Doing more with less: Strategies for competing on price, quality and both at the same time

With the shift from fee-for-service medicine, hospitals and health systems across the nation are asked to perform a highwire act — to compete on price and improve the quality of care they provide while facing reimbursement cuts.

U.S. hospitals have absorbed more than $144 billion of new cuts since 2010, including Medicaid disproportionate share hospital cuts under the Middle Class Tax Relief and Job Creation Act, the offset for two-midnight policy included in the final inpatient prospective payment system rule for fiscal year 2014, and MS-DRG coding cuts included in the Medicare Access and CHIP Reauthorization Act, the American Taxpayer Relief Act and CMS regulations, according to the American Hospital Association.

Hospitals also face underpayments. Combined underpayments to hospitals for both Medicare and Medicaid were $51 billion in 2013, with a shortfall of $37.9 billion and $13.2 billion, respectively, according to the AHA. For Medicare, hospitals received payment of only 88 cents for every dollar they spent caring for patients in 2013.

On top of the cuts and shortfalls, hospitals also face penalties under Medicare quality improvement programs, including the Hospital Readmissions Reduction Program, the Value-Based Purchasing Program and the Hospital-Acquired Condition Reduction Program.

The financial strain caused by these cuts and penalties can be significant, and those pressures are amplified when hospitals and health systems undertake initiatives to compete on price, quality or both simultaneously. There are health systems that are successfully taking on the two, however, achieving this feat is no easy undertaking.

The push to compete on price
While hospitals look for strategies to lessen the pain of shrinking reimbursement rates, they face another dilemma — naming a price and competing on it.

Patients are increasingly involved in their medical care for a number of reasons, including the growing popularity of high-deductible health plans. In 2014, about 37 percent of those under age 65 with private health insurance coverage were enrolled in a high-deductible plan with deductibles of at least $1,250 for single coverage and $2,500 for family coverage, according to a report from the National Center for Health Statistics. That's up from 34 percent in 2013 and 31 percent in 2012.

The growth in high-deductible health plans — along with employers directly contracting with healthcare providers and private insurance exchanges — places downward price pressure on hospitals. These factors have also caused a major push for more price transparency, which has created several challenges for hospitals.

Embracing the challenge
One challenge is getting accurate information to patients early on. Consumers need to know out-of-pocket costs to properly compare. Yet many times patients only have access to a hospital's gross charges, which are inconsequential, according to Kelly Arduino, a partner in Wipfli's healthcare practice.

"The gross gets adjusted to a contract or negotiated fee that can often be half the price. Looking at the price of a knee surgery for $10,000 at the hospital vs. $6,500 at an outpatient surgery center would be more comparable if the consumer could understand what the out-of-pocket costs would be for each," says Ms. Arduino.

The simple solution to this problem is telling patients their out-of-pocket costs up front, but that requires an individual analysis of every patient. The ability to predict and customize the expected cost given a patient's health plan and other complicating medical issues is one of the biggest challenges hospitals face as they try to compete on price, says Ms. Arduino.

This is a test that Naperville, Ill.-based Edward-Elmhurst Healthcare Senior Vice President and CFO Vince Pryor took head on. His system equipped patients with firm numbers about their out-of-pocket costs. To do this, Edward-Elmhurst Healthcare must delve into each patient's information, including the details of his or her insurance plan. "We've taken on the role of financial counselor," says Mr. Pryor.

Although about two to three times more patients are contacting Edward-Elmhurst Healthcare this year with questions about prices compared to last year, Mr. Pryor says the system still isn't inundated with calls. The system directs calls to one place, which ensures patients receive consistent information.

The push to compete on price requires health systems to make changes like those Edward-Elmhurst Healthcare made. Competing on price will also force leaders to scrap the old way of thinking.

"Hospitals only began to seriously look at costs as payment and reimbursement mechanisms changed," says Ms. Arduino. "Now the next challenge will be becoming an organization that embraces 'marketing.'"

This involves being able to provide information in a format that is "easily accessible, accurate and comprehendible," she says.

The price and quality conundrum
Price is one way to compete, but hospitals are still scrutinized based on the quality of care they provide. Competing on both is "the quintessential highwire act that all hospitals and systems are performing now," says Kanner Tillman, PhD, CFO of Sherman Oaks (Calif.) Hospital & Encino Hospital Medical Center.

It costs money to improve quality — that was the conventional wisdom anyway. Now, hospitals are more aggressive about finding opportunities to cut excessive spending in areas that don't add value.

"For example, physician-specific information on the cost and quality of the preference items and on adherence to evidence-based practice show there isn't always a positive correlation between cost and quality," says Dr. Tillman.

The Association for Healthcare Resource & Materials Management predicts that medical supplies will outpace labor as the biggest expense for hospitals and health systems around 2020. Therefore, when systems are looking to reduce costs, supplies is a natural place to start.

Some of the more innovative systems and suppliers are coming together to redesign procedures with a focus on overall value. Intermountain Healthcare, a 22-hospital nonprofit system based in Salt Lake City, is one of those systems. More than four years ago, the system took seven senior sourcing managers and created a solutions department to start building a framework for collaboration with suppliers.

Intermountain has also developed a process to determine whether products benefit patients. The system conducts physician-to-physician comparisons to see if a product has a clinical benefit. If not, the system begins the process of eliminating the product.

With an eye on overall value, hospitals are also cutting costs by eliminating clinical waste. Christiana Care Health System in Wilmington, Del., was concerned it was spending too much on cardiac monitoring for patients who didn't need it. The two-hospital system made changes to its computer system to encourage physicians to follow American Heart Association guidelines for cardiac monitor use. Afterward, the number of patients using cardiac monitors and the system's daily costs for monitoring fell by 70 percent without any harm to patient care, according to a 2014 study in JAMA Internal Medicine.

The interplay between quality measures and hospital finances
CMS got the ball rolling with its value-based programs and other payers are not far behind. "More and more, quality is being rewarded in the marketplace, and it will increasingly be a revenue driver," says Dr. Tillman.

Hospitals and health systems are increasingly using value-based payment models as they transition away from fee-for-service medicine: As of February, 42 percent of hospitals reported that 10 percent or more of their revenue stems from value-based contracts, according to a survey from Kaufman, Hall & Associates — an increase of 20 percent since August 2014.

The survey found even more dramatic growth in expectations for future use of value-based payments. The percentage of hospitals anticipating that value-based contracts will constitute 50 percent or more of their revenue within the next 24 months tripled, from 7 percent to 22 percent, in six months.

Gaining the rewards of pay-for-performance initiatives takes the whole team, including management and physicians.

"Physicians can be your best partner in this effort if you give them data that shows their performance relative to their peers and how they contribute to quality and outcomes," says Dr. Tillman.

Providing high-quality care can also be great leverage with payers. "Metrics such as risk-adjusted mortality rates and all the measures used by CMS can allow hospitals to price differently in the marketplace," says Dr. Tillman.

Can hospitals successfully compete on price and quality at the same time?
"The answer must be yes because a number of hospitals and integrated delivery systems are doing a great job achieving both objectives simultaneously," says Dr. Tillman. "Strong stock performance of publicly-held integrated delivery systems and strong financials and rapid expansion of some other for-profit and nonprofit hospitals and systems are a testimony to that."

Operating in a system that requires efficient, high-quality care is a painful evolution for some healthcare organizations, especially given the tight financial parameters many run under. However, both aspects — price and quality — are inseparable for the success of any hospital or health system.

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