Managing the Transition to Value-Based Reimbursement: 8 Core Strategies to Mind the Gap

There is no shortage of challenges in healthcare today. One of the most significant challenges is managing what economic futurist Ian Morrison calls "life in the gap," according to an American Hospital Association report. The "gap" is this awkward period of time when healthcare organizations are being pressured to lower costs and improve quality, but remain paid largely on a fee-for-service system.

Some hospitals and health systems have opted to be first movers — they became a pioneer accountable care organization or developed a new program with a commercial payor — while others are taking a more cautious approach, focusing on building relationships with physicians and community organizations. Here, healthcare experts from across the industry share their experience with "life in the gap" and how hospitals and healthcare systems can prepare for reform while remaining solvent.

The challenge: Living in two worlds at once

Whether a hospital or health system chooses the first mover or second mover approach, it will face risks. By experimenting with new payment models first, a hospital can lose revenue in the short term because outside of select pilots, CMS is still reimbursing based on the fee-for-service system. By waiting, hospitals lose the opportunity of practicing the new skills and processes that will be needed to succeed in the future, which may cost them long-term revenue.

GBMC HealthCare opted to be a first mover. In July, CMS approved GBMC HealthCare's Medicare Shared Savings Program ACO called the Greater Baltimore Health Alliance. This Medicare Shared Savings Program ACO is the only one in Maryland with a hospital component. GBMC HealthCare is also increasing the number of primary care access points throughout its system.

"We joke that we could do the right thing right into extinction, because if we cut unnecessary utilization of health services and lose that revenue while we are providing coordination that is not reimbursed, that is a huge problem for us," says John Chessare, MD, president and CEO of GBMC HealthCare. "My number one fear is this: that we redesign a much better system but the payment system continues to incentivize uncoordinated, ineffective and extremely expensive care."

Hospital leaders face the challenge of how much to risk in the transition to healthcare reform.Navigating the transition: Strategic options

There are many strategies for navigating the transition from a volume- to value-based healthcare system, and the success of each one will depend on individual hospitals' and health systems' cultures and markets.

1. Drive out waste.
One option is to focus on optimizing efficiency to eliminate duplication and save costs. "We are redoubling our efforts on performance improvement within our hospital, using Lean tools to try to drive waste out of the hospital, then free resources to apply to the building of patient-centered medical homes," Dr. Chessare says.

In fact, he suggests hospitals that do not think they have the funds to support reform efforts focus on streamlining care to shift resources to where they are needed most. "Hospitals that said they don't have money to do this should do what we're doing: Roll up their sleeves and drive waste out of their own processes, and they will find the resources," he says.

KentuckyOne, a non-profit system formed by Jewish Hospital & St. Mary's HealthCare in Louisville and Saint Joseph Health System in Lexington in January, is also working to eliminate redundancies in its transition from volume- to value-based care. Englewood, Colo.-based Catholic Health Initiatives, which has majority ownership in the system, aims to reduce expenses by $2 billion over the next five years to better operate in a reform environment, according to Dan Varga, MD, chief physician executive of KentuckyOne Health.

"That's a lot of expense to take out, and we're not able to do that just by optimizing labor metrics and optimizing cost of supplies in inpatient settings. We have to figure out how to take care of inpatients in lower cost settings," he says. He says KentuckyOne will have to look to comprehensive outpatient settings, home care and various other settings to manage patients more cost effectively while improving quality.

2. Implement new payment models.
One of the more common strategies of transitioning to healthcare reform is participating in new payment systems under CMS pilots, such as Pioneer ACOs, or with private companies, such as Cigna, which aims to establish 100 accountable care initiatives by 2014.

In 2010, San Francisco-based Dignity Health formed an ACO with Blue Shield of California and Hill Physicians to serve members of the California Public Employees' Retirement System. So far, the ACO has saved more than $37 million and reduced inpatient readmissions and the average length of stay, according to Michael Blaszyk, senior executive vice president and CFO of Dignity Health.

"Our ACO collaboration has led and should continue to lead to population management capabilities that should enable us to increase our capacity to serve additional populations [and] increase revenues while providing a forum to work with our physicians and other partners to reduce costs and improve quality," he says.

There are other options for hospitals and health systems to incentivize efficient, high-quality care in addition to ACOs. For example, while GBMC HealthCare participates in an ACO, it is also rolling out a financial incentive program that will give employees bonuses if they meet clinical and financial goals. "In the first year of our three-year strategic plan, we did pretty well and we made a lot of changes, but my concern was that not all of the family was in the improvement boat," Dr. Chessare says. "We decided to test the notion that if we put a financial incentive out there, we might get more people hungry to make changes to help us get closer to our vision."

3. Collaborate with other healthcare providers.

Another strategy for managing the period of transition from fee-for-service to pay-for-performance is collaborating with other healthcare providers, including physician practices, rehab facilities and ambulatory centers. Reaching out beyond the hospital space will be crucial for hospitals going forward, as they will likely be responsible for the patient's continuum of care, not just the patient's hospital care.

"We believe that our ability to manage this transition is optimal when we are effectively engaged with our physicians, patients and payors," Mr. Blaszyk says. "The industry must improve communication among providers, payors and physicians in order to meet the demands of a reformed healthcare environment."

Partnering with physicians is particularly important for hospitals as healthcare reform changes demand a coordinated approach to care. "As we look to redesign the delivery system for the future, it is very important to have physicians and other clinicians in leadership roles," says Valinda Rutledge, president of Jewish Hospital in Louisville, Ky., and leader of parent company KentuckyOne Health's Louisville market. "They're the only people who understand how that redesign has to happen."

Hospitals can partner with physicians to standardize patient care processes to improve quality, increase efficiency and lower costs. Standardization will help hospitals prepare for healthcare reform measures that reward high quality while allowing the hospital to continue to prosper under the current fee-for-service system, which rewards productivity.

Partner with past competitors
Hospitals struggling to prepare for healthcare reform in the current, non-reform environment may also consider partnering with past competitors, such as other hospitals in the region, to combine resources, eliminate waste and gain more clout with payors. Mr. Blaszyk suggests hospitals "explore creative, even unconventional, ways to partner with others in order to achieve better operational effectiveness that promotes patient satisfaction."

4. Invest in primary care.
Some first movers in the transition to healthcare reform have invested in primary care and patient-centered medical homes to better track patients through the continuum of care. As hospitals still face decreased reimbursement, however, these investments may need to be scaled back depending on the hospital's financial resources. "Last year we spent a lot of money building a lot of new primary care sites," says Dr. Chessare. "This year we pulled back a little on the throttle and slowed down building primary care sites because, quite frankly, we didn't have the margin to do it."

When new payment systems take effect, these primary care sites will be a key strategy to coordinating care and managing population health. "Right now a lot of hospital services that are being used are the end results of poor coordination of care," Dr. Chessare says. By improving coordination of care through primary care partnerships and integrated health information systems, hospitals can prevent unnecessary readmissions and unnecessary utilization.

8 core strategies to mind the gap
1. Drive out waste.
2. Implement new payment models.
3. Collaborate with other healthcare providers.
4. Invest in primary care.
5. Develop health data analytics.
6. Establish employee health programs.
7. Begin a cultural revolution.
8. Evaluate and re-evaluate strategy.
5. Develop health data analytics.

Healthcare analytics will play a significant role in the delivery of care in the future as hospitals learn to use trends in patient data to drive new strategies and decision-making. Investing in health IT and analytics now can help hospitals learn the skills required to measure, track, analyze and apply data to real patient care. While health IT requires a significant investment now, it will be crucial for determining whether a hospital meets the financial and quality metrics it will be paid for in the future.

Ms. Rutledge says there are three components of analytics that hospitals need to develop. The first is a database that includes data for patients beyond the four walls of the hospital — such as data on primary care visits, rehab facility visits and nursing home stays. The second is the development of competencies to interpret the data. The third is redesigning care from the analytics so multidisciplinary care teams can provide comprehensive, coordinated services to patients.

6. Establish employee health programs.
Second movers — hospitals and health systems that are hesitant to implement system-wide changes — can start preparing for new payment models by starting with their own employees.

"The logical place to start, the place where there's limited risk but a lot of upside, is with employees," says Bill Woodson, senior vice president at healthcare analytics company Sg2. "Most [hospitals] are self-insured, it's a risk they already own. If they implement care management models and improve quality, they can benefit from that and then take it out to the marketplace."

For example, hospitals can lower insurance costs for employees who perform certain wellness activities, such as going to a wellness center or having a nutrition consultation. Experimenting with population health management strategies for their own employees allows hospitals to work toward transforming the delivery of care with very little risk.

7. Begin a cultural revolution.
The gap between the current and future reimbursement system provides an opportunity to start changing the hospital's culture to focus more on the whole patient and wellness instead of single episodes of care and sickness. Changing the culture of an organization takes time; starting now can help prepare hospitals for the future. "The challenge is not only financial, but cultural in terms of changing the [organizational] mindset of the healthcare industry," Mr. Blaszyk says.

By assessing the hospital's current culture and communicating with physicians and staff about healthcare reform changes, hospitals can determine how fast the organization is prepared to move to these new models of care. "How good is your clinical leadership overall, and what's your internal appetite for innovation and risk?" Mr. Woodson asks. "Are you willing to struggle to get to the next level? Do you have an incentive structure in place internally with leaders and employees and physicians to pull all this off?"

8. Evaluate and re-evaluate strategy.
This period of change from fee-for-service to pay-for-performance is a time of uncertainty and constant change. Hospitals therefore need to constantly evaluate their strategy and determine if the strategy needs to change to better meet the organization's goals.

"We look at strategy almost on a daily basis," Dr. Chessare says. "We have a set of organization-wide goals that are the answer to the question 'How will we know if the changes are leading us to our vision?'" GBMC HealthCare's goals align closely with those of healthcare reform — better health, better care and lower costs — and specific outcomes such as patient satisfaction scores and operating margin indicate whether the system's strategy is helping meet those goals.

Implementing strategies for healthcare reform goals now does not prevent the system from operating successfully in the current environment, and may even aid in successful operation, according to Dr. Chessare. "There isn't anything in our strategy that is bad. We're making the kind of care system we would want for our loved ones. Even in a fee-for-service world, we're going to be attracting more patients to our company."

Deciding when to take the leap
The number and kind of strategies hospitals adopt will depend on how fast they want to move to the new payment model. To determine what level of risk to take, hospitals need to be aware of their market — what the prices of their competitors are, what the payors in the area are doing and how consumers are behaving, according to Mr. Woodson. "Be on the ground; understand what's going on with your competitors, your payors. Be able to move quickly if you need to," he says.

Ms. Rutledge also emphasizes the importance of knowing one's market. "You want to be the first mover, but not faster than the market can support," she says. As markets differ across the country, so does the speed of change among hospitals. Massachusetts hospitals, for example, have been first movers because some health reform measures had already been enacted in the state.

Ms. Rutledge suggests four strategies to innovate within the boundaries of the market. First, she recommends engaging and educating the board and community leaders about reform so everyone is prepared for the coming changes. Second, hospitals should learn from others nationally to identify strategies that may work in one's own market. Third, hospitals need to stay focused. "If you're all over the board trying to do 20 different initiatives, you're not going to do anything well. Figure out the core competencies of the organization and figure out which project gives you those competencies," Ms. Rutledge says. Last, hospitals need to determine best practices in their organization and decrease variation from those best practices.

As hospitals and health systems continue to navigate the transition between two different healthcare environments, healthcare leaders will need to seek ways to manage current margins while preparing for more quality-based payment systems. Being aware of the market and the culture of the organization can help hospitals achieve this balance.

More Articles on Hospital Strategy:

Managing Population Health: Where Should Hospitals Begin?
Hospital and Health System Strategy in 2012: 6 Key Initiatives

Ideas Into Action: 3 Hospital CEOs Talk Strategy Going Into 2013

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