Does more value mean less profit? How to keep pay-for-performance from hurting hospital income

Downers Grove, Ill.-based Advocate Health Care and Advocate Physician Partners — a care management collaboration with Advocate that brings together more than 4,500 physicians —  are trailblazers in the realm of value-based care, says APP President Mike Englehart.

Advocate launched its first commercial accountable care organization, AdvocateCare, with Blue Cross and Blue Shield of Illinois in October 2010, and APP has released an annual value report detailing programs and initiatives that transform care delivery and lead to better outcomes for a decade. "We believe that the [care] model is unsustainable unless we move into an outcomes-based model," Mr. Englehart says.

Still, despite Advocate's commitment to a value-centric care system, he says he understands why hospitals and health systems might be fearful of making the leap from fee-for-service. The transition can undoubtedly be "painful," he says.

Recent surveys and studies suggest a notable number of healthcare providers expect the road from volume-driven reimbursement to value-based contracts to be a rocky one. A survey of 240 representatives from hospitals, physician practices, health plans and pharmaceutical companies conducted during a series of webcasts in April and May by KPMG — an audit, tax and advisory services firm — found approximately 33 percent of healthcare managers expect value-based contracts to have a negative effect on operating results.  Survey respondents from hospitals, health systems and large physician groups had particularly pessimistic expectations, with 49 percent saying they expect a drop in operating profits because of the transition to value-based payment.

A study released in June by McKesson Health Solutions had similar results, finding that only 35 percent of the 350 healthcare providers surveyed thought value-based contracts would have a positive effect on their finances. "Many providers are saying 'Geez, this may hurt us,'" says David Nace, MD, McKesson Health Solutions CMO.

checkA focus on value and a possible revenue reduction
As providers focus on preventive care and keeping patients out of the hospital, the decline in inpatient volumes is bound to have a financial impact, according to Jim Landman, director of healthcare finance policy, perspectives and analysis at the Healthcare Financial Management Association. "As a hospital-based system, the more you're reducing admissions to the hospital, you'll have a decline in revenue," he says. "That can be an outcome, especially if you are not able to increase market share. You'll be getting less revenue from hospital admissions because you're being more proactive."

Many providers have already taken a fiscal hit as Medicare shifts from fee-for-service to value-based reimbursement. For instance, during the first year of the Medicare Hospital Readmissions Reduction Program — which was established by the Patient Protection and Affordable Care Act and took effect in fiscal year 2013 — CMS cut Medicare reimbursement by up to 1 percent for 2,213 hospitals with high readmission rates for heart attack, heart failure and pneumonia. The second round of penalties started Oct. 1, 2013, and CMS cut reimbursements for 2,225 hospitals in 49 states by up to 2 percent.  In fiscal year 2015, the stakes will get even higher. Hospitals could see their Medicare payments cut by as much as 3 percent, and CMS plans to add chronic obstructive pulmonary disorder and total hip and knee replacement to the program.

The Hospital Readmissions Reduction Program cuts might not seem like a lot, but for hospitals with high percentages of Medicare revenue and a low to negative operating margin, it can be a sizeable amount, potentially the hospital's entire margin. "People are certainly threatened by that," says Bill Bithoney, MD, managing director with BDO Consulting and chief physician executive for BDO's Healthcare Advisory practice, where he co-leads clinical strategy for the firm's Center for Healthcare Excellence & Innovation.

However, despite the potential loss of income, providers are still better off taking on value-based contracts than they are sticking with fee-for-service, says Dr. Nace. McKesson's recent study indicates payers and hospitals anticipate two-thirds of payments will be based on complex reimbursement models with value measures by 2020. Furthermore, 90 percent of payers and 81 percent of hospitals surveyed already had a mix of fee-for-service and other reimbursement models. Consultants have predicted refusing to go along with the industry's inevitable transition to value-based payment could result in hospital margins as low as -17 percent.

"They're saying, 'I don't know that this will be successful for us; it may hurt us financially,'" Dr. Nace says of providers taking on value-based contracts. "But what you're not hearing as much is, 'But not as much as if we didn't do anything.' What you're missing is, 'We're going to do it anyway, because we're dead if we don't.'"

How to make the switch without sinking
At this point, many providers exist in a state of limbo between the two payment models, trying to figure out how to proceed successfully. "Many systems are describing this as a foot on the dock, foot on the boat moment," says Mr. Landman of HFMA. "A lot of them are caught between fee-for-service and value-based contracting, looking at when they will reach the tipping point."

As they continue to navigate that transition, hospital and health system leaders can take numerous steps to prevent or at least mitigate the potential loss of income that value-based payment models could bring. Mr. Landman recommends cost restructuring as one major strategy to consider. "Your revenue will drop, but if you bring your cost structure down at the same time, you'll maintain your margin," he says. He advises providers to get a sense first of whether and where they're capable of cost restructuring, which often involves clinical practice redesign.

Similarly, KPMG Partner Cynthia Ambres, MD, says providers should understand their core business well and consider financial restructuring to ensure they're operating seamlessly: "Get your financial house in order, and move simultaneously toward financing a new payment structure. Total revenue may drop but your margin may increase with better coordinated care delivery models."

Advocate has taken exactly that approach to its cost structure as it focuses on value-based care. "We are laser-focused on our  care model trying to drive out any waste or inefficiencies," Mr. Englehart says. "It's got to be really taking a step back and strategically look how can provide the care differently and more efficiently."

Mr. Landman also advises providers to start by experimenting with their self-funded employee population: "That gives them a real sort of feel for what the impacts are. It allows them to project to broader populations. That's a really great spot to start is getting your feet wet."

Hospitals that want to "dip their toe in" the value-based payment pool can start with bundled payment programs, according to Dr. Bithoney. However, he warns against being too timid and only implementing bundled payments for one diagnosis, such as hip replacements. The old-fashioned methods still in place everywhere else in the system can undermine the experiment.

"They haven't really changed the system," he says. "They've tried to change just one thing and try to leave everything else the way it's always been." He says it's better to "jump in" and apply bundled payments to 20 or 25 different diagnoses, albeit not without careful thought and analysis first.

Another piece of advice for transitioning to value-based contracts: Adopt new technology. "That's going to be essential to being successful," says Dr. Nace. "All the technologies…for example, revenue cycle systems that hospitals and health systems use today…they are built for a fee-for-service environment, and they are completely inadequate to address value-based methods of reimbursement."

Technology can also play a part in clinician engagement and education about new care delivery methods — another key aspect of a smooth switch to outcomes-based reimbursement, according to Dr. Bithoney. For instance, electronic health records can contain "blue buttons," which are links to the latest clinical literature and practice guidelines. "If the clinician has a question, he can look at it," he says. "That kind of thing can be quite helpful."

There's no one-size fits all approach to taking on value-based contracts. Providers need to consider a number of factors — from cost structure to organizational culture to physician relations — before taking on the new payment model, according to Mr. Englehart of Advocate Physician Partners. "You can't be a me-too," he says. "You get in trouble when you try to catch up to someone else in your market, and you don't have an honest  assessment of your strengths,  weaknesses and rate of change your organization is willing to take on

As for APP and Advocate, the system is prepared to focus more and more on population health, maintaining its focus on providing value while simultaneously seeking to keep a healthy balance sheet.

"We think that shared savings and ACOs are bridges toward a higher level of responsibility for the total cost of care," he says. "We're committed, we're in. This is where we believe we need to go."


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