3 Risks for Hospitals Avoiding New Payment Models

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There are several catalysts driving the healthcare industry's push for new payment models such as the prospect of a more competitive insurance market — if insurance exchanges develop as part of the Patient Protection and Affordable Care Act; clinical integration efforts at hospitals and health systems; and governmental programs like the Medicare Shared Savings Program and Bundled Payments for Care Improvement. For a variety of reasons, some hospitals may be hesitant to pursue new payment models. However, avoiding ACOs and bundled and episodic payments may also put hospitals and health systems at a disadvantage.

"All hospitals should be moving towards new payment models to some degree. How far down the road they travel depends on local market conditions. Regardless, hospitals should be proactive in the new payment models because it could be a winning formula required for success in the future," says John Harris, principal at DGA Partners.

The need to embrace new payment models as the healthcare landscape evolves is best evidenced in the risks organizations may face if they are not proactive.

1. Limited revenue opportunity. Hospitals and health systems that are not proactive with new payment models could place their revenue streams at risk. As the healthcare industry explores new payment models, healthcare providers are going to need to demonstrate value to payors — service at a better price and with better outcomes than other providers. If a provider is not willing to demonstrate value, it could be faced with flat or declining fee-for-service reimbursements as payors focus their additional funds on demonstrable value, says Mr. Harris. Under new payment models, providers that focus on the overall cost of healthcare and the patient experience will be more successful. Providers will need to manage not only care in the hospital but also care after discharge. If providers do not pursue this sort of quality, they may be at a disadvantage for reimbursements down the road.

"If a provider is not willing to take the risk, commercial payors may say they are not willing to put money on the table," says Mr. Harris. Whether or not the federal government continues to push for ACOs and bundled payments, commercial payors will most likely move away from strictly fee-for-service reimbursements so they can provide incentives to control costs.

2. Reduced market share. Changes in the insurance market could affect market share for a hospital that is not proactive in successfully managing the costs to a payor. In the current insurance market, most health plans have broad provider networks and limited incentives to use lower cost providers. In a more competitive insurance market — partly due to insurance exchanges under health reform — health plans will seek to steer members to providers that yield lower overall costs. Mr. Harris points out that the providers that do not successfully manage costs will likely lose volume to providers that can reduce costs.

Providers may need to partner with payors and prove their overall value through risk-sharing or incentive-based payment arrangements. It may feel like patients will maintain loyalty to providers, but the possibility of saving their own money — either in premium or co-payments — may lead patients to switch providers, says Mr. Harris. This dynamic could drive down market share for providers that do not deliver value.  

According to Mr. Harris, if providers do not want to be placed in a situation where they can only react to what another hospital or provider has done, they should be proactive with new payment models.

3. Depleted physician network and referrals.
Hospitals that are negotiating financial arrangements like risk sharing or upside-only incentives may attract more physicians. If a physician sees an opportunity to utilize population management and receive incentives, he or she will gravitate to that opportunity, says Mr. Harris. More so, physicians could begin to steer their patients to hospitals that enable them to manage population health and away from those that do not. According to Mr. Harris, 19 of the 27 ACOs in CMS' Medicare Shared Savings Program are physician driven, illustrating physician interest in managing care with quality, cost-effective healthcare services.

The healthcare industry is changing. Whether these changes will stick depends on many factors, according to Mr. Harris. To ensure that a hospital or health system remains viable, it should at least begin to gain experience with new payment models, says Harris. "Nothing can replace direct experience to understand the ins and outs of innovative payment models — you can't just wait until it's an imperative and turn on the expertise overnight." While the pace of adoption may depend on local market competition, payer dynamics, and physician relations, the hospitals that are proactive in preparations for new payment models will be at an advantage. They could avoid risks of a flat revenue opportunity, reduced market share and a depleted physician network.

"Providers will need to manage population health cost-effectively to secure a strong position in the evolving healthcare market and to be paid reasonably for their services. For this reason, providers need to begin learning and implementing new payment models," says Mr. Harris.

More Articles on New Payment Models:

7 Steps to Navigate Payment Allocation Under ACOs
60 Accountable Care Organizations to Know
5 New ACOs Announced This Year; What Does the Future Hold for Accountable Care?

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