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Financial Modeling: Predictive Insight into Value-Based Care Success

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Since the Patient Protection and Affordable Care Act passed in 2010, healthcare provider organizations have explored sharing in cost savings with other providers and/or payors and taking on risk through accountable care organizations and other value-based care models.

While the ACO model has flourished as of late, many hospitals and health systems are still reluctant to join the movement. In fact, 75 percent of hospitals polled by the Commonwealth Fund were not considering ACO participation at all, according to a report published in August 2012.

The hesitancy is understandable: Accountable care is a threat to traditional hospital and health system revenue streams. But Eric Olmsted, PhD, director of analytic consulting for Lumeris, a healthcare technology firm, says not participating in the new care delivery model may be even worse. "Hospitals are more likely to lose money if they don't participate in forming accountable care organizations," says Dr. Olmsted.

When hospitals and health systems choose not to help shape accountable care, they miss an opportunity to strategically address serious challenges that affect their revenues, such as declining utilization, network leakage, high-risk transitions of care and the evolving role of the emergency room as an essential health benefit under health insurance exchanges.

"Accountable care is likely going to be the solution to the current ailments in the United States' healthcare system, and hospitals stand to gain in moving to value-based care models," Dr. Olmsted says. "By being an active participant, they can control how accountable care is designed, delivered and measured."

So, while there no doubt are financial risks to participating in accountable care, it can be even more risky not to be involved. Fortunately, there is a way to offset some of the inherent financial risks: strategic financial modeling.

Financial modeling 101

A financial model can help hospitals and health systems prepare for and make a successful transition to accountable care. A good financial model is comprehensive, including enrollment and claims data, hospital financial data and local market condition information. It arms hospitals and health systems with predictive insight to make decisions about strategic next steps and investments needed to transform their organizations, reshape revenue models and make money in a value-based care model.

More specifically, a financial model allows hospitals and health systems to analyze different investment scenarios. For example, a hospital may want to invest in care managers as part of their ACO. The model would show the impact of that investment. "The organization can then tailor investments to achieve the desired outcome," Dr. Olmsted says.

Usually, organizations move one segment of a population to accountable care at a time, such as moving Medicare patients to an ACO after joining the CMS Medicare Shared Savings Program. Most organizations focus solely on the impact of accountable care on that patient population, but the change goes further than that. "Financial modeling looks at the impacts on the target population and also the impact on the remainder of the population still in a fee-for-service model. It can reveal opportunities to improve care outside of the value-based care population," Dr. Olmsted says.

A financial model can be completed either while an organization is contemplating value-based care or already building and operating an ACO.

Benefits

Putting together a financial model can make the challenging transition to accountable care a little easier for hospitals and health systems. Here are four ways financial modeling helps:

1. Anticipate case mix change. Usually, one sign of a successful transition to accountable care is a reduction in the number of medical admissions, which can mean a reduction in revenue for the organization. That means the facility's case mix becomes heavily weighted on surgical admissions. "We can help them anticipate the changes in the case mix and…surgical volume," Dr. Olmsted says. "There are types of investments you need to make for that scenario," he explains, and a financial model can help determine what the level of those investments should be.

2. Leverage competitive advantages in the market. With reduced admissions come empty beds, which, again, can negatively impact a hospital's revenue stream. However, those beds do not necessarily need to stay empty, and hospitals can begin to focus on expanding their popular service lines. Administrators can use the financial model to determine some of the underserved needs of patients in the area and start building service lines around those in order to boost elective admissions.

3. Understand the impact of a specific contract. Accountable care reimbursement contracts include quality metrics that organizations need to meet in order to share in any savings. A financial model can help organizations understand how they are currently doing on those quality measures, anticipate if they can hit the contract's targets and help determine what future contracts should look like. "The model can help negotiate future versions of the contract," Dr. Olmsted explains. "A hospital might want to take on more risk as it has gotten better at managing its population's health," he says, which can be measured by the financial model.

4. Communicate better with physicians. Hospitals and health systems are not the only ones skittish about buying into accountable care: Physicians have also expressed caution when approaching the new care delivery model. "We hear from physicians that they understand accountable care is happening, but are interested in seeing specific data and scenarios played out," says Andrew Goodman, a consultant with Lumeris' strategy and consulting services. "Financial modeling offers a tool for CFOs and other leadership, giving them information to engage and communicate with physicians," he explains. So, the model can inform the conversations between administrators and physicians in a hospital or system contemplating a value-based model of care.

Financial modeling can be a great resource for hospital and health system executives who may be hesitant to make the important switch to accountable care. "You don't want to be left behind," says Mr. Goodman. "These kinds of…models can really help with a difficult transition."

Whether an organization is just starting to think about ACOs or other new delivery models, or if it has already started down that road, sophisticated financial modeling can help ensure its success in the future.

More Articles on ACOs:

Number of ACOs in the United States — A Quarterly Breakdown
ACO Data on the Cloud
Survey: 40% of Physicians Averse to ACOs

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