Win-Win Payments for Providers and Payers

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.