the idea that knowledge of better strategies creates fiduciary liability, the floodgates may open.

That said, I predict courts will be cautious. Knowing a better path exists is not the same as acting imprudently. There’s still the question of market realities, labor contracts, cybersecurity needs, and the dozens of other factors employers must balance when selecting a PBM. Whether a judge will credit those constraints or deem them insufficient remains to be seen.

The Real Challenge: Constitutional Standing

Across all three cases, the common hurdle is Article III standing—a constitutional requirement that plaintiffs show an actual injury that’s concrete, particularized, and redressable.

This is where health plan litigation diverges from the 401(k) wave. In retirement cases, it’s relatively straightforward to show that excessive fees reduce investment returns. But health benefits are far more complex. Plaintiffs need to show not just that their plan overpaid—but that they personally suffered financial harm as a result.

That’s not impossible. The “perfect plaintiff” would likely be a current employee, in a high-deductible health plan, with evidence (EOBs, receipts) that they overpaid for drugs compared to market alternatives; backed by actuarial reports showing that different PBM models could have saved money, and; documentation that their premiums or out-of-pocket costs increased due to rising plan costs. When 90% of Americans have a hard time understanding the difference between co-payments and co-insurance, this seems like a tall task.

But given the magnitude of the value these cases hold for enterprising attorneys and plaintiffs alike, I believe strategies will be revised and refined—the bar may eventually be met.

A Legal and Cultural Inflection Point

The legal landscape remains fluid. The U.S. Supreme Court’s ruling in Cunningham v. Cornell University simplified pleading standards for prohibited transaction claims, potentially lowering the barrier for future ERISA cases. Meanwhile, Congress continues to scrutinize PBMs, and a handful of states have gone further—passing laws that actually designate PBMs as fiduciaries under state law. Combined with regulatory implementation of the Consolidated Appropriations Act and increasing state-level enforcement activity, we may be approaching a new era of accountability.

Or maybe not.

The pace of change is still uncertain. Litigation alone, as we’ve seen, may not be the accelerant we once imagined.

I’ll be the first to say it: I was wrong.

I once believed the threat of litigation would be the wake-up call—the thing that finally forced employers to pay attention to what was happening under the hood of their health plans. That fear of fiduciary exposure would drive scrutiny, reform, and better deals for employees.

But I don’t think that anymore.

I think the real catalyst will be discontent. Not from judges or regulators—but from plan members and employers themselves. People are angry. They’re tired of getting fleeced, nickel-and-dimed, and gaslit into believing this system is the best we can do. They’re watching drug prices skyrocket, premiums devour raises, and TPAs treat their data like proprietary secrets. They're watching their consultants and carriers grow richer while their employees skip care.

And yes, in tragic and extreme cases, like the recent murder of UnitedHealth’s CEO, we’re reminded that the disillusionment with the system is no longer abstract—it’s palpable, volatile, and dangerous.

Employers don’t need to act out of fear of lawsuits. They should act because it’s the right thing to do. Because their employees deserve better. Because they’re mad as hell and aren’t going to take it anymore.

And if that anger is what finally brings the change we’ve long needed in this space?

Then maybe I was wrong for all the right reasons.

Told you Chris is awesome sauce.

Oh, sorry, it’s me. Preston again.

Go connect with and follow Chris!

See you out there!

Why it matters: Because they are whack, and shocker, lead to higher costs and less doctors

Read time: The time it takes to actually cook dinner. No it’s not a 15 minute recipe Ina. (9 minutes for real though)

Here’s the crux:

Doctors are underpaid for the value they deliver in healthcare. The rising costs are made worse by the payment mechanisms. Those mechanisms drive the economic outcomes of the system. The economic outcomes of the system are too expensive for the value that patients and doctors receive.

This episode is brought to you by the good people at Forward Slash / Health. And their new unbeatable offer for independent physician practices!

Schedule a quick call and see if you are a good candidate for a free top to bottom Financial SOAP of your practice. Get an analysis, evaluation, and recommendations on 4 key elements of your practice.

1. Operations

2. Financial performance

3. Revenue Cycle Management

4. Business model and strategy

This goes deep.

The best part? It’s free and yours to keep.

No obligation at all.

Only 4 spots for April.

Clicky click below to see if you’re a fit:

The clicking part

Here’s the fun part:

All right you boat shoe wearin, gold chain danglin, fist wagging, Wall Street Journal reading fiscal conservative but social liberal. Let’s talk economics.

The economy is largely based on simple principles. One being supply and demand. Another being price elasticity. And another being value exchange. I suppose we could bring in market structure too.

You may be asking, how did all this come about? Well, while I should have been working, it was scrolling on professional Facebook and came across an INCREDIBLE interview with the one and only King Maverick Emeritus (Mark Cuban) and Dr. Graham Walker.

What got me is when Marky Mark said while it costs $25,000 for a heart transplant (heh, he’s been slingin low cost drugs for too long and forgot how much this stuff actually costs), the doctor only makes $2,500.

He goes on to say that the doctor should be paid $10,000 for the procedure!

And I agree. Totes. I want my doctor to be paid a bucket load and not have to do tons of cases a day to keep the lights on. I don’t want them charting on the weekends, pulling 24 hour shifts, and making pennies while taking call.

But, there is more to the story. Let’s look at the detailed breakdown of what Maestro Cuban is talking about.

First, a heart transplant doesn’t cost $25,000. Maybe in Turkey. I don’t know.

According to this Journal of the American Cardiology College (JACC) article, here are some costs of a heart transplant:

Median Medicare: $216,927
Median Commercial: $418,997
Median Chargemaster: $935,473

If you want more info on the whackado chargemaster, we wrote about it here.

Ok, so CONSIDERABLY more expensive than $25K.

But here’s the real kicker.

Surgeon reimbursement is based on CPT codes. The Heart Transplant CPT is 33945.

33945 in Atlanta reimbursement: $4,717.34.

Oh, thank my lucky stars for that 34 cents!

To be fair, that million dollar heart transplant you just got isn’t like a quick stay. You are in the hospital for the better part of a month. ICU. Tons of nurses. Constant monitoring. All the drugs. A new heart for crying out loud. Not cheap.

The purpose of this illustration is less about the total cost, but an indication that payments seem to be unbalanced. Though I may argue that a heart transplant isn’t the best example.

Let’s look at one more. One that comes up always and is important for all kinds of reasons.

The knee replacement.

We’ve been looking at this thing economically for decades. And don’t worry, I haven’t forgotten about the economics piece. Just laying the foundation.

So, for a knee replacement, here are some thing to Big League Chew on.

According to this article in the Journal of the American Academy (way fancier than College) of Orthopedics, here are some costs:

Mean Medicare: $11,828
Mean Chargemaster: $85,115

Full transparency. I don’t love this article. There are some typos (I expect way more from the academics than from my own grammatical and spelling capabilities). It doesn’t look at commercial rates. And the info is from 2018. But I am about those back links and this still gives you an idea of what’s what.

These days, Medicare is paying around $13K to the hospital. Surgeon reimbursement?

$1,272.63.

All right, but we still have two things to talk about.

One, what are these numbers based off of?

Two, is you said we were going to talk about economics!

I am trying to sprinkle a little fairy dust here! I am setting a scene. Don’t yell at me!

First, all of these payments are based on several payment mechanisms.

1. The Physician Fee Schedule (PFS).

2. The Inpatient Prospective Payment System (IPPS).

3. The Outpatient Prospective Payment System (OPPS).

And to get these payments wrong, we use something called CPT codes, which are part of HCPCs codes, MS-DRGs, and APCs.

I am sorry. I hate me too.

But, it’s important to understand since everyone is always prattling on about facility fees. Well, here we are.

Let’s do a quick overview, since either we have been talking for like an hour, or this is just taking forever to write.

Physician Fee Schedule

I hate the name because it makes people think this is what doctors are paid. It isn’t. This is what is reimbursed based on the particular procedures or services provided by a physician.

Remember that forty seven hundo the surgeon gets paid for the heart transplant? If they weren’t paid a salary by the hospital, they would only have that much money to pay all practice expenses.

It’s revenue, not salary.

We’ll come back to this.

The PFS uses CPT (Current Procedural Terminology) codes. Each CPT code has a reimbursement amount assigned to it. If you want the breakdown on where those rates and what even the heck an RVU is, check it out here.

Looking to keep your practice not only afloat, but thriving, growing, and wildly financially successful?

Get one of the last 4 spots for a Forward Slash / Health Financial SOAP for a full practice performance analysis. Totally free!

Schedule your call

Inpatient Prospective Payment System

The IPPS is based on MS-DRGs (Medicare Severity Diagnosis-Related Groups). There are rates associated with each DRG. Then, there are calculations made that depend on various factors within each hospital using the DRG rate.

Those calculations will account for room and board, overhead, disproportionate share, cost ratios, all the good stuff.

As you can imagine, hospitals spend a considerable amount of time figuring out how to justify these numbers to get their rates as high as possible.

Outpatient Prospective Payment System

The OPPS is similar to the IPPS. You can think of them as effectively the same. The difference is instead of being based on DRGs, it is based on Ambulatory Payment Classifications (APCs).

Again, similar to the DRG, but takes different factors into consideration. These factors have to do with the clinical setting and all the costs and overhead the facility incurs.

Hospitals are more expensive than outpatient facilities because there is a 24/7 ER among other things.

And one more little bonus feature, the Ambulatory Surgery Center (ASC). Obvs. P.S. you should totally open one. Forward Slash / Health can help.

Ask how they can help

ASCs are typically paid at lower rates if they are independent from a hospital. When a hospital owns one, it can apply full OPPS rates versus the discounted ASC rates.

Ok, that was a lot. And this is a lot of words with less numbers. But we still have a little ways to go, so stick with me.

Refill your Big League Chew.

The golden nugget in what I just did a poor job explaining, is the professional fees versus facility fees.

Promise we are super close to tying this to economics.

The IPPS and OPPS are designed and necessary to cover a facility’s cost. It’s expensive to run a hospital. Hospitals need that paper. And they certainly aren’t covering the cost of a heart transplant on $4.7k.

These are the facility fees you hear so much about. Naturally, they are way higher in a more expensive facility, i.e. hospitals.

The rub is that so many of these procedures can be done in different, lower cost settings. The other rub is a big part of the reason they aren’t is because the lopsided nature of the payment systems.

Listen, a hospital needs a booty load of money to give you a successful heart transplant. But there is also zero ways a surgeon can run a successful practice getting $4,700 per transplant. You can’t do 12 in a day.

So what happens? The hospital employs the surgeon, pays them $800,000 a year and then its overhead goes way up.

And I think it’s important to say this here: IT IS NOT PHYSICIANS’ FAULTS THAT COSTS ARE GOING UP!

Sorry for type yelling.

That’s a big salary. But remember how much the hospital makes off of the surgeries that physician brings in. All wrapped up in those facility fees. And not nearly enough in the professional fees to run diddly squat.

See the dynamics?

The total knee example also give some additional perspective here. Because while you need a heart transplant in a hospital, you don’t need a knee replacement in a hospital.

But, hospitals keep buying ASCs or building them and then charging higher facility fees. And the independent physicians are having to up their productivity because CMS keeps lowering the PFS.

Mark is definitely right. I also want the doctors making WAY more money per procedure. But it isn’t the whole story. The whole story is worse and leads to ever rising healthcare costs.

Ok, now that I have been typing all day, here’s the economics part. Real quick.

Health systems benefit from Oligopoly market structures. Meaning few firms in a market. That drives consolidation and raises costs as competition is reduced. Health insurance companies do the same, though their goal is to lower THEIR costs, by paying less to the folks actually delivering healthcare and shouldering real costs.

So, then it seems that competition, naturally, is the answer. Yes and no. Knees? Yes.

Heart transplants, cancer, heart attacks, trauma? No. You can’t shop healthcare when you’re dying.

MRIs? Yes.

It’s a mix then. And market structures play a big role in the healthcare economic landscape. But we have to consider price elasticity. You will pay ANYTHING you can to live. So price becomes irrelevant. Hospitals know that.

In terms of supply and demand we are effed. Demand is increasing. Supply is decreasing. Doctors are in short supply. Nurses and all other clinicians too. Why?

All that junk I just talked about up top. Also the unrelenting moral injury.

Also this: value exchange.

Sure, give the hospital $200K for my new heart. But $4,700 to the surgeon?

The surgeon who took my beating heart in her hands, cut it out of my body, then put a new beating heart into my body in one of the most complicated biological systems on the planet, all while keeping me alive.

That’s $4,700?

The value equation is broken. All of these elements are coming together to break the system. And not in a good way like a Kit-Kat bar. In a really dangerous way. A way where we aren’t able to carry on this way much longer.

Good talk.

Here’s what I just said in one sentence:

Physicians are the value driver in healthcare delivery but do not earn the commiserate value exchange, therefore exacerbating the economic breakdown of the healthcare system.

Want to make the economics of healthcare work for you instead of constantly against you? Take you practice to the next level.

Grab your spot now before they’re gone.

Talk to those handsome devils

Why it matters: UHG is the largest healthcare company in the world and they control access and the cost of healthcare for over 100M people… so ya, it matters

Read time: The best scene in My Cousin Vinny, so all of it (9 minutes for real though)

Here’s the crux

UnitedHealth Group is the 8th largest company in the WORLD. It control access to healthcare for over 100 million people, showing no signs of slowing down.

And unfortunately, people with UHG coverage or are in-network physicians often feel like a deer in south Alabama drinking from a little brook. BAM!

It’s financial prowess is underscored by its devious practices that directly impact patient lives. Understanding the financial picture, how the money flows, and where the company is going will help to elucidate issues with the system and possible uncover opportunities.

Here’s the “fun” part

Let’s start this party off with a good laugh. According to UHG’s 10-K, this is the business UnitedHealth Group would have you believe they are in:

“UnitedHealth Group Incorporated is a health care and well-being company with a mission to help people live healthier lives and help make the health system work better for everyone. Our two distinct, yet complementary businesses — Optum and UnitedHealthcare — are working to help build a modern, high-performing health system through improved access, affordability, outcomes and experiences for the individuals and organizations we are privileged to serve.”

No, no. I know. It’s hilarious.

And, since it’s hard to keep up with all the business UHG does do, here’s a little overview:

UnitedHealthcare = individual, employer, Medicare, and Medicaid insurance
Optum Rx = PBM and specialty pharmacy
Optum Insight = Change healthcare and analytics
Optum Health = Care delivery employing over 100,000 physicians and a bank (ya, a bank)

Cool, now that we know generally what UHG is up to, how they doin over there?

Not too shabby although I am sure Sir Witty would like to see better than flat returns. It has outpaced the so called S&P 500 Health Care index. Basically a more apples to apple situation to make UHG feel better about itself.

That’s more than half of the work that UHG does by the way, making it feel better about itself.

Now that we have an overview of UHG, let’s dig into the numbers to see what these two yutes have been up to, shall we?

Naturally, Balance Sheet first:

Oh, look at that, UHG is rich AF and has all the money. More shocked than Ralph when he got popped on murder one when all he did was cop a can of tuna.

And just because UHG has any Goodwill at all, let alone $107B worth of it, there is more to the balance sheet story.

Liabilities:

After all, UHG does provide, health insurance? Whatever that means. So naturally, we need to scrutinize the liabilities to see 1 of 2 of the biggest heists in the UHG (and all US vertically integrated alleged payors) playbook.

The float.

We see that UHG has $86B in current assets. It also owes $104B in current liabilities.

If you are a graduated master of my Healthcare Breakdown - The Finance Course!, you know this is all kinds of a red flag for the liquidity of the company.

But, this is an insurance company. Meaning, that while they do owe those medical costs payable, that’s other people’s money. In other words, that cash shows up as a liability that is owed, but currently UHG is holding all of that money since you have already paid it in premium dollars.

In other, other words, UHG uses your money to make itself rich AF.

So, I guess we were right to assume the rich AFness in the beginning.

Float, by the way, is what made Warren Buffet so rich. He owns Geico and when people pay their premiums, Warren takes them and invests those dollars. They are recorded as a liability, but all the money made off those liabilities go into his tiny pockets.

But, enough about the float. If you want more, you can read it in past issues here.

Let’s see how UHG makes all it’s cash in the first place. Cuz we know it’s not by hustling J.T. at pool. That guy only has a roll of ones with a twenty wrapped around it anyways.

Here is a detailed income statement:

As you can see, I have pink boxed some interesting items. Namely that premiums have gone up, but so have medical costs. Now, this alone doesn’t tell us a lot. Because with more people served, that means more premiums, and naturally more costs.

The proportion of increase is important though. Premium revenue has increased less than medical costs. This year was “tough” for UHG having to pay for stuff it didn’t want to. There were also Medicaid redeterminations and Medicare Advantage base rate adjustments. That means more cost for UHG.

And we can see that the MCR (medical cost ratio) has increased YoY.

Maybe UHG is incurring higher medical costs. It does deny a lot of care and drives unreasonably high out-of-pocket costs landing people in the ER, which is super expensive. And maybe, juuuuust maybe there is more in that MCR than medical costs which are inflated anyways (foreshadowing).

Fun fact about medical costs. Did you know things like quality improvement initiatives count as medical costs? Whatever that means.

Bottom line, between the inflation of medical costs (more foreshadowing) and the bogus padding games UHG can play, what I see is solid positioning to raise premiums across the board.

But despite this cost increase, UHG has tightened up and fired a bunch of people to keep it’s operating margin right about 8%.

Next! The second best trick in the playbook and one of the reasons our healthcare keeps getting more expensive.

Intercompany Eliminations! He said with a booming voice. We’re that the foreshadowing part by the way.

You can read up on intercompany eliminations here if you are so inclined.

You see there that UHG eliminated $151B last year. That means, in my humble opine, it took too much money out of one pocket and put it in its other pocket.

Because the beauty of intercompany eliminations is that you can pay yourself as much as you want and still make oodles of cash. All while boosting the ole’ MCR.

Here’s a picture of how it works:

We can also see it’s significant growth of 11% YoY. So, while medical costs have increased 9%, eliminations have increased 11%.

I obviously don’t have all the detail to do a super detailed analysis, but when your eliminations are growing like this, to me it seems like a driver of costs. Not the opposite like UHG would have you believe.

Anyways, let’s take a stroll down revenue lane to see the segments and where all the scrilla comes from.

This is UnitedHealthcare revenue by segment:

Holy CMS Batman. If we look at the total portfolio, UHG earns 74% of its revenue from Medicare and Medicaid.

What that means is tax payer dollars are enriching UHG. Because last I checked and as we are about to see and have seen, UHG makes a ton of cash.

P.S. UHG exited Brazil faster than Vinny got out of town before the New York Clerk came back and was about to get busted by Judge Chamberlin. That’s what the big swing in the Global segment is. It also accounts for a significant expense on the income statement, which you may have caught.

Money is one thing, people are another.

Below is the breakdown of covered lives in the insurance business. Interestingly, the CMS covered folks only account for 39% of covered lives. Meaning a disproportionate contribution of this population in revenue compared to the amount of people covered. Translated, there is a lot of money to be made of Medicare and Medicaid.

Just so long as you aren’t a doctor or a patient.

INTERUPTION!

Whoa whoa whoa, Preston. Hold on second. We at Forward Slash / Health respectfully disagree. There is money to be made with both Medicare AND Medicaid. And we’d be very happy to show you how.

We work with private practices all over the country, helping them grow financially successful practices and stay totally independent. All while taking Medicare and Medicaid.

Just hit this link here to learn more or the button below to set up a call.

The schedule a call button

Ummmmm, that was a weird interruption. You let someone sponsor your newsletter one time and they just keep popping in unannounced.

Anyways, back to the amount of covered lives for UHG on government programs.

Finally, we come to the statement of cash flows. And a couple of interesting items.

First, Medical costs payable, as you know are premiums paid by customers, held and owed by UHG. This number has gone up year over year and represents a positive cash flow into the business.

Don’t be deceived by every liability.

And of course, over the year, UHG has pulled $24B in cash.

Sweet.

For investing, UHG does it. It has plenty of cash, using that float to buy investments to the tune of $27B last year.

And interestingly, it classified the loans made and repayments received as the results of the Change Healthcare cyber attack as investing activities. I suppose someone smarter than me can give a good explanation, but since UHG constantly has cyber incidents, I would consider this part of operations.

But I am more George Wilbur and less Ms. Vito when it comes to things like this.

Nevertheless! That cash needs to be accounted for somewhere and it is accounted for here.

Lastly, as we should all be way too aware, UHG takes your money and buys back its own stock and also pays its shareholders dividends every year.

To the tune last year of $16.5B.

Now, to be frank, it’s good business. If you feel the stock is undervalued and/or a good investment you should buy it back. And you should incentivize and reward shareholders with dividends.

So, this may be more of a commentary on the healthcare system at large (shocker, I know), but it does seem contrary to the spirit and necessity of society creating mechanisms to help ensure and supply healthcare in this country. Surely we are better and stronger the healthier our population is.

As such, while it may be financially prudent from a publicly traded, for profit company perspective, it is antithetical to a healthcare system designed to provide benefit to those which it serves.

Oh, UHG is also a bank. I said that at the beginning but you may have missed it. So wild right?

That’s part of the numbers below. Customer funds administered from HSAs and the like.

And here is how much UHG paid to buy back its stock:

Creating a ton of value for patients right?

Welp, that’s all folks!

I have a new wrap up section below. But if you are exhausted from trying to figure out my movie references and can’t fathom reading any further, just know, I heart your face.

Here’s what I just said in one sentence

UHG controls access to healthcare for over 100 million people and will continue to operate as it has for the past 60 years creating very little patient value and extracting as much as it can from the system it purports to serve.

Heart hands.

Why it matters: This program allows the rich to get richer while the poor stay that way

Read time: As long as it took Sanka to win his 7^th push car championship (6 minutes for real though)

Let’s be real for a minute. If you really want to go deep and get the real deal look at the 340B program, put down this newspaper and head to Drug Channels. Adam Fein is THE authority on drugs. Yes, even more than Walter White. Nicer too.

And since he’s smarter and more attractive than me, many of the graphics you will see in this episode come straight from the illustrious Adam Fein himself.

Ok, if you stayed to hear my take, the simpleton’s version, let’s get right to it.

Let’s start with the obvious question:

But Preston, how can it be bad for poor old rural hospitals to buy drugs at a discount from big old mean drug makers?

Well, sweet little Jason, I will tell you. But first! What even is 340B?

It’s a no longer little program that went into effect in 1992. The year before the perfect retelling of the triumphant story of the Jamaican bobsled team that forever changed the world of bobsledding, Disney magic, and lucky eggs. The program allows “covered entities” the ability to purchase outpatient drugs at a steep discount from drug manufacturers.

Covered entities used to include a very limited number of facility types that you might expect such as Ryan White centers, Federally Qualified Health Centers, tiny little, baby little rural community hospitals, and the like. Nowadays, thanks to everyone’s favorite punching bag, the ACA, the qualifications for a covered entity has greatly expanded. The darling of that expansion is the so-called Disproportionate Share Hospital (DSH).

A DSH like metro Atlanta’s very own, Wellstar. That same one that runs a $100M venture fund and bought a hospital for $800M right after closing one of two of Atlanta’s only level one trauma centers that happened to serve a low-income community.

No, no, I’m not bitter.

But you probably can start to see the issues.

And here how the program has grown in dollars, both program value and purchase price:

That’s a lotta cheese. And in fact, is now the second largest drug program right behind Medicare Part D. Ya, the big dog.

So, in 2023 covered entities purchased $124B worth of drugs for $66B.

Back to the original question of why is it so bad for hospital, even those really rich ones, to buy drugs at a discount? Especially since the drug companies can afford it? Well, sit down here on grandpa’s knee and let me tell you how capitalism works.

If my profit margin is eroded by say, mandated discounts and loopholes in a well intentioned but poorly governed program, that allows organizations like Ascension, Cleveland Clinic, and NYU Langone (Ya, that hospital that made $1B in cash and burned $8M on a Super Bowl commercial that wasn’t even funny) to buy drugs at half the price, then I’m just gonna go ahead and raise the price.

Don’t start telling me I’m wrong yet, you well educated lot. Drug companies do have to provide rebates if they raise the price of covered drugs more than inflation. Good thing drug companies don’t just make one drug now isn’t it. Also good thing that there are lots of channels in which to sell drugs.

We’re talking about the ripple effects to the whole system here.

This is the basics. When you are trying to maximize sales and profits, you look at your mix and raise prices where you can to offset lower margin drugs.

Yes, the expansion and rise of 340B utilization definitely has helped to propel the rise of drug costs.

But it’s not just manufacturers. I know everyone likes to pick on them, but don’t forget about the darling PBMs. And those lovely covered entities too.

So, around the time of the program’s expansion, the government also told hospitals that they were allowed to contract with pharmacies to dispense 340B eligible drugs. That meant that the hospital didn’t even need to touch the drug. It could just send a patient on their merry way to Walgreens or CVS to pick up their covered drug.

Or better yet, they could do a mail order script. Love those. And guess who manages all this fun?

Ya, Pharmacy Benefits Managers. And when hospitals were allowed to use contract pharmacies instead of in-house, the number of contract pharmacies exploded to over 30,000. Not to mention the over 200,000 contractual relationships between all of these pharmacies and covered entities.

OK, I know we are having more fun than a Jamaican bobsled team line dancing in Canada.

Here is how things flow when a patient who is 340B eligible gets their meds:

A simplified version of course. There are a couple more middleman missing as you might imagine, but this is the gist. What’s wild is the hospital doesn’t even need to touch the drug. Oh, and there’s more…

And again you are thinking, so what Preston pants? The patient must be getting some of that savings, right… right????

Ya, sure all you healthcare junkies. Sometimes.

Like this many times:

Ya, less than half the time.

Fun right.

What does this mean? This means that hospitals are pocketing profits and not passing along the savings to their patients. And not just the hospitals. The contract pharmacies too.

You know Optum isn’t leaving someone else’s money on the table.

Here’s one more example from the master of pharmacy himself, Adam Fein on how much profit a hospital and a contract pharmacy stand to make through this program:

Herein lies the crux of the issue. Consolidation is afoot in healthcare. Mega systems are getting super mega. And when a rich af health system buys a small little community guy, they also buy access to the 340B program. That allows them to open clinics as extensions of the little community guy and give rich white people expensive drugs that the hospital bought at a discount, but reimbursed at the full amount, then pocket the profit.

See, now that the hospital can buy drugs at half price, doesn’t mean that a patient gets the drug at half price. The plan still reimburses the full amount of the drug. The PBM takes its cut. The contract pharmacy its cut. And the hospital gets the rest. The patient and the plan still pay the full reimbursement amount.

And if I sound a little salty this week, well, sorry not sorry. We’re talking about entities making billions of dollars, invested in private equity, hedge funds, and venture capital, stashing money in Venezuela and The Caymans, flying private jets around the world, opening hospitals in Dubai, while closing them in inner cities, all while taking advantage of the very people they supposedly are on a mission to save.

But don’t take it from me, take it from the wolf’s mouth:

And that $685M in cash is with an insane $1.5B increase in A/R from their own and Change Healthcare’s cyber attacks.

The loving ministry of Jesus Christ, serving Private Equity with billions of dollars while divesting in low-income markets. Pretty sure that’s what he would have done.

Also, this is one hospital. Now, extrapolate across all the large mega systems in the US. Yes, even Cleveland Clinic. 340B is definitely keeping them afloat. Or they are for sure passing on those savings to patients… ya…

Ok, I’m going to eat some ice cream not to get this salty taste out of my mouth.

Feel the Rhythm!

Why it matters: Health insurers are denying claims and delaying payment to protect float

Read time: As long as it takes to get too full from IHOP’s endless pancakes (6 minutes for real though)

I think we can all agree, insurance companies suuuuuuuuuuuuuck. Like they really, really suck. Healthcare costs the US $5T and 5 health insurers rake in about $900B of that.

20%.

5 companies.

But first, a word from our sponsor!

As healthcare becomes increasingly consolidated, with large hospital systems and corporate entities gaining greater control over healthcare, the Association for Independent Medicine (AIM) counterbalances this trend. It champions the belief that independent medical practices — led by physicians who own and operate their practices — offer unique advantages in terms of patient care, healthcare costs, and physician autonomy.

AIM was created in 2022 to advocate for the autonomy of healthcare professionals who want to maintain control over their practice without the influence of corporate medicine or hospital systems. The organization’s mission is multifaceted: it provides resources for physicians and other healthcare professionals to navigate the challenges of running their practice, advocates for regulatory and policy changes, and fosters a network of like-minded professionals who believe in the importance of patient-centered, personalized care. Open to all specialties, AIM offers both group and individual memberships. More info can be found at www.associationforindependentmedicine.org.

DARN RIGHT! Love those guys. They’re doing great things. Call them. Like right now.

Ok, back to the rafts.

The float we are here to talk about, is insurance float.

First of all, what the heck is it? Why does it matter? And how can you get you some?

Foray one: what is it?

It’s this:

It’s also this:

For those keeping track, this means…

UHG
Working capital ($20.6B)
Current ratio: 0.79

Cigna
Working capital: ($11.4B)
Current ratio: 0.77

From first glance you may be asking, why in the world does UnitedHealth Group, the largest and most nefarious of all insurers, owe more money than it has?

Isn’t that a problem?? You spend all these Healthcare Breakdown issues telling us about why you shouldn’t get overleveraged, managing cash, and all kinds of boring conservative stuff and now this???

Wait, don’t go!

First of all, check this out:

Sorry for the tiny writing. See, one more reason to hate insurance companies. They make everything harder.

It’s easy to see that while it may seem like a problem, these two puppies are doing just fine. And by puppies, I mean large, soulless, evil empires.

Cigna made a TON of money and UHG made even more TONS of monies.

So, what IS going on then? How do they owe all this money but still make so much money??

Well, insurers in their infinite wisdom and trickery use something called float.

And it’s all about this:

And this:

What you are looking at is cash received but not yet paid out. Cash that these insurers have, but owe. Later.

The dark arts is in the “later” part.

Here is how it works:

You pay your premium.

UHG’s 7,900 actuaries estimate how much you are going to cost them over the next year.

That number, the estimate, goes onto the balance sheet as a LIABILITY. It’s not an asset because it’s money they will eventually pay out.

Key word: eventually.

As in, you pay them $400 bucks this month, they keep $60, and record $340 as a liability. To be paid at some point in the future.

Here is the magic though! They don’t just let that money sit on an old dusty mattress in their Scrooge McDuck money vault to go swimming in on the weekends.

They put that money to work. They invest it. They buy stuff with it. They use that money to make more money.

Then, eventually, after they have denied your claims as many times as possible to prolong the eventuality of payment, they pay that $340 out.

But, unbeknown to you, that $340 is now worth $470.

Free money.

What looks like a liability to you and me, is free money for them. Your money.

It’s all about timing.

Which brings us to…

Side quest 2: Why does this matter?

It is literally (am I using this word right? Maybe it doesn’t mean what I think it means…) the underlying cause of so much of our insurance woes.

Remember the “eventually” part?

That’s the whole game. The longer an insurer can wait to pay you out, the more money it makes.

What does that look like for you and me?

Denying MRIs ordered by your physician. Denying medications you need. Denying surgeries. Denying treatment that couldn’t be more medically necessary.

Denials for the sake of delay.

Insurers will do anything to protect the float. And unfortunately, it’s not the good kind on the Hooch. It’s the evil kind.

And that’s all I have to say about that.

Final countdown: How you can do it for good, not for evil.

Remember your best friend, Cash Flow and why it’s so important?

The reason is timing. It’s also why float is powerful.

Sure, you owe that money, but not yet. What can you do with it to grow it before you owe it?

Ohhh my. I like that. “Grow it before you owe it.”

Trademarked! Can’t steal it! You heard it here first. Where’s a lawyer?

Freakin lawyers, never there when you need one, always there when you absolutely don’t.

Here’s how you can apply the concept.

Find ways to get your revenue upfront to deliver a service or product later.

Practically speaking that could look like preselling 4 month’s supply of something upfront to be delivered over the coming 4 months. Use the money to get more customers, more product, or invest in something else.

Discount memberships for the full year so you receive payment upfront but deliver over the coming 12 months.

Bundle services that someone will use over time, but the cash is received before services are delivered.

Here’s a picture of the concept. Cause I know you love hot pink pictures:

(By the way, ignore the simplicity of how revenue hits a balance sheet. This is just for illustrative purposes.)

In this totally made up example, you have a customer who pre-pays in some way for the service or thing you sell.

$613 of those dollars are a liability since you owe delivery on something worth $613 later. But there is nothing keeping you from using all of that money to get the customer flywheel going.

Since you are savvy AF, you use that money to get more customers to pay you upfront, to get more customers to pay you up front, to get you more customers to pay you upfront, to…. I think you get my point.

Customer financed customer acquisition.

That’s one way to adopt the concept. In insurance land it’s use premiums that should be paid out in covered services to buy more investments from your bestie’s private equity fund and stock buybacks to increase returns and share price to get a bigger bonus and higher profits.

I mean, tomato, tomahhhhhhtoh (phonetic spelling of snarky posh British accent).

And while you may not be operating in the financial sense of float, the concept can be applied in the same way insurers use it.

Get max money upfront and then grow it. Be careful not to overextend it. This isn’t a Ponzi scheme. This is a focused way to grow through customer financing.

Use this tool for good. Not for evil.

By the way, unrelated side note… let’s stop calling insurers, “payors.” They are processors. And gate keepers. It’s your money, not theirs. They don’t pay for anything. They take. You pay.

Love you.

Why it matters: Understanding this new age math can help private practices stay that way and patients/employers understand what they are really paying for

Read time: As long as it took you to realize He-Man and Ivan Drago are the same guy (7 minutes for real though)

And now, a word from our illustrious sponsor:

Forward Slash / Health works for physicians. Yes, they work FOR Physicians… to escape the unrelenting crush of administrative burden, run financially successful practices so you can take your significant other on Disney cruises whenever they want, and stay totally independent after you let the private equity company fly you somewhere fancy to eat caviar and drink champagne on their dime just to say politely but not too politely…. ummmmmm pass.

*Unnecessarily silly language added for style and because that’s how I roll. They are much less silly, but still, the right amount.

Give ‘em a call!

The call scheduling button

I totally missed you too.

Now that we have the sappy stuff out of the way, let’s jump into math that makes less sense than common core math. IYKYK. What’s up parents.

That’s right, today, we are talking about charges, chargemasters, and how in the world your bill went from $22,000 down to $1,700.

Ya, you wish.

On the flip side, for all my doctor fraynds, it’s also key to your practice. Because while you are charging $238, they ain’t paying you that. But then again, if you charge less, you may be leaving money on the table.

Let’s start with the patient perspective, because we’ve all been there.

Here’s a bill from the internets:

Thank you Kaiser Bill of the Month Club. This poor soul went for a colonoscopy and got charged for two. Classic.

But what I want to point out is the this top section here:

We’ve all seen it. We don’t love it. We don’t know what it means, or why it exists.

But I’ll tell you.

The what it means part:

First up we have “Charges.” This one is going to come up a lot and it’s common from all the perspectives and settings. This is what the hospital, the doctor, the practice, the whatever, charges. This is the same charge for everyone. It can be for a private plan or Medicare. It can be for you or me. Doesn’t matter, this is the “price” set by the care provider.

But they know, now you know, we all know this isn’t what they will or anticipate being paid.

Silly right? It gets better.

Next column, you see, “Adjustments/Ins Payment.” Sometimes this is broken out into two columns, but why waste paper space or make things easier to understand. This is healthcare dang it.

This column shows both what has been adjusted and what insurance has paid. Since that makes no sense, here’s what that meaning means:

A doctor (you, if you are a doctor) contracts with an insurance company. I would say that you both agree to what they are going to pay you for certain services, but we all know that’s not entirely true…

Anyways, you have a contract with the insurance company for an “Allowed Amount.” That’s the contracted rate. Another column would then show what the plan or the “payor,” paid.

And if you decoupled the “Adjustments/Ins Payment” column you would also see the adjustments made. That would simply be the difference between the charges and the allowed amount. Good old subtraction.

To be fair, from the payor perspective it does make sense to lay it out this way. When they do, it shows why you have insurance in the first place. If not, look at those charges! You would be on the hook for all of it without those nights in shining armor. Or in He-Man’s case, shining speedo armor thing.

This is the game.

Blue Cross Blue Shield actually has a nice little example on one of its 12,000 websites. Here’s the image:

To bring it all together, here’s what the the first bill and the above Explanation of Benefits tells you:

1. What the “price” of the service is

2. The difference between the charges and the allowed amount, or the adjustments made

3. How much the insurance company is contracted to pay (sometimes)

Shweet. Then you can tell how much you are on the hook for.

Not too shabby. Why do I even write this thing (I constantly ask myself), you could have totally figured that out.

But wait, there’s more!

Why, good madam, do we even have these wily charges? The fanciful things that everyone knows no one is going to pay?

I will explain by asking you two questions….

1. Does Africa have more or less than 10 countries?

2. How many?

Don’t peak at the answer!

It’s 54.

How many did you guess (unless you are a geography wizard and know)?

What just happened to you was anchoring. Anchoring is a point of reference that you subconsciously set based on some potentially unrelated or arbitrary input. The first question anchored a low number in you mind. When you do this, the majority of people will guess a lower number than 54.

If I had asked does it have more or less than 60, you probably would have been closer and guessed a higher number.

Weeeee psychology!

Soooo…. When you see this:

(And who said that L&D was a money loser…)

You know this is anchoring in action.

This too:

I had to make my own chart, because chargemasters ain’t pretty.

Not too shabby for a gross charge. Just a little 317% mark up over the discounted cash charge.

And anyone’s guess what private insurers are reimbursing this for.

If I had more time and patience, I would have calculated the Medicare rate, but as reliably as He-Man yelling that he has the power unnecessarily, like we know guy, we know… it is a huge pain in the tuchas to get all the info together from CMS.

Honestly, it’s no wonder that hospitals have to spend so much money and time on their billing departments. It’s not an easy game.

They do make it easy to look up physician fees though. Which is mighty nice of them.

Here’s what a physician is going to make from Medicare for the procedure:

That’s sweet.

Who is it that’s driving up healthcare costs again?

Anyways, back to this code provided courtesy of Wellstar. It provides a glimpse into the complexity and the madness of charges, adjustments, and all the morass.

But back to the anchoring for a moment. Two reasons charges are silly/not silly. They serve as a foundation for negotiation with these alleged payors. Anchor high as a starting point.

Additionally, in every contract the language stipulates that a payor will pay the lesser of charges.

That means that if your contracted rate is $125 but your charges are only $115, they gonna pay you $115.

I mean I would.

This brings me to my next point.

This one is for you my private, independent practice homies.

Get your charges right. There is some art and some compliance science to it. But what you definitely need to know is that your charges need to be higher than your contracted rates. If not, you will get the lesser of the two.

Silly game? Yes. Game you have to play? Yes. So know the rules.

And I agree with everyone reading this that’s like, “well it’s the insurance companies, and opt out, and Bucky Fuller, and other fist shaking shouldas.”

But we are here, right now. And for a physician working to remain independent, care for their patients, and stay in business, this is how it works.

Change? Yes, please.

We can do both at the same time.

Ok, I think that’s enough high horsery for today.

I still love you.

Why it matters: Because its essence is actually pretty simple, giving way to opportunities for better care, cost, and access all around

Read time: All Too Well, Taylor’s Version from the Vault

Ever feel like you’re taking crazy pills?

And no, not like when you are debating with your spouse about whether you actually talked about the plans you allegedly forgot about.

No, like when you stare into the unabashed eyes of an employer who is like we need to go with a BUCAH cartel plan.

In fact, I feel like I am on a crazy IV drip because I have no idea why we need the likes of the carriers in the first place. Yes, yes. They take on and pool risk, blah blah blah.

They also do a whole lot of terrible things in the name of profit maximization and I cannot seem to find any particular value they do bring. Only that which they extract.

Hence, the crazy.

Anyways. This episode is not about that. It’s a little too easy to take shots at insurance companies these days. Instead, I am going to go into something that’s pretty cool. Something that will hopefully do two things:

1. Show you that insurance in principle isn’t all that complicated.

2. Show you an example of partnering with insurance companies that can be a boon for private, independent practice with a real example.

First up, at it’s core, let’s talk about what insurance is. You know the history of health insurance, since you have been with me since the beginning and never miss an episode. If for some reason that isn’t the case, which there’s no way that’s possible, you can refresh yourself here.

So, in the beginning it was a way to make more steady money for hospitals and it gave teachers access at a reasonable price to a single health system. The teachers paid a monthly amount, then got the discounted access.

Cool.

If we break that down, what’s happened? A group of people had a contract with a hospital to pay it a certain amount for a defined set of services.

That. Is. Literally. It.

Here’s a picture if you’re more into that sort of thing:

You can come for me all you want and yell about actuarial things, risk modeling, pools, and all the stuff. But at it’s core, it’s a person or organization contracting with healthcare organizations to provide care at a certain price for a certain set of services.

Hooray, insurance.

So the question is, why do we think it has to be so darned complicated?

Well the money of course. It’s always about the money.

Great, money.

Fun fact. Employers spend about $1T a year on healthcare. The rest of the $4.8T comes out of our pockets, Medicare, Medicaid, and Tricare. What’s really fun is that we fund those programs and so it all comes out of our pockets.

I digress though. The point is employers can very simply choose to contract directly with healthcare organizations just like insurance companies do on their behalf. The best part is no middlemen taking way too much money out of the value chain.

Like DeSoto Memorial Hospital, which saved 54% of it’s healthcare spend and saw $1.2M drop straight to the bottom line. Imagine the rural hospitals we could save with these plans and this savings.

Or a 150-year old local pharmacy that saved $40,000 a year with an employer built health plan. Imagine the local independent pharmacies we could save.

Just common sense contracting and solutions we know that work.

Speaking of things that work, now that you know health insurance is actually pretty simple, here’s how one private independent practice is taking the principles to heart to help improve access for patients.

Gwinnett Clinic was started in 1983 by Dr. J.J. and Meena Shah. In better words than I could have written: It is an independent, locally owned, multi-specialty medical group with seventeen (17) locations throughout northeast Atlanta. Gwinnett Clinic was among the first practices in the nation to offer same-day and walk-in visits and direct scheduling with in-house specialists as well as onsite imaging, laboratory, physical therapy, and pharmacy services. In addition to primary care, family medicine and internal medicine, GC offers specialty care including allergy and asthma, lifestyle medicine, obesity medicine, neurology, and orthopedic surgery. Gwinnett Clinic patients avoid urgent care and emergency room costs by having easy access to doctors they know and trust in a comprehensive care model. Having served over 500,000 patients, Gwinnett Clinic consistently performs in the top quartile nationwide in cost and quality metrics.

Here's where I stole that marvelous introduction.

Now, Gwinnett Clinic under the leadership of Dr. Deep Shah is partnering directly with Ambetter. Ambetter is a health plan brought to you by Peach State, which is brought to you by Centene.

While there is no love lost between Centene and I, although I am quite sure not a single person who works there knows who I am, there is something to be derived and replicated from this partnership.

First, a boon for private, independent practice. Independence is getting harder and harder. But look at Gwinnett Clinic. 41 years, 17 locations. PRIMARY CARE!

Ya, it’s possible. And we need it.

Because I don’t know if you caught the last part…. But, “Gwinnett Clinic consistently performs in the top quartile nationwide in cost and quality metrics.”

In fact, here’s a graph showing that:

What you are looking at is CMS data showing that Gwinnett Clinic outperforms all of Georgia and the same zip code in terms of cost.

Let’s go back to the principle, insurance is just a contract between two entities for a certain set of services. Centene has now contracted with Gwinnett Clinic to offer a health plan which has the clinic as the cornerstone.

It’s called Ambetter Health Gwinnett Clinic Select. And if you live in Gwinnett County Georgia in need of an exchange plan, it’s there. Outside of the clinic, the plan includes Piedmont health system for hospital care.

But good thing Gwinnett Clinic does a darn good job keeping people out of the hospital.

The plan comes in Silver and Gold, just like Simone Biles’ necklaces from Paris. The economics on the patient side are a bit of a moving target since this is an exchange plan, but here are the Silver and Gold rates for a median family in the county.

Household size: 3
Household income: $84,000
Applicant: Male, 37, non-smoker

Silver

Premium: $448.51
Deductible: $5,000
Fam deductible: $10,000
Max out-of-pocket: $8,000

Gold

Premium: $469.76
Deductible: $1,500
Fam deductible: $3,000
Max out-of-pocket: $7,800

Here’s the specs on Gold and Silver if you are curious.

Before I go on, let’s not get it twisted, I am not out here promoting health insurance plans. I am trying to show what’s possible out there with the current system. And the independent physicians and practices can pull a set up right to the table and get some sh… stuff done.

And in Dr. Shah’s words:

"Taking care of our patients - many of whom are friends, neighbors, and community partners - is a singular privilege…. Primary care is the foundation of our practice, and we will continue to expand access to care that leads to superior outcomes. This is the type of creativity we will need to help patients and local businesses find value when they go to the Marketplace.”

An incredible clinic contracts with a health plan to agree on pricing for a specific set of services.

That’s all we are talking about here. Dr. Shah has found a way using the mechanisms of our traditional system to create a product expanding access to members of the community to receive higher quality care.

And it shows, along with what the folks like Carl Schuessler (DeSoto Memorial) and Cristy Gupton (Moose Pharmacy) have done with Mitigate Partners for employers.

This is basically just a really long, rambly intro email.

Just like you don’t need to listen to all the ivory tower health system administrators going on about how complicated health system finance is, you don’t need to buy into the cliché that health insurance is too complicated.

A contract and a network.

Now, go have another.

See you next time, planet earth.

Why it matters: Non-profit health systems save billions in tax dollars, but they may not be earning that privilege

Read time: The length of that Sarah McLachlan commercial with the dogs where she makes you cry with her haunting mezzo-soprano (7 minutes for real though)

You want to hear some crazy ish?

The NFL was a non-profit until 2015. In 2023, the NFL generated $20B in revenue.

That’s 1/5 the revenue of Kaiser. Which at $100B in revenue is larger than everyone’s favorite mouse ear ice cream company.

Disney, it’s Disney.

Yet, in 2015, the NFL gave up it’s non-profit status and started paying Uncle Sam.

Today, we’re going to talk about it. Primarily what even does “Non-Profit” mean. What is profit really? Should health systems pay the piper? And how much are we even talking about anyways?

But first, an exciting announcement from my friends at Forward Slash / Health! And before you wonder why they show up here so much, it’s because I sincerely believe in the mission of bringing back, strengthening, and enabling private independent practice. They’re doing the things.

On November 8th, they are launching a comprehensive course to help physicians launch their own direct primary care practice. If you pre-order, it’s at the insanely low price of $599.

That price goes up after November 8th, so act fast.

In additional to all the great course content, which will literally walk you step-by-step through how to setup and get rolling in DPC, you get one-on-one time with the team.

Check out the course here

They are also launching a community for clinicians looking to start practices or grow their current practices. If I were a clinician I would be all over it.

Check that out here:

Sign up for community access

Cool. Check those awesome cats out. Now back to the show.

First, what do we really mean when we say “Non-Profit?”

A Non-Profit or Not-For-Profit if you’re long winded is a type of entity that usually, most of the time, pretty much all the time, doesn’t have to pay any taxes. On more or less anything.

No tax on property. No state tax. No sales tax. No federal tax.

The obvious first question you are going to ask, is how much taxes are health systems not paying?

Great question and a little hard to quantify. Obviously, because they are messy and healthcare entities’ favorite word is obfuscation. A haughty word that means, the action of making something obscure, unclear, or unintelligible.

You know, like most political speeches over the last 8 years.

Here are two takes on how much health systems benefit from non-profit status exemptions:

From the AHA: $13.2B in 2020 and clearly a joke.

From KFF: $28.1B less of a joke.

Even at the high side, it doesn’t seem like all that much. But, if we look at the context of those potential taxes a little differently, the picture becomes clearer.

There are 2,987 non-profit community hospitals in the United States.

That’s $9.4M in taxes not paid by each hospital each year. Imagine what that amount of money could do for the communities these health systems… ahem… serve.

Ok fine in order to get this magical designation, health systems do have to provide services to the community. Here’s another moving target that lives in the grey. And not like the entertaining Liam Neeson type.

If you listen to the AHA, community benefit clocks in over $100B annually. Not too shabby.

KFF on the other hand doesn’t look at total community benefit, but rather only charity care as defined by care provided for free or at a discount for qualifying patients. The estimate clocks in at about $16B.

Comparing apples to apples or kiwis to kiwis if you are feeling exotic, the AHA reports charity care provision at around $57.4B. Now, that is still more broadly defined and includes Medicaid shortfalls.

See, it gets all complicated.

But here is my big contention outside of the fact that we really just need some better definitions around things:

Charity care calculations are like Kris Kross. Wiggity Wiggity Wiggity whack.

Here’s how charity care is calculated:

Cost-to-charge-ratio times the value of the care provided. Sounds simple and great Preston, what’s your issue? Why do you get all bent out of shape over hospitals all the time?

Beeeecause Becka, that value of care provided at a discounted amount is inflated. It’s totally made up. And while the cost to charge ratio should take care of it, it doesn’t.

Here’s an example:

See there, the higher the made up gross charge, the larger the discount and the more charity care is recorded. Fun time.

Let’s keep digging into the madness.

Total community benefit includes shortfalls from Medicare and Medicaid. Medicaid I can get behind, but Medicare, nuh uh. You can make money on Medicare.

Annnnd I am not sure who need to hear this, but running a low margin on Medicare doesn’t mean squat. Non. Profit. Remember? Breaking even should be fine if you are serving the public good.

Sorry. Sorry. I got heated.

Community benefit also includes things like professional education, you know, educating people who work for you to make them better at their jobs and drive more value and quality in your organization. K.

Community activities and services. So, marketing. Word.

And some other things I can get behind.

So maybe there is a middle ground. But I am not entirely sure we’ve seen the entire picture here.

Because while these health systems are enjoying non-existent tax bill, they are still making plenty of money.

Here’s the deal, just because a company isn’t taking all the money it has left over and paying distributions to shareholders or increasing shareholder value, doesn’t mean it can or doesn’t spend all kinds of excess on things like travel, compensation, bonuses, and a whole bunch of other perks that have nothing to do with providing community value.

Let’s just look at some fun things shall we.

How about Atriums $52M in the Cayman Islands:

Or Atrium’s private planes used by it’s executives:

Maybe we should ask about how much of this tax exempt money is being poured into Private Equity. Just look at Cleveland Clinic. There’s almost $7B between PE and Hedge Fund investments.  And that’s just one system.

I am not entirely sure that is the best and highest use of the tax payers money, while these profit only driven organizations are destroying healthcare left and right in the name of profit.

Or, Ascension’s private equity fund:

A cool $1B under management with companies generating around $60B annually in revenue. Cool story Hansel.

Or Wellstar’s venture capital fund:

You get the point.

Health systems forgo paying billions in taxes every year, trump up what they are allegedly providing to their communities, all while they are focused on generating as much cash and building as much wealth as possible.

One more, because I have been talking a lot.

Let’s just look at Kaiser over the years:

Yes, that’s my own LinkedIn post. No, don’t make it weird.

On the flip side, what’s up with the for profit health systems. You know em, you love em, HCA, Tenet? Those guys.

Surely they must be way worse….

Well, Rebecca, yes and no.

If we look at the dollars, which is what we’re about here at the Breakdown, HCA made $5.2B in 2023. It paid $1.6B in taxes. ANNNND provided $3.7B in uncompensated care.

Inflated? Yes, but that’s grapes to grapes.

Lookie:

To be fair and I am sure I can find a nurse in about two seconds that would vouch for this, HCA ain’t a beacon of quality, but from a financial perspective, all the money. While paying taxes. While providing all kinds of uncompensated care.

So, let’s get back to the original question, should non-profits be tax exempt?

Yes, if they were run properly. But no, probably not, because they aren’t nor are they living up to their end of the bargain.

Now, ending caveat. There are plenty of smaller, rural hospitals on the struggle bus right now. Hitting them with taxes and the burden of uncompensated care would be a death blow. So it’s not a one size fits all situation like that oversized sport coat every 12-year-old boy in the 90s owned. Yo.

But those are two different stories with much broader implications of the system’s financial designs that we will tackle another time.

Until then, love you, mean it.

Why it matters: Oh, just because they decide if you get treatment or not

Read time: The length of that one Grey’s Anatomy episode (no, not an eternity, 6 minutes for real)

Right about now we are on track to spend around $5T on healthcare.

But before we get to all that…

You are most cordially invited to join The COG, a first-of-it’s-kind community for real-time, expert support for digital health startups.

From fifty-state entity configuration, to Medicare enrollment, contracting, RCM, licensing and credentialing, and more, The COG advisers can help you conquer common obstacles while expediting time to revenue.

Just imagine you could text your bestie who also knows everything there is to know about setting up operations for digital health startups and has done it. Successfully. Like a lot of times. It’s awesome.

Join now!

In 2013, we spent $2.9T on healthcare. At $5T by the end of the year, that’s a mere 72% increase. Meh, 0.72 isn’t even a whole number.

In 2014, the Affordable Care Act took effect. That’s important to note, because while this landmark legislation was well intentioned and had a lot of good, there also came a lot of downside. Mostly because the various lobbying organizations made the bill look more like Anakin Skywalker post lava dip versus the adorable pup we all met on Tatooine.

One of the items in the bill was the Medical Loss Ratio, familiarly referred to as MLR. Insurance carriers are beholden to an MLR of 80-85%. That means they have to spend at least that much of premium dollars on medical costs.

Funny, I know.

Let’s part with reality for a moment and assume that if an insurer coughs up the requisite 85% that it’s all legitimate, fairly priced, and actually goes towards medical care. I know. I hope you didn’t just spit out your mimosa.

Now that we are living in the floating realm of make believe, here are the strategies and reasons for the strategies that your friendly neighborhood insurance provider employs to make themselves as rich as possible, while you wonder if you can afford to pay for that procedure your doctor told you that you needed but United Health Group said wasn’t covered.

1. Deny, deny, deny

We’ve all seen this rodeo before. You need an MRI, but your insurance company, which apparently is allowed to practice medicine and somehow formed a physician patient relationship with you has decided you don’t need an MRI. Or a procedure. Or a medication.

This does two things. Well three if you include how much it pissed you off.

From the insurance company’s perspective, it improves its bottom line and its cash flow.

In terms of profit, a denied claim means premium dollars it doesn’t have to spend. That’s money it gets to keep.

For cash flow, that’s money that stays in the coffers, not money going out. Cash in hand son.

Yay money. It’s a big part of the reason UHG, for example, is looking like a cash king in Q3 2024:

Who doesn’t want a cool $21.8B? I’d for sure be drinking my mimosa out of a 10th century Han dynasty chalice.

It’s also mega profitable.

As an aside, you may have seen UHG stock slipping lately. Them and all the other big dogs. Well that’s what happens when you only make a billion dollars a month instead of two. Get your act together United!

2. Prior authorizations

Prior Authorizations, if you know, are like pre-denials. Well, really they are pre-approvals. But you know what’s happening here.

For many procedures and things like MRIs you will need a prior auth to make sure your insurance will pay for the thing.

Fun fact, only about 10% of Medicare Advantage prior auth denials were appealed in 2022.

Just look at the denial appeal rate. If you were in the business of getting a lump sum from the government and told you can keep what you don’t spend, wouldn’t you love denying and banking on the fact that only 10% of the time anyone would come knock on the door and say, “Where’s my money man? That was a loan.”

Speaking of loans, the prior auth game is really about protecting the coveted float. Turn the page. Figuratively. Not like a literal page. I know you don’t bring books into the bathroom anymore and you are reading this instead of your morning doom scroll.

3. Protect the float

Guess what made Warren Buffet extra super rich? That’s right, Geico’s float.

Float if you haven’t heard is the money that insurers collect in premium dollars and know they will need to pay out but haven’t yet.

It’s a liability on the balance sheet, like-a-so:

Despite that being a liability, it’s also cash. Cash that the insurance company can use for other stuff. Presumably investing in things. Like yachtspitals probably.

Just like your bank doesn’t just take your money and throw it on a musty mattress in the vault, waiting for Al Capone and his tommy gun to come steal it or for you to come withdraw it for that matter, your delightful insurance company isn’t just sitting on your premium dollars waiting for you to twist your ankle.

They have deployed that capital and are making money off of it. Just like the old dude in Mary Poppins singing about your deposit being invested in railroads or some quaint old timey thing.

By delaying payments in the form of denials and prior authorizations, we are all giving Sir Andy Witty the pleasure of making free money off the other free money.

Take another sip, you’ll need one for this next section.

4. Increase the cost of healthcare, I mean revenue

Remember that MLR thing? Hypothetically speaking, if you ran a business and I said you were never allowed to make more than a 15% margin, what would you do to earn more profit?

Not a trick question, you would raise prices. If the profit percentage stays the same, the only way to increase the bottom line is to raise the top line.

But here’s the rub, if you raise the top line without matching spending, your percentage will necessarily increase.

Buuuuut, if you also increase spending so you stay at 15% but on a bigger number, then you just won the game.

Last but… that also means in healthcare land, cost have to go up.

So while insurance companies are always trying to pay less and complain about reimbursement and costs, they really don’t give a hoot, scoot, or boogy.

They need healthcare costs to go up. If costs don’t go up and they just raise premiums, they have to pay back their customers. Blech, who wants to do that.

Looky, here’s an example of how that works:

So there you have it. The upward spiral of healthcare costs in three way too simple pictures.

Here’s your TL;DR:

Insurance carriers are in the business of making money, not paying for your healthcare.

To do that they employ these macro strategies:

• Deny claims to improve margin and cash flow.

• Require and deny prior authorizations to improve margin, cash flow, and protect the float.

• Focus on keeping the float high so our premium dollars can make money by sitting on the balance sheet. See the first two strategies.

• Let healthcare costs balloon so they have justification for raising premiums and making greater net profit.

Well, I hope today’s issue made you want to fire your BUCA plan, go rogue, and join the revolution. And remember if it made you want to start something crazy and you want the baddest folks around on your side for the most wildly incredible deal, you know where to clicky.

It’s here. Click here.

Or Here

See you out there!

Why it matters: Private practice is challenged to say the least, understanding MSOs is critical for physicians

Read time: Much shorter than Apocalypse Now (6 minutes for real though)

I hope you have your espresso martini primed, because we are about to dive into some topics that are changing the landscape of healthcare.

Yes, that’s right, it’s the MSO.

First of all, what is an MSO?

Thank you for asking the most obvious question since asking, if Tay and Travis Kelce breakup, what does that breakup song sound like? And do other teams use it as a hype song against the Chiefs?

P.S. I would sooner quit healthcare than see Tay and Trav breakup. It’s too adorable.

Speaking of adorable, there’s a super adorable guy putting on a webinar this coming Wednesday. You should totally check it out if you’re into this whole private practice thing.

Click on this gorgeous picture for details:

There may even be some extra awesome stuff if you tune in live. See you there!

Here’s a button too in case you forgot to click the picture:

Register dang it

Sorry for the digressions. MSO…

MSO stands for Management Service Organization.

Aside from the obvious that an MSO is an organization that provides management services, what pray tell, does and MSO actually do?

Well, that can depend. At the simplest level, they do in fact provide management services. Think the business junk that is everything except clinical care.

Not like McKinsey consultants that drop a PowerPoint on you after charging you $250K to annoy the people who actually do work in your company.

Management services would be things like billing, accounting, compliance, human resource management, general practice management, etc. That day-to-day grind.

MSOs can do even more depending on the model, which we will get into in a second, like buy buildings and lease them to practices, manage all the bank accounts, invest in additional growth capital, serve as in-house counsel, and negotiate contracts on behalf of a practice.

What you may not know about MSOs, except for all that stuff I just told you, is that they aren’t new.

Shocker, I know.

They used to be called PPMs, or Physician Practice Management organizations. The darling of that original ilk was PhyCor.

Check out PhyCor at it’s height:

Yup. A billy plus in revenue. Though margins were pretty slime. I guess it’s hard to run a practice after all.

And at it’s demise:

From a cool $1.5B in revenue to $300M, with losses in the hundreds of millions.

Not to mention its balance sheet…

Yeesh. What happened?

And what can we learn from it.

PhyCor essentially did what the modern MSO does today. They would buy or contract with practices to leverage scale, take on capitated payment structures, provide administrative support, and help navigate the ever evolving regulatory and payment landscape.

It was much easier to take on risk as a group with thousands of physicians as opposed to 7.

Not at all familiar, right?

Before we look at the modern marvel, let’s chunk down the types of MSOs into 3 buckets.

1. The private equity MSO

Private equity can’t own physician practices outright. I have written about the structuring a few times, which you can check out here.

Essentially, a company is created and a series of contracts are written whereby the physicians retain ownership of their practices on paper, but all the value transfers to the MSO and the physician cannot sell the practice without permission.

The PE group uses the MSO to provide admin services, consolidate negotiating power, roll up practices for higher valuations, and then sells the whole thing in about 3 years.

2. The old, but now new model

The modern MSO such as Privia, Astrana, Aledade, Pearl, and agilon to name a few function eerily similar to PhyCor and it’s best friend MedPartners. Although these days, with such diverse payment models, they each focus in slightly different areas.

At the end of the day though, it comes down to three main things.

Enablement, Aggregation, and Management.

While some focus on one area more than others, it’s really about these three levers. The same levers that PhyCor used to pull.

Now, PhyCor was heavy into buying practices, got way over it’s skis in debt, and realized (as PE soon will) that there are two kinds of leverage in this world and they were playing with the risky kind.

Without dissecting each in great detail, the highlight is this:

Aledade - ACO enablement all day. Still private so the jury is out

agilon - MA now into ACO, losing all the money. They also sign like 10 year term contracts… Yeesh. PhyCor used to sign 25 year terms. Even 2 years gives me hives.

Pearl - ACO, still private. Founded by investment bankers and hedge fund managers so who knows.

Privia - Public, most diverse revenue, though largely in the FFS game. Meaning, it’s value prop is owning the administrative headache and having you in their medical group. Revenue as a percent of collections is mighty high and I hear it’s hard to get out of a deal.

Astrana - Also public and heavily in on risk based contracts. Most of it’s revenue is capitated payments. It’s profitable too. Imagine that.

They all come in slightly different focus and flavors. At the end of the day, it’s about what makes the most sense for the practice. The major drawbacks I see are that these organizations are another means of shipping out autonomy. Because if you decide to bring things inhouse or change partnerships, you may be looking at an uphill climb.

3. The other guys

This is the fragmented world of MSOs. Smaller boutique style firms that serve as contract organizations to help practices run better. They provide many or if not all the administrative services, but are not as involved in value based arrangements. They can often help work towards VBC readiness, but will not bear risk along side of a practice group.

The folks are pretty straightforward and can be helpful. If they know what they’re doing.

To sum it up, there are three main types of MSOs:

1. Private equity – we own you

2. VBC redux – we kinda own you

3. Outsource – we don’t own you

Now that you know what they offer, here’s what they take.

Private Equity takes it all and leaves some scraps to everyone they didn’t fire so long as you crank your production to unsafe levels.

The big dog enablers can take a lot. For a long time. I am sure some folks out there have more specific numbers that this non-investigatory journalist cold find, but I have seen fees amount to 12% of revenue in some cases for a small practice up to 40% of collections.

Here’s what that looks like for Privia:

Now, there is a lot more to this, but it states that of its representative physician groups, owned and affiliated, those groups bill $2.84B. Privia earns $1.66B in revenue.

That’s 58%.

It does pay out $1.3B in provider expenses. But the devil is in the detail of these contracts where someone else isn’t pulling the purse stings, but controls the entire purse.

Here’s it’s P&L:

It’s taken some time, scale, and lots of aggregation to get to where it is today. The question remains, will history repeat itself?

It comes down to this, which I have said before and I’ll say it again, man I love being a turtle. Wait, sorry, 90’s movie reference.

There is no one way. Only your way.

Speaking of your way, if you are an independent physician making your way, you should talk to my friends at Forward Slash / Health. Their mission is to help independent private practice physicians escape the crush of administrative burden, build a financially successful practice, and remain totally independent.

They’re one of those boutique ones I mentioned.

Here’s an large logo you can click and check out their newly gussied up website:

Tell them I sent you.

While MSOs have been around for a hot minute, they aren’t going anywhere. And with private practice becoming increasingly difficult in the face of reimbursement challenges, the rise of private equity and health system predominance, and the tricky regulatory landscape, MSOs can be a boon to stay in the game. And even, dare I say, thrive in the game.

But then again, that’s what PhyCor said.

Go in with eyes wide open.

Unlike Nicole Kidman that one time.

See you out there!

Why it matters: Private equity is messin up all kinds of things and making you doctor want to bail

Read time: That time you told your spouse it would only take 5 minutes to fix that shelf (12 minutes for real though. Not the shelf, the reading. The shelf will take an hour).

Today we are re-visiting private equity. That thing you hear about that’s really effing things up for doctors and patients in healthcare.

And as you will see, it’s none too great for the likes of all of us… cough… Steward Health Care… cough

Before we jump in, a quick reminder that if you are in or around Atlanta, GA, the Hotlanta, The ATL, October 6th, and happen to be a doctor looking to bail on this PE mess, and have been thinking about Direct Primary Care as an option, come to the DPC mixer, hosted by my good friend Dr. Michelle Cooke.

Here’s a flyer you think can clicky:

Here’s how this is gonna go. We’re gonna rundown what private equity is, some of the mechanics, and why it’s all up in healthcare’s business. Then I’ll dazzle you with the strategies it uses to maximize returns. Hint: It’s never about better patient care..

So… What is private equity?

I’ll keep this one short. Private equity is a group of people who raise a bunch of money and buy private businesses. It’s a way for investors to invest in private companies, expecting returns they otherwise couldn’t get in the stock market.

Imagine you have like $40M and you want to invest some of it but the old S&P workhorse just doesn’t do it for you anymore. So you meet a slick 30 something who’s dad set him up with his own private equity fund and all the fleece vests he could ever want.

He tells you that he can get 20%+ returns through his new $500M fund that he’s raising. He focuses on healthcare, buying practices and selling them in 3-5 years. And brother, business is a boomin.

So you and 27 of your closest friends plus a number of pension funds throw in and he raises $500M. He starts buying companies, increasing their value, and then selling them in the time frame promised.

Boom. A bunch of besties, pooling money and buying companies. That’s really what it boils down to.

Fine, maybe there’s a little more to it or they wouldn’t be able to afford all the sweater vests. Here’s some more of it.

And how does this magical game work?

Sub-part: the structure of a private equity fund. This part has pictures, yessssssssssss.

Funds are setup like this: A General Partner (GP) goes out in his awesome vest and raises money from Limited Partners (LPs). The GP is the front man, makes the decisions, buys the businesses, and does all the fancy stuff to make lots of money for himself and his investors.

It looks like this:

All the lines are money lines. Not unlike the 80’s in your favorite stock broker’s private room at the club. The main difference is the lines were white then, not hot pink.

When this stately fellow is done raising his fund, he goes out and buys businesses.

Sub-part: how the money flows. More pictures!

The GP makes money on fees and performance. The most common structure is called 2 and 20.

This kindly lad charges 2% on all the money that gets deployed by the fund. So if he has a $500M fund and has bought $372M worth of companies for the portfolio, he’s making a meager $7.4M. Poor guy.

When he sells one of the fund’s businesses or exits it by going public, the LPs get their principle back plus 80% of the returns (the extra money the business was sold for). Young Beckham gets 20%. He’ll also get his principle back if he invested.

Like so:

That’s the fund structure. Now, how are these gracious gallants buying these businesses?

Debt, baby!!

Sub-part: how businesses are bought, the debt jams. Also, pictures.

Fun fact: HCA was bought by private equity in 2006 and then taken back public in 2011. It demonstrates on a large scale how this works.  

Here are the high level deets:

HCA was bought for $21B.

The private equity gentleman borrowed $16.8B (debt).

They invested $4.2B of their own money from the fund.

They owned it for 5 years.

During that time they distributed $4.3B in dividends.

They decided to exit by going public again in 2011 and raised $3.8B in the IPO.

Investors made $1B through the IPO.

They kept equity stake in the company worth $11B.

So basically they invested $4.2B and earned cumulative returns of $16.3B (dividends + sale profit + current equity).

Not a bad slice of pie.

I made another picture:

Check out the numbers behind this ole leveraged buy-out bonanza. Debt in 2006 before the private equity saddle and after it went back public in 2011:

That’s quite the debt increase.

And in the Private Equity world, the company holds the debt. That’s the best part.

Another way to think about it is sort of like buying a house and flipping it. Basically you can learn everything about private equity by following those guys on Instagram who boast about how much debt they have in their rental portfolios and using OPM (Other People’s Money).

You put down 20% of your cash and then get a loan for the other 80%. The house is collateral.

For a company, you put down 20% of your cash and get a loan for the other 80%. The magic here is that the 80% goes on the company’s books. The business is on the hook for the debt, not you. And in theory, operations covers the debt. Just like your renters cover your mortgage.

Then you increase the value of the company and sell it in a couple of years. While in the house example you would need to pay off the debt from the sales money, in Private Equity world, you don’t. You leave the debt behind for the business to take care of over the next 30 years or so.

Winner, winner, chicken dinner.

See the game? No wonder Beckett just bought that chalet in Big Sky.

But why does Private Equity love it some healthcare?

I think you know. We all know. It’s a $4.8T opportunity for cryin out loud.

As you may know, PE groups have had their eye on specialty practice groups for a couple of decades. There are two main reasons PE targets specialty clinics in their pursuit of happiness.

1. It’s hard as shoot buckets to delivery care these days in a highly complex regulatory environment, not to mention individual and population dynamics, and trying to figure out how to get paid through value-based contracts

2. Reimbursement suuuuuuuuucks. Sorry, not sorry. CMS isn’t paying doctors enough. Doctors, not hospitals. Hospitals make enough. And to boot, commercial plans don’t care about your 3 physician practice being out of network so they are going to go ahead and cut your payments 40%. Because.

That’s also why a PE buyout is appealing to docs. Not only do those headaches go away (don’t worry, new ones are right behind them), you also get a nice payout which is better than riding into the sunset with a satchel full of thank you notes.

Don’t get me wrong, satchels of thank you notes are amazing. They warm the soul. But so does a yearly vacation to the Mediterranean on a chartered yacht. The weather is positively soul warming.

The play for private equity in any of their acquisitions is to maximize EBITDA for a sale at a higher multiple in 3-5 years.

Financial returns are the name of the game.

Now, as you can imaging there are some different ways an organization can go about improving EBITDA and multiples.

The first is grow a great business. Treat people right, make good decisions, try really hard, all that good stuff. If you love that kinda thing, you should talk to my people at Forward Slash / Health. It’s all they do.

Orrrrrr, if you’re way more awesome, use financial engineering to pump up the valuation.

What’s financial engineering you ask?

So glad you asked. It’s basically the use of financial strategies to improve the financial position and hence the valuation of a company.

To help think about it, here’s what financial engineering is not:

• Operational improvements.

• Value creation for the patient or clinician.

To help even more, which is the reason I spent my donut fueled Saturdays writing this, we’ll look at some perennial favorite tools of Blair’s PE fund:

Sale and lease back

This is when you sell an asset and then lease it back from the buyer. You get a lump of cash and then lease payments become an expense. You were depreciating the asset before as an expense on paper, now it’s just become a real expense. Here’s the upside:

Lower tax payments
No maintenance costs
Risk transferred to buyer
Cash available for distributions, I mean investing in the business

Optimize cashflow

Ok, this one is a little more on the up and up. Basically we are just bringing cash in faster and optimizing our outflow. The bring cash in faster makes sense, but optimizing outflow deserves a couple extra lines.

Sometimes waiting as long as possible to pay is well and good. No penalties and more importantly, no incentive to pay early. In some cases you have the option to pay within say 15 days and get a 2% discount. That might be worth it depending on your cash flow cycles.

Them PE boys will look at all that and get the cash machine humming. When you are collecting faster and paying more efficiently, costs go down and cash conversion cycle gets faster. For the distributions, I mean investments.

Financial incentive alignment

Here’s the real thorn in everyone’s side. When a PE firm buys a physician practice, they can’t employ the doctor directly. That would violate Corporate Practice of Medicine laws. And although hospitals do it all the time, Brighton’s dad’s firm isn’t allowed to.

What you can do is setup a management service organization (MSO) that has a master service agreement (MSA) with the practice you just bought. Then the MSO does everything except tell the doctor how to practice medicine… sort of.

Sort of, because the doctor(s) have vested interest in the financial success of their “new” practice. It’s new because the PE firm sets up a separate holding company in which the doctor receives equity on top of the buyout (that’s the MSO). Then the PE maestros will put all kinds of “incentives” in place to increase the valuation.

Like-a-dis:

That’s the gist of the structure and how not to run afoul of CPOM laws.

Not saying that docs are doing nefarious things by any stretch. The usual situation is the doc becomes a minority owner in the new company with little say in how things roll. And yes, on paper the doctor still has full control over clinical decision making, but when someone else has all the operations under their control and controls the money and controls your financial future, it becomes easier to see why a private equity owned OBGYN practice does significantly more C-sections than practices not owned by PE.

Just sayin.

Multiples arbitrage

This one is fun and ties directly into the big strategic play.

A business’s sale price is based on a multiple. Usually it’s a multiple of EBITDA. Private Equity yacht jocks love them some EBITDA.

A practice for example may sell for 2x EBITDA. The “2x” is the multiple. This completely made up, hypothetical practice is smaller and has about $500K in earnings.

Another practice in the same specialty with $4M in earnings may sell for 5x EBITDA. Bigger is better after all. It shows more stability as a larger organization, which would command a higher multiple, not to mention the gross values.

So, now, here’s the trick. Write this down. Wait, I’m writing it. Just don’t delete this email.

Buy 10 small practices at a 2x multiple on $500K EBITDA for a purchase price of $10M. Don’t worry, you only need to front $2M and load the new business with the rest in debt.

Now, you have a business with $5M in EBITDA having done… NOTHING. Well as you know, this bigger business commands higher multiples. So you can turn around and sell it at 5x EBITDA.

$25M. You only put in $2M. Nice return. The goal.

Ok, I did make one more picture:

Listen, this is a simplified version, but you wonder why every finance major wants to go into private equity and why everyone who is super rich at least plays in the arena.

Tax structuring

I’m not an accountant so I can’t give you all the nitty gritty here. And frankly you probably don’t want it. Even I can’t make tax structuring interesting.

My two cents, they do all kinds of stuff with leases (as we saw above), refinancing loans, new debt, etc. to lower the tax bill. Cause damn the man, save the Empire!

It’s very American to avoid taxes. In fact, it’s the exact way and reason this country got it’s start. Huh. I guess tax evasion is about the most American thing there is.

Raise prices

I obviously don’t need to go into this one much. Aggregate that buying power with all the newly owned practices and negotiate better reimbursement. Also raise cash pay prices.

Do what you have to do. But raise prices.

Thus concludes our stroll down Goldman Sachs lane.

Outside of these financial engineering chicanery, PE firms will do some operational things. They’ll get you a bigger, worse EMR. They’ll cut your support staff. They’ll centralize a lot of functions, firing some of your favorite front and back office team. They’ll streamline processes and make things more efficient.

All in the name of cutting costs. The goal again, improve EBITDA. That’s how you get a strong exit.

And here’s The Big Strategy: Buy practices in the same specialty and put them onto a single platform. The PE firm reaches economies of scale in the new business, has a net higher EBITDA to drive a higher multiple, and how more leverage across all it’s contracts.

It’s essentially an economies of scale play. Classic. But the real question… Is economies of scale the way to make healthcare better?

We’re not making sweater vests.

All righty, now you know what in the heck is going on with this financial engineering stuff. And just like is sounds, nothing is really happening in terms of how the business serves people. These are just activities to increase valuations to generate returns on the sale in 3-5 years.

Cool. I am going to call my friend Barron now and see if he’s hiring.

Good day to you.

Why it matters: Because relationships are the lifeblood of life

Read time: The time it takes to finish a Wendy’s Frosty if you only use french fries (2 minutes for real though)

Hello gorgeous souls. It’s so nice to be with you on a not regularly scheduled Sunday.

The reason for this special half edition is that it occurred to me that you know all this stuff about me, and I know very little about you.

Like what’s your favorite color? Mine is black and hot pink.

I know that’s two colors, but you know we aren’t about convention here.

You also may or may not know that I have two kids (6 &4), am married to the coolest lady ever, and I am kinda tall. Sometimes I wear t-shirts.

I also have strong opinions about the Healthcare system and want to be a part of fixing the mess.

But back to you. This is about you.

Would you be wildly opposed to filling out this survey?

I would love to hear all about you, what you like, what you love, what you want to hear more about in healthcare. All of it.

Here’s a button in case you missed the first survey link:

Button

You can fill out as much or as little as you like. There are no rules here. We’re like Outback Steakhouse, just without the awesome bread.

Sorry about the bread.

Thank you for being you and all the incredible things you do everyday!

Here you go (it’s that survey, remember?):

Thank you for filling this out you awesome human you!

See you out there!

Why it matters: Applied correctly, these fundamentals can lead to better care and higher profits

Read time: Depends how many times you doze off while reading this (8 minutes for real though)

This episode is brought to you by:

Hungry for a change?

Join our Virtual Lunch & Learn!

We'll dig into how we're saving employers an average of 21-33% on total cost of care. And send you a free lunch!

Register here!

With Fall around the corner there are two things on everyone’s mind. Flu shots and pumpkin spice lattes.

Naturally there is another topic on everyone’s mind. A perennial favorite, the wild costs of healthcare. Funnily enough, despite costs being out of control and everyone constantly talking about costs, you may be surprised to learn that most healthcare leaders don’t know their own costs.

And as you will see, not knowing your costs leads to all sorts of issues. So today we’re talking about contribution margin and activity-based cost accounting.

First, let’s talk about why this is important in business in general and then why it matters in healthcare. If you don’t fall asleep or pull your eyelashes out first, you can stick around for the “how to do it” part.

Minor disclaimer: If you are reading this, you probably know where I stand on the issue, but for now, we’re going to table that and get real businessy.

Let’s start from the very beginning. Contribution margin is revenue from one thing minus the direct variable cost to make the thing or provide the service. It’s essentially the very first step of profitability, before you add in things like overhead.

It basically goes like this:

Why am I bothering telling you so?

The delta between price and cost is how you make money and grow a business. With no delta, or very little, you are stuck.

You can’t invest in more people. You can’t invest in new tech. You can’t open a second location.

And the issue that most people face is they don’t know their costs at all. Well, they kinda do, but only at the end of the day.

Check out the madness:

Here’s a link if you’re into that sort of thing.

Now, it’s not like these titans of Excel don’t know how much the whole kit and caboodle costs to run at the end of the day. But they have no idea how much it costs to take someone’s old decrepit knee cap out and slide a new one in.

They definitely don’t know what it really really costs to take out your gallbladder.

Any why don’t they? Well because it’s hard AF.

Just think about all the complexity going down in an OR. You have team members all with different salaries. One case is done in 37 minutes and another takes 2 hours. One uses 7 liters of irrigation fluid and another uses 1. One has complications and requires assistance from another surgeon and the other doesn’t.

It’s bananas out there.

Then, you have this overhead nonsense. It costs money to keep the lights on, run the A/C, play the AC/DC, and keep those glazed carrots in the surgeons cafeteria warm. Who pays for all that jazz?

I know what you’re thinking at this point, “I don’t want a valuable lesson, I just want ice cream.” But stay with me.

When you have multiple service lines and multiple types of visits or procedures within that service line, if you don’t know the costs associated with each one, you can’t make well informed financial decisions.

So say you are an awesome-sauce independent practice and have defined 3 service lines. Within those service lines you bill for roughly 5 procedure/visit types each. Your P&L looks pretty good at the end of the day, but can never seem to grow past a certain point.

Well, if you looked at every service line individually, you might find that one of them is 15% less profitable than the rest. A further drill down reveals that 2 of the procedures are losing you money.

Bingo. Stop offering those procedures and profitability will magically improve.

We often think that less revenue is bad. That’s not true. Less of the wrong revenue is good. You can only find the wrong revenue if you know your costs based on the specific service.

Ok Sam I Am, now that we know why we should do this, how do we do this?

While it will be different for different care settings, the principles are the same. And if you’re interested you should check out the work that Dr. Vivian Lee did at the University of Utah. And after you are impressed by that, you should check out her book.

Let’s imagine you are in private practice and ready to take things to the next level. The example above gives you a little perspective into how this helps, but where do you start?

Well, dust off your algebra books cause you may recognize this little ditty:

y=mx+b

Yup, that would be the old linear equation. And there you were in 6^th grade thinking to yourself, why the heck fire do I need to learn this junk? You’re welcome Mrs. Sniderman.

Here’s how you use it. With pictures, naturally.

Step 1: Get all your cost data in one place. You need to collect a few months of it.

Ok no picture here.

Step 2: Get all your productivity data in one place. So all the appointments. That patient volume.

Or here… The pictures are coming though, promise.

Step 3: Fire up Excel. Put each data type in a column. By week if you like. Doesn’t matter too much, but you want enough data over time. Don’t worry about dates. We are just looking at the relationship.

Step 4: Scatter plot that sucker.

Step 5: Insert a trendline

Step 6: Get the equation

Now, drumroll, you have an estimation of your variable costs and your fixed costs. That’s the magic sauce in contribution margin.

In this totally made up example you have an average variable cost per patient of $111.35.

You have fixed costs of $2,544.60.

If I know how much I average in revenue per patient, I can quickly see how many patients I need to see on a weekly basis to breakeven.

In this rough example, if my average revenue per patient is say, $150, then my contribution margin is $150 - $111.35 or $38.65.

To cover my fixed costs I need to see 66 patients a week.

When you have your fixed costs (those are the costs that don’t change no matter how many patients you see) and you know your variable costs (the costs that change depending on volume) you can determine:

1. How many patients you need to see to breakeven.

2. The price that things need to be (which impacts number 1).

3. If something has the chance to be profitable or if you should move on.

That’s the quick and dirty. That’s how you can probably approach this if you are running your own practice or in a mid-sized group or smaller.

Looking to grow your practice, but not sure where to start? Setup a consult with Forward Slash / Health. They even offer a complimentary financial analysis of your practice.

Schedule here

In a hospital or large multi-specialty you may want to approach things from a bottom-up activity basis. That’s what Dr. Lee did so well.

The basics is you have to track everything over time. For everything. How many lap sponges. How long the scrub tech was in the procedure. How long the procedures took. Ev. Er. Ry. Thing.

Ya, cumbersome.

But the results speak volumes. The University of Utah was able to save millions, become more efficient (more revenue), and improve outcomes.

Because what happens when you have an unnecessarily long length of stay, generally? Ya. Worse outcomes, less money, and a lot of grumpy people.

It may seem boring and like doing this type of exercise would make you a fusspot. But sometimes boring things can be fun. Chili knows.

Here are the fun parts:

1/ when you know your costs, you can control them much more effectively. That increases profit. That means as a practice owner you make more money without doing more. Yay.

Now don’t go all Ralph de la Torre and cut costs that are necessary. That’s a fast track to yachts, I mean jail. Well, maybe not fast, but eventually. Maybe.

2/ You can make better financial and strategic decisions. Wanna grow? How much is it going to cost to start the new clinic? How many patients do you need to bring in to make it profitable? How profitable can you be in the first year?

Exactly, get them costs and contribution margin. Then those questions aren’t scary. Still annoying. Not scary though.

3/ You have leverage when asking for investment from leadership.

Ohhhhhh buddy. The hidden gem. I just have to expand on this a little with a creative application.

Let’s say you are running a department and want some raises for your people, but the administration whines and says there is no money because costs are too high. Remind them, semi-politely, of your contribution margin. And further more, you don’t agree with the overhead and administrative cost allocation to your department. In fact, you can politely this time, ask for the breakdown of those cost allocations so you can see exactly why they can’t afford any raises at this time. You can also suggest that if they had a better handle on costs they could lower them and then afford to pay the people who actually drive revenue more.

That’ll be a fun convo. When management doesn’t have a good handle on costs they can’t manage anything.

All right, this is getting too long. If I had more time, I would have made it shorter.

You stay classy, planet earth.

Why it matters: Healthcare costs have been on a wild roller coaster ride, leaving patients feeling like they're strapped into a rickety wooden cart. Choosing and navigating traditional insurance plans can feel like trying to untangle a ball of yarn with mittens on while blindfolded. Let’s face it: healthcare shouldn't be a circus act.

Read time: Less time than it takes to reheat last night's leftovers under a hair-dryer (10 minutes for real though).

Before we get into it, just wanted to share something AH-mazing —the Healthcare Huddle newsletter is perfect for healthcare providers like physicians, nurses, APPs, and students to stay updated on the industry. 

The weekly newsletter is packed with digital health insights, policy updates, and business trends. Written by Jared Dashevsky, a resident physician in NYC, the content offers a unique physician perspective. 

Join 30k+ health professionals already ahead of the curve. 

Subscribe now here. Or with this shiny button:

Shiny Button

Now, on to the show! And this is a special show, because I, am but the messenger. The episode of actionable and action packed optimism is written by my good friend, Mr. John McCluskey.

John has had a front row seat to health plan building and administration, so it’s safe to say, he knows what he’s talking about when it comes to cost and quality. He’s also just down right cool, incredibly knowledgeable, and pretty savvy with the dad jokes.

Without much more ado, cuz you know I like to type ramble… Here’s John!

Ever felt like your health insurance plan was giving you the runaround? You're not alone. We've all been there. The truth is, healthcare costs can feel like one big, slippery slope. But fear not! We're here to help you navigate this crazy world and find a healthcare strategy that won't break the bank.

Why This Matters:

Studies show preventative care and primary care visits reduce emergency room visits and decrease hospitalizations, but many patients choose to avoid preventative medicine and do not have a primary care provider they see regularly because healthcare costs are leaving many patients feeling like they're on a one-way ticket to Brokeville. Let's break it down:

The Numbers Don't Lie: Healthcare costs are soaring higher than a kite on a windy day. Insurance premiums are through the roof, deductibles are out of control, and patients are left holding the bag for the foreseeable future.

The research group PricewaterhouseCoopers (PwC) is projecting an 8% year-on-year medical cost trend in 2025 for the Group market and 7.5% for the Individual market, driven by inflationary pressure, prescription drug spending and behavioral health utilization and historically averages around 5-7%.

The overall annual average cost per employee increased to $15,290 in 2023, an increase from $14,624 the previous year. The total cost per employee varies depending on several factors that include participation of dependent, spousal coverage and types of health benefits offered.

A survey conducted by the Survey Income and Program Participation (SIPP) estimates that people in the United States owe at least $220 billion in medical debt. Approximately 14 million people (6% of adults) in the U.S. owe over $1,000 in medical debt and about 3 million people (1% of adults) owe medical debt of more than $10,000.

This System is Broken: The current healthcare system is like a tangled ball of yarn with no end in sight. Insurance companies, providers, and patients are all pulling in different directions, leaving everyone feeling lost.

With a proliferation of benefits structured around High Deductible Health Plans (HDHP), Individual Health Reimbursement Arrangements (ICHRA), Health Reimbursement Arrangements (HSA) and Health Savings Accounts (HSA) can make it difficult to know what the best strategies are to provide meaningful health insurance benefits that create real value and savings.

The Affordable Care Act (ACA) attempted to provide coverage for workers in the United States by mandating that large employers with over 50 employees working at least 30 hours provide some basic levels of coverage or face fines for noncompliance. This brought a new generation of bare bones health plans to the market that typically only cover mandated preventive services and have yet to help provide affordable health coverage. 

The Human Cost: The financial burden of healthcare is taking a toll on people's lives. It's like trying to juggle work, family, and medical bills all at once.

Many agree that healthcare costs are out of control and the burden of providing meaningful benefits is getting further out of reach. Look no further than the pending lawsuit from former employees at J&J or Wells Fargo who are suing their former employers for what they believe is mismanagement of their healthcare benefits and not passing along rebates and other discounts they received from their Pharmacy Benefit Managers (PBMs) to their employees, specifically around prescription and rebates. The outcome could have a far reaching impact on the future of how employers and employees provide and obtain health benefits. So what's a constant or true north when thinking about health benefits?  The fact that humans need quality, cost effective healthcare. Let’s take a closer look at how healthcare is obtained. 

The Rundown: How We Got Here

Imagine healthcare as a complex game of telephone, where information gets lost in translation and everyone ends up speaking a different language.

1. Benefits Gone Wild: Companies offer a dizzying array of health insurance options, leaving employees scratching their heads. 

KFF.org reports as of March 2023, 60.4% of the non-elderly, or about 164.7 million people, had employee sponsored insurance (ESI). Of these, 84.2 million had ESI from their own job, 73.8 million were covered as a dependent by someone within their household, and 6.7 million were covered as a dependent by someone outside of their household.

2. The Gatekeepers: These folks decide what treatments are covered and how much you'll pay. It's like trying to get a straight answer out of a politician.

Typically these payers are administrative service organizations (ASO) in fully insured arrangements or Third Party Administrators (TPA’s) for self funded employers who are responsible for things like paying claims, answering phones and other administrative aspects managing a health plan.

According to the research from the Health Affairs Forefront article, administrative spending accounts for between 15 and 30 percent of medical spending. 

Healthcare Consumers: Caught in the Middle: Doctors and hospitals are trying to do their best, but they're often handcuffed by insurance red tape.

According to Debt.org the average family of four with health insurance in 2023 paid $31,065 in medical expenses, including insurance premiums, up from $28,310 in 2021. Those without insurance often must make choices between getting healthcare or paying bills.

Debt.org continues to say the cost of a doctor visit is hard to quantify because there are many factors that go into what the final bill is. The average cost of a doctor visit, not including procedures or tests, ranges anywhere from $80-$170 across the U.S.

It's me, hi, I'm the problem, it's me: Misaligned Incentives & Information Overload

The current healthcare system is like a three-legged race where everyone is pulling in different directions. Insurance companies want to maximize profits, providers want to deliver quality care regardless of cost, and patients just want to be healthy but not have to choose between housing and medical bills and food. It's a recipe for disaster.

The MRI Maze Example

Mr. Thompson had a headache and went to see Dr. Evans. Dr. Evans thought it was stress, but to be sure, wanted to order an MRI. But first, Dr. Evans had to get okay from the insurance company. Mr. Thompson didn’t know how much it would cost, but wanted to feel better. The insurance company (plan design) dictates if a prior authorization is needed, how much the plan will pay and how much Mr. Thompson’s financial responsibility will be, which could cost thousands of dollars and puts everyone in a tricky position to evaluate the best path forward.  

Building Trust: Doctors vs. Insurance Companies

Let's be honest: you probably trust your doctor more than your insurance company. It’s like choosing between a trusted friend and a used car salesman. What about the payer “insurance company”? Their main focus is managing risk and keeping costs down, not always directly translating into the best care for you as seen in the example with Mr. Thompson. You don’t have to look far for examples of how this impacts each of us. Just ask Dr. Jerome Adams, MD, MPH, the former Surgeon General who ended up with a $5,000 medical bill for an emergency room visit. So how do we move towards cost effective solutions that are making a difference? It is important to note there are times when urgent care and emergency room visits are appropriate however there are other instances where other options are extremely beneficial. 

Healthcare Opportunity: Options You Will Enjoy:

Enter Direct Primary Care (DPC). It's like finding a hidden oasis in the desert. DPC offers a refreshing alternative to traditional healthcare, with a focus on prevention, personalized care, and affordable pricing.

Direct Primary Care (DPC): Your Doc on Speed Dial

Imagine having a doctor you know and trust, accessible 24/7 (well, almost!). DPC practices can offer a flat monthly fee for primary care services typically ranging between $70-$80 that include preventive care. This fosters a closer relationship with your doctor and potentially cuts out unnecessary costs. 

According to a National Association of Community Health Centers NACHC report it is estimated that more than 100 million people in the United States don't have a primary care provider, and about a quarter of those are children.

The lack of an established primary care can significantly impact the amount consumers spend when needing healthcare along with preventable healthcare issues. 

In 2020 the Society of Actuaries (SOA) commissioned Milliman to develop a report on potential savings that can be achieved by making DPC a focus and showed an average decrease in medical claims cost by an average of 12.64% after risk adjustment. 

Figure 1: DPC: Evaluating a New Model of Delivery and Financing

Additionally, emergency department usage decreased by 52.50% and urgent care visits by 18.86% respectively further validating the impact that DPC can have on healthcare.

Figure 2: DPC: Evaluating a New Model of Delivery and Financing

The U.S. Centers for Disease Control and Prevention  (CDC) says that ninety percent of the nation's $4.5 trillion in annual health care expenditures are for people with chronic and mental health conditions.

Some of the usual suspects are heart disease, stroke, cancer, diabetes, obesity, arthritis and often patients have several conditions going on simultaneously known as comorbidities. 

There is a silver lining, according to the CDC proven chronic disease interventions can be cost-effective. "Cost-effectiveness" recognizes that the cost of the intervention is worthwhile in terms of longer life and better quality of life. in that proven chronic disease intervention.

This builds on the value and credibility that DCP can have on healthcare costs and provides the ability to better support disease management through the continuity of care (CoC) model. The State of Rhode Island’s Department of Health defines CoC as an approach to ensure that the patient-centered care team is cooperatively involved in ongoing healthcare management toward a shared goal of high-quality medical care. CoC promotes patient safety and assures quality of care over time.

The DPC strategy can be embedded in plan designs and also has the added benefit of being an additive healthcare benefit that comes alongside existing health insurance offerings. Notably there has been a resurgence on making DPC a focal point of health plans while providing modern virtual solutions for members to engage wherever they are at. One such solution is Vitable Health who’s founder Joseph Kitonga started the company to offer a benefit for those who do not have access to meaningful health insurance. The DPC strategy has proven time and time again to be effective in both terms of providing a meaningful health benefit and also a solid cost management strategy. 

The Final Takeaway: 

Direct Primary Care (DPC) offers a refreshing alternative. By focusing on preventive care, building strong doctor-patient relationships, and offering transparent pricing, DPC can help you take control of your healthcare. With DPC, you'll enjoy easier access to care, potential cost savings, and improved overall health.

Annnnnd scene!

See you next time, planet earth.

Why it matters: You’ll see

Read time: Dominos delivery in the 90’s (7 minutes for real though)

I know. I know. We’ve been talking about PBMs a lot. The news, in fact, has been talking about PBMs a lot.

I told you I was a serious journalist. Take that high school teachers who gave me bad grades on my book reports.

But stick with me. Don’t just mark this as unread in your email and then delete it after not reading it for 3 weeks. It’ll be good, promise.

Today we have no sponsors so we’ll just jump right in.

By the way, you or your friend should totally sponsor this newsletter cuz it’s super cool and you’ll totally get business. Press this button to fill out the form.

Button, press me

Ok, that was a word from our non-sponsor.

Today we are going to address the elephant in the pharmacy room: The discount card. More specifically GoodRx, since it is the dominant discount card on the market.

It’s obviously the yellow branding. It’s also because it saves people all kinds of dollars on prescription drugs. Amazing right?

Wrong!

Well, I mean it is great when someone can actually afford their medication which they otherwise would not have been able to because they are either uninsured or have a poo face plan that makes them pay too much money for their Cialis.

But there are two things I would like to say. First, GoodRx should not HAVE to exist. If our system was designed in such a way that delivered healthcare and supported the healing of people in a way that did not seek to maximize profits through utilization of the system, then it would not need to be a thing. Because PBMs wouldn’t be a thing and mega insurance carriers would also not really be a thing. Nonetheless, we are not here to talk about my Bernie Sanders issued mittens and tin foil hat. We are here to talk about PBMs.

Secondly, GoodRx, not from an individual saving on an individual prescription perspective – that perspective is cool, I like it… No, the other perspective is that of the independent pharmacy that is getting hurt by GoodRx and ultimately the PBMs.

You see GoodRx is great and will totally save you money until your pharmacy closes because it keeps losing money by being forced to work within this broken ecosystem.

Here's how it all works.

Remember this awesome image:

It’s a little nutty to add another box in there, so we’ll break out the discount card money and data flow seperately.

Here we are (Dotted lines represent information flow. Solid lines represent money flow):

Now, let’s see what’s happening here, Maui. Sorry Moana reference just snuck in. I have kids, ok!

When you, the patient, goes to fill your prescription, your friendly neighborhood pharmacist tells you that it’s going to be $98. You’re like, say huh? That’s crazy expensive. Then you ask what the cash price would be.

They wouldn’t tell you since they aren’t usually allowed to after you flash that fancy insurance card, but the cash rate is even more. See, pharmacies have to play the same dumb games that hospitals play. We all know and hate the chargemaster, which was written in fairy tail land. Pharmacies use the same Narnia math to determine inflated cash prices.

Listen, it makes sense. No one wants uncle insurance carrier to come to the negotiation table and see that you have been charging $15 when they have been reimbursing $25. Say goodbye to ten dollars.

So then you say, what about this yellow discount card thing I have been hearing so much about? Pharmacy Jim rolls his eyes and then tells you that’ll be $13.

Woah! Jackpot! Now you don’t have to die from your cholesterol being too high.

What you don’t know is that now Jim just lost money on that sale. Because he is taking GoodRx, he now only makes $13 in revenue on a drug that he paid $8 for. Factor in all the costs and overhead and he’s probs underwater. Not to mention the fact that he is also going to pay like $3 back to the PBM for the good privilege of taking GoodRx. The PBM then throws some money over to GoodRx for hooking them up with a patient.

And don’t get it twisted. It’s their patient. Despite you paying cash, this is a PBM claim. GoodRx is a data aggregator for existing pharmacy networks. You’re now in the system man. On the grid.

That’s where all this gets squirrely. GoodRx is theoretically doing a great thing. It accesses cash rate, discount pricing from all the PBMs and then gets the pharmacy to give you that price. The problem is everyone wins until the pharmacy is squeezed so much that it goes out of business.

Now, imagine that the you went in, had different insurance and a different PBM and Jim rang you up and told you that your cost was $13. Well look at that. Just so happens that you are a member of the PBM that GoodRx directed you to in the first scenario. In this case, instead of Jim also needing to pay the PBM a fee, the PBM actually pays the reimbursement rate of $13 plus a $2 dispensing fee.

Look at that. Seems like a better deal for ole Jimbo. And you to boot.

The other thing that’s going on here is that the PBMs have seen the writing on the wall and like this GoodRx thing. As a result, they aren’t just hooking up GoodRx with data and then charging pharmacies a fee to pay GoodRx with. They’re partnering to access the GoodRx network.

At the end of the day the PBM is just the pharmacy version of medical benefits. They have a network of treatments and treatment distribution, negotiate rates, and then use your premiums to pay for those treatments while keeping as much as possible. It’s in their benefit then to access lower costs and just collect on the fees.

Here’s how that banana-rama goes.

Picture first (same drill on the dotted versus solid lines):

You go to the pharmacy. You have CVS Caremark. CVS taps into the GoodRx network and finds another PBM with a cheaper price. You get the drug for that cheaper price. That price is a discount rate from the second PBM, which you pay as a copay. The copay is applied to your deductible. But since this is a GoodRx rate, the pharmacy is now on the hook for a fee back to the PBM. The PBM then splits the fee between GoodRx, itself, and that rando that got invited last minute.

Now, in this crazy world, you don’t even need to opt to use GoodRx. It gets used for you. The PBMs are also making money for doing literally nothing at all. The health plan doesn’t even lift a finger in this case. But you can be sure the plan sponsor isn’t enjoying any of those bogus fees.

Again, that can be great for you. Lower costs and all. Yay.

But from the pharmacy perspective it’s a rough deal. Now the pharmacy doesn’t even know when it’s going to get hit with additional fees. Lower payment and more fees. That doesn’t sound like a recipe for strong financial performance.

Here’s the TL;DR

GoodRx and discount cards are cool for patients, but generally screw over pharmacies, especially small independent ones.

PBMs are still in the driver seat, determining the fees and the prices. They have opted to embrace GoodRx since it enables them to make money doing nothing at all.

GoodRx is a front door to aggregated pricing data. It’s value is in its brand and current market position. We’ll see how long it’s defensible.

Thus concludes our romp down PBM lane. The next issue is going to be a super special one. I won’t give away too much detail, but you should totes read it.

In the meantime you can catch me watching the summer Olympics enjoying the French way of life. That’s right in honor of the Olympics I will be watching hard working dedicated athletes while drinking mimosas, wine, and bread and cheese. What’s more French than that?

See you out there!

Why it matters: I feel like I would like to know if someone is ripping me off

Read time: The time it takes for that first slice of pizza to cool down enough to not melt the roof of your mouth (7 minutes for real though)

Welcome to Part III of this PBM paradise. Perfectly paired with your sippy by the pool.

If you haven’t already, head back in time to Part I; What the heck is a PBM anyways, then over to Part II; The pharmacy ecosystem, to get caught up on all things nefarious in the world of managing pharmacy benefits.

Oh, and since you asked, yes, this episode is brought to you by none other than ME! And this finance course I made, which you should totally take. Because how else are you gonna fix this mess if they’re always hoodwinking you with their financial shenanigans.

Boop.

Free for life after paying

Back to business.

There are 5 main games that PBMs play to bilk your hard-earned dollars. Kinda like the person who orders water and then puts Sprite in the cup.

We see you bro.

The games:

1. Spread pricing

2. Kickbacks, I mean rebates

3. Mail order

4. Direct and Indirect Remuneration (DIR)

5. Overpaying yourself

6. Bonus – Prior authorization denials, not allowing substitutions, intercompany eliminations

Away we go.

Spread pricing

This one is pretty simple times. Not cool, but simple. The PBM simply charges the health plan way more for the drug than it reimbursed.

For example, the pharmacy is reimbursed by the PBM for $70. The PBM turns around and invoices the health plan for $100 plus the admin fee. In fantasy land, the PBM should be invoicing the health plan for the reimbursement, not some made up number to make extra profit.

Picture!

Kickbacks

I am not calling them rebates. Sorry not sorry. These are dang kickbacks Annie Oakley.

The PBM sets the formulary for the health plan. That means it gets to say what drugs are covered and for how much. To earn that honor one would think it would be based on efficacy, affordability, accessibility, and all the good things that help to treat patients.

Scoff. This is healthcare, not Unicef. We aren’t running a charity here. We’re making hundreds of billions.

So, the PBM sets the formulary and will happily give a pharmaceutical company preferred access for a kickback. But since kickbacks are illegal, they have rebranded them as rebates.

The two companies agree to a certain amount of rebates, often based on pay-for-performance, to buy a spot on the formulary. The PBM looks like a hero to the health plan because they trot back on their white horse, which they overpaid for from the stud farm of a politician, and hand over a “rebate” check.

What they fail to mention is the cut of the rebate check they keep. So the rebate may be $100 but the PBM goes ahead and holds on to $30.

Easy money picture.

Mail order

You can also think of this one as repacking. I don’t know about you but Express Scripts keeps hitting me up asking if I want to get my prescriptions through its mail order service, which naturally will cost me less. No copay!

Jokes on me and them, since I already hit my max out of pocket this year.

Here’s how this seemingly awesome thing actually sucks. They waive the copay, they eliminate the admin fee to the plan, they even offer a deeper discount to the plan. All sounds good right?

Not so fast Halle Barry. Since they are now the wholesaler of the drug, they set the price. So great, no admin fee and a deeper discount on a drug that may cost 50% more.

And PBMs ain’t no scrubs. Why do you think they waive the $40 copay. When a drug costs $873 and then gets marked up 50%, that $40 isn’t making a dent.

Don’t worry, I made another picture.

DIR party

Y’all remember “No Child Left Behind” right? Basically some PBM exec was sitting around reminiscing about the good ole days while sipping a mint julep, peering over his monocle, twirling his Dick Dastardly mustache, and lauding the efforts of politicians penalizing underperforming schools.

Eureka.

See, no child left behind may have been well intentioned, though I have no idea how they missed something so obvious. It’s almost like the same people are responsible for Medicaid.

Anyways, if a school underperformed, it would have it’s funding cut.

Stick, not carrot.

The issue here is that the underperforming schools were also the most already under-resourced. Cutting funding only hurt the school more and sent it into a death spiral, earning cuts year after year.

Think of DIR fees in the same ways. PBMs set some Narnia conditions that a pharmacy must meet and when they don’t they claw back reimbursement.

Guess who gets hit the most? Ya, pharmacies that aren’t CVS. What’s up Caremark.

PBMs make significant amounts of revenue, or rather avoid significant amounts of costs by stealing, I mean, taking the money back from a pharmacy against its will after it preformed a service.

Simple picture.

Overpaying yourself

But how? But why?

Remember, the PBM game is one of vertical integration. Especially where specialty pharmacy is concerned. Specialty pharmacy is just the complex stuff. Think infusions and cancer drugs. Fun fact though, PBMs also deceide what qualifies as “specialty.”

So, Caremark is obviously CVS, which has specialty pharmacy. Cigna owns Express Scripts, which owns Accredo. And United Health owns Optum RX, which owns Optum Specialty.

In the vertically integrated game, when someone else foots the bill (the health plan) it makes all the sense in the world to overcharge yourself.

Say a drug is reimbursed normally at $50. The Plan should bay $50 to the PBM, which then pays the pharmacy $50. I mean, makes sense right?

But this isn’t about sense, or cents, it’s about yachts. Lots and lots of yachts.

Caremark happily “negotiates” a reimbursement rate of $100 to CVS pharmacies and gladly pays. Because guess what? It turns around and charges that $100 to the health plan.

At the end of the day, CVS owns all of it, so it just whips up a few intercompany eliminations and makes itself a cool $100 for negotiating with itself, when it should have only made an admin fee and reimbursed $40.

Good negotiators.

It’s fine cuz, more pictures.

Bonus – Prior authorization denials, not allowing substitutions, intercompany eliminations

I figured you weren’t tired of my overly wordy, not to the point, occasionally often non-sensical writing and stayed for a bonus.

Naturally, PBMs require prior authorization for drugs. The longer the authorization is delayed, the more money they hold and can invest. When your premium dollars aren’t being paid out, they don’t sit on a mattress in a vault. They make millions for the PBM when they buy-back stock and invest in their buddy’s hedge funds.

No substitutions is part of the formulary games. PBMs want the high priced drugs and they want the kickbacks. It can’t be said enough that the higher healthcare costs, the better for insurers and therefore PBMs. So, they have crazy rules and don’t allow for substitutions of certain drugs so that you and the plan are on the hook for the expensive brand name drug.

Finally, intercompany eliminations. I have touched on this in the past. It’s how insurers make the government look like a joke (although it doesn’t need any help), by getting around Medical Loss Ratios. It’s also the mechanism that enables charging yourself really high prices.

All you do is charge your subsidiary or other division a lot of money, but since your cost on the front end is low, you can show greater costs (MLR) but you aren’t really incurring it. It’s a cradle to grave situation. Then you just do an interco elimination to keep the difference.

So if you buy something for $3 then sell it to your subsidiary for $9 and they sell it for $18, your profit isn’t $6 (9 minus 3). You eliminate the $9 and it’s ultimately $15 (18 minus 3).

Last picture.

Party on.

Why it matters: Oh, I don’t know, maybe it’s the $621B we spend on this every year

Read time: Longer than you were able to watch the debate (8 minutes for real though)

I don’t know about you but few things have me fired up this summer like that Shaboozey song and Pharmacy Benefits Managers (PBM). They both have the propensity to make you want to throw caution to the wind, throw on some cowboy boots, get in a pickup truck and just drive. Far, far away.

And in today’s episode we are going to unpack the pharmacy ecosystem. How the goods move, who is in bed with who, and who is paying.

Spoiler, you ultimately pay, but that’s a different topic.

But FIRST! Our sponsor for this series. The good people at Forward Slash / Health. The company that makes your clinical practice run like a boss and changes it’s ads like every two days. They’re cool though.

Are you sick of hospital life? Private Equity got you down? Over arguing with insurers, looking at spreadsheets, and chasing patients? Want to practice on your terms, your way, but not sure how to handle all that business junk?

We can help with the junk.

Schedule a call today.

The calling button

Reminder, to keep this, your most favorite healthcare publication free forrrrrr eeeevvvvvvveeeerrrrr, The Healthcare Breakdown is now taking sponsors.

Tell thousands and thousands and thousands of your best friends all about yourself. Clicky click below.

The clicking button

This is a follow up to our last episode in which we introduced you to the PBM and all the fun things they do.

In that episode, I shared this little gem.

Now, this graphic doesn’t even fully cover all the goods and detail, but it’s close. Here’s one more sourced by the Guru of all things drug flow and PBMs, Adam Fein at Drug Channels.

What is about to ensue is a whole lot of splainin about the players and relationships in this hot mess.

We are going to go playa by playa and then bring it all back home. Hopefully it will make more sense or less sense depending on whether you are more of a blue pill kinda gal or red pill.

1. Manufacturer

I figured we could start at the source. Our friends at Eli Lilly, Novartis, Pfizer, Amgen, Teva, and the likes.

We are starting with the top flow. The Manufacturer has two customers in our little diagram and one major game.

Customer one is the wholesaler. As always we need as many intermediaries as possible in our world of specialization. Wholesalers buy the drugs from the manufacturer for distribution to pharmacies. It’s one of the simpler relationships here.

The manufacturer also has deals with the PBMs to get preferred placement on formularies. Essentially they pay to play through rebates and incentive payments. These are otherwise known as kickbacks. Sorry not sorry.

Lastly, manufacturers have these awesome programs and a topic for another day called Patient Assistance Programs. Essentially they give patients money that will go towards their deductible in order to cover the cost of the drug.

It’s great for patients because they get like $2K of their deductible knocked out. It’s bad overall because it’s a way for manufacturers to overcharge and get your health plan on the hook for the remaining $80K, when you may have opted for something equally effective but less expensive had the program not been in place.

Games.  

On to the next one!

2. Wholesaler

Still in the realm of simplicity, and an effective oligopoly, we have the wholesalers. There are three essentially.

McKesson, Cardinal, Amerisource Bergen.

You’re looking at 85% of the market. Naturally great things happen when so few entities control the supply of drugs. Lucky for us, they hardly make any money.

Margins are mighty slim in the distributor world and one of these lads may net $3.00 on a prescription. But, millions of three dollars certainly adds up.

So these guys buy the drugs directly from the manufacturer and then sell them to the pharmacy at some minor markup. Or they sell it for less but get rebates and back end payments from the manufacturer.

Fun right?

They will also charge fees to manufacturers so they know where the drugs are going. And there are other fees they make up and may charge to pharmacies for their services outside of the drug costs. But at the end of the day the margins are still slim.

Take a peek:

Small margin. Big dollars.

But let’s move on to the place where you can also buy a pint of ice cream, a pack of cigarettes, and a Bud. Go figure.

3. Pharmacy

We’re going to dive a little deeper here in another episode, because there is so much to unpack. But as the saying goes, the poo rolls downhill. And pharmacies are getting squeezed on both sides.

It’s especially hard for independent pharmacies. Mostly, because as with much of healthcare, they have to buy things at normal prices and then sell them, using a lot of high paid person power (hello pharmacists) at weird, random, way-discounted prices in which they have no say.

They also get locked into bananas contracts where they pay all kinds of fees if, for instance, a patient doesn’t have an 80%+ medication adherence. Like, how is Debbie’s pharmacy setup to help with patient engagement when almost no one can crack that code and the best thing we have is annoying text messages reminding you 17 times to show up to your doctor’s appointment.

Anyways, the pharmacy pays the wholesaler for drugs. Just like you would in high school. The main difference is they will usually do it based on a contract and negotiated rates by a Group Purchasing Organization (GPO). Yes, yet another entity that you have the pleasure of paying so you can get better pricing. And the GPO makes money on both sides of the coin, from the wholesaler and from the pharmacy.

Once the pharmacy has the meds, they charge you a copay, set by your health plan, and then get reimbursed by the PBM.

At face value it all seems so simple, but really, it’s not such a treat considering independent pharmacies are often losing money on dispensing drugs not to mention the clawbacks and additional fees they pay left and right to the PBMs. That $1.00 dispensing fee isn’t quite making up for it.

Somehow our pharmacists, wildly important and talented clinicians, have been reduced to pill container movers. An effective last mile distributor.

And it’s a bunch of B.S.

But like I said, we’ll unpack this a bit more in another issue.  

4. You

On to my and your favorite topic. You. The patient. The person who needs their statin because cheeseburgers taste better when you are staring down the possibility of heart disease. Living on the edge!

By the way, I take a statin, so it’s cool. We all do it.

Moving on. You go to the pharmacy, usually the closest one, where you grocery shop, bulk shop, or that CVS since Wallgreen’s is disappearing. You pay your copay and get your meds.

Pretty simple. You do also pay your monthly premiums, sometimes get copay assist, and have the rest of your health plan costs covered by your lack of salary increases since your employer is on the hook for so much of the ever-rising healthcare costs.

This is the part of the ecosystem we are all the most familiar with. Considering it’s us, after all.

5. Health Plan/Plan Sponsor

I am including health plan and plan sponsor in one, because for this unpacking session, it makes sense. The health plan is the well, plan. What gets paid, how much, who is allowed to do stuff. You know, the rules. And the plan sponsor is the money that pays for stuff.

But of course, pharmacy is complicated so plans outsource pharmacy benefits to managers. Aptly named, Pharmacy Benefits Managers. They control the purse strings.

And the health plan collects premiums, shares in some of the rebates when the PBM tells the truth, and pays out the money for the PBM to keep and sometimes distribute.

As you know, may insurers now have their own PBM, since they have been shown to be so lucrative. It makes sense in a lot of ways. Why do we need a sub-insurer to manage pharmacy and the main one to manage medical. Seems like the one company should be able to do both. And they do now. The issue is that PBMs provide a vehicle to generate outsized profits since they are held to different regulations.

That aside, in this ecosystem diatribe, the health plan/sponsor is making its money from premiums, trying to pay out as little as possible, gets a little cut back from the PBM, and pays for the stuff with your money.

6. Pharmacy Benefits Manager

Well, well, well. We meet again.

There is not too much to add here that you couldn’t read in the first installment of this riotous series.

I’ll just point out again that in both images, the PBM has the most arrows going in and out. They are in control of the drug trade because they are in control of the money flow.

The key is that while they control the flow, it’s not their money. It’s the plan sponsor’s money. Which is free to do with as they please. One of those things could be using a different, transparent PBM.

I know like 28 people you can talk to about that, by the way.

To put a bow on this little ditty, and since you come here to see numbers, here are some numbers based on this fun filled ecosystem…

This is just an example and adapted from the fine resources at Drug Channels.

The thing to notice here, is first, this is an illustrative example. Second, there are fees, calculations, and entities not fully represented here.

The takeaways are the PBM retaining a significant portion of profit relative to the pharmacy and that health plans are at the mercy of PBM opacity. It also shows some concepts we’ll be touching on in Part III, like spread pricing.

Welp, that’s all she wrote.

See you in the next one.