Can Congress agree on the Cadillac tax?

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Cadillac taxi?

Health care is too costly in the US. One reason is that health insurance premiums are fully tax deductible for employers. This distorts the market, causing employers and employees to prefer devoting the next dollar of compensation to healthcare rather than wages. That’s fine in any given year but over time it’s helped drive up healthcare spending and hold down wages.

One of the many things the Affordable Care Act did right was to start to address this issue with the so-called Cadillac Tax, an excise tax on high cost employer plans. Like everything in the ACA it has been attacked and derided by the law’s opponents. But many Republican plans have equivalent measures, which would cap the deductibility of health insurance. Either one of these approaches would help by causing employers to work harder to hold down healthcare spending and by generating tax revenue that could be used for other health law goals or for general purposes. The end of tax deductibility only kicks in at a high threshold, which means the impact in the early years is limited and everyone has time to get used to the new rules. I’d like to see Congressional leaders be brave and embrace some form of cap as a bi-partisan consensus move.

Alas, the caps are opposed by an array of forces: employers don’t want a new tax, labor groups are worried that benefits will be eroded and out-of-pocket costs increased, and the healthcare industry worries about a squeeze on revenue.

Without strong leadership in Congress, it seems doubtful that new legislation will be passed. So maybe the best bet is to leave the Obama era Cadillac tax in place, imperfect as it may be.

By healthcare business consultant David E. Williams, president of Health Business Group.

 

Looking abroad for healthcare answers

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Serious students of the US healthcare system understand that costs are high and quality is uneven. While there are some incredible components of our system, it’s clear to me that we should look elsewhere for best practices that we could apply in the US. That outlook led to my interest in “medical tourism,” which I spent some time focusing on just before the Obamacare era.

A Harvard Magazine article (Global Health at Home) starts with the same premise, and cites a statement from the World Bank president that “situations of scarcity lead to innovation.” This gets right to the heart of the matter, because in the US high and rising costs are taken for granted, and budgets are not really a constraint. As a result we are not forced to think differently and creatively.

I was a bit surprised that the authors then jump to the conclusion that the solution is global health, which is “premised on taking responsibility for all people in a given location.. and at all levels of income. Philosophically, global health is guided by the words of… Paul Farmer, co-founder of Partners in Health: ‘The idea that some lives matter less is the root of all that is wrong with the world.’ Equity is the soul of global health.”

The authors use the term “Global Health at Home,” to describe their concept of bringing this global health approach, developed for poor countries, back to the US. Their solutions are pretty sensible: a holistic approach to chronic diseases, attention to identifying and addressing the social determinants of health, deployment of community workers, and an emphasis on care at home. These are good ideas but we don’t have to go abroad to learn them and frankly I don’t see that equity is the key lever for cost containment in the US or elsewhere.

I’m thinking about how scarcity has led to innovation in other fields: like how farmers in Israel innovated in irrigation to compensate for the lack of water or how earlier computer programmers developed elegant programming approaches when memory was a scarce resource (unlike the typical bloatware we see today).

What are the equivalent opportunities in healthcare, from both a process and product standpoint? What clever and efficient approaches are being taken for diagnosis and treatment in resource constrained settings? Can we apply them to the US? If we do, are there trade-offs that we need to consider?

What barriers are in place and can or should they be lowered? These may include regulatory requirements, malpractice risks, and payment methodologies.

It’s a topic worthy of systematic inquiry. I assume people are working on it, so if you’re aware please let me know on Twitter @HealthBizBlog

As a sidenote, it’s inspiring that the lead author of the Harvard article is in his 90s and still going strong!

Image courtesy of KROMKRATHOG at FreeDigitalPhotos.net

By healthcare business consultant David E. Williams, president of Health Business Group.

Due diligence in middle market healthcare M&A. The boutique consulting firm advantage

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You’re a middle market private equity firm that’s just signed an LOI with a profitable and growing healthcare company. What started as a proprietary deal turned into a competitive process and you had to stretch toward the top end of your valuation range to win. Now you have a few weeks to complete the due diligence process and close the deal. A boutique consulting firm specializing in M&A for healthcare companies may be your best bet to assist.

What help do you need?

When middle market PE firms hire consultants for commercial due diligence of healthcare companies they usually have a few objectives:

  • To generate insights on topics that are critical to the investment thesis. There are often macro questions, such as the fate of healthcare reform after an election or the speed of adoption of a new technology. Then there are questions about the competitive landscape and specific competitors, and about market demand and the needs and satisfaction levels of key customers. Sometimes the potential buyer also needs an assessment of the management team and company processes. A PE firm can do some of this work itself, but often finds it useful to leverage additional resources and skill sets, such as the ability to extract valuable information from players throughout the industry on an unnamed basis.
  • To gain access to an objective third party that can play the role of a constructive skeptic and thought partner, making sure that investors don’t let their desire to close the deal cloud their judgment. The best consultants have the instinct, gravitas and wisdom to challenge consensus thinking and are willing to point out potential pitfalls in a deal and to counsel against proceeding when needed, even if the potential buyer doesn’t seem to appreciate it at the time.
  • To prepare for a fast start after closing by generating and validating compelling strategic initiatives and tactics.
  • To get as much high quality support as possible in a tight timeframe while staying within a reasonable budget.

What firm to hire?

Premier strategy consulting firms such as McKinsey, Boston Consulting Group, and Bain have strong due diligence practices serving PE firms. There are solid reasons for their success. These firms can:

  • Mobilize large teams of highly intelligent consultants around the world to gather and analyze data. They hire the best and brightest from business schools and undergraduate programs.
  • Leverage their knowledge base and industry networks built from hundreds or even thousands of relevant client assignments. Their proposals often reflect the perspectives and data they have assembled over the years.
  • Produce high-grade graphical presentations, with professional staff dedicated to consistent, visually pleasing outputs.
  • Offer their brand name as a seal of approval, which is reassuring to investment committees.

But boutique firms, typically consisting of 3 to 20 professionals, represent a superior due diligence option for middle market private equity firms. Why?

  • Consultants at boutique firms are often former senior professionals from the big, premier firms. The consultants performing the data gathering and analysis are frequently more experienced than the partners from the big firms, who are mainly selling and managing client relationships while fresh graduates staff the cases. A boutique firm’s consultants don’t need time to get up to speed, which is crucial when the project is only a few weeks long.
  • Boutique firm consultants are generally better than their big firm peers at thinking like investors and board members. Many gain this perspective by serving as board members of PE or VC-backed companies and as LPs in PE and VC funds. This profile makes it more likely that the consultant will approach the work with a practical, focused mindset, crisply addressing the questions that really matter. This differs from the classic strategy consulting project that employs elegant but often theoretical approaches. In select cases a consulting team member from a boutique firm is appointed to the board as an independent director post-closing, something that is generally not possible with a big firm.
  • Certain boutique consultants are entrepreneurial and commercially astute. When appropriate, they highlight opportunities for post-closing business development and partnering to help the new owners hit the ground running. Compared with the big firms, there are fewer constraints on introducing clients to one another and aligning with the PE firm for commercial success.
  • Professional fees for the engagement are usually a fraction of what the big firms charge. There are multiple reasons for this. Boutique teams are smaller and flatter because there are no trainees. Consulting veterans don’t need mid-level managers to watch over them. Everyone on the team pulls their weight; no one is there just to boost the billings. There are fewer fixed overheads like HR, administrative staff and downtown offices to cover, and boutiques are not charging a premium for their brand name. All this means that boutique firms can pay staff as well as the premier firms while still offering compelling value to clients.

I co-founded the company that became Health Business Group back in 2001. At that time most of our clients were former colleagues from my days at Boston Consulting Group who had moved into PE firms or senior management roles at companies. After being on the inside they understood our value proposition. Over the next few years we attracted new business from referrals and networking. Recently, we have been pleased to receive a number of qualified inbound inquiries from our website contact page, which represents a change in how clients find consultants. Middle market PE shops are searching the web specifically for boutique healthcare consulting firms to perform due diligence. After interviewing us and checking our references, they often bring us on board and are pleased with the working relationship and results.

By healthcare business consultant David E. Williams, president of Health Business Group.

What if the FDA is eliminated?

President Trump’s first couple of weeks have people taking him literally, not just seriously. What does that mean when it comes to the regulation of drugs?

As I wrote in early December (Would an FDA radical make any real difference), I’m not convinced that even a major shift away from regulation will dramatically change the market. Even if the bar for approvals is lowered, third-party payers will still want to see compelling safety and efficacy data before they provide reimbursement. Medicare and Medicaid may also up their game by directly or indirectly discouraging prescribing of medications that are unproven.

The pendulum tends to swing back and forth between the demand for speedy approval and concern about harms to patients from inadequately tested drugs. Recently the pendulum has been swinging toward fast approval, and the newly enacted 21st Century Cures Act continues that trend.

But what will happen when a drug that’s rushed to market causes patient injury and death?

“We’re going to be cutting regulations at a level that nobody’s ever seen before. … And we’re going to have tremendous protection for the people — maybe more protection for the people,” Trump said Tuesday.

Trump is promising the impossible, and it may come back to bite him. Then again, maybe it won’t.

Rerun: We need a liberal immigration policy to support health care reform

I went down to Copley Square, Boston yesterday to protest President Trump’s Executive Order on immigration. I’m very concerned about the direction the country is taking. Beyond that, I’m also saddened at the lack of appreciation for immigrants in building our economy and helping health care reform succeed. Below is a rerun of my blog post from 2011.


Over the last decade, the United States has intentionally made itself less attractive to immigrants, forgetting that immigration has been a huge driver of the country’s economic success. In a recent article (America needs a 21st century immigration policy), leading entrepreneurs, executives and investors including Steve Case and Sheryl Sandberg said:

To some, the link between immigration reform and economic growth may be surprising.  To America’s most innovative industries, it is a link we know is fundamental.

The global economy means companies that drive U.S. job creation and economic growth are in a worldwide competition for talent.  While other countries are aggressively creating policies and incentives to attract a highly educated workforce, America has stagnated.  Once a magnet for the world’s top minds, America now faces a “reverse brain drain” and is no longer the first choice for many entrepreneurs creating new companies and jobs.

America needs a pro-growth immigration system that works for U.S. workers and employers in today’s global economy.  And we need it now.

Openness and encouragement of immigration is vital for the success of health care reform. Why?

  1. Immigrants innovate and create economic growth. This growth is how the country gets wealthier and better able to support health care expenses without raising tax rates
  2. Immigrants tend to be younger, so they mitigate the overall aging of the population, making it easier for the country to afford its commitments to older citizens
  3. Immigrants can use their intellectual capital and training –whether acquired abroad or here– to fill health care jobs such as primary care physician, pharmacist, nurse that would otherwise go unfilled

President Obama actually understands this dynamic, but has to tread carefully since immigrant bashing is so popular on the right. But unfriendliness to immigration is all over in the place. For example in Massachusetts the state has decided –for short-sighted financial reasons– to exclude legal immigrants from subsidized health insurance. With luck, that decision will be overturned as unconstitutional by the state’s Supreme Judicial Court.

I agree with the Republican rhetoric of the need for a “pro-growth agenda.” Low taxes and limited regulation can certainly play a part. But policies that encourage immigration, especially of younger, well educated people, are absolutely essential. We need it for the economy as a whole and for the health care economy in particular.