Health execs support value, but don't know how to get there

October 21, 2015

A new PwC report finds that most health system executives support the move away from fee-for-service (FFS), but struggle with how much they should invest in payment alternatives.

The industry supports the tenets of alternative payment models (e.g., higher quality, more coordinated care; reducing healthcare ‘waste’ and improving efficiencies), but finds that actually doing so is incredibly difficult, according to the findings of a new report from PwC's Health Research Institute.

“Healthcare’s Alternative Payment Landscape” found that most health system executives said they support the move away from fee-for-service (FFS), but continue to struggle with how much they should invest in payment alternatives.

“The industry is seeing major purchasers of care-Medicare, Medicaid, private insurers, employers-demand a better accounting for the money they spend on care. CMS has made payment reform its number one priority, as evidenced by the goals it set earlier this year,” according to Ceci Connolly, managing director of PwC’s Health Research Institute.

New payment models, such as accountable care organizations (ACOs), bundled payments and ultimately capitation, are growing in numbers, despite uncertainty from the industry, Connolly explains. “Ultimately, the demands of the ‘new health economy’ are forcing the industry to change,” she says.

The Centers for Medicare & Medicaid Services (CMS) is providing the impetus to make the switch.

“It has set goals to have half of all Medicare payments tied to alternative payment models, and 90% of all of its payments tied to quality improvement programs,” Connolly says. “It’s a short window, too. CMS expects this to happen in 2018. And the agency has made participation mandatory in some of its bundled payments demonstrations, including one that will pay a set fee for hip and knee replacements. That program is mandatory for some 700 health systems.

Next: The main hurdle in the shift to value

 

“It’s the classic quantity versus quality debate,” she continues. “Traditional FFS rewards the number of medical procedures performed rather than the quality of those outcomes. Such a payment system creates little incentive for change across the nearly $3 trillion per year US health sector. In order to change the way care is delivered and paid for-in part, so that it aligns with the goals of the Affordable Care Act [ACA]-Medicare sees provider payment as the key lever to pull to overhaul the industry. Long-standing health policy experts would agree on this point-that if you want to force change in the industry, change how the payments are made.”

The other main driver, which also can be attributed to the ACA, is consolidation/partnerships. “The ACA creates payment arrangements-think accountable care organizations-that reward collaboration across multiple healthcare settings,” Connolly says. “This falls under the parameters of ‘population health,’ where payments ultimately reward providers who are able to treat entire communities under a certain arranged payment cap. Once again, payment is the driver for change.”

The main hurdle is that the industry is used to FFS for medicine, she says. “Hospitals and physicians have financially benefitted under the current FFS system, so it’s a difficult pattern to break. Another obstacle is that many health systems simply do not know either how to define population health or how to work towards achieving it,” Connolly says. “Conceptually, the idea of population health-keeping consumers healthier so that they do not overly use the healthcare system in the future-takes a financial stream of money away from providers. So health systems are now looking at ways they have to change internally so that they can operate leaner in the future.”

Other obstacles abound. Many alternative payments models come with the expectation of risk-that health systems may lose money if they do not meet certain savings goals. “Chief executives are typically reluctant to enter into arrangements that require them to budget for losses over several years,” she says.

Next: Connolly's five strategies for a successful transition

 

 

 

Connolly offers five strategies for a successful transition:

#1. Understand what kind of healthcare system you run now-and how you want it to evolve in the future.

“If your system excels in delivering specific medical services, you may choose a bundled payment model,” Connolly. That means that academic medical centers or organizations with top-tier cardiac specialties or cancer services may want to fall under this category. Instead of investments in walk-in clinics, the system may instead focus on investing in complex medical equipment and research facilities.

If your system chooses to focus on population health management, then the right model should be able to accept financial risk. Such health systems should have deep roots in the community, strong partnerships with outpatient clinics, home health, etc.

#2. Understand your own market.

Some markets are more evolved than others, Connolly says. “Health system executives have to understand what’s driving change in their markets. It could be that private payers are pushing a lot of new payment initiatives, contracting with providers to do so. Or maybe it’s a large employer in the market demanding more financial accounting for their dollar. Before a health system tests different payment models, it should first understand the pressure points that are forcing the change.”

#3. Consumer engagement is a must.

If financial incentives and care transformation are tenets of value-based care, they will only go so far without patient participation, according to Connolly.

“Making care available to consumers during off hours, and expanding locations will distinguish one health system from the next,” she says. “Identifying and closely working with consumers, especially patients with multiple conditions, improves outcomes and lowers costs. Additionally, insurers and clinicians must understand the general health of their community, including non-clinical factors such as average income and education.”

Next: The final two strategies

 

 

#4. Discover what works-and then replicate it.

“There’s a reason why ACOs tend to cluster in markets that have a high penetration of Medicare Advantage plans,” Connolly says.

An analysis by the Medicare Payment Advisory Commission (MedPAC) found that ACOs form primarily in markets where Medicare Advantage plans have already shown an ability to reduce medical services and lower costs. Moreover, MedPAC data demonstrates that ACOs are only half as likely to locate in regions where Medicare Advantage plans struggle to deliver care under a capitated rate.

#5. Know the true cost of care.

Health systems are rife with procedures that are charged well below the actual cost-or well above,” she says. “A deeper understanding of how much it actually costs to perform a medical procedure is needed before a hospital can move to value-based payments. Health systems need to reduce costs as they change their revenue.”