4 Objectives Hospitals Must Pursue to Shift Successfully to Value-Based Care

As government and private payors shift their reimbursement strategies from fee-for-service to value-based contracting, hospitals are gradually becoming more on the hook, financially, for meeting certain quality and cost targets.



Moody's Investors Service recently put out a report that said it is paramount for hospitals to master the evolving value-based payment and delivery mechanisms because eventually, their credit ratings and financial health will depend on it.

"After decades of following volume-based incentives, measuring and proving value will become necessary for healthcare systems to maintain operating stability and distinguish themselves as market leaders," Lisa Goldstein, Moody's associate managing director, said in the report.

Here are four management objectives based on Moody's report that hospitals should consider during this massive business model shift toward value-based care.

Lisa Goldstein, associate managing director at Moody's Investors Service1. Break even on Medicare reimbursements. When it comes to cost reduction, most hospitals have engaged in strategies to find the low-hanging fruit for simpler cost savings. If hospitals want to completely redesign their cost structure and transition fully to a value-based healthcare system, they will need to follow the lead of their most prominent payor: Medicare.

According to Moody's hospital medians, Medicare represented 43.7 percent of non-profit hospitals' gross patient revenues in fiscal year 2011. In addition, since 2003, the average Medicare hospital margin has been negative, as most hospitals receive between 70 and 90 cents on the dollar from CMS. Ms. Goldstein says despite the lower reimbursements from Medicare, compared with commercial payors, hospitals must make Medicare the new baseline and find ways to break even on it.

"Many hospitals across the country are thinking most payor rates are going to be close to Medicare. Not necessarily single-payor, or national reimbursement, but rates from commercial payors will retract and hover closer to Medicare rates," Ms. Goldstein says. "Becoming break-even under Medicare has been one of the guiding objectives we hear across the U.S."

2. Build scale through nontraditional methods. Although full-scale mergers and acquisitions are expected to continue in the hospital sector, hospitals are looking at nontraditional ways to consolidate and increase their economies of scale. For example, in February, Irving, Texas-based Christus Health signed an agreement with Pontificia Universidad Católica de Chile, a Chilean university in Santiago, to form a joint venture for the ownership, operation and expansion of PUC's health network, which diversified its revenue into a new geographic service area. Also, in April, four Ohio-based hospitals and health systems created the Purchasing Organization of the Western Reserve to drive down supply cost.

"The contemporary thinking is that under reform, the bigger you are, the more you can spread the costs of your infrastructure over the enterprise's footprint," Ms. Goldstein says. "Long term, you can leverage a less-expensive healthcare system to payors, exchanges, employers and all purchasers of healthcare. This is a wait-and-see approach. But many in our meetings are asking, 'What else can we do besides a full-asset merger or acquisition?' And that's where these nontraditional strategies start to innovate."

3. Improve the patient experience. Patient satisfaction has become pertinent for hospitals for a few reasons: Consumers are being more selective as they look for the most affordable provider; patient loyalty is at a premium due to tough competition among hospitals; and CMS' value-based purchasing now factors patient experience into Medicare reimbursements.

Ms. Goldstein says hospitals are using a number of different strategies to improve this area, such as employing care navigators, care teams or even chief patient experience officers. Information technology is also playing a role in coordinating care to improve the patient experience.

David Ebel, former CFO of Mayo ClinicDavid Ebel, director and senior CFO consultant for Warbird Consulting Partners and former CFO of Mayo Clinic in Rochester, Minn., adds that the hospital finance team plays a crucial role in this objective.

"Finance professionals are generally the first and last people that patients deal with during their healthcare experience. So they have the opportunity to make both the first and last impression on patients," Mr. Ebel says. "This has always been true but becomes much more important as both the importance of patient experience and the patient's share of costs grows. CFOs need to make sure their finance professionals have strong customer service skills to make lasting, positive impressions. Knowing how to do this can make a big difference."

4. Cultivate informed leadership. Hospitals that lack effective governance will fail at any time, and the current transition phase of healthcare reform demands that hospital leaders be even more attuned to trends and innovative thinking. Looking outside the healthcare field has been a common theme lately, as hospitals are recruiting executives, managers and board members with "atypical" and corporate backgrounds.

"We've seen several different types of board members serve on not-for-profit boards lately," Ms. Goldstein says. "Folks with engineering backgrounds, manufacturing, M&A expertise, technology — everything that the health system is going through now, chances are someone else in another industry has experienced these challenges already to some degree."

More Articles on Hospitals and Financial Strategy:

125 Hospital and Health System CFOs to Know
4 Recent Events That Have Changed How Consumers View Healthcare
Building the Right Financial Squad: Q&A With Former Mayo Clinic CFO David Ebel

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