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