The move toward value-based reimbursement is not only no guarantee of financial catastrophe, but the experience could even be a financially positive one, hospital CFOs say.
This article appears in the July/August 2015 issue of HealthLeaders magazine.
Many hospital CEOs and CFOs have been forced to straddle the two worlds of fee-for-service and value-based reimbursements for some time now, even if their organizations largely held to the more familiar approach and hoped others would show how to thrive when putting revenue at risk. As more healthcare systems are joining—or being swept along—in the movement toward increased bundled-payment and shared-savings contracts, those early adopters are revealing their secrets to success.
Their message is largely reassuring: You can move toward value-based reimbursement without any catastrophic effect on revenue. The whole experience could even be a positive one financially, they say.
Joel Perlman |
An integrated delivery system in which virtually all of the entities in the healthcare system are geographically contiguous has proven to be a positive factor in Montefiore Health System's move to value-based reimbursement, says Joel Perlman, executive vice president and chief financial officer with the system based in the Bronx, New York.
Montefiore consists of eight hospitals and an extended care facility, with a total of 2,747 beds, a school of nursing, a home health program, and primary and specialty care provided through a network of more than 150 locations. Approximately 80% of Montefiore's revenue comes from government payers, and more than half of that is Medicaid.
The contiguous entities facilitate Montefiore's efforts at population health and care management, Perlman says. "You get the real richness and value out of managing care by keeping the individual in your care delivery network all or most of the time," he explains. Because most of Montefiore's patients are going to remain in the community for years—as opposed to members of a particular health plan who may change to another insurer frequently—the health system can focus more effectively on longitudinal prevention and chronic care.
Montefiore started transitioning to value-based reimbursement far earlier than most. In 1995, the system worked with its employed and voluntary physicians to establish an integrated provider association to align the medical center and physicians to take on greater financial risk and improve care delivery. The IPA board includes hospital and physician representation, with the latter involving employed, voluntary, primary care, and specialty physicians.
"We concluded that fee-for-service was a dead end for Montefiore, given the direction that payments from all payers were going. We anticipated that would only get worse because of our large government payer mix," Perlman says. "We decided that we had to execute a different business model and strategy for engaging the patient and payer communities that we did the most business with, and that took the form of developing our own infrastructure to manage that care."
Managing risk
One year after forming the IPA, Montefiore established a care management organization (CMO) to handle the risk for the IPA and the medical center. Through delegated arrangements with insurers, Montefiore's CMO performs claims processing services for its managed care business, allowing real-time access to claims and the utilization patterns of its attributed population. Case managers assess high-need patients to identify their clinical and social issues, such as housing instability and availability of transportation. The CMO now manages risk for more than 350,000 Montefiore patients—roughly broken down into one-third each of Medicare, Medicaid, and commercial.
Montefiore was the top performer in the Pioneer accountable care organization program in both year one and year two, serving approximately 50,000 Medicare fee-for-service beneficiaries with a network of more than 2,500 providers. After choosing the highest risk/reward model, Montefiore has achieved a 7% savings—the highest savings and cost reduction of all the Pioneer ACOs in the first two years. Savings generated from the program go back into improving and refining Montefiore's infrastructure and to the primary care providers who are on the front lines of care. Montefiore has shared-savings arrangements with the three largest national health plans in the country, along with several of the largest regional health plans.
"We are managing care for a revenue stream of about $2.5 billion," Perlman says. "Approximately half of that never hits the books of Montefiore because non-Montefiore providers delivering care to patients under our risk arrangements receive payments directly from health plans. In 2015, more than half of Montefiore's economy has been risk-based."
Montefiore's transition has been margin accretive, and Perlman notes that margins in his region are more challenging than in some parts of the country. The system has hit its goal of a 3% operating margin in recent years, except for falling a bit short in 2014, mostly due to implementation of an Epic system and upgrades after being designated an Ebola center.
"We wouldn't be hitting that 3% goal, and intending to make it in future years, if we weren't in the managed care and risk business," Perlman says. "Our care management and population health strategy has contributed to the bottom line. Probably one of the three percentage points that we generate in margin is a differential on how we do with the risk business versus how we would do on that same business with just fee-for-service."
The flexibility and discretion that come with receiving a share of premiums allows Montefiore to focus on efforts such as patient-centered medical homes and telehealth that provide direct benefits to patients and providers, rather than what is defined under a regulatory payment system, Perlman notes. Most physicians who participate in the capitated model at Montefiore stay with it, he says, partly because they can benefit from technology, work-flow processes, and other physician support provided by the health system.
Montefiore is continuing to expand, moving beyond the Bronx into the Westchester and Hudson Valley regions of New York and other areas with a different payer mix. Some of those communities have resisted risk-based care so far, but Perlman says Montefiore's track record will help it achieve its goal of reaching 1 million covered lives.
"The learning curve for us was pretty steep, but now, as more of us have begun to adapt to this changing model, I would speculate that the learning curve for the next wave of adopters will be quicker," Perlman says. "There's more of a knowledge base to draw upon."
Lower reimbursement not automatic
Contrary to the assumption of many healthcare leaders, transitioning to value-based reimbursement does not necessarily have to mean a loss of revenue, at least on a per-unit basis, says Stuart Kilpinen, senior vice president of managed care for payer and product innovation at Trinity Health, based in Livonia, Michigan. Trinity is a not-for-profit Catholic health system operating 86 hospitals in 21 states and employing 89,000 people, including 3,300 physicians.
Common wisdom holds that if you enter a value-based contract, you have to accept a per-unit reimbursement reduction, Kilpinen notes.
"We don't agree with that," he says. "It may mean that for some, but it doesn't have to because this is about managing your total cost of care, which is quantity times price. If you focus on the quantity and not just the price, you can actually have a higher reimbursement than where you were and still manage the total cost of care down. For us, it has not been the case at all that lowered reimbursement is the first step toward value-based contracts."
Trinity has been focusing more on value-based payments since 2013 and now has 135 value-based contracts that cover almost 1.6 million people and 22% of the system's revenues. Margins have held steady during the volume-to-value transition, with an operating cash-flow margin of 9.3%–9.5%.
The goal for Trinity's volume-to-value transition is to have 75% of the system's revenue tied to value-based contracts by 2020, explains Benjamin R. Carter, executive vice president of finance and chief financial officer for Trinity. That aggressive mark forces Trinity to make the decisions that will move it toward value and away from volume, he says, and that is why Trinity has ACOs, Medicare shared savings plans, bundled payments, and value-based contracts in every market the system serves.
"It has changed the way we contract and how we do business with payers," Carter says. "Clearly we have a foot in both worlds and we are predominantly still fee-for-service based. Even though our strategic goal is guiding how we are working with payers and the work we do with payers who are oriented toward this change, we can't ignore one or the other as we make the transition."
More data and transparency
Maintaining a good margin during the transition can be attributed largely to Trinity's success in constructing the payment contracts to get enough of the savings accruing back to the provider's system and affiliated physicians in a timely manner, says Kevin Sears, senior vice president of payer strategy and product development at Trinity. Additionally, contracts were negotiated to provide infrastructure support for providers to help them meet the value-based goals.
Organic growth of the Trinity system also was key in keeping operating margins healthy, Sears says. As utilization rates come down, volume naturally will be reduced on a per-capita basis, he notes.
"You can take this more compelling value proposition into the market place and productize it, using that to drive growth," Sears explains. "That helps to backfill the volume losses we experienced from improving utilization rates."
Kilpinen also points out that it is important to get a relatively high percentage of the premium dollar in order to make a value-based contract work. A contract with a 50/50 gainsharing arrangement is unlikely to be workable for a health system for more than a couple years, he says.
Trinity uses a set of five criteria to evaluate a payer's willingness to work toward value-based reimbursement, Sears explains. The payer is assessed for its willingness to calibrate fee-for-service reimbursement at appropriate levels, provide funding for infrastructure development, incorporate value-based reimbursement in the contract, develop products to channel business to Trinity Health, and appoint executive-level relationship management.
Trinity's relationships with payers have become closer through value-based objectives, with Trinity even jointly developing and marketing specific insurance products that have benefits and premium price points intended to support population health goals. In some cases the system has issued requests for proposals explicitly soliciting payers such as Medicare Advantage partners to work with Trinity in creating value-based arrangements.
"There's a whole different set of fundamentals that are involved with a value-based contract," Sears says. "Those contracts introduce actuarial elements, consideration of utilization rates, and in some cases premium pricing. So you have to address a broader set of variables than you have in a traditional fee-for-service contract."
That need for data required Trinity to develop additional capabilities and expertise within its payer strategies and product development groups. Trinity now employs actuaries who help set appropriate per-member, per-month targets for gainsharing programs and cap rates for total-cost-of-care contracts, and determine percentage-of-premium arrangements, for example.
"Cooperation and transparency are the elements that make this work with payers," Kilpinen says. "The payers that are willing to be transparent and work in a collaborative fashion are the ones we are able to work with most effectively."
Arrangements oriented to total cost of care or population-based payment have stalled when payers were tentative about their commitment to sharing data, Kilpinen says. Trinity expects payers to provide regular and full claims data and full eligibility files. Transparency works both ways, however, and CFO Carter notes that sharing cost data was a new experience for Trinity.
"That was one of the biggest hurdles for us, when we got to the point where they said, 'Now you have to give us timely and accurate information relative to the costs of caring for this defined population,' " Carter says. "It's the cornerstone of this kind of relationship, and you have to be prepared to provide information that in past years you might have kept close to the vest."
Gregory A. Freeman is a contributing writer for HealthLeaders Media.
Reprint HLR0815-7
This article appears in the July/August 2015 issue of HealthLeaders magazine.