How Value Gives Healthcare Providers an Edge

As competition for volume increases among hospitals and health systems, employers are seeking high-value partners.

This article appears in the July/August issue of HealthLeaders magazine.

Mercy, the nation's sixth-largest Catholic health system, is by all accounts a thriving and innovative 32-hospital health system that is based in Chesterfield, Mo., and operates in four states. But Alan Scarrow, MD, is under no illusions. It will have to compete hard to remain so.

The neurosurgeon and president of Mercy Springfield (Mo.) Communities, which includes Mercy Hospital Springfield, is competing with dozens of hospitals and health systems, not just locally but across the country and beyond over what he and many others see as a shrinking revenue pie. Innovation and transparency, he says, are the key tools in that competition. Better defining and distinguishing itself through value will be the key differentiator.

"We're the high-value folks now, but there will be more competition in this space," he says.

Scarrow was integral in involving Mercy in local demonstrations about the value the organization could provide large employers, thanks to reams of data about outcomes and utilization compared to other healthcare institutions.

Further, he says, Mercy demonstrated a commitment to giving employers what they want—a measure of cost certainty when it comes to expensive procedures. Mercy's effort, which started locally in Springfield nearly eight years ago, culminated late last year in a medical destination agreement with Wal-Mart Stores Inc., which employs 1.4 million associates in the United States.

Walmart's Centers of Excellence program calls for the retail giant to send employees who may need spine, heart, and transplant care to Mercy Springfield, which has 866 acute licensed beds and posted a 2011 total operating revenue of $866 million. Along with Cleveland Clinic, Geisinger Medical Center, Mayo Clinic, Virginia Mason Medical Center, and Scott & White Healthcare, Mercy has agreed to treat Walmart employees who may need these procedures for a single price for the entire episode of care.

Patients still have a choice, but the carrots Walmart and other employers are starting to dangle in front of them are alluring. In return for choosing one of these organizations for their care, Walmart employees are subject to no out-of-pocket healthcare costs for the care and the procedures that result from their condition.

Scarrow sees the program as a way for progressive healthcare organizations to drive patients to their organizations in an era where many in the industry expect reduced volume. Indeed, volumes are soft nationwide, especially in some of the most expensive, and therefore most profitable, services hospitals and health systems offer. Walmart's Centers of Excellence program, Scarrow says, is only the beginning of a move toward price and quality transparency. Hospitals and health systems can either embrace that demand or slowly wither.

What is value?

Proxies for value are often price and quality, but value can be difficult to discover where prices are obscured by the third-party payer system, among many other factors peculiar to healthcare. Quality often can be determined only by measuring factors that aren't clear until long after service is rendered, if ever. But science and intelligence based on data is getting better.

"We are on the path of understanding how information needs to be presented to affect how people make decisions," says Anne-Marie Audet, MD, vice president for health system quality and efficiency at the Commonwealth Fund, a New York City–based private foundation that focuses on access and quality. On the individual consumer level, she says, much of the work is currently in behavioral economics, noting the fact that some healthcare consumers perceive that higher prices indicate higher quality. There is no correlation, but because of this belief, it's "really important how we present data."

On the employer side, things are progressing much more rapidly, she says, but even though employers have much more sophisticated ways of measuring value, there is still a concern about who is determining value: namely, an entity that has a vested interest in cost savings.

"Employers can play a big role in directing consumers to high value," she says. "But now of course we have the exchanges that will be coming up, and people will have to select their coverage and providers, and that's another big opportunity to steer to high value."

Robert Pryor, MD, MBA, president and CEO of Scott & White Healthcare in Temple, Texas, which is one of the approved facilities in the Walmart program, says linking pricing to value can be misleading because, especially in healthcare, cost and quality are not always linked. He also notes that pricing is based on a complex set of factors that may include where a procedure is performed, the number of similar procedures an organization performs, and variations with the pricing of products necessary for a particular intervention.

Getting to high-value care, at least for Scott & White—a nonprofit healthcare system that includes 12 acute care hospitals, 140 clinics, and a health plan—is dependent more on producing a quality outcome than lower prices.

"We find through the proper application of medical judgment and skill, we are able to provide the best solution to the patient's medical need and avoid unnecessary or inappropriate procedures that can increase cost … hence, right care, right place, right time," he says.

And volume is a key factor in that strategy.

"Our agreement with Walmart enables us to treat patients from outside Scott & White's normal catchment area," he says.

He adds that the organization's involvement in the Walmart plan has attracted interest from multiple employer groups but has had little impact on traditional local insurer negotiations. He sees this type of "shopping" growing in importance strategically for hospitals and health systems—more on the employer level than with individual patients.

Though it's also in the Walmart program, Cleveland Clinic has also made strides with a handful of other national employers looking for high quality, high volumes, and a package price for care.

"Boeing, Walmart, and Lowe's are all significant clients, but we have many others in the pipeline," says Michael McMillan, executive director of market and network services with Cleveland Clinic, a nonprofit academic medical center with 4,450 beds systemwide. "We have good relationships with other employers for second-opinion services."

And Cleveland Clinic sees such value propositions as a key growth area.

"We haven't reached capacity," he says. "We can serve a significant chunk of this employer population."

Only the beginning

The Centers of Excellence program grew out of a similar program that Walmart has conducted for organ transplants for about a decade. In nearly all scenarios involving group health benefits, a small number of people account for most of the healthcare costs incurred.

Tom Emerick, a vice president for global benefits for Walmart who left six years ago to consult with employer clients that wanted to develop similar transplant programs, says that in many employer health plans, between 6% and 7% of employees generate 80% of the costs. If the employer could get a handle on increasing the value of the high-dollar procedures its employees needed, that could make a drastic difference in its annual outlays for health coverage—never mind the benefits to patients who were receiving unnecessary transplant surgery.

In studying transplants, Emerick and Walmart discovered that there was wide variation on utilization around transplants—certainly one of the riskiest and most expensive procedures known to healthcare.

In 1996, Walmart chose Mayo as its partner for transplants.

The eye-opening statistic, he says, is that they found that a significant number of patients, 40%, after being examined by Mayo physicians, did not need transplants. That data has held firm as he's helped set up similar programs in recent years for other employers.

"Over those years, four in 10 people who were told they needed a transplant clearly did not need one," Emerick says. "It's astonishing that it's happening at that rate. And some of these transplants are utterly inappropriate. For some of my clients, it's as much as 60%."

Walmart's spine and heart programs are based on the transplant Centers of Excellence program—with a wider choice of health systems. Emerick says Walmart, after seeing the success of the transplant program, clearly set out to discover what other high-cost healthcare diagnoses were driving up their healthcare costs. Beginning in 2005, Scarrow and his colleagues were seeking that answer as well with an idea that they could compete with other providers on value.

"We knew the high cost of spine care, and we would go out to local businesses to talk about value and utilization using our own outcomes data," says Scarrow.

What Mercy Springfield had, they soon realized, was a resource that many other healthcare organizations lacked, because the financial payoff for outcomes data in 2005 was uncertain.

"We had been doing outcomes for surgery patients since 2005," Scarrow says. "But no one gets paid more for outcomes at the 90th percentile than at the 50th. As a result, most hospitals and health systems have not invested a lot in outcomes. We had that data."

Mercy made the investment in data because it thought local large employers would be interested. The data was compelling. Scarrow says Mercy surgeons (all employed) noticed how widely the costs for spine treatment varied, and it wasn't based on severity of illness.

"There is a twentyfold difference in lumbar spine costs," he says, "but it's impossible that there is a twentyfold difference in incidence of disease between the highest and lowest utilization area. The question we were trying to answer was what level of utilization is reasonable?"

Overutilization, while especially prevalent in spine care, is an industrywide problem, says Scarrow, and a key factor in healthcare costs that continue to outstrip the rate of inflation for the rest of the economy. He says to provide cost-effective treatment and prevent overutilization, a hospital or health system has to combine three factors: highly ethical care, high-quality outcomes, and a reasonable price. Until recently, most hospitals and physicians haven't been interested in cutting utilization because it has the pernicious effect of cutting their reimbursement. But employers and payers are getting smart about this problem, and hospitals and health systems that can effectively manage utilization have a huge head start on their peers.

"There is an ethical overlay to this," Scarrow says, regarding surgical intervention, especially in heart and spine care. "You can justify a number of things to do interventionally, but what is really evidence-based for that patient?"

Big savings

In Walmart's Centers of Excellence program, Mercy has consulted on 39 patients. Of those, physicians told 17 to not even bother getting on a plane because they would recommend against surgery. Some 22 have traveled to Springfield. Of those, Mercy physicians have performed spine surgery on 11 and told another 11 that surgery was not their best solution. Previously, all 39 would have probably ended up with spine surgery, which is risky to begin with, and which may have actually harmed them.

"The best hospitals should be the ones who put themselves out of business, right?" says Scarrow, half-jokingly, referring to the revenue Mercy could have earned from this group of patients. "We ran into this same thing with the Medicare demonstration project, managing patients with congestive heart failure and diabetes in a proactive way to keep them out of the hospital. We were successful. Our reward was we made less money."

Yet that fact does not deter Mercy's leaders from pursuing such affiliations with employers and payers. Mercy pioneered value-based deals with local employers such as Bass Pro Shops and O'Reilly Auto Parts. And though it can lead to second-guessing as the health system turns away patients for whom it could easily perform expensive procedures of uncertain benefit, Scarrow puts it in the context of the big picture.

"We're $16.5 trillion in debt already, and the largest demographic group in history [the Baby Boom generation] is coming into their prime consuming years as they hit Medicare. There's no way we can sustain this, so we have to find better answers."

There is a silver lining. As a top performer in quality and evidence-based medicine, Mercy gets additional patient volume for its efforts. Scarrow is hopeful that will continue and that Mercy will remain a leader, because "it's about ethics, quality, and price, and when you allow the market to sort that problem out and decide winners and losers, you'll get a more efficient solution."

But he's under no illusions about employers. They're doing this to save as well as improve care.

"If we don't have these things in spades, they will go to someone else. They'll treat us like any other vendor. The market is choosing who does this well, and that is where patients will gravitate."

He says as a nonprofit health system, Mercy Springfield has an emergency room that sees 100,000 patients annually, and it treats all payers.

"The price we pay for that is that we have to make money off the commercially insured to subsidize," he says. "For-profits getting into medical destination could undercut our price significantly. That is one potential problem we will have to solve somehow if we are going to stay in this line of business."

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This article appears in the July/August issue of HealthLeaders magazine.