How hospitals are transitioning to value-based care: Key thoughts to avoid a 'race to the bottom'

Around 160 percent of hospital profits in fee-for-service come from commercial membership while hospitals often lose money on government programs. As a result, many hospital CEOs don't feel it would make sense to participate in CMS' alternative payment models.

However, John Kao, CEO of Alignment Healthcare, recommends these hospitals dip their toes into the value-based world with government programs where the contributions will break even without upsetting the commercial fee-for-service business. "If the ACA and exchange products take hold, which it's debatable whether they will, then the hospital will have the tools to provide care coordination strategies among different populations, including the commercial sector," he says.

He's already seeing the shift begin in Medicare.

"We are seeing the whole notion of population health management shifting from the board rooms to operations, and people are starting to think about how to actually execute population health," says Mr. Kao. "Hospitals are also revisiting risk. They are doing fee-for-service well today, but at places like Ascension and UNC, they are investing in Medicare Advantage as well as alternate payment models for success in the future."

CMS has been at the forefront of innovative payment models including the Pioneer ACOs, Next Generation ACOs, Medicare Shared Savings Plans and the Comprehensive Care for Joint Replacement programs. But many hospitals see these programs as a "race to the bottom," because the more they improve, the harder it gets to receive incentives. According to Mr. Kao, that is why many hospitals are moving toward Medicare Advantage for seniors and bundled payments for the commercial population.

"They are saying, if we are going to do value-based care, let's lean toward the most stable and growing model, which is Medicare Advantage," says Mr. Kao. "We view that as a fee-for-value model, or fee-for-wellness, that incentivizes high quality and low cost."

The hospitals Mr. Kao works with all came to the conclusion that, assuming MACRA is not delayed, it will push the hospital and physicians toward value-based payment models. As a result, he has seen a move toward bundled payments in specialties such as orthopedics and cardiology, which are geared toward the commercial population as well as a move toward Medicare Advantage for care coordination and integrated care.

Success with the Medicare Advantage patients can move them through the hospital more quickly and free up beds or operating room space for patients with commercial payers. "We are working with hospitals to take care of their seniors but keep them out of the hospital and healthy so there is more capacity for other patients," says Mr. Kao.

Alignment Healthcare has grown to roughly 30,000 members in California, Florida and North Carolina with about 60 percent growth per year. As the next period of eligibility for participating in Medicare shared savings approaches, the company can add membership. They partner with physicians and independent practitioners as well as the hospital and their employed physicians.

"We have had to align economics with the physician and leadership of health systems," says Mr. Kao. "There is a big difference between the entrepreneurial primary care physicians that get our value proposition quickly versus the employed hospital physician. The employed hospital physician is compensated on a work [relative value unit] to create the right incentives for the primary care physician to work in that care model."

Mr. Kao has worked with hospitals and health systems to redesign the work RVU and engage physicians in producing clinical outcomes as well as financially beneficial outcomes. For example, in North Carolina, the company created a Medicare Advantage product around the University of North Carolina. The product was sold to the senior leaders and eventually became so attractive 62 percent of the eventual patients who joined were brand new market share.

"These patients had never been inside a UNC hospital or doctor practice before," says Mr. Kao. "They liked our care model, they liked that we were working with UNC physicians and hospitals. From the hospital leadership's point of view, that's a good thing. It provided better integrated care and they are actually attracting incremental market share for the hospitals and specialists."

The company also worked closely with Florida Blue, which is one of the few large payers in the United States doing well with the ACA product; it will have more than 1 million members next year. Elsewhere exchange products are experiencing high annual premium increases and some payers are leaving the exchanges.

"We see a trend where those exchanges will begin to serve and integrate the Medicaid population through each of the respective states," says Mr. Kao. "We think it will keep growing, but the growth will eventually go away. We think CMS will continue to innovate with alternative payment models and those payments will be designed to incentivize hospitals and providers to engage more in value-based payment models."


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