Healthcare equity research group head Ryan Daniels walks through his team’s report, the Coming Healthcare Cost Tsunami, to discuss how employers are leveraging partners to drive greater health and benefit satisfaction among employees and contain healthcare costs more effectively.

Podcast Transcript

00:00 - 00:27
Chris Thonis
Welcome to William Blair Thinking Presents, a new podcast series that aims to provide in-depth expertise from our award-winning equity research and capital advisory teams on today's financial and economic landscape. I'm Chris Thonis, head of equities marketing and media relations, and I'm delighted to be your host.

On today's episode of William Blair Thinking Presents, we welcome back analyst Ryan Daniels, CFA, partner, group head of the healthcare technology and services sector. Ryan is joining us again to talk through his team's latest healthcare mosaic. It's a report they release every quarter that sets out to cover a far-reaching topic of interest in the healthcare space, analyzing its impact for the broader healthcare marketplace.

This report, called Coming Health Care Costs Tsunami: Driving a Need for Engagement and Cost Containment Solution. It focuses on the employer healthcare market with a specific focus on how employers are leveraging partners to drive greater health and benefit satisfaction among employees and contain healthcare costs more effectively. With that, Ryan, do you mind just jumping in? Provide listeners with a brief overview of what this latest report is all about?

01:16 - 00:01:43
Ryan Daniels
Sure, Chris. First, however, I want to thank you for asking me back to do another episode of William Blair Thinking Presents. The first one we did on Social Determinants of Health and Food as Medicine got a great response from listeners, so really looking forward to another session here. So again, I really appreciate the opportunity. Now regarding your question, as you mentioned earlier, we do these reports every quarter and the goal is to identify a topic we think has broad implications for our clients, both in the public and private markets.

And when we contemplate what to focus on, we're really trying to find areas that we believe are about to emerge as an important topic across the industry, but a topic that we've not seen others talk a lot about. So, in effect, we're trying to be vanguards in a specific area of interest and then tie together our thesis with a variety of industry data points that we've collected.

For this quarterly healthcare mosaic, we started to bring together a lot of the macro data we're seeing about health care spending, likely future trends regarding the rate of this spending and what impact this could have on employers as well as what they're doing and likely to do in order to help address the issue. And it's really an important topic, if you think about it, more specific health care spending accounts for about 20% of our GDP.

So, it's a huge sector and increasing cost trends in health care and health insurance can therefore have a big impact on economic growth and inflation, which are two hot topics today. Second, health care costs really impact everyone, be it you or me and the premiums we pay for insurance, or what our employer pays for coverage, or how the government funds care for covered individuals.

02:48 - 03:13
Ryan D
So it's a really broad topic of interest. And thus, for this report, we looked at what we think is going to be a markedly higher cost trend in the U.S. healthcare market in 2024 and beyond, why that's likely to be the case, and then what the solutions are that employees may turn to in order to help address these cost trends to help improve health care for employees and really better engage their overall workforce. In a nutshell, that's the impetus for the report and a few of the key areas that we focused on.

03:18 - 03:49
Chris T
[At the start] of the report you talk about why you believe employer health care costs are set to spike after a period of sub-trend cost inflation, quote unquote. In particular, you have four specific factors you believe will drive that spike. Do you mind just walking through each of those briefly? I believe they included pent-up demand for more discretionary services, delayed care and prevention procedures, a continued uptick in behavioral health issues and significant future increases in healthcare provider pricing.

03:49 - 04:27
Ryan D
Yes, sure, Chris. And that's a great setup. As you outlined, the four key drivers we see impacting the market going forward. So let me go into each of those in a bit more detail. First, we are definitely starting to see signs of increasing overall demand for healthcare, especially related to areas like outpatient surgical care. This first came up early in the second quarter when two of the largest public managed care companies came out and commented that their medical benefit ratio, or MBR, which is the percentage of their premium revenue that they spend on health care, was seeing an uptick and then uptick was primarily related to more surgical care in the outpatient setting.

And there appears to be a few factors really behind this driving it. First, there was likely some pent-up demand for this care as it's non-emergent and was postponed during COVID and the subsequent public health emergency. But now that COVID has really died down and mask mandates are effectively gone, more individuals, especially seniors, appear to be going back to getting these procedures done again.

So demand is increasing and this should continue for some time. Now, second, and this is related, supply is also increasing. And what I mean here is that the health care workforce which face really a ton of challenges related to staffing, to turnover, to burnout during COVID in the year and two after is really starting to stabilize as well.

05:11 - 05:43
So there's more operating rooms open for business. They're fully staffed, if you will. So more demand for care, more supply for care equals more surgeries and higher medical costs. And that's really the first big driver of pending cost inflation that we're seeing in the industry. So again, that's point number one. Second, you mentioned delayed preventive care and what we focus on here is the potential that things like colonoscopy screens, breast imaging, cardiac screens, etc., likely took a bit of a backseat during the pandemic as well.

And what that could mean is that a lack of early preventive care will lead to higher acuity cases in the coming years. So as an example, the individual that did not get that colonoscopy might have a more advanced stage of colorectal cancer than might otherwise have been the case if he or she had been screened earlier. And that's just one example.

06:01 - 06:23
It could be a variety of areas like oncology or cardiology, etc., And this is really more of a “time will tell.” But a lot of experts believe there's some inevitability to this occurring. And if it does, it's clearly can drive up again the demand for care and the cost to treat these patients. And then the last two, third, there has been an enormous uptick in the demand for behavioral health care over the last two years, in particular.

It's hard to say what's causing this. Is it the pandemic and its aftermath? Remote work and disconnection, societal issues? It's probably a little bit of everything, but the punch line is it's exceptionally clear that the trend is there and there's a need for more behavioral care. Now, there's also a really good silver lining here, and that's that people are more active in seeking out this treatment.

And we think the stigma has really been reduced for seeking out behavioral health care. And you know, another interesting post-COVID dynamic, it's probably the use of virtual care telehealth for behavioral health care that's really blossomed and allowed this to happen. If you think about it, it does make sense because it's the perfect area for virtual care. As you know, a lot of it is really talk therapy.

There's no need for lab work. There's no need to check your joints or to run diagnostics. So virtual is just as effective as in-person for most people. People probably are much more comfortable getting behavioral health care at home versus having to go to a facility or a therapist's office. So perhaps that is what's reducing the stigma is a barrier to obtaining care, and thus the use of services is skyrocketing, which is a really good thing.

07:29 - 07:54
And just to put a final point on this, the largest commercial insurer in the United States said on its earnings call just a week or so ago that the percentage of people seeking access to behavioral health care is up by double digits over the past year alone. So again, a really clear uptick in the service category. And then the final point here is you mentioned just an uptick in the price of healthcare services that we expect to see in 2024 and 2025.

Now, this is a bit of a unique nuance in health care with saying that prices are set in advance oftentimes for several years. And we don't see an immediate uptick in care delivery prices, even if the cost to deliver care is increasing or if there's a near-term supply-demand imbalance in the market, which is pretty unique in health care.

As an example, a lot of health systems might enter into multi-year contracts with payers that set their reimbursement rates. So even though labor and supply and drug costs have been skyrocketing, hospital rates and prices were fixed. But now that these contracts are coming up for renewal, we anticipate hospitals are really looking to catch up with a lot larger price increases.

And we've seen some data coming out of the industry that hospital systems are looking for 10 to 20% price increases in 2024. Yeah, and that's versus a typical 5% or so rate increase. So, you know, if that happens and the payers have these higher costs, that's going to trickle down to the employers via higher insurance premiums as well.

So that's one area that people are probably less aware of given the lag effect. But like I said, these are rate negotiations that are definitely occurring across the U.S. So just to conclude, if you look at the four items, you have higher prices for care, you have more use of care, and that's going to have a multiplier effect. And that's what's really kind of key to driving this cost tsunami that we outlined that we think is about to hit in 2024 and 2025.

09:21 - 09:44
Chris T
So, Ryan, you also talk about costs rising well above anticipated rates in the next three or five years. And as a result, employers reassessing their benefit offerings, looking to bundled solutions. So as part of this process, you touch on how point solutions that are underutilized or lack validated ROI studies are being jettisoned in favor of more integrated and higher-value offerings.

Do you mind just touching a bit on what those point solutions are? I think from my point of view, I'd love to hear more and I'm sure our audience point of view would love to hear more about why they became popular in the first place and why employers are now shifting away from them.

09:58 - 10:22
Ryan D
Yes, I'd be happy to. What I would say here is that post-COVID, there is a huge wave of VC and private equity dollars that flowed into the digital healthcare space. We saw investments in virtual care delivery, navigation solutions, chronic care management in a wide variety of niche benefits around things like fertility care, high-risk pregnancy, behavioral, really all areas across the healthcare spectrum.

And these new digital health companies were pretty savvy at marketing their solutions to employers and in order to gain market share as new entities, they did so with some pretty attractive pricing. So, there was a ton of adoption across the marketplace in employers for these solutions. But that also created a pretty large issue in hindsight or actually a number of issues.

So first, for an HR manager and an employer, you suddenly were negotiating, managing just a ton of new contracts. You had your health insurer, maybe a different dental and vision contract for insurance, a telehealth provider, a chronic care company, your fertility benefit manager, second opinion services, etc., So, you know, there was a lot of fatigue among H.R. managers in dealing with these contracts and renewals year after year.

Second thing, employees themselves actually had difficulty understanding what benefits they had and really how to access them, as they were all provided by different vendors. So you and I here, William Blair is a great example. We have a different dental plan, a different vision plan. We have our core health care plan, wellness provider, a different telehealth provider. And for each of these, there's different ways to enroll, there's different numbers to call to access services.

There are different ways that we need to file claims to get paid for each. And it really becomes overwhelming, often to the point where we don't use these benefits effectively, if at all. So it kind of defeats the purpose in having them is you don't really know how to use them. And then third, and you mentioned ROI. When an employer attempts to see who created value for their workforce, it's nearly impossible to do so when you have so many investors, you know, meaning did the cost trend decline because of the wellness program or was it the chronic care management or your virtual care navigation company?

12:07 - 12:28
So that just added to this kind of fatigue because these are all single solutions that weren't integrated. And what we're seeing here, just to conclude, is it really is causing a backlash in the industry, if you will, among employers and benefit consultants against these single product companies. And in turn, these organizations are either merging or they're developing partnerships to offset the issue. So we really see the market again, moving away from these point solutions to more bundled offerings today.

12:34 - 13:02
Chris T
Let's touch a bit on the growing importance of holistic health and benefit solutions. I mean, the report you highlight that employers are now emphasizing solutions that come with higher ROI increased employee engagement and greater overall integration, with the idea being that these products offer both employers and employees the ability to access benefits with markedly less friction and then also can dramatically increase the continuity of care delivered to employees and their dependents. Do you mind digging out a little bit into what these possible strategies and solutions might look like to meet demands for these types of solutions?

13:12 - 13:30
Ryan D
Yeah, in effect, it's literally the exact opposite of what I just talked about. It's signing up with a single provider that can help you manage the full spectrum of benefits and healthcare delivery, and it helps reduce the contracting burden on H.R. It's more effective for employees to access care, and it becomes a single source of truth, if you will.

A great example of this to really help resonate with listeners is working with a patient navigation and advocacy vendor in the market. There are three or four sizable private vendors. There's one large public organization in the marketplace, and they provide a single source of healthcare activism and access for your entire workforce. So just to give you a little bit of background here, it starts with selecting the right health insurance plan.

You can literally call the advocacy team or your navigator, and they can help you understand your current and likely health care needs and they can help you pick the right health plan among all the various options offered by your employer during the open enrollment period. Then, if you need care during the year, you can literally call that same phone number and a care guide will be there to help you find the best in-network doctor to see, and they'll help you understand what your out-of-pocket costs are.

And they can even recommend a telehealth visit if it's something minor or if it's something more complex, they can arrange a second opinion service with a curated network of specialists in that complex area. And then they also have these trusted vendor or supplier programs as well. You have prescreened a number of point solutions that they've kind of created as a portfolio that you can access under their contract.

14:44 - 15:11
So again, you're calling the same number, you're talking to the same advocate or using the same website or application on your phone. And then if you want a high risk pregnancy program, you know, they have a preferred vendor for that. So again, they can help you manage access to that. So to give you another example, imagine someone calls their care advocate for a prenatal screening and the advocate can look at all the health data and if it's warranted, they could say, “Hey, you should really consider entering into this high risk pregnancy program.”

00:15:11:18 - 00:15:33:15
Ryan D
So they're doing it in a fluid point for the employer. It's the right time. They have that need and it drives a lot better engagement and value. And again, it's frictionless for the employer. So again, we really see that as the future of the benefit design utilization for most employers. And I know that it's a bit of a long answer, but hopefully provides a more concrete example of kind of why that's a better value proposition.

15:33 - 15:59
Chris T
Further into the report. You also talk about a greater long-term growth opportunity related to the adoption of ancillary cost containment solutions. Do you mind just jumping into what these solutions are and then the impact they may potentially have on leading drivers of rising health plan costs? And then as a second part of that question, I'd love for you to talk through the product categories you mapped out that show promise in addressing these rising costs while still providing high-quality care. I think it was navigation and patient advocacy on site news side, direct primary care, and then telemedicine virtual care management.

16:08 - 16:25
Ryan D
I just addressed one of them, which is the patient advocacy and navigation solution and which we think will be a big one. So let me jump to some of the other areas and I think a big one, probably one of the other most promising is going to be the onsite and near-site care delivery option. And at its roots, this is a simple one.

This is literally where an employer contracts with a third-party advanced primary care provider to put a clinic staffed with a PCP or ancillary provider like a nurse practitioner in their office to provide care for their workforce. Now, for employers that have scale, they can do this directly onsite and for smaller employers or those with more distributed workforces, most of these advanced primary care providers also offer network or near-site locations, which are clinics that can be shared among several different employers. And one unique aspect of this, besides the location and ease of access, is that the employer is actually paying the operator to staff and run these clinics, and it's usually a per member, per employee or per month fee, which we call PMPM fees that they pay in advance to the operator to run the program.

So if you're an employee that walks in to see a clinician, there's no paperwork to fill out, there's no insurance claim, there's no co-payment. Again, it's already been paid for. Your employer's paying a PMPM fee to have this clinic there. And what that means is it's a lot higher engagement, it's more convenient, there's easier access and there's really no cost for the employees to use this.

17:39 - 18:02
Ryan D
So this onsite or near-site clinic gets a ton of traction with employees and it's really seen as an important and tangible health benefit. And the model here can actually be really brought. A lot of these providers offer virtual care. So, for times when you're out of the office or your office is closed, you can still access a physician, They can provide lab and pharmacy onsite, they might offer physical therapy or behavioral care.

And if you need that more advanced care, they can help you manage referrals as well and kind of guide you on that care journey. So again, it's another way to really engage your workforce with a single solution, one that generates high engagement, high satisfaction, and usually a very robust ROI. So again, we see this as another example of how to offer that frictionless, holistic health solution to a workforce that improves care, it engages your employees, and it's going to help offset these cost trends that the market's about to face.

18:31 - 18:38
Chris T
Right. As usual, I can't thank you enough for joining. Before I let you go, though, is there anything else we didn't mention that would be worth noting?

18:38 - 19:00
Ryan D
Yes, thanks for that, Chris. I think we hit on most of the key topics, but I would again highlight that we have this more detailed mosaic report and even more solutions we didn't address. There are other things we see on the benefit design front. So, areas like using health care, centers of excellence, or various types of reference-based pricing that can be added to these holistic approaches to further expand their value.

So if there's interest among listeners, I would suggest looking at those sections in the report. Moreover, at the very end of the report, we do a really detailed overview of all the leading providers in navigation and advocacy in some of these ancillary solutions onsite near site advanced primary care and a bunch of other areas. So again, if there's interest in learning more about the leading public and private operators in the space, definitely suggest checking out the full report.

19:26 - 19:34
Chris T
Great. And then one last curveball question. You showed so much passion for this sector. What was it that got you into health care in the first place?

19:35 - 19:54
Ryan D
Prior to joining William Blair. I actually worked in the healthcare industry doing some M&A work at Deloitte, and I was a consultant, and we did a variety of different industries. And I always found health care to be the most fascinating. Again, going back to where we started in our conversation today, the fact that was such a large portion of our economy.

Yet the more I dug into it, the more it seemed like it was so antiquated in care delivery, the way it was paid, the outcomes achieved. So, it really became a fascinating market to me. And as I dug more into it, I just decided it's an area I want to focus my career on. When I had the opportunity to join William Blair, now 22 years ago, I had pushed to become a healthcare analyst, started out with the services space, then picked up the IT space and eventually became group head of the Healthcare Equity Research Team.

So it's been a great privilege to have had the opportunity to work with a great variety of mentors here at Blair in the healthcare and broader research sector. And it's a space I do have a ton of passion about and see these innovative solutions and private and public companies addressing a lot of these inadequacies that I've seen in the markets. So a really exciting time for healthcare.

Chris T
I know we are all thrilled to have you here. I appreciate it as always. Do you have a sense of when the next mosaic report will be out?

Ryan D
Well, we do one of these each quarter, so let's keep it rolling and talk again in a few months. And again, thanks to all the listeners as well.

Chris T
Great. Appreciate it, Ryan. Let's do this again soon.

Ryan D
Cheers, everyone.