At the Forefront: How Hospitals and Health Systems Can Be on the Cutting Edge With Payers

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This past May, Moody's Investors Service put out a red flag to hospitals. The credit rating agency said if hospitals and health systems want to have a shot of success in the future, they will have to focus on quantitatively measuring value rather than volume, and those indicators will have to coincide with the shift to risk-based contracting.

The purpose of risk- and value-based contracting, of course, is to root out inefficiencies in payment and reduce the overall cost of care. Medicare is attempting to accomplish this through several initiatives, including accountable care organizations, bundled payments and the readmissions reduction program.

Commercial payers, per usual, have been following the lead of Medicare through several innovative models of their own. For example, in January 2012, Blue Cross Blue Shield of Massachusetts and Boston Children's Hospital signed a three-year deal, called the "Alternative Quality Contract." Under this global payment system, the hospital receives modest rate increases that are less than the general medical inflation rate, and the hospital and physicians are only paid for quality of care provided. Boston Children's President and CEO Sandra Fenwick says the contract will save $115 million on healthcare costs through 2014.

Hartford, Conn.-based Cigna has been one of the most active investor-owned health insurers to delve into new payment models. As of August 2013, Cigna has created 66 collaborative accountable care initiatives — which are Cigna's version of an ACO — and the insurer hopes to have 100 in place by 2014.

Many payers and providers have taken big steps in finding creative ways to pay for, and be paid for, healthcare services. Here is some perspective from a few hospital executives on what other similar providers need to do to modernize their payer strategies.

The health system perspective

One of the many cited perks of hospital consolidation is the ability to negotiate with commercial payers for broader, more innovative contracts. At SCL Health System in Denver, that is precisely the goal.

Debbie Welle-Powell serves as vice president of accountable health and payer strategy at SCL Health System, which operates nine hospitals. She says every health system, from a smaller, local system to a larger, multistate one, must be pursuing value-based contracts right now with payers. This means taking advantage of government programs — like the Medicare Shared Savings Program and CMS' Bundled Payments for Care Improvement initiative — or researching commercial options like the ones described earlier.

"If you are not negotiating with payers around Medicare, Medicaid, commercial and exchange strategies, it's not a good place to be," Ms. Welle-Powell says. "Value-based contracts fit within the largest context of population health management. If we're going to manage a population, we want to create a global contracting platform to bring all providers to the table."

For most systems, it will take an "all-of-the-above" approach, Ms. Welle-Powell says. For example, SCL Health System's Denver facilities have built up their managed care and capitation strategies. Managed care in Denver now represents 67 percent of the market, including Medicare Advantage, which she says is a growing line for many providers. CMS also awarded SCL Health System a bundled contract for two diagnosis-related groups — major hip and knee replacements — under BPCI. (The system also had one of the four original hospitals within the Acute Care Episode demonstration in cardiology.) When it comes to the health insurance exchanges, SCL Health System has hospitals in four different states, two of which will have federally facilitated exchanges. Ms. Welle-Powell says in one state, the system is working "with those various carriers that are developing a high-performance network."

While juggling different payer strategies may seem like a challenge for many systems, executives can find success by understanding their limitations, their market and their infrastructure.

"It's about building a portfolio of value-based contracts," Ms. Welle-Powell says. "It's not all capitation, bundled payment, commercial ACO or Medicare Shared Savings Program. It's important to identify who you are as an organization, your values, your willingness to assume risk — and how to effectively meet the needs of your market."

The safety-net and independent hospital perspective

Sinai Health System is one of the primary safety-net providers in Chicago. Medicaid makes up roughly 60 percent of Sinai's inpatient payer mix, while Medicare makes up 20 percent. Uncompensated and self-pay represents 13 percent, and commercial payers like Blue Cross Blue Shield make up a scant 7 percent.

While many larger hospitals and health systems are focusing on establishing new value-based contracts with commercial payers, standalone hospitals and safety-net organizations often have to make sure their primary payers — Medicare and Medicaid — can still keep the institutions afloat. Chuck Weis, CFO of Sinai Health System, says government payers are vital for his organization and must continue to be a key part of financial strategy at other similar hospitals.

"We are really focusing our attention on these populations and the structural changes there, too — movement to managed care — because they are so significant for Sinai," Mr. Weis says. "At this moment, that's a much larger population than trying to capture all commercial payers, many of which already have established relationships out there."

Mr. Weis says there is one other major area safety-net hospitals and independent hospitals have to evaluate: the insurance exchanges. As mentioned by Ms. Welle-Powell of SCL Health System, the exchanges are giving providers a fleet of new previously uninsured or underinsured patients with commercial coverage. Combined with Medicaid expansion, Mr. Weis says roughly 300,000 people in Sinai's service area will gain coverage under the Patient Protection and Affordable Care Act. Executives must reach out to health insurers that have actively said they will participate on the exchanges because those will be a source of enhanced revenue — and perhaps more intricate accountable care management afterward.

"We're talking to every payer who has indicated a desire to be on the insurance exchange," Mr. Weis says. "We're looking at participating in those plans that will want to share risk with providers such as Sinai as time progresses."

More Articles on Hospital-Payer Relationships:
Blue Shield of California Scales Back Coverage for Proton Beam Therapy
153 Statistics on Dominant Payers in Each State
22 Recent Issues Between Hospitals and Payers

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