Provider organizations still have far to go in preparing for the transition from fee-for-service to value-based payment—and most can benefit from having a comprehensive strategy for accommodating change while accounting for current realities.
Population health management and value-based payment have become nearly ubiquitous as topics at healthcare conferences and in the healthcare press. There is little doubt that the momentum in the transition from fee-for-service to value-based payments is expected to grow steadily. A December 2015 report by Leavitt Partners projected an increase in the number of lives covered under Medicare, Medicaid, or commercial accountable care organizations (ACOs) from 23.5 million in 2015 to more than 100 million by 2020 in the most likely of four scenarios they modeled.a Such projections are subject to the uncertainties created by full-scale implementation of President-elect Donald Trump’s “repeal and replace” promise for the Affordable Care Act (ACA). However, as evidenced by the recent movement toward implementing the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), which was passed with bipartisan support, it is apparent that the Centers for Medicare & Medicaid Services (CMS) is fully committed to transitioning all of Medicare to value-based payment arrangements, and most Medicaid-funded care is now provided through risk-based managed care organizations.
These realities make a reversal in the larger trend toward value seem unlikely.
Not every dollar will be at risk, but an increasing number of patients will be subject to risk- and value-based contracts, and hence a growing portion of margin will be subject to value-based performance risk. More important, MACRA was created as a budget-neutral, zero-sum game. Although the early risks are minimal, over time, an increasing proportion of physician payment will be at risk, and performance incentives will be set “on a curve.” There will be clear winners and losers.
One of the primary impacts of MACRA will be to force small independent physician practices to join larger organizations, either health systems or large independent physician organizations and medical groups. To retain control of their physician workforce, health systems that have been reluctant employers of physicians will need to reconsider that strategy. And because an increasing proportion of physician payment will be subject to performance risk, health systems will be competing to ensure that their physician enterprises are high performing and to avoid the impact of financial penalties resulting from below-average performance.
Market Evolution Requires a “Strategy for the Middle”
The transition from fee for service to value is forcing all healthcare providers to look around the corner and develop new capabilities for performing under value-based payment and in population health arrangements. But the reality is that most healthcare organizations in the next three to five years will need to have “a strategy for the middle” that enables them to operate in both worlds. A successful transition strategy will need to embrace a goal of patient-centered accountable care; MACRA should remove any lingering doubts on that score. But it also will need to maintain focus on the engine that got the health system where it is in the first place: volume-based, fee-for-service medicine.
An “all-in” population health strategy for risk contracting may be the correct approach for a handful of systems, such as Advocate Health Care, Northwell Health, Intermountain Healthcare, and Partners Healthcare. These early adopters of population health solutions have enormous resources, determined leadership, and a significant portion of their business now in risk-bearing arrangements. They have made the strategic judgment that their exposure to value-based revenue models has moved beyond the point of no return, and they are taking organization wide steps to shift their business model. But for most provider systems, the transition is not so far along, requiring continued focus on the current business model along with the development of new capabilities to succeed in the new model. They will need to learn to operate in the new world of value and risk while maintaining and growing market share under fee for service.
“[T]he historical changes sweeping the healthcare system are taking root slower than expected . . . , ” Standard and Poor’s comments in its September outlook report for the U.S. not-for-profit healthcare sector.b S&P observes that, although the movement toward value and away from fee for service was expected to continue, the financial performance of “the vast majority of providers” would remain the same over the remainder of 2016, because of the impact of the fee-for-service commercial market and continued performance improvement.
Speaking at a healthcare conference at the Yale Law School last fall, Cecelia Montalvo, vice president of business development for Kaiser Permanente—which is itself a population health management organization—put it succinctly when she noted that most providers “are stuck straddling two different payment worlds,” with risk-based revenue constituting too small a fraction of the budget to allow for a business-model change.c Montalvo confirmed her viewpoint in a recent interview with BDC, saying she expects the implementation of MACRA will drive more individual physicians to seek the safety of hospital employment, but that this effect, too, may not change the payment model. Given current trends, the majority of providers will need to continue to operate with “one foot on the dock” of fee-for-service payment and “one foot on the boat” of population health management.
At least nine key issues must be addressed in a successful strategy for the middle. Collectively, the responses to these issues will provide a playbook to guide a successful transition to the value-based market.
Attention to Volume and Margins
Volume and market share are still needed to maintain margins. New value-based arrangements in Medicare and Medicaid don’t mean that margins will automatically shrink—there will be winners and losers. But the arrangements are designed to shrink utilization. Protecting commercial fee-for-service volume, therefore, will be essential to any strategy. User-friendly patient access, appropriate physician availability and network design, pricing transparency, and enhanced customer experience will need to be orchestrated as part of an effective plan. And for poor performers, loss of either value-based incentives or fee-for-service market share will limit the availability of resources for investment in the expensive infrastructure and data analytics required to manage population health.
Implication: Health systems should direct their efforts in this area toward eliminating access bottlenecks; developing a customer engagement strategy to build patient loyalty and trust; focusing on brand development; and maintaining broad commercial, Medicare, and Medicaid network participation.
The Future of Accountable Care
Accountable care may be a “megatrend,” but ACOs are still a work in process. The focus on developing more value-based care has been a core concept of the ACA and has been widely accepted in the commercial market. But ACOs, the primary delivery vehicle for reform, face performance challenges. Only 28 percent of Medicare ACOs have achieved positive bottom-line results so far—even though a few, such as the Memorial Hermann ACO in Houston, have recorded spectacular savings. According to CMS, of the 220 ACOs participating in the Medicare Shared Savings Program (MSSP) that were eligible for renewal, just 147 renewed, while 18 transitioned to the Next Generation ACO program or combined or merged with other ACOs. A number of those leaving the MSSP, however, continue to operate in the commercial space. As of April 2016, there were an estimated 838 ACOs in the MSSP and commercial sphere combined, with 1,217 identifiable contracts.d ACOs remain new business models, and it is not surprising providers are taking a while to figure out how to operate them successfully.
Implication: It’s not enough to have an ACO; the ACO has to perform. A Medicare ACO strategy should be based on a market-specific understanding of cost benchmarks. Organizations should consider Medicare Advantage as an alternative to the MSSP. Implementation of the Republican “repeal and replace” platform may put Medicare ACOs on the endangered species list given their struggles to reduce costs. Most health systems, particularly those in the early stages of the transition to value, will no doubt want to see how the dust settles 2017 before moving forward with any new MSSP plans.
Persistence of Fee-for-Service Payment
Fee for service is deeply embedded in most provider cultures. When it comes to paying for physician visits, despite movement of providers to risk-based incentives, fee-for-service remains the overwhelmingly dominant payment method. Nearly 95 percent of all physician office visits in 2013 were still paid on a per-visit basis, according to a new study by economists at the Center for Financing, Access, and Cost Trends, part of the Agency for Healthcare Research and Quality (AHRQ).e Only 5.3 percent of office visits in 2013 were covered under pure capitation contracts, down from 6.6 percent in 2010. The shift from episodic fee-for-service care to more preventive whole-person care will require a shift in mind-set along with a change in operating systems and workflow processes. Effective value-based care will require new behaviors and processes fueled by data interoperability and patient engagement technology.
Implication: Health systems should revisit relative-value unit (RVU) and revenue-minus-expense physician compensation models in light of the need to create incentives for practice behaviors beyond pure productivity. Most organizations will want to consider adding significant incentives for quality, total medical expense, patient satisfaction, and citizenship on top of productivity-based models. Organizations with strong physician management cultures can consider salary-based compensation models coupled with a meaningful performance review process.
Impact of MACRA
MACRA will require a new set of hospital-physician relationships. The law is expected to have a fundamental impact on physician payment and how the C-suite relates to voluntary, employed, and affiliated medical staff. Successful implementation of MACRA will likely force increasing numbers of private physicians into larger organizations that have the resources needed to meet the program’s advanced reporting and risk management requirements. Developing high-performing physician enterprises will become an increasingly important competitive dimension for health systems because payment bonuses exceeding 10 percent eventually can be achieved by avoiding penalties and demonstrating exceptional performance. MACRA will affect both physician compensation design and Stark Law changes, making it important for health systems to establish appropriate standards to capture metrics of quality as well as physician productivity. As a result, providers may need to develop new governance structures with both clinical and executive leadership to oversee MACRA readiness activities and to deal with issues of organizational culture and change management.
Implication: It’s not enough to have a “physician employment” strategy. Every health system with significant numbers of employed and affiliated physicians requires a strategy and operational model for developing a high-performance group practice culture.
Health Insurance Exchanges Uncertainties
The ACA’s health insurance exchanges have gone through growing pains and could well be overhauled or done away with under the Trump administration, eliminating a potential new sources of growth. Even before the election, the uncertainties in the federal insurance marketplace, where enrollment has been far below original projections, give renewed import to maintaining or growing market share in the large-employer and group-health markets. Most employers have opted to maintain their benefit plans for employees instead of dropping coverage in favor of the exchanges—meaning a radical disruption in the commercial marketplace is unlikely in the next few years.
Implication: All health systems need a market-specific private-payer strategy addressing all key payer segments (traditional commercial, exchange, Medicare Advantage, and managed Medicaid).
Digital Technology Innovation
The impact of new digital technology is uncertain. Technology makes innovation and disruption easier than ever, but technological breakthroughs do not necessarily create new markets. A recent article in the New England Journal of Medicine points out that, despite some impressive new products and medical service providers, none of the attention-grabbing new ideas and delivery innovations (such as “bedless” hospitals, online medical care, mobile health apps, and retail clinics) appear ready to overtake or displace established care providers.g And start-up managed care ventures such as Oscar (www.hioscar.com), which has leveraged new IT and software to enter the individual insurance market, have yet to prove their business model is sustainable. Again, however, this is a market-by-market phenomenon, with various disruptive innovations playing more meaningful roles in individual markets.
Implication: Large health systems should consider participation in one or more strategic healthcare venture funds as a way to monitor technology development in a disciplined way. All heath systems need an internal process for managing innovation (both internal and market-disruptive innovation).
Consumerism and Price Transparency
Consumerism and pricing will be increasingly important considerations in all markets. A recent Commonwealth Fund survey found that, when given an option in the ACA health insurance marketplace, four in 10 adults selected the less expensive plan with fewer physicians or hospitals.h And about 25 percent of the consumers who bought insurance on the exchanges for 2015 switched plans in 2016, generally opting for lower-cost plans.
With the stiff premium hikes projected for the coming year, even more shopping is expected during 2017 open enrollment. As patients adopt a consumer mentality, it will be important for the C-suites of hospitals and health systems to pay close attention. Pricing will influence consumers’ decisions to purchase insurance products in narrow or tiered networks. The impact of pricing also can be seen with the spread of reference-pricing contracts such as CalPERS, where patients shop for services because they are responsible for cost of above a reference point, and in response to deductible-sensitive service such as MRIs.
Implication: Health systems should recognize the limitations of the chargemaster as a blunt-pricing instrument. They should adopt much more sophisticated pricing strategies and models similar to those used routinely in other industries such as air travel, lodging, and online retailing, and they should be prepared to give up “facility-based” pricing for most outpatient services.
Merger-and-Acquisition (M&A) Considerations
Given the stance of antitrust enforcement in the Federal Trade Commission (FTC) and the Department of Justice (DOJ), health systems will not have a free pass when it comes to M&A strategies. In November, the 7th U.S. Circuit Court of Appeals ruled in favor of the FTC and the State of Illinois against a proposed merger involving Advocate Health Care and NorthShore University Health System, sending the case back to district court to consider issuing a temporary injunction to block the deal. In September, the FTC won a similar appeals court victory pausing a merger between Penn State Hershey Medical Center and Pinnacle Health System, sending the case back to the agency for administrative review. In both cases, the appeals courts overruled the lower courts’ decisions on the grounds that the mergers were economically unsound, would harm competition, and would lead to higher prices for insurers and employers. The FTC and the DOJ have made clear both their skepticism about the value of mega-deals and their intent to see pro-competition law operate robustly (although whether these agencies take a different approach in a Trump administration remains to be seen).
This stance by these agencies will present challenges for health systems seeking to grow their footprint through M&A deals, indicating the need for stand-alone survival planning. But as payment models evolve, some hospitals will lack the capital or know-how to succeed and will have to merge to stay alive. Both offensive as well as defensive merger strategies may be needed as part of any effective strategy for the middle.
Implication: Health systems should prepare for a resurgence of non-merger-based alignment models such as joint ventures and clinically integrated networks. There should be a stronger focus on brand-based organic growth strategies than on mergers.
Population Health Infrastructure
Building population health infrastructure requires new perspectives and capabilities. For most providers, performing in population health contracts will require development of a new care management infrastructure, improved data interoperability, and a broad network of physicians to provide market coverage and successfully manage care. If a provider believes that all roads eventually lead to population health management, achieving this endpoint will require the development of new perspectives in care planning to support the transition. This endeavor may include aligning payer-provider contracts, developing cross-continuum care models, and addressing related gaps in the technology infrastructure—all of which can be costly and time consuming. Success in population health will require further development of clinical analytic capabilities—and greater collaboration between payer and provider organizations to manage disease effectively. It will require embracing patients as consumers. Partnering with organizations with retail strengths such as Walgreen’s or CVS Pharmacy will become more important, particularly as a channel for attracting new patients.
Implication: Health systems should clarify make/buy/partner strategies around population health infrastructure. They should prioritize investment relative to the expected pace of the business model transition and develop organizational discipline regarding technology acquisition while avoiding “shiny object syndrome.” The focus should be on acquiring and/or developing the people and resources needed to establish a population health management culture.
Strategic Imperatives
To date, the strategy many health systems have pursued—if it could appropriately be called a “strategy”—in the face of complex market and government challenges has been to “launch 1,000 ships” in response to regulatory and business pressures, hoping that some of them will reach the promised land of value-based care.
A successful “strategy for the middle,” however, will require a leadership focus not only on value but also on maintaining flexibility and ongoing innovation. There is no doubt a variety of disruptive initiatives such as retail partnerships, Super ACO alliances, and even e-commerce will be part of the playbook for different health systems, depending on their market situation. A health system’s success will depend on its ability to bring new program initiatives to scale rapidly, harvesting value when it is earned—while also avoiding having any sentimental qualms about disengaging programs that are not performing.
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