Dan Mendelson and Erik Johnson

Healthcare reform is raising fundamental questions about future hospital strategy-much faster than anyone in the industry thought likely.

In some ways, what hospitals are confronting is similar to the original theory of managed care in the late 1980s and mid-1990s. Both managed care then and healthcare reform now focused on shifting risk downstream to providers. But this is not just a "déjà vu" experience; there are clear differences between these two eras that hospital finance leaders need to understand and embrace to succeed in this new post-reform world.

To begin, we have seen a decade-long journey in the adoption of health IT (HIT) at the point of care-a journey that continues to this day. Such adoption is essential to the capturing of data necessary to manage clinical and financial risk. Only by collecting and analyzing patient-centric data can providers identify, and then manage, the clinical risks inherent in their patient populations. In addition, payment models are slowly aligning to reward the successful management of clinical risk. To be sure, there is a long way to go here. But payment and delivery reform are co-dependent variables, and they are both moving, although slowly, in the same direction-with much stronger linkages between quality and enhanced payment, and growing expectations on the part of the payers that providers will successfully manage care more cost-effectively.

We also have a much bigger body of evidence-based guidelines that the original incarnation of managed care lacked. Although it does not cover every condition a provider might face, it does address some of the most costly, resource-intensive conditions. And with the ever-accelerating adoption of HIT, we are beginning to have an effective distribution mechanism for this evidence.

Four Pillars of Healthcare Reform

Unlike the early days of managed care, the environment has shifted, enabling hospitals to identify and successfully manage risk. So although hospitals should not fear managing risk, they need to be careful. And that means understanding the four pillars that are essential to realizing the full potential of healthcare payment and delivery reform: transparency, accountability, evidence, and HIT. These are the capabilities that all hospitals need to have in place by 2015 to operate successfully in this new paradigm.

Transparency. It is essential that patients, providers, and payers understand what works in health care and how much it costs to make it work. The healthcare reform statute puts considerable emphasis on the reporting of cost and quality data-building on a long-term trend of requiring greater reporting from providers on their performance across a variety of quality metrics. Multiple reporting initiatives-Physician Quality Reporting Initiative (PQRI), the CrownWeb initiative for ESRD providers , the Centers for Medicare & Medicaid Services/Premier Hospital Quality Incentive Demonstration-all have accustomed providers to aggregate the necessary data to report publicly. In essence, the government is asking providers to show their stakeholders that they're running well.

Accountability. Once your organization has decided who its partners are in the delivery of care both during a patient's hospital stay and post-care, the organization needs a payment model that aligns the partners' behaviors with the organization's goals and holds the partners accountable for outcomes. Bearing greater risk brings with it a new sense of having to be more mindful in choosing partners with whom to coordinate and provide care. If the buck stops with you, you need to make sure that all parties are accountable to you and your goals.

Evidence. Entire subindustries are dedicated to disseminating the growing body of evidence-based guidelines to clinicians who should be using them. Hospitals need to become more evidence-based operations where problems are identified and fixed quickly to ensure that high-quality care is delivered.

HIT. HIT is in many ways the linchpin to achieving the other three pillars. The capture of consistent and accurate data, the ability to inform an intelligent and nuanced payment regime, and the mechanism by which evidence is distributed to clinicians when they most need it all rely on the effective and intelligent deployment of HIT. Moreover, the electronic transmission of patient data from one site and set of providers to the next in the continuum of care is far more reliable than paper charts, patient memory, or the informal relationships between providers.

Without a doubt, successfully establishing and implementing these four pillars isn't easy, but it is as essential as making sure the concrete pillars of a bridge are firmly set before the bridge spans are put in place. These pillars are important because implicit in healthcare payment reform is a fundamental re-ordering of risk, going well beyond the Medicare and Medicaid programs. Traditionally, commercial payers have been the risk-bearing entities in the healthcare ecosystem, but they have managed risk through the underwriting process. Healthcare reform has essentially eliminated the ability of payers to manage risk in this way. Moreover, medical-loss ratio requirements will mitigate the effectiveness of most utilization management techniques, as there will be persistent pressure to meet specific targets.

What Finance Executives Should Do

What does this all mean? Reform shifts risk downstream to providers. As the healthcare economy migrates to bundled payments, capitation, and outcome-based reimbursement, providers will have to become much more aggressive in managing risk.

To manage risk proactively, finance executives need to address certain areas right now. First, finance executives should lead their hospitals through an assessment of the partnership, joint venture, and acquisition opportunities they might pursue in light of reform. Health systems will need to focus on the entire continuum of care, not just the inpatient stay, as they are increasingly held accountable for cost and quality outcomes.

Second, finance executives will need to ensure that sufficient capital is set aside to invest in new clinical and back office systems, as well as analytical capabilities that take advantage of the new data streams. Developing a business analytics group within the finance department, in particular, will give health systems the ability to understand and respond to the marketplace's changes in a much more proactive fashion.

Third, there is the need for a strong legal and financial infrastructure for aligning partner behaviors. Whatever risk management system is established will have legal ramifications, including new, yet-to-be-defined exemptions. Hospital executive teams need to know how to best use these legal requirements to make the risk management system run efficiently, effectively, and profitably. And of course the team needs to ensure that it avoids risk for things it can't control, and indemnifies the institution for risk that cannot be borne on the balance sheet.

Finally, none of this is likely to go away even if elements of health reform are repealed. The federal government is facing a fiscal crisis of large proportions, and will need to ensure that innovation in payment is employed to reduce cost.

The bottom line: In the coming years, hospitals face a whole new way of managing risk. And this risk extends beyond hospital care to the entire continuum of care. Fortunately, there are tools-such as evidence-driven care plans and patient-centered medical home delivery models-that if thoughtfully used will help hospitals successfully manage patient outcomes.

Dan Mendelson is president and CEO, Avalere Health LLC, Washington, D.C. (dmendelson@avalerehealth.net).

Erik Johnson is senior vice president, Avalere Health LLC, Washington, D.C. (ejohnson@avalerehealth.net).

Publication Date: Wednesday, December 01, 2010

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