5 steps to improve margin via value-based payment

Even before COVID-19, health systems were experiencing reduced fee-for-service margins. In 2019, median Medicare margin nationally decreased 2.2 percent while hospital costs rose 2.5 percent per year. With Medicare as the fastest growing segment of the patient population, the majority of geographies will see their Medicare payer mix increase substantially moving forward – a shift that will further compress margins. 

Amidst this demanding environment and the backdrop of COVID-19, providers must strategically consider where to pursue alternative sources of revenue and margin. Key to this is prospectively modeling the financial impact that a well-executed value-based care and payment strategy will have on margins long term.

Providers have long recognized the need to shift toward value-based models. But they’ve been unsure of how to craft a roadmap that ensures adequate margin and fiscal sustainability.

That’s the takeaway of experts at Premier, who have been sitting down with health systems across the country to financially model their transitions to value-based care. Premier’s experts are enabling providers to model their transition to value-based payment by starting with the end in mind. Providers who do so are finding confidence in their long-term fiscal sustainability.  

Value-based care and payment are a means to more holistically manage the health of patients and insulate balance sheets, all while ensuring predictable revenue to improve margins. For payers, improving the health of populations lowers costs and allows them to produce more attractive plan designs with lower patient financial responsibility. This win-win scenario supports stronger collaboration between providers and payers.

Premier’s experts have developed a model that acknowledges the realities of today’s environment, and offers a game plan to successfully surmount them.

The output of this effort, shared transparently across the health system, also establishes alignment and trust that value-based care and payment will contribute to the organization’s goals for the long term. 

Here is a five-step outline Premier’s experts use to model the move from volume to value and grow margin. A detailed flight plan has providers making this transition over the next three to five years. 

1. Identify the population or payer. The correct financial modeling exercise incorporates all of the provider’s current value-based and fee-for-service performance, populations, and health plan market dynamics, and builds around them. This creates transparency around the impact of value-based payment across the entire payer mix and enables development of the payer strategy that produces the best value-based payment and contribution margin results.

Medicare is often a sweet spot; the acuity of this population represents a greater opportunity along with the corresponding larger global budgets or capitation rates available. Medicaid and commercial populations may offer opportunity as well, depending upon the organization’s local market dynamics.

2. Identify the long-term financial goal. Start with the end in mind by identifying the long-term financial opportunity. Consider the anticipated decrease in utilization and infrastructure needs, as well as the projected increases in margin derived from value-based payment performance success that will be needed to achieve the stated financial goal.

3. Transform existing infrastructure. Develop a roadmap outlining the tactical elements necessary as well as the projected timeframe to achieve the end financial goal. For many providers today, this means transitioning an accountable care organization (ACO) or clinically integrated network (CIN) that’s traditionally been in pilot mode to become a greater contributor to the overall margin of the health system. For others, it could be greenlighting a team-based primary care approach that decreases more costly services down the road. A population health expert should play a lead role to assimilate the multiple variables into an accessible projection.

4. Identify and plan around the metrics for success. At a high level, these metrics would include accurate risk scores, quality metric performance and clinical and social interventions that successfully manage patients across the continuum of care. Consider how metrics can be stratified by priority over a timeline. Risk scores, for example, are key to calculating a benchmark or capitation rates that reflect the acuity of the population being managed – and therefore are critical to establishing the right global value-based payment budget to model and track financial performance and margin impact. Therefore, providers may prioritize calculation of this metric before execution of clinical interventions.  

5. Measure results. Providers need robust analytics capabilities and actionable intelligence to assess the effectiveness of care strategies – as well as the potential need to course-correct. Regular reporting helps ensure the transition is on track and that the organization is on pace to reach the stated financial goal and sustain long-term success.

Delivering Margin in a Value-Based World

It’s long been shown that value-based care models produce better clinical population management results, leading to reduced costs. In September, for example, Premier reported that 75 percent of ACOs in its Population Health Management Collaborative achieved savings of more than $700 million to their organizations, in aggregate, over the last five years.

With margins eroding and the newfound emphasis on value, it’s clear that providers need the tools and market foresight to map out the transition into value – and translate that into improved margins. With the right financial modeling insights and expertise, providers are finding they can build an actionable roadmap that leads to a successful, margin-generating conversion.

Learn more about how Premier is helping providers succeed in the world of value here.

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