Having already picked most of the low-hanging fruit, provider organizations are looking for—and finding—new ways to spend less on materials.
This article appears in the April 2014 issue of HealthLeaders magazine.
As margins shrink and budgets tighten in reaction to healthcare reform and the development of value-based reimbursement models, hospitals and health systems need to trim as much expense as possible from the supply chain in order to remain financially viable.
Simply relying on a group purchasing organization to contract with vendors for competitive pricing is not going to cut it anymore. What hospitals need now are strategies for finding deep, sustainable reductions that move the dial even further on supply-chain costs.
Cutting costs through 'staff or stuff'
Three years ago, Boston-based Beth Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School with 649 licensed beds and about $1 billion in annual net patient service revenue, began a mission to find big supply-chain savings, says Steve Cashton, director of purchasing and contracting.
"We were being squeezed by declining reimbursements, and there was an initiative to cut costs," Cashton says. "We either had to cut staff or stuff, so instead of staff, we decided to look at the stuff. You really can't cut your way to success by reducing staff so we started looking at where we can improve our margins with the supply chain."
Since then, BIDMC has cut about $25 million from its supply-chain spend. "We took out almost $7 million in fiscal year 2011, $10 million in fiscal year 2012, and $9 million in fiscal year 2013, in round numbers," Cashton says. "We have a similar target set for this year. We'll be looking to cut about $8.5 million."
To achieve these savings, BIDMC created six clinical quality value analysis teams in the areas of support services, OR, med-surg, pharmacy, clinical services, and intervention procedures to "look at the value of the supplies that are already in the organization," Cashton says. "Each team has a goal, and all of them hit those goals and typically exceed them. They are looking at everything to find the opportunities that we have to save."
Cashton notes that while the teams are looking for ways to cut expenses, they are also always concerned about quality. "The reason we called it clinical quality value analysis is we didn't want it to be a finance-driven process. We do look at outcomes and length of stay and all of these clinical aspects, which are central to our analysis along with the financial piece."
BIDMC has targeted physician preference items as an area to find large savings, Cashton says.
"We go where the money is, which a lot of times are the physician preference items like knees and hips," he says. "We are not talking about small numbers. These are big opportunities."
For the most part, physicians have been receptive, Cashton says. "They do realize more and more the need to bring down costs. … We try to engage them and give them figures and statistics on what the savings would be. They generally have responded if they are involved from the beginning and know what the cost-saving opportunities are."
BIDMC also has tapped into nonclinical areas to find savings, he says.
"We've saved about $1 million in food service, and we're looking at janitorial supplies and all kinds of service contracts like collections, IT maintenance, employee benefits. We are looking at all of our services as well as products. We think we are looking at saving somewhere between $4 million and $7 million in purchase services savings over the next few years," he says.
BIDMC also joined the Northeast Purchasing Coalition two years ago to harness its bulk buying power with other regional healthcare institutions.
"It brings GPO pricing to another level. We get an additional tier by aggregating our purchasing through this group," Cashton says. "In calendar year 2013 we took out about $1.4 million in savings based on this commitment."
Standardization reins in spending
Jeff Baiocco, chief financial officer at Eastern Idaho Regional Medical Center, a 312-staffed-bed institution in Idaho Falls that is part of Hospital Corporation of America, says that, like most providers, his organization has already utilized its GPO to find the easy cost cuts. To find more savings, EIRMC is looking to standardize physician preference items.
"Standardization is the new challenge as we look at trying to reduce variability so that we are not stocking five or six items, but are instead stocking two," he says. "If we can eliminate even one item, it allows us to capture some of the purchasing power that is left to gain. Physician preference item management is really a big part of where we are focusing our attention."
Baiocco says that the financial realities of value-based purchasing have encouraged physicians to be more open-minded than ever about trimming supply chain expenses, but he acknowledges that this new outlook only goes so far.
"Physicians are more receptive because they know they are facing the same financial pressure as the hospitals due to rising costs and declining reimbursements," he says. "At a high level, there is no one who argues with the need to cut costs, but when you go a little deeper, it's a lot like a town wanting a landfill but everyone's attitude is 'Not in my backyard.' They know we need to cut costs, but they don't want it to be on the items they like to have."
To overcome this resistance to giving up certain items in the interest of the organization's overall fiscal health, EIRMC's administrative leadership spends time discussing each decision with physicians.
"It takes a lot of time with the medical staff to partner with them and really reevaluate whether we are using certain items because they really do offer a superior clinical effect," Baiocco says. "Ultimately, physicians are responsible for that patient outcome, and the surgeons need to be actively involved in selecting the items they are using."
Reprocessing reduces waste and cost
Demonstrating success in cutting costs without hurting outcomes is one way to win over skeptical clinicians, Baiocco says, citing EIRMC's recent decision to reprocess OR trocars as a success story. By cleaning, disinfecting, and sterilizing reusable medical devices on the carts rather than replacing them with new products, EIRMC has seen considerable savings without impacting the quality of patient care.
"We consolidated to one vendor, and we've gone with a vendor that allows us to reprocess," he says. "We had that vendor come in and work with physicians to get them comfortable. We are saving between $30,000 and $50,000 on an annual basis."
Cheapest is not always best
Reducing supply-chain spending is also an organizationwide initiative for Main Line Health, a 1,295-licensed-bed health system with $1.4 billion in annual operating revenue based in Bryn Mawr, Pa.
"Every year we have a target to cut somewhere between 5% and 7% of our spend," says Chris Torres, MLH's vice president of supply-chain management.
Despite the emphasis on cutting costs, Torres says finding the cheapest product is not MLH's priority.
"The last thing we look at in our supply chain is cost," she says. "We look at safety—both for the patient and employees—and the quality of the product. It's interesting because you can get quality products that are sometimes less expensive and sometimes more expensive, but it all goes back to utilization. If you don't have waste and rework, the more expensive product may be more efficient in the end."
Torres says that because buying a less-expensive product doesn't help the bottom line if more of it has to be used, MLH keeps a close eye on the real cost of every new product to make sure the value is truly there.
"When we implement something new, we monitor it every month. We don't say, 'We are going to change gloves and that is going to save us $100,000,' and then never look at it. We can save money on the cost of something coming through the door, but if we are using five times as much of it because of a lack of quality, we are not saving money."
Data can sway physicians
Like many other provider organizations, MLH sees physician engagement as critical to success when it comes to removing cost from the supply chain. The system has clinician advisory groups in orthopedics and cardiology, two of the areas where the most money is spent on supplies and where some of the biggest opportunities for savings exist, Torres says.
"Year over year, part of that 5% we are taking out of our spend is usually capital equipment, ortho, and cardiology," she says. "We look at those areas every year, and we meet with the clinicians monthly. … We've had an orthopedic advisory group in place for six years, and one in cardiology that involves physicians and nurses who sit in a team atmosphere and talk about where the opportunities are."
It is also very important to be transparent with clinicians about cost containment initiatives and to provide solid data on pricing and outcomes, Torres notes.
"The first thing you go in with is data, but it has to be actionable, and it has to be accurate," she says. "The last thing you want to do is go to a group of physicians with inaccurate data. … Our clinicians don't want to use the most expensive thing. They want to use the product that has the best outcomes for their patients. They might be willing to compromise on some things and not on others."
In deference to its physicians, MLH has not limited physician preference items as severely as other supplies.
"We have standardized general med-surg products like gloves and catheters. When we get to physician preference items, it becomes more interesting because of physician training, and we haven't gone down to one item. We have to understand the clinical needs as well and what physicians need to get the best patient outcomes," Torres says.
"The reason I've been successful is because I have established relationships with our clinicians based on trust and respect," she adds. "We're not clinicians, so we rely on our clinicians to guide us and help us."
Looking beyond a GPO
In addition to working with its GPO to cut costs, Torres says MLH also looks on its own for better prices.
"We leverage our GPOs contracts for the large majority of our med-surg products. About 30%–40% of our spend is through local contracts," she says.
MLH has also found some significant savings through reverse auctions, Torres says. "Basically, there are companies out there that will take your spend and your parameters and host an online bidding process."
Although Torres says this approach is "simple," she also says it can reap important savings. For example, during a recent reverse auction for trash can liners, MLH saved $200,000 by using that method of negotiation.
"When you think about how many trash can liners we use in healthcare, it represents a 6%–7% savings based on the volume of the purchase," she says.
Pulling as much cost as possible out of the supply chain will be critical to health systems' long-term financial success as payment models change, Torres adds.
"I think it is one of the hubs of how we are going to move into a more value-based purchasing system in healthcare," she says. "You have to have a core understanding of your supply chain costs in order to manage it in a more efficient way."
Reprint HLR0414-8
This article appears in the April 2014 issue of HealthLeaders magazine.
Reimbursement cuts aren't the only challenge rural hospitals face. Recruitment and retention of clinical staff is a perennial issue. But creative leadership and telemedicine are making things better at two small Maine hospitals.
Like most hospital and health system chief financial officers, Randy Clark, CFO at Sebasticook Valley Health in Pittsfield, ME, is concerned about cuts to government reimbursements. SVH has a 25-bed critical access hospital and three primary care offices and is a member of the Eastern Maine Healthcare System.
"I think what we generally struggle with is the proposed or actual cuts we receive from Medicare or MaineCare [formerly Medicaid]," Clark says. "It seems every year we are in some debate about why our reimbursements shouldn't be cut. We are also dealing with the 2% cut from sequestration, which for us has an annual impact of about $225,000. We've had to scurry to figure out what to do to deal with that… There are always either threats or actual cuts to our reimbursements, which complicates things, because we still have to pay our staff, give raises, remain competitive, and employ physicians."
Maine's decision not to expand Medicaid adds to an already difficult reimbursement environment, says Jennifer Goodrich, CFO at Charles A. Dean Memorial Hospital, a 25-bed critical access hospital in Greenville, ME, which is also part of Eastern Maine Healthcare System.
Tight Reimbursements a Major Concern
"Now we are seeing our free care go up and our bad debts go up, and if we had some reimbursements on these patients, it would be helpful," Goodrich says. "The people in our community have a high rate of chronic disease, and we have a high volume of uninsured and underinsured patients. We rely on government payers, and when they threaten to cut rates or make changes to payments, it impacts us greatly."
Although most healthcare providers are feeling the financial pinch of dwindling reimbursements, small institutions in rural settings have additional challenges to contend with, including recruiting physicians and consistently balancing patient volume with staffing levels.
Goodrich says these are two of her organization's biggest ongoing obstacles.
"Recruiting is a big challenge," she says. "I find we have better luck when someone has ties to Maine and knows this is an excellent place to raise a family and to retire."
"We sometimes have trouble recruiting because finding work for the spouse can be a challenge," she adds.
Facing Unique Staffing Challenges
Because C.A. Dean is located in an area where the population changes dramatically with the seasons, it is difficult to always have the proper staff-to-patient ratios, Goodrich says. Having to employ more staff than necessary during the slow seasons creates a financial burden that is tough to avoid.
"We are not like other businesses, like an ice cream shop, that can lay off employees and then rehire them. These are people who sought out an education and are certified, so you can't do that. It's very difficult to go through the seasons where our patient population drops off and productivity suffers… We are lean, but at some points during the year, there is not a lot of patient volume to support the need for staff," she says.
Clark says that because SVH isn't as remote as some rural hospitals, it has the advantage of being able to consider a job sharing situation for specialists that the system needs but not on a full-time basis.
"Sometimes we don't need a specialist full time, and we'll try working with one of our sister hospitals within Eastern Maine Healthcare System to try to think outside of the box by having the physician work two days a week in one hospital and three days a week at another," he says. "These are specialist that are needed in our communities, and we think joint recruitment can benefit both hospitals."
Typically in this arrangement, the specialist is employed by one of the hospitals, which is then reimbursed by the other for the hours the physician spends providing care to its patients, Clark notes.
Making Do, Building Alliances
Low operating margins can make it difficult for a rural hospital to keep pace with needed building upgrades—something C. A. Dean struggles with regularly, according to Goodrich. The hospital's roots are tied to a logging operation that became a large paper company and expansion over the past 100 years has been modest. A second hospital building was erected in the 1960s, and hospital leaders have worked hard over the years to forge regional affiliations.
"We operate on a tight budget, and we've been doing that for a long time, so it is difficult sometimes to keep up on maintaining and improving the buildings," Goodrich says, noting that her organization will celebrate its centennial anniversary in 2017.
"The original building is still here, and I'm sitting in it right now," she said.
The hospital has been part of the Eastern Maine Healthcare System since 1998.
Telemedicine Offers a Solution
Both C.A. Dean and SVH have found telemedicine to be an important tool to connect them with larger facilities so they can improve patient care without adding a lot of expense.
"We use telemedicine, and we find that it is very helpful," Goodrich says. "We use it frequently in the ER. We contact Eastern Maine Medical Center, and they can assist us while we are going through a trauma. It's like having another doctor right there in the room with us. We can have providers giving advice to providers on how to best take care of patients."
"Also, if we decide we need to transfer the patient to Eastern Maine Medical Center, it helps EMMC because they have already seen the patient. When they see the patient again, it's easier for them to tell if the patient's condition has changed," she adds.
Clark says SVH has been using telemedicine for many years and has found it to be tremendously helpful in expanding services while keeping costs down.
"One area where we've used it for about five years is the ICU, and that helps us with nursing. Our nurses can contact folks at EMMC who deal with these issues all the time. The clinicians at EMMC can actually see the patient and help determine the care for that patient or whether they should be transferred," he says.
SVH also uses telepsychiatry in its emergency department. "Sometimes in our ED, we have patients who need psychiatric care, and we're trying to figure out if they need to be transferred to another facility or if we can treat them here," Clark says.
"The doctors can speak to each other and see the patient and assess whether or not care can be continued here. That's one thing telemedicine has done for us is to allow us to expedite psychiatric care for the community."
Many hospitals and health systems are paying for prior acts malpractice insurance as a way of attracting physicians, but how are they absorbing that expense once they've committed to it?
This article appears in the October issue of HealthLeaders magazine.
Healthcare leaders know that to keep pace with the impending changes in the industry—such as the influx of newly insured Medicaid patients that the Patient Protection and Affordable Care Act is projected to bring into the system and the movement toward population health management—they must have the right people in the right places in their clinical settings.
Yet building the best possible medical workforce is a major challenge, and healthcare executives are concerned about shortages. In the HealthLeaders Media Industry Survey 2013: Strategic Imperatives for an Evolving Industry, 76% of respondents cited physician shortages as a threat to their organization.
As provider institutions compete with each other to hire physicians, offering to pay for tail coverage—insurance against malpractice lawsuits that may emerge from the physician's previous employment—is one method of drawing talent. By committing to pay for this considerable expense, hospitals make it easier financially for a doctor to leave his or her current employer and more appealing for a physicians group to sell its practice.
Vic Arnold, managing director at Chicago-based Huron Consulting Group, says covering the tail as part of the compensation package when acquiring a medical practice gives a hospital a "competitive advantage" over other potential employers.
"On all these acquisitions, the deals are so transaction oriented, but you have to take a step back and think about what would be something that would be attractive to this particular physicians group. If a hospital includes tail coverage, it's a transaction cost that the group doesn't have to bear and can help overcome some of the acquisition postdeal issues," Arnold says.
"What the hospital is doing is buying an insurance policy that covers the professional liability risk," Arnold adds, noting that prior legal issues are factored into the cost of the coverage and that policies for some specialties—such as gynecology, obstetrics, and orthopedics—potentially can be more costly than for others because of the higher likelihood of a lawsuit.
"For example, in OB-GYN, it is not uncommon for physicians to have at least one suit or settlement in the past, so it's not unusual for the tail coverage to be somewhere in the range of $100,000 or more," he says.
Hospitals generally keep the tail coverage for five years, Arnold says. "What the new employer is doing is making sure they don't take a catastrophic hit."
Once the hospital has committed to paying the tail, it has to determine the best way to cover the cost. Hospitals without a captive (in-house) insurance company typically purchase the coverage from the physician's existing commercial carrier, if they can. These hospitals can often negotiate with the insurer to bring down the rate.
"If you don't have a captive, sit down with the insurance company and walk them through what you are thinking," says Arnold. "They are going to want to work with you because it is incremental business."
The majority of hospitals, however, are now self-insured, and the numbers are trending up. According to the Hospital and Physician Professional Liability Benchmark Analysis released in October 2012 by the American Society for Healthcare Risk Management and Aon Risk Solutions, nearly 80% of U.S. hospitals are self-insured, up from 73% the previous year.
Some self-insured health systems are designing programs within their own captive as a strategy for providing tail coverage to newly hired physicians and are achieving meaningful savings on the cost of the insurance.
"Physician employment is becoming more and more popular, and physicians are looking to join large organizations like hospitals. The problem is one of the deterrents is the fact that they have this chain around their necks for past liabilities," says Charles Kolodkin, executive director for enterprise risk and insurance at Cleveland Clinic, an 11-hospital health system with 2012 net patient service revenue of about $6 billion.
In 2006, Cleveland Clinic decided to cover tail policies through its captive as a way of trimming costs and liberating physicians who could not afford the expense.
"We determined we could bring physicians on in a much lower-cost way," Kolodkin says. "We use our captive to provide prior act coverage. We do it at a pure loss cost. We don't have a profit margin built into it, and we don't have administrative overhead. Our prices are anywhere from one-quarter to one-half of the usual cost of a tail."
For example, Cleveland Clinic now spends less than half on the tail policy when onboarding a primary care physician as compared to when it was purchasing the coverage through a traditional insurer.
"We may charge somewhere in the neighborhood of $15,000 for a premium for prior acts where the tail premium might have been $35,000 to $50,000 through a commercial carrier," says Kolodkin. "We're their new employer, and we're going to insure physicians anyway for all their coverage once they are an employee, but now, separately, we are also going to insure their prior acts."
Cleveland Clinic has seen solid results since starting the program. "We have 172 physicians insured, representing $4.2 million in premiums. … The cost of tail coverage had it been purchased from commercial carriers is estimated to be approximately $9.2 million," Kolodkin reports.
"The premiums we have been taking in for the past seven years have been extremely adequate," he adds. "The actual claims are still under $1 million, at about $900,000. Our loss ratio has been … a real positive."
Overall, Cleveland Clinic has been more than pleased with the results, Kolodkin says. "We've considered it to be exceedingly successful. It's been successful beyond our initial expectations. When we first started it, we hoped to break even, and also to use it as a way to remove that barrier for physicians who wanted to go to an employed model. Our experience in this program continues to be outstanding."
Leaders at Annapolis, Md.–based Anne Arundel Medical Center, which operates a 380-bed hospital with 2012 operating revenue of $575 million, have learned that physicians in their market expect to have the tail covered when joining the staff and say most physicians with good legal histories will not consider employment without it as part of the deal.
"From the physicians' perspective, it's a given that we are going to assume the liability, and they really don't care how we do it," says Stephen Clarke, vice president for physicians services.
Anne Arundel protects itself with a contract caveat around the tail coverage, Clarke notes. "If the doctor leaves in a short time, they would have to reimburse us for the cost of the tail."
Bob Reilly, the system's chief financial officer, says before making an employment offer, Anne Arundel analyzes each physician's claims history and, based on risk, decides whether to cover the physician through its captive, continue to cover the physician through the existing commercial carrier, or not to cover the tail at all for those with a less-than-stellar malpractice track record.
"In the initial hiring phase or employment phase, there is certainly a background check of claims. If a doc has a high number of claims in the past, there is a lot more scrutiny of that physician as to whether or not to bring them on. It may also change the arrangement of the tail where we may say the doctor has to pay his or her own tail," he says.
Anne Arundel also considers the standard level of risk for each specialty when deciding how to cover the tail.
"For certain specialties, such as obstetrics, we make the decision to leave them with their own carrier and see how things go over time before we decide to bring them into our own captive," says Clarke. "For low-cost tails like primary care, we pay it and are done with it.
"We know how much more risk we are assuming based on underwriting and actuarial tables, and often we issue a certificate of insurance [through our captive], and they are off and running," he adds. "We've very deliberately managed the process, and we've been fortunate in terms of our claims experience and our ability to deal with claims that do arise."
Anne Arundel is yielding significant savings thanks to its strategy of covering many tail policies through its captive. "As a general rule, we are saving somewhere between 15% and 20%," Reilly estimates.
Additionally, the health system saves money because it operates an offshore captive located on Grand Cayman, which reduces many of the associated expenses.
"On the administrative side, the regulatory requirements and funding requirements for an offshore captive are initially less to establish the company," Reilly says. "The legal work is less, and the exposure to taxes is less. Quite a few organizations are now self-insuring offshore. … [T]he logistics on the whole work very well."
Because mitigating risk is the objective when it comes to tail coverage, Anne Arundel purchases reinsurance from Lloyd's of London to protect itself even further from the possibility of the steep financial loss that could result from a malpractice lawsuit.
"We reinsure and cap our risk on an annual basis so that if we have a major claim, we won't have to pay out of pocket … We lay off some of the high-dollar risk to a greater insurance population," Reilly says. "Lloyd's of London has the ability to provide insurance on a consistent basis and not have to raise premiums or drop clients because of big claims. The London market has proven to be a little more stable because of the enormity of the insurance base and the history of the way they do business."
Regardless of how hospitals and health systems ultimately decide to pay for the tail, making the offer to cover the expense is a smart way to start off on good terms with physicians, says Arnold.
"You have to look at this transaction as a long-term relationship and think about what is good for both parties," he says. "Ideas like using tail coverage as a negotiating tool are good. If physicians think they are working for someone who cares about them, it's a lot better than just getting a paycheck."
Reprint HLR1013-7
This article appears in the October issue of HealthLeaders magazine.
As healthcare moves away from fee-for-service to reimbursement models that reward quality and value, payers and providers are entering into new contract arrangements designed to align their financial incentives.
This article appears in the September issue of HealthLeaders magazine.
As healthcare moves away from fee-for-service to reimbursement models that reward quality and value, payers and providers are entering into new contract arrangements designed to align their financial incentives.
Although the relationship between these two sides historically has been adversarial, this innovative approach represents a chance for provider organizations to partner with payers to receive compensation for improving the quality of the care they deliver. Hospitals and health systems appear to realize the potential economic benefits: In the HealthLeaders Media Industry Survey 2013: Strategic Imperatives for an Evolving Industry, 64% of respondents cited value-based purchasing as an opportunity for their organization; only 20% labeled it a threat.
Many payers believe in the promise of these associations, too. In 2011, Hawaii Medical Service Association, an independent licensee of the Blue Cross Blue Shield Association, partnered with its statewide network of hospitals and the Premier healthcare alliance to launch a four-year program called Advanced Hospital Care. Through this initiative, HMSA is now tying 15% of reimbursements to outcomes for all hospitals, excluding small critical access facilities, using Premier's QUEST (Quality, Efficiency, Safety, Transparency) program as the framework.
"If you want to change behaviors, you've got to change incentives," says HMSA Chief Health Officer Hilton Raethel. Unlike a traditional fee-for-service model, which creates an antagonistic relationship between the provider and payer, the Advanced Hospital Care program creates shared goals and objectives, he says.
"Under this program we have aligned incentives, so it's a very different conversation with providers. It's a collaborative approach that is about improving care in the community, and that is what we should be doing."
HMSA is paying the fees for the hospitals to participate in the QUEST program and plans to extend the contract term beyond the original four years due to the significant results that have been achieved so far, including a 12.5% reduction in hospital readmissions and a 43% drop in hospital-acquired infections, Raethel says.
One reason for the program's success is transparency, Raethel believes. All participating hospitals see each other's data, and HMSA is working to make the information available to the public as well.
"Hospitals send a data feed to Premier on a monthly basis and Premier scores them on quality metrics, then sends a scorecard back to the hospitals. Every single metric is transparent—every hospital gets to see how every other hospital performs on the metrics," Raethel says.
That kind of open scrutiny tends to motivate poor-performing hospitals, he says, citing one hospital in particular that added resources to make improvements to its metrics after languishing at the bottom of the list for the first 18 months of the program.
"Part of it was simply that the hospital has a very high proportion of government-pay patients and [it is] running a lean shop, but even [so, it still has] a responsibility to provide high-quality care," he says. "Not only were they not performing well in terms of the metrics, they were also earning at the lower end of their potential so they were leaving money on the table. The primary incentive is about improving patient care, but there is a financial incentive for doing it."
"We are absolutely convinced that this is the right direction to take," Raethel adds. "We want these hospitals to do very well on these metrics because we believe by doing that, they are improving the quality of care that our members receive."
While HMSA initially set a target of 15% of hospital reimbursement tied to outcomes, based on the success of the accountable care agreement and the collaboration with Premier QUEST, HMSA plans to roll out in 2014 the next generation of the ACA, in which up to 30% of reimbursements are tied to outcomes.
Hawai'i Pacific Health, a 564-licensed-bed system based in Honolulu, is the first hospital to enroll in the program.
"The leadership in both organizations have a similar vision for a sustainable model for healthcare in Hawaii and have been able to reach an agreement that provides support for mutual success under this vision," says David Okabe, Hawai'i Pacific's executive vice president, CFO, and treasurer.
Under the ACA, Hawai'i Pacific will benefit financially from what Okabe calls "a three-legged stool" of payment criteria: patient management services, shared savings and shared risk related to actual medical cost trends, and the quality of healthcare services provided.
"The most significant change is the sharing of medical cost savings based on providing services to our patients," he says of the agreement.
Between Hawai'i Pacific's participation in the ACA and its other payment contracts with HMSA, the financial incentives for improving value are high.
"The ACA represents about 15% of incremental reimbursement under our HMSA commercial agreements over the next five years. If you include hospital and physician payments, which are tied to pay-for-quality, more than 60% of expected, incremental payments under our HMSA commercial agreements are based on performance," Okabe says.
Like Raethel, Okabe believes increased transparency of data is critical to the success of the program. "Without the sharing of data, we would not be able to understand how we are performing under various metrics and whether there are any opportunities to improve the care being provided to our patients."
Okabe says Hawai'i Pacific wants to be proactive in the way it handles evolving payment reimbursement methods and sees its contracts with HMSA as a step in the right direction. "The U.S. healthcare system is not sustainable. No matter what happens in the future with federal healthcare reform, our view is the underlying healthcare system needs to fundamentally change. Healthcare organizations can decide to embrace the change or be reactionary, but either way, there is no option to stay in place."
Raethel says Hawai'i Pacific also is driven by a desire to increase its market share.
"Hawai'i Pacific Health's primary motivation is they believe they can outperform the other hospitals in their market in terms of quality and efficiency," he says. "They believe that by being successful in this program, they will score better and attract more patients to come to their system."
CHE Trinity Health, a Livonia, Mich.–based system with $13.3 billion in annual operating revenues, has recently entered into a new value-based reimbursement agreement with Blue Cross Blue Shield of Michigan.
Benjamin Carter, executive vice president for finance at CHE Trinity Health, says the health system wanted to turn its relationship with Blue Cross into a partnership as a way of moving toward effective population health management.
"One of the key components with our arrangement with Blue Cross Blue Shield of Michigan is, about a year or so ago, we were doing our usual contract renegotiations, and we talked about having a different type of relationship—about having a real partnership and not just using the term in the way it is overused, but really being partners," Carter says.
This meant aligning incentives so both the provider and payer were working toward the same goal, he says.
"We still had to renegotiate our rates, which we did, but we also created an opportunity to have a partnership relationship in terms of what we considered to be a value-based contract. … We crafted a methodology that would allow us to take an attributed population of Blue Cross members, group them together, understand the cost per member, and join in the goal of reducing overall cost per member per month. … That way our incentives are aligned, and it's a win-win-win-win: We win, Blue Cross wins, employers win, and patients win."
The contract is "value-based," says Carter, with a gain-sharing feature that allows the providers, physicians, and payers to share the gains by reducing the total cost of care.
CHE Trinity Health phased in the program in stages, starting first with its facilities in west Michigan and then in southeast Michigan, with all of its hospitals in the state coming online by July 2013. The contract with Blue Cross is based on shared savings, and the precise percentages of the split between payer and provider will be revisited annually, Carter says.
Kevin Sears, vice president for payer and product innovation at CHE Trinity Health, says the claims data the health system now receives from Blue Cross is vital to the success of the program.
"Transparency is a fundamental principal and a cornerstone of our relationship with Blue Cross," he says. "They provide a monthly feed of all relevant claims data so it can be disseminated to relevant physicians and to other providers of care. … Traditionally, the transparency of data between payers and providers really hasn't been there, and, oftentimes, it is why these things fall apart. This element of trust is part of what is transformational in our relationship with Blue Cross."
Carter says he is the health system's executive leader and point person for the program, and Blue Cross has also designated a senior leader to take the lead in the partnership.
"We work together when issues come up. By assigning this to an executive level of the organization, we have elevated the trust that we have with Blue Cross. … It is very different than it was a year and a half ago, and it's an important element of being able to successfully create these types of arrangements with payers," Carter explains.
He says it is too soon to analyze results but notes that CHE Trinity Health leadership will base the program's success on factors such as improved quality indicators, lower total cost of care, and improved patient satisfaction relative to how care is delivered and with regard to access to care.
"We need to be in a position to assume responsibility for the vast majority of medical expenses and premium dollars," Sears adds. "Assuming such responsibilities aligns our interests to improve quality and reduce costs in ways that benefit individual patients and our communities."
CHE Trinity Health's arrangement with Blue Cross is just the beginning of the value-based contracts the health system plans to roll out.
"We are in active discussions with well over a dozen payers on similar kinds of relationships and are at varying levels of working those things through," Sears says. "We think this is a starting point. We ultimately think this will lead to even more significant vehicles for alignment. As a provider and delivery system, we need to be in a position to assume responsibility for the vast majority of medical expenses and premium dollars. The opportunities lie in creating better quality and costs relative to our individual patients and our communities."
Reprint HLR0913-9
This article appears in the September issue of HealthLeaders magazine.
Despite the prospect of millions of newly insured patients, many hospital and health system finance executives are not expecting healthcare reform to be a boon to their organizations' bottom lines.
This article appears in the June issue of HealthLeaders magazine.
The Patient Protection and Affordable Care Act is designed, in part, to provide more patients with health insurance through expanded Medicaid eligibility and the introduction of government-run health insurance exchanges that will allow low-income individuals to purchase medical coverage at a subsidized rate.
The goals include improving access to care for this segment of the population and reducing the amount of uncompensated care provided by the nation's hospitals. While this sounds good on paper, many hospital finance administrators are not convinced that the PPACA will benefit providers and are instead bracing to take a hit to the revenue cycle.
Tim Nguyen, corporate controller at Palomar Health, a San Diego–based system with 690 licensed acute care hospital beds and $2.5 billion in gross annual revenue, says there is a catch-22 built into the healthcare legislation that will ultimately hurt providers.
"With the Affordable Care Act coming out, more people are going to qualify to go to the exchanges. In the past, most of that would have been bad debt, and we would have to write it off and that hurts [us]. So, yes, this could potentially reduce our bad debt. But here's the catch: The exchanges will have different tiers with different deductibles and copays," he says.
California's health exchanges will have four tiers when the program goes live in January 2014, Nguyen explains: platinum (where the patient pays 10% of total healthcare expenses); gold (20%); silver (30%); and bronze (40%).
"These patients will still be responsible to pay, and they probably don't make that much money and are likely to choose the silver or bronze tier to keep the premiums low. … That will increase our bad debt even though they have insurance."
Additionally, the federal government will subsidize insurance purchased through the exchanges with consumer tax credits—something Nguyen says will be bad for providers. "They are going to reduce reimbursements to pay for the program. What they did on the front end, they will take back on the back end. When you put all these things together, you come out negative," he says.
Perhaps the biggest challenge, Nguyen says, is the uncertainty surrounding the health insurance exchanges and how they will operate once they are up and running. "You can do analytics all day long, but the state and federal governments are still learning how to run it. Nobody knows. Right now it is all speculation. But you can't just sit there and wait; you have to try to anticipate what is going to happen because there are concerns like cash flow and budgets. … The scary part is we don't really know. There are a lot of challenges here," he says.
One strategy Palomar is employing to meet these challenges is to increase its level of automation. Nguyen says his budget for the next fiscal year includes funds to buy software that will allow the health system to automate the processes of determining whether patients are eligible for insurance through the exchanges, getting authorizations before procedures are performed to make sure the health plan will consider it medically necessary, and estimating patient deductibles and copays.
"Our team has to be really tight on determining eligibility and authorizations for these people who were previously uninsured but who are now able to buy insurance through the exchange. … Even with the software, it will still be a hybrid model. Staff will still play a role, but it will make their job a lot less complex and less confusing. The software can be loaded with all the health exchange tier details. Without that, the process would be more inefficient and time intensive."
Marlene Zurack, senior vice president of finance and chief financial officer for New York City Health and Hospitals Corporation, a municipal integrated healthcare delivery system with $7.1 billion in total operating revenue when combined with HHC's MetroPlus health plan, is also doubtful that the insurance exchanges will result in a net benefit to her organization.
HHC currently serves 1.4 million people per year, 475,000 of whom are uninsured. "We are not sure whether our uninsured patients are going to be able to participate in the exchanges," Zurack says. "There are a lot of requirements that they might not be able to meet, and, also, there is the cost sharing."
Regardless of how many more patients obtain insurance coverage, HHC is likely to lose revenue in the end, Zurack says, due to cuts being made to Medicaid's Disproportionate Share Hospital program, which distributes payments to qualifying hospitals that serve a large number of uninsured individuals.
According to the Centers for Medicare & Medicaid Services, the PPACA aims to reduce funding to the Medicaid DSH program by $17.1 billion between 2014 and 2020. The planned reductions are based on the assumption that the PPACA will result in more insurance coverage for low-income patients and, therefore, less uncompensated care. In reality, Zurack says, the cuts will be extremely damaging to hospitals that serve this population.
HHC is preparing for hundreds of millions of dollars in cuts to the revenue it presently receives through the DSH program. "Those were the cuts that were enacted as part of the Affordable Care Act to pay for the expansion. We are concerned that the new revenue potential for the exchanges will be lower than the disproportionate care cuts," Zurack says.
In the current fiscal year, HHC will receive $818 million in disproportionate share funding. That number is slated to be reduced by $150 million by FY 2017, and more cuts are on the way in subsequent years. "The federal dollar loss will be as much as $300 million by FY 2019," Zurack says. "It's the cuts to disproportionate share funding that are really, really hurting us. Because of that, there is no net benefit to us."
HHC is trying to offset the hit it will take to its DSH funding by attempting to enroll more patients into its MetroPlus health plan. "The health plan is going to participate in the exchanges. They are trying to make lemonade out of lemons and trying to get as many people as possible insured through our health plan. "Our MetroPlus health plan is applying for every product available on the New York state exchange. We are hoping to have a competitive product that our patients will join," Zurack says.
Zurack notes that HHC is also working with other payers to position itself well for the changes it anticipates with the PPACA. "We are trying to be strategic in our contracts with insurance companies … to get favorable rates so we can afford to care for all of the newly insured. … We are actively engaged with all of our payers with lots of conversations. This all mostly takes effect in 2014, which is not that far away, but we are trying to prepare."
Stephen Forney, vice president and chief financial officer at Lovelace Health System, a 606-licensed-bed integrated delivery network with a 210,000-member health plan based in Albuquerque, N.M., says one major concern he has about the PPACA is that patients who become insured through the exchanges may not have a full understanding of their liability because most will be moving off of state-run insurance initiatives that generally have no or low premiums and copays.
"These initiatives are going to be subsumed by the exchanges, and the new products are going to have significant patient liability and premiums. That is going to be a bit of a sticker shock for those individuals who have not been used to that in the past," Forney says.
This patient population, which has traditionally sought care through the emergency department, "is going to access care in nonacute settings in a fuller fashion," Forney says. "When the doctor refers them to the hospital for a CAT scan or a procedure, they probably won't have the ability to pay for that out of pocket. It will diminish some uncompensated care in the ER and shift it to other sites. … In a sense, what you are going to do is encourage utilization in nonacute sites by patients who can't pay the patient liability portion."
To minimize the impact to the revenue cycle, Forney says Lovelace is preparing to work with these patients to teach them about exchange products and help them know what to expect. "We are trying to anticipate what it will mean to the revenue cycle and how we can best integrate those individuals. … We'll be doing a lot of education with this newly insured population so that they understand how their products work and what it means to them before they get to our door so people can adjust and adapt."
Lovelace plans to educate patients about healthcare exchange products through an outreach campaign that will include printed materials, website postings, advertisements, and educational seminars.
When the Supreme Court ruled on the constitutionality of the PPACA in June 2012, it gave states the right to decide against expanding their Medicaid programs. To encourage states to cover more individuals through Medicaid, the federal government is covering 100% of the cost for newly eligible beneficiaries for the first three years, then gradually decreasing to 90% in 2020 and thereafter. Even with this inducement, some states have opted out.
In Texas, Republican Gov. Rick Perry has been a steadfast opponent of the PPACA—which he has referred to as an "Obamacare power grab"—and to the expansion of Medicaid in his state.
H. Jeffrey Brownawell, chief revenue officer at Memorial Hermann Health System, a Houston-based provider with 3,508 beds, isn't surprised by the governor's stance. "I think there is some good conversation going on, and people understand how much money we are talking about. But I think there is a fundamental political issue as far as the expansion of Medicaid and what it would do to the state," he says.
Brownawell says he is not convinced that the health insurance exchanges—the federal government will operate exchanges in states that choose not to implement them—will increase the number of insured people in Memorial Hermann's service area because the fine for not purchasing insurance may not be expensive enough to motivate people to spend the money for coverage.
Although anyone who does not receive health insurance through an employer or government program is required under the individual mandate provision of the PPACA to purchase it, the penalties for not doing so are widely considered to be too small and toothless to force compliance.
"Hopefully, there will be more people who decide to be insured versus taking the penalty, but the penalty may just not be enough to cause people to jump in and add health insurance because of their out-of-pocket expense," Brownawell says.
Memorial Hermann's leadership team is currently working to establish its strategy with regard to the exchanges but does not anticipate much improvement to its level of bad debt, Brownawell says. "We are having a lot of discussions right now about where and how we want to position ourselves with the health exchanges. … We are not looking at a big reduction in our bad debt and self-pay patients because Texas is not expanding Medicaid."
While Brownawell is not expecting to see a decrease in bad debt once the exchanges roll out, he is also not anticipating an increase. "Houston is a very uninsured city. Our uninsured rate is about 30% to 33%. We are not expecting to see more bad debt," he says.
Like Nguyen at Palomar Health, Brownawell believes one of the biggest challenges with healthcare reform is the uncertainty that surrounds it. "It will be very interesting over the next five years to see how it all plays out with the ACA and that transformation—to see [what happens] with health exchanges and whether states decide to expand Medicaid with the federal government. There are still a lot of things to be determined and issue to be resolved."
This article appears in the June issue of HealthLeaders magazine.
Most healthcare providers believe enhancing their collection and use of patient data is the only way to move forward in the pursuit of better care delivery.
This article appears in the May issue of HealthLeaders magazine.
Despite concerns over the sluggish economy and changing payment models, hospitals and health systems are making big investments in electronic medical records, earmarking significant portions of their capital spending dollars to implement these expensive systems in the hope of improving their ability to manage population health.
The irony is not lost on providers, who are well aware that they are investing vast amounts of money in an IT project that will allow them to provide better coordinated care for which the government and commercial payers intend to pay less. Yet most believe enhancing their collection and use of patient data is the only way to move forward in the pursuit of better care delivery.
Investing in an EMR is also a smart move in light of Medicare's shifting reimbursement structure. Hospital executives believe the return on investment in an EMR will come from better care coordination, more streamlined clinical processes, improved patient satisfaction, and lower readmission rates—all of which will result in healthier Medicare payments.
"We're in the process of implementing a new computer system—electronic medical record—it's our biggest single expenditure," says John Heye, senior vice president for finance and CFO at Maine Medical Center, a 600-bed hospital in Portland and the largest entity in the MaineHealth integrated health system. "All told, we'll spend $61 million."
Heye says Maine Medical Center plans to pay for the EMR out of capital equity but will also consider other options. "This year we are starting to reevaluate our strategy and see where the rates are."
The strategic thinking behind the EMR implementation is to "focus more on accountable care and population health management," says Heye, noting that the EMR will allow the health system to transfer information quickly and efficiently between providers once the technology is up and running throughout MaineHealth, which covers 11 counties in Maine. Heye expects the rollout process to take up to 24 months.
"It's very expensive for everyone to be using an EMR, but it's the right thing to do," says Susan Doliner, Maine Medical Center's vice president for development. "The EMR is the most significant advancement we have ever made. This will change the way care is delivered. … It will make a huge difference in efficiency, confidentiality, and safety."
The leadership team at Maine Medical Center will track patient satisfaction surveys and will look for less duplication of testing, fewer medical errors, improved patient safety, more efficiency, and process workflow improvement to determine if the EMR is a success. "All of these areas will be measured for continuous improvement," Doliner says.
Doliner notes that Maine Medical Center is making a considerable capital investment in the EMR to improve the care it delivers while simultaneously dealing with a shifting reimbursement model that will result in less revenue. "It's like having one foot in two canoes," she says. "We are all going to be reimbursed less for what we are doing. … As you look to the future, to the way hospitals will be reimbursed, it will depend on how healthy their community is."
"In moving toward accountable care and population health management, the reimbursement system still has not evolved to reimburse well for these kinds of activities," Heye echoes. "Until we craft a better way to get hospitals reimbursed for preventable care and avoiding hospital admissions, it's going to make things more difficult."
According to Heye, Maine Medical Center's decision to implement the EMR was not motivated by CMS' meaningful use incentives, which can amount to millions of dollars for eligible hospitals that use EMR technology to reach certain CMS-defined benchmarks to improve the quality of patient care.
"At Maine Medical Center, we didn't budget for meaningful use in funding the EMR project. It's better to go ahead and do this for the right reasons, and if we happen to get some money back from the federal government, then that will be quite fortuitous," says Heye, who acknowledges that the medical center expects to receive "a substantial amount of MU dollars."
Maine Medical Center is not alone in its capital spending focus. In the November 2012 HealthLeaders Media Capital Funding Buzz Survey, 68% of respondents indicated that healthcare information systems (including EMR) and IT infrastructure will be a top-three priority for capital investments in the next 12–18 months, surpassing the No. 2 priority (upgrading existing facilities) by 21 percentage points.
Peter Markell, executive vice president for administration and finance, CFO, and treasurer at Partners HealthCare, a Boston-based health system with $9 billion in revenue, says his organization is also focusing its capital investment dollars on IT projects. Partners is working on the development and implementation of a new EMR that is expected to take 10 years to complete and represents a capital investment of at least $600 million–$700 million.
"More of our dollars are going toward IT and network development than we've done historically, and less is going into brick and mortar," says Markell. "Having a focus on population health management, data access, and network development has become critical to meeting the needs of patients at the right site at the right time."
Partners cut its capital spending in 2008 and 2009 because of the economic downturn but has since returned to normal spend levels. "We have weathered one set of storms. Now what we are worried about is weathering another set of storms in the form of government payments that are going to get worse and worse and be lower than costs," Markell says.
Like Maine Medical Center, Partners' decision to invest in an EMR was based on a strategic plan to improve its ability to use data to manage and improve population health, Markell says. Senior leadership believes moving in this direction will allow for better coordination of care across accountable care organizations and within the framework of new payment models.
The goals are to improve coordination, reduce duplicate tests, and decrease unnecessary treatments and procedures. Successful implementation of the EMR will enhance Partners' ability to collect, manage, and report clinical data throughout the system and will allow for a greater focus on population health management.
"To be real honest, the meaningful use money is a factor, but a small factor in our decision-making," he says. "The real driver of the IT expenditure is that we just believe data is going to be one of the real keys to the future success of the delivery of medicine."
Markell says allowing clinicians to have access to patient information across all care units is critical to improving care and lowering costs. He gives the example of a patient who presents in the emergency department instead of a physician's office for a nonemergent health concern. Rather than the ED doing an expensive workup of the patient, the EMR alerts the physician's office and the patient is moved to the right care setting.
"It's really about workflow, care coordination, and that the information be available to every clinician who is involved along the way," says Markell. "We need the data and information to follow patients to every part of their care. … All of that has to be there to effectively deliver well-coordinated care."
Whether or not hospitals are motivated by meaningful use dollars, they most certainly want to avoid the financial penalties that are on the horizon for those who don't get on board. The carrot will give way to the stick when Medicare payment reductions begin in 2015 for providers who are eligible but choose not to implement an EMR.
The level of concern healthcare leaders feel over declining reimbursements is hard to overstate. In the HealthLeaders Media Industry Survey 2013: Strategic Imperatives for an Evolving Industry, a whopping 92% of respondents indicated that they consider reduced reimbursements to be a threat to their organization, well ahead of the physician shortage, which ranked second with 76% of respondents identifying it as a threat.
In the same survey, 24% of respondents rated coordination across the continuum of care as the single greatest challenge for their organization with regard to clinical quality improvements, and 14% indicated that population health management is the biggest challenge—both of which can be helped greatly by the successful use of an EMR.
One provider who is ahead of the curve with its EMR implementation and can attest to the benefits of going digital is Sharp HealthCare, a San Diego–based integrated health system with FY2012 net revenue of $2.7 billion.
Sharp spent $45 million to introduce EMR systems (using two vendors) to both the hospital and ambulatory sides of its business, says Ann Pumpian, Sharp's senior vice president and CFO.
The EMR has made it possible for clinicians to access patient records from anywhere in the health system, Pumpian says.
"The days of searching for the patient chart are over, and the clinician is able to view a more complete picture of the patient's condition, treatment, and progress," she says. "Imaging exams can be displayed online, as well—wherever the physician is working. Utilization of standard order sets based on best practice medicine ensures that our patients receive the best possible care. Physician productivity is enhanced, as they no longer spend hours in chart rooms signing off on records, as this has occurred during the care process."
Although Sharp has not specifically measured the ROI, it is able to identify financial gains anecdotally, she says.
"Several million dollars in HITECH incentive dollars have been received as we demonstrated meaningful use," Pumpian says. "Staff time transporting charts has been reduced significantly. Chart storage space has been recovered and repurposed for direct patient care. Transcription costs have been reduced considerably and will decline further as we complete our clinical documentation improvement initiative."
The cost savings, clinical advancements, and improved population health management capabilities Sharp has experienced since deploying its new systems are exactly the results healthcare executives at hospitals all over the country are hoping for as they invest big money on their own EMR strategies.
Reprint HLR0513-8
This article appears in the May issue of HealthLeaders magazine.
