U.S. Supreme Court Upholds the Affordable Care Act; Health IT Market Will Accelerate Across the Board
Summary of Supreme Court Ruling
On June 28, 2012, the United States Supreme Court, in a 5-4 decision, found that the Patient Protection and Affordable Care Act’s individual mandate is a tax and thus allowable under Congress’ constitutional power to levy taxes. Under the law, most people, save those who quality for exceptions based on financial or religious considerations, are required to purchase health insurance or be subject to a penalty payable to the IRS amounting to 1 percent of their income starting in 2014. The penalty will increase with time. The Supreme Court’s decision leaves the majority of the law in place, with the exception of the Medicaid funding formula. Specifically, the majority of the court agreed that the law's expansion of Medicaid to an estimated 16 million people by 2019 is unconstitutional as written and that the federal government cannot threaten to withdraw existing Medicaid funds from states if they choose not to expand Medicaid. It is expected that this aspect of the ruling will impact the extent to which some states participant in the Medicaid expansion called for under the law, at least initially. While the ruling is seen as a win for the Obama administration, the next hurdle facing the Affordable Act (ACA) will be the November Presidential elections, as the Republicans have vowed to repeal the law if they win the White House. Even in the event that the Democrats retain the Presidency, it is highly likely that certain provisions of ACA will likely be repealed and/or revised in the coming years, e.g., the controversial tax on medical device manufacturers.
Overall, we see the Supreme Court ruling on ACA as a very strong positive for heath IT. Despite the prospect of a Republican win in November, most industry experts believe that there is more clarity now about how health system transformation is shaping up--and the headwinds are strongly in favor of an even more aggressive adoption of EHRs and related technologies. Clearly, this trend has been accelerating for the past several years, due in no small part to The Health Information Technology for Economic and Clinical Health (HITECH) Act, enacted as part of the American Recovery and Reinvestment Act of 2009. But beyond that, we see that the culture and attitudues around health IT are changing as well. We firmly believe that the ACA ruling will result in an even more widespread acceptance of the inevitable changes that will reshape the financing and delivery of health care in the United States. Specifically, the health care system will be increasingly characteristed by a greater volume of patients, many of whom are new to the system; a greater number financially disadvantaged patients coming into the system; and, most importantly, more patients with complex, chronic illnesses, often exacerbated by years of no access or poor access to health care services. This situation requires that providers gain every advantage in terms of facilitating access to care for more patients while simultaneously driving comprehensive improvements in quality, safety, and cost-efficiency. Such improvements simply cannot happen without the greater use of health IT. As providers come to grips with the new reality, those health IT stragglers, namely small physician practices and some small hospitals, will increasingly come on board out of sheer necessity. Many of these providers will be required to merge with larger practices, join an ACO, or get bought out by a hospital/IDN.
Below is a summary of some potential near-term and long-term impacts of the ACA ruling on key health care market participants:
With regard to EHRs, the ruling will probably not have much of an impact for large hospitals and academic medical centers as they have been strongly focused on EHRs anyway due to HITECH. Projects are well underway; contracts have been signed. Large vendors with fully integrated systems for hospitals and ambulatory practices have been winning big and this will continue and accelerate. Growing consolidation presents operational challenges for health IT implementation, especially when providers are on separate EHRs. This could slow the path to Meaningful Use (MU) for some providers. As a result, there may be some push back on MU measures and timelines due to growing consolidation as well as the need to ramp up other IT systems in preparation for 2014, particulary financial systems for revenue cycle management (RCM). We see a big opportunity for hospital RCM. Hospitals need to quickly get very smart about managing financial risk and reducing bad debt. The onslaught of newly insured patients coming into the system will require robust RCM capabilities including patient engagment at the pre-certifcation stage. While the fact that patients will be insured is good, hospitals will need to be very efficient about collecting co-pays and deductibles because nothing can be left on the table due to Medicare cuts and the growing numbers of Medicaid patients.
There will be vendor displacement because of consolidation for all sectors of the market; large hospitals to some degree, but especially for mid-sized and smaller hospitals. Smaller hospitals (under 150 beds or so) are most likely to get absorbed into larger systems. Financial imperatives will be overwhelming for many and vendors serving that market are likey at increased risk. In addition, some large legacy vendors, especially those with weakness on the ambulatory side, will continue to get displaced. Hardest hit vendors will likely be those serving the small ambulatory medical practices. These practices will increasingly need to partner with a larger provider and will eventually go onto the larger system’s EHR. The next six months are very risky for vendors serving this market as some providers delay upgrade/purchasing decisions waiting for outcome of elections and/or seek to partner or get bought out. Add that to the need to spend more money for Stage 2 MU certification and these vendors face very difficult market conditions that will undoubedtly cause many to go under. Looking out over the longer term, the distinction between ambulatory and hospital EHRs will largely disappear over the next decade. We will likely see a move to open, cloud-based platforms that are interchangeable among all providers and care settings. Provides will select applications and modules that are relevant to their practice, e.g., EHRs, patient portals, PHRs, etc. However, user interfaces/usability may be more standardized due to regulatory oversight due to patient safety concerns.
The short term impact will likely be somewhat negative for payers but they have been expecting this so and much of the downside has already been accounted for in their business plans. Long term, we believe ACA is a strong positive for the insurance industry. We will likely see an acceleration in payers interested acquiring health IT companies as they need to have more access to quality data and provider performance metrics. As for state health insurance exchanges, we do expect some uptick in activity to form exchanges over the next several months; however, some states will be waiting until 2013 (after the elections) to move fully forward on this. The issue of health insurance exchange is a very political issue in many states. Thus, the process will likely be contentious and characterized by fits and starts as the market settles, much like what has taken place over the past several years with public health information exchange organizations.