The President Wants You to Get Rich on Obamacare - New York Times

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Tom Scully bolted through the doors and up the stairs to a private dining room on the third floor of the '21' Club. Scully, 56, is slightly taller than average and has tousled graying hair, an athletic build and a lopsided smile. He typically projects a combination of confidence and bemusement, but on this rainy September afternoon, he was frenzied. Scully was scheduled to deliver the keynote address at an event hosted by the Potomac Research Group, a Beltway firm that advises large investors on government policy (tag line: 'Washington to Wall Street'). Today's discussion centered on the most significant change in decades to the nation's health care policy, the Patient Protection and Affordable Care Act, a.k.a. Obamacare. As Scully walked to the front of the room, some 50 managers from hedge funds, mutual funds and private equity firms tucked into the round tables. Others gathered in the hallway. A hush of anticipation hung in the air.


During the past year, anxiety about the onset of Obamacare has created a chill in some parts of the economy. While large health care businesses - insurance companies, for instance, and hospital chains - have poured significant resources into preparing for millions of new customers, countless investors have appeared spooked by the perpetual threats to repeal, or at least revise, the law. According to Thomson Reuters, private equity investment, usually the lifeblood for entrepreneurialism, has dropped by an astonishing 65 percent in the health care sector this year.


Scully has been trying to assuage these worries, but the nervous questions keep coming at him. Before he even began his speech, one attendee said he feared that only three million new patients, far fewer than estimated, would be signing up for insurance. 'No way,' Scully said. 'Way more - way more. At least 15 million, maybe 20 million. The Democrats have a huge incentive to make this work.' Another asked if Scully was worried about Congressional repeal. 'It's just not going to happen,' he said. 'Don't pay attention to Rush Limbaugh.' When Scully finally began his speech, he noted that the prevailing narrative among Republicans - assuming that many in the room were, like him, Republican - was incorrect. 'It's not a government takeover of medicine,' he told the crowd. 'It's the privatization of health care.' In fact, Obamacare, he said, was largely based on past Republican initiatives. 'If you took George H. W. Bush's health plan and removed the label, you'd think it was Obamacare.'


Scully then segued to his main point, one he has been making in similarly handsome dining rooms across the country: No matter what investors thought about Obamacare politically - and surely many there did not think much of it - the law was going to make some people very rich. The Affordable Care Act, he said, wasn't simply a law that mandated insurance for the uninsured. Instead, it would fundamentally transform the basic business model of medicine. With the right understanding of the industry, private-sector markets and bureaucratic rules, savvy investors could help underwrite innovative companies specifically designed to profit from the law. Billions could flow from Washington to Wall Street, indeed.


Scully, who has spent the last 30-some years oscillating between government and the private sector, is hoping to be his own best proof of the Obamacare gold mine. As a principal health policy adviser under President George H. W. Bush, he helped formulate many of those past Republican initiatives - like the shift to private-insurance programs - that Obamacare has put into law. Under George W. Bush, he ran the Centers for Medicare and Medicaid Services and oversaw a host of proto-Obamacare reforms, like Medicare Part D, which introduced competition into the government-supported health care market. After leaving C.M.S. in 2004, Scully began working simultaneously at Welsh, Carson, Anderson & Stowe, a leading health care private equity firm, and Alston & Bird, a law firm and health care lobbying organization. When the Affordable Care Act became law in 2010, he found himself in the rare position of being a lobbyist, private equity executive and former government health care official with access to a serious amount of capital. During the past three years, as other Republicans have tried to overturn Obamacare, Scully searched for a way to make a killing from it.


A couple of years ago, Scully identified his best bet. NaviHealth, the company he co-founded, is designed to streamline an enormous but often overlooked corner of the health care market that, many studies conclude, is the most financially wasteful: post-acute care, or the treatment of patients (mostly seniors) after hospitalization for surgery or serious illness. NaviHealth relies on complex analytical software and a vast medical staff (it has about 175 employees) to offer better post-acute care at lower cost. By that September afternoon, Scully and his partners had already raised $35 million to build NaviHealth, which he expected to be profitable in one month. If all went according to plan, NaviHealth would be just the first of many billion-dollar companies built around the Affordable Care Act. Scully could demonstrate for countless other investors how to become their very own Obamacare billionaires.


Scully wrapped up his speech on a personal note. As a Republican, he said, he was ambivalent about the Affordable Care Act. He liked the market-driven private-insurance exchanges, but he detested that the law called for hundreds of billions of dollars in future subsidies to help Americans, including certain families earning up to about $95,000, buy insurance. The rapid transfer of so much money from other parts of the economy could have a negative overall effect. 'It's way too much money, way too fast,' Scully said. 'But it's going to be great for you investors.'


Most of the attention surrounding the Affordable Care Act has focused on a single aspect of the law. Even the House Republicans' recent effort to dismantle it - and the major computer malfunctions that botched its rollout - have been funneled into a debate about the expansion of insurance coverage. (Before the technological setbacks, the Congressional Budget Office expected up to 16 million people, including Medicaid subscribers, to sign up for insurance by the end of 2014.) In many ways, however, Obamacare is less about health care than it is about economics. Medical costs have outpaced inflation for decades, and they are expected to continue to grow significantly over the coming years. The C.B.O. has indicated that those costs, which are expected to nearly double as a percentage of the overall economy by 2038, are by far the largest contributor to the country's long-term deficit. 'Health reform was not just about covering the uninsured,' Elizabeth Fowler, a former staff member for Senator Max Baucus of Montana and a chief architect of the Affordable Care Act, told me. It was 'about this twin goal of access and finding ways to reduce the rate of growth in health spending. Everybody is focused on the coverage angle, but the changes in the law designed to address cost could be a bigger and longer-lasting change.'


The economic assumption inherent in the law is that the government can cut costs by shifting the incentives of health care providers. The existing system is built around a so-called fee-for-service model, in which doctors, hospitals and other practitioners are paid procedure by procedure. The Affordable Care Act seeks to pivot toward what's called a value-based model, one in which plans and providers compete on price and quality rather than volume. 'Before the Affordable Care Act, hospitals and other providers were paid almost solely based on how much work they did, not on how well they did,' Jonathan Blum, the principal deputy administrator of the Centers for Medicare and Medicaid Services, told me.


Obamacare emphasizes these new incentives by leveraging the extraordinary buying power of Medicare and Medicaid, which together foot the bill for nearly $1 trillion a year in health care costs, to encourage providers and entrepreneurs to come up with new ways to provide better care at lower cost in return for their business. This isn't an entirely market-based solution - the health care businesspeople often need to persuade government officials to approve their plans - but it's certainly more market-based than what it hopes to replace.


A few days after Scully's speech at the '21' Club, I met him at Saint Thomas Midtown Hospital, near NaviHealth's headquarters outside Nashville. As we entered the emergency room, Scully began to explain how the old incentive structure worked. Using a young woman we saw talking to a triage nurse as a case study, Scully told me that what appeared to be one hospital was actually a group of independent businesses with their own agendas. That triage nurse worked for the hospital, but once she sent that young woman to an E.R. doctor, she was bringing in the services of a new company. If the situation were serious enough, the patient would be admitted to the hospital, where she might be visited by an attending physician from yet another private group. In other hospitals, she might also incur the charges of an independent radiology firm (a fourth company), a physical therapist (a fifth) and so on.


These separate firms bill an insurer - Medicare, Medicaid or a private company - for every service. And this gives them an incentive to provide, well, a whole lot of services. In hospitals throughout the United States, patients undergo redundant procedures, from an interview to an expensive M.R.I., frequently because the various providers use incompatible medical-records systems and have no financial incentive to avoid duplication. Often, in fact, they have reason to avoid coordination altogether. An E.R. doctor and a hospital nurse might be reluctant to discuss streamlining a patient's care for fear of violating laws designed to prevent referring physicians from getting kickbacks from hospitals.


The real incentives paradox, however, occurs when patients leave. More than a third of patients who receive surgery or other treatments in a hospital need post-acute care (nurse observation, physical therapy or some other treatment that doesn't require the full resources of a hospital) after they're discharged. Many patients, research indicates, recover best at home, where they are surrounded by loved ones and far away from the opportunistic infections and depressing atmosphere that can permeate an institution. Home health care is also the cheapest option, even when accounting for a visiting nurse, physical therapist and rented medical equipment. Yet about 60 percent of Medicare patients are instead sent to nursing homes or rehabilitation hospitals.


That's because most of these patients are senior citizens. Medicare, which picks up a majority of their health bills, encourages hospitals to discharge patients quickly after surgery, but it doesn't offer financial incentives to choose one form of post-acute care over another. And because discharging a patient to home care requires a lot of extra work - ensuring that the correct equipment will be in the home, training family members and so forth - many doctors choose the easier option. They can simply ask a nurse to send the patient to a rehab facility, and everything is handled in about a minute. Medicare automatically approves payment for 20 days of recuperation in a nursing home, and many facilities simply treat the patient for the full allotment. 'Miraculously, everyone is cured on the 21st day,' Scully says.


NaviHealth was born from the notion that data could be used to break up this expensive feedback loop. In 2011, when the Affordable Care Act was a year old, Scully and various partners at Welsh, Carson attended a retreat at a Hudson Valley hunting lodge to discuss how Obamacare might change the investment landscape. The partners understood that the new law was going to create new winners and losers, and with billions of dollars under investment, they went around the room looking for ideas.


During the retreat, Scully grew increasingly animated about the potential for an idea he had come across two decades earlier: better-coordinated post-acute care. Scully proudly points to a line he inserted in the 1992 federal budget identifying improved coordination as a way to save hundreds of millions of dollars in health care costs. But it wasn't until the passage of the A.C.A. that the incentives were in place. Among other initiatives, the A.C.A. would relax restrictions on collusion between health care providers. He and his colleague Scott Mackesy assumed that several companies would have already pounced on this opportunity, and they set out to develop a list of the top post-hospital care coordinators, choose the best one and invest their firm's money in that business. By the end of the summer, though, it was clear that no such company existed. So by January 2012, they had founded NaviHealth.


The company, at first, seems like a medical concierge service. NaviHealth, which works with hospitals (like Saint Thomas) and insurers (like Aetna), dispatches its employees to a patient's bedside during their recovery to discuss the best post-hospital treatment option. The employee, usually a registered nurse, then asks a series of questions about the patient's age, medical stats and functional abilities. The data are entered into a software program that Scully calls 'the instrument.'


Essentially a database of about 750,000 patient outcomes, the instrument determines how those with similar characteristics fared in various post-hospital settings: home health, nursing facility or rehab. It can also offer analytics-based suggestions about the optimal length of post-hospital care. (The patient and the physician make the final decision.) Afterward, a NaviHealth nurse stays in close contact with the patient for two or three months to coordinate the recovery.


The company makes money by guaranteeing its client, usually an insurance company or a hospital, at least 2 percent off the average cost of post-hospital care. If NaviHealth saves more money, it shares the savings with that hospital or insurer. If it fails to cut costs by the arranged margin, though, it has to pay the difference. This risk, Scully says, gives the company a strong incentive to provide the best care, not simply the cheapest. The patient is simply an indirect beneficiary.


As we exited the emergency room, Scully walked me through the math. On average, Medicare's fee-for-service model pays for about 2,000 days in a post-acute care facility for every 1,000 beneficiaries. By comparison, Kaiser Permanente, a provider of low-cost quality care, averages 600 days per 1,000 clients while achieving better outcomes. It's possible, in other words, that Medicare is paying for 70 million unnecessary days for all of its approximately 50 million enrollees, wasting tens of billions each year. 'Even if we're pretty lousy at this,' Scully said, 'even if we only get that down to 1,500 or 1,200 [days per 1,000 clients], we're going to save them a lot of money and make a lot for ourselves.'


The key is keeping patients healthy. Readmission to hospitals, after all, is the single-most-costly aspect of post-acute care, and a single readmitted NaviHealth patient could wipe out a dozen successful transactions. Ken Botsford, NaviHealth's chief medical officer, told me about a recent conversation he had with a cardiologist who was skeptical of NaviHealth's incentives. He asked the cardiologist to imagine an at-risk patient, one with a high likelihood of a stroke or heart attack. Typically, the doctor would see this patient, write a series of prescriptions, offer instructions for him and then not see the patient until there was a crisis. A trip to the emergency room for a heart attack, however, could easily cost $12,000. Seeing the patient every week, Botsford explained, would cost around $3,000 a year and might prevent the costly (and of course, dangerous) heart attack.


After the hospital visit, we took a short drive to NaviHealth's headquarters in Brentwood, Tenn., a generic town filled with office parks that is quickly becoming a hub of the health care sector. (The tax incentives in the area are very good.) I wondered aloud why a company like NaviHealth didn't already exist when there seemed to be such obvious moneymaking opportunities in this corner of the industry. It quickly became clear, however, that this isn't exactly a business of easy money.


When we reached NaviHealth's office, Clay Richards, its president, showed me around the spartan setup: Ikea furniture, rows of small cubicles, managers in small, windowless offices. Richards, who has an eerie resemblance to a young George W. Bush ('I got that all the time a few years ago,' he says, 'but I'm one of the few liberals around here'), explained that the company was rapidly pouring its resources into hiring and training the staff and improving the instrument. (A considerable amount of money had been allotted simply to explaining the instrument to providers and patients.) NaviHealth had already spent the entire $35 million that Scully raised. Now the company was requesting another $15 million from its original investors. And despite Scully's optimism that NaviHealth would be profitable by October, its revenue had yet to exceed costs. 'Someone is going to do this and make a lot of money,' he said, repeating his mantra. 'I hope it's us.'


Scully has a simple way of describing what NaviHealth - and much of the Affordable Care Act - brings to medicine. 'It's called capitalism,' he told me. 'Which doesn't exist in health care, really.' He's right - sort of. In a normal market economy, money is the reward that signals success; it flows to whatever business best serves people's needs and wants. The central idea of capitalism, as Adam Smith declared it, is that people and firms seeking profit for themselves will also, inadvertently, help create better outcomes for society.


But this doesn't always work in health care, an industry in which market forces reward all sorts of perverse outcomes. A healthy person, for instance, is far less 'valuable' to the health care industry than one who overeats, smokes, misuses medicine and ends up with diabetes, heart conditions or a host of other ailments that require hospital beds, enrollment in high-cost nursing facilities and expensive interventions.


Since at least the 1950s, economists and practitioners have been seeking ways to make health care mimic other efficient markets by financially rewarding those who provide more health, rather than those who treat more ailments. But politicians made a series of short-term fixes that all but guaranteed long-term problems. For example, the seemingly unimportant decision, in 1954, to make health care benefits tax deductible accelerated the proliferation of employer-based health care programs. This, and a few other legal prods, created an ad hoc system with limited access and rapidly rising costs.


Each president since Lyndon Johnson has proposed alterations, and a result has been an increasingly byzantine and conflicting system of market forces and government control. In 1965, Congress created Medicare, the single-payer health plan for seniors, and Medicaid, a program that benefits those with chronic disabilities and low incomes, among others, and operates differently in each state. Medicare's fee-for-service model, in which the government pays for a huge number of procedures with minimal cost control, contributed to steadily rising health care costs. Then, the Nixon administration promoted the Health Maintenance Organization in an attempt to more efficiently manage care for patients. Many foresaw a nation of H.M.O.'s competing for customers through better services and cheaper prices, but they didn't solve the rising costs.


By 1990, it was clear that government health care spending, which was rapidly outpacing overall economic growth, presented a looming fiscal crisis. So President George H. W. Bush instructed his staff to come up with a new health care delivery system. His budget director, Richard Darman, gave the assignment to Tom Scully, a telecommunications lawyer who had recently come to the White House. Working with Glenn Hubbard, an economist in the Treasury Department, Scully began to draft a plan rooted in conservative values. He wanted a health care plan that would operate partly as a free market - by funneling most spending through private insurance companies - while allowing the government to coordinate incentives toward maximizing patient health outcomes while lowering cost. But the health care plan was derailed by the first gulf war. Then Bush lost re-election.


In 2001, after George W. Bush appointed Scully the administrator of what would soon be known as the Centers for Medicare and Medicaid Services, he at last began to implement his ideas. Scully focused on designing and executing Medicare Part D, which opened one corner of government-provided health care - pharmaceuticals - to market forces. This created a new role for a previously relatively obscure business, the pharmacy benefit manager, or P.B.M., which streamlined prescription-drug services. Express Scripts, a once modest Midwestern company, used economies of scale to lead the effort in shifting seniors from expensive name-brand drugs into generics. According to Fortune, it is now the 24th-largest company in America.


By the time Medicare Part D went into effect in 2006, Scully, who was by then in the private sector, put his theory to the test. He invested in a smaller P.B.M., MemberHealth, which grew, in three years, from $6 million in revenue to $1.2 billion. 'It was a hockey stick,' he recalls. 'It took off like a rocket.' When the A.C.A. was near passage, Scully hoped to repeat the success. Once he and his partners at Welsh, Carson realized no one else had seen the potential in post-acute care, he thought he had another MemberHealth on his hands. 'That's what I expected with NaviHealth,' he told me. 'I felt the same way: we would take off like a rocket.'


Partly obscured by the debate about coverage is the fact that the Affordable Care Act has created something called the Center for Medicare and Medicaid Innovation, a sort of health care innovation incubator that funds companies as they explore new ways of delivering quality care more cheaply. So far, hundreds of existing companies have adapted to take advantage of various A.C.A. incentives; others are newly formed. Some are small (a physician practice in Williamstown, Ky., and another in Junction City, Ore.); others are behemoths. TransforMED, a subsidiary of the American Academy of Family Physicians, for example, is running a pilot program that seeks to coordinate all of a patient's care in practices across the country. Some markets seem especially competitive - not only large cities like Los Angeles but also Little Rock, Ark., and Tulsa, Okla. There are so many new or redesigned companies, in fact, that it's clear that many will have to restructure their approach in the competitive market.


That could even include NaviHealth. Running a well-capitalized start-up isn't easy, and Scully's constant travel often reminded me of George Clooney's character in 'Up in the Air.' He works half the time in New York and the other half in Washington, and he is seemingly always on the road, giving speeches, meeting clients and investors, overseeing the concerns of his company. NaviHealth has persuaded a few large insurers, like Aetna, to run pilots in states from New Jersey to Washington, and the company currently has 1.5 million patients. But the hockey-stick money won't come until NaviHealth persuades the biggest potential client of them all, Medicare, with its 50 million enrollees, to employ its services broadly.


Yet that's unlikely to happen anytime soon. While NaviHealth currently works with the Medicare Advantage program, it still needs to convince the larger organization of its potential. On Jan. 1, the company will begin a three-year demonstration project with hospitals in five cities through C.M.S. So for the next three years, as Medicare monitors the program, NaviHealth's growth could be marginal, and Scully will remain on the go. His greatest fear, he confessed to me one morning, was that in the meantime some larger, better-capitalized firm would swoop in and turn NaviHealth into the Nokia of the Obama­care business. 'The idea is sound,' Scully said. 'I know the idea will work. I just don't know if we'll be the ones who do it.'


Which companies will get very, very rich is hard to predict. Who knew, in 1998, that Google's algorithmic search would beat out the hand-built version of Yahoo. Or that Amazon's everything store would win over the countless specialty retailers, like Pets.com. Scully's NaviHealth is an enormously expensive and high-tech model that will be challenging to scale nationwide, and it already has competitors with entirely different models. RightCare Solutions has gotten a lot of attention for a software program developed by a team of Wharton students, similar to the NaviHealth instrument. But RightCare doesn't put its own money at risk; it simply offers a software tool and analysis to hospitals and others. It's easily scalable. The Center for Medicare and Medicaid Innovation also lists dozens of hospitals trying post-acute care businesses quite similar to the NaviHealth model. It's exactly the kind of competition that Elizabeth Fowler, and the Baucus team, intended the law to encourage.


Whether all this money flowing from Washington to Wall Street will benefit the rest of us is another question. Glenn Hubbard, the pre-eminent economist who helped devise George H. W. Bush's health plan with Scully, told me that the cost of the A.C.A. will far outpace any possible efficiencies. Dean Baker, an economist at the progressive Center for Economic and Policy Research, told me that a government-run single-payer plan would be far more beneficial. Sherry Glied, dean of N.Y.U.'s Wagner Graduate School of Public Service and a former senior official in the Department of Health and Human Services under President Obama, said the law won't 'have big effects in either direction.'


On the morning that Congress finalized the deal that would reopen the government and defeat - for a few weeks, at least - the latest Republican effort to derail Obamacare, I visited Scully in his New York office. On his wall was a picture of him with Eric Cantor and John Boehner, and so I asked if he wanted to show off his association with some of the least popular politicians in America. 'I'm a Republican,' he said. 'Maybe a moderate one, but I'm a Republican.' He shook his head. 'Boehner is a great guy. I really feel for him. He didn't want this.' Scully then began a set speech I had heard many times about how Republicans don't understand the new health care law, that it's actually more, not less, capitalistic than anything that came before.


I could tell he was frustrated. He was no longer talking about how it was essential for NaviHealth to make a profit by October. Now, in mid-October, he said he wanted a profit by December. He thought it would already have taken off, but he noted that Obamacare wasn't fully enacted yet. 'We're early,' he said. 'It's good that we're early.' Then his voice lowered. 'Maybe we're too early. In five years, there will be a dozen companies like NaviHealth competing in the space. I hope we make it.' That, of course, is another central aspect of capitalism. Not every company does.


Adam Davidson, a founder of NPR's 'Planet Money,' writes the ' It's the Economy ' column for the magazine.


Editor: Jon Kelly







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