Hospital financial executives will be even more important in the next decade than they have been in the last, says Ian Morrison, author, consultant, and futurist. Driving that enhanced role are coming changes in the way hospitals are paid and the way the care system is structured. Morrison recently discussed his outlook for the changing system with hfm.

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Q. You stated in your book Healthcare in the New Millennium, "We need new reimbursement ideas." In your opinion, what types of payment models would work today?

A. Many people believe that how you pay for health care determines what kind of health care you get, how it's organized, and indeed how effective it is. We're learning from comparisons with other countries and our own experience within the United States that if we change the reimbursement system away from rewarding procedure volume toward paying for outcomes, we are going to get a very different health system-hopefully, a much more effective one. The question is, how do you make that happen?

When I wrote the book, I was a big fan of capitation, and I still am to some degree because, in its most positive light, capitation gives organizations an incentive to take risk and to manage resources for an outcome for the entire population they are responsible for. The downside, obviously, and the reason why public opinion turned against capitation, was that many physicians who were receiving low capitation rates complained to their patients. But what killed capitation was the sense that insurers were bribing physicians to provide less care than they should, which did not go over well with the public. As a result, capitation fell out of favor.

We are hearing talk of bundled payment, which means rolling together into a single payment hospital and physician fees and associated workup before and after the hospital admission-perhaps including risk for readmission that may be caused by a medical error or poor management of the patient. Bundled payment would have an important effect on causing hospitals and physicians to think differently about how they engage with one another, and may be a step in the right direction. However, bundled payment still rewards providers every time they get a patient to come through the door.

What is missing is any method of payment that involves a capitation-type model, such as a global-budgeting model. We will eventually realize that we need to manage costs from the top down, not the bottom up. And we may end up moving toward some kind of budgeting or global-budgeting-type model for episodes of care, not simply for an individual DRG or hospital episode.

Q. What are the greatest challenges to implementing such payment models? How can we overcome these challenges without unintended disruption of the healthcare system?

A. That's a very important question. We don't know how to do it right. There isn't a clear understanding of the optimal way to reform payment. What we need to do is to pilot some alternative models, such as bundled payment. But we have minimal history in this country of turning pilots into real progress. We do successful pilots and then ignore them. One way to change this tendency was embedded in some of the versions of healthcare reform legislation: giving the Secretary of Health and Human Services and/or some newly constructed commission for innovation in healthcare financing the authority to mandate changes resulting from these models much more quickly through the Medicare system without having to take it to Congress for a vote.

In addition, the private sector needs to step up and run some of these experiments. We have seen some evidence of that with Blue Cross Blue Shield of Massachusetts doing some interesting extensions of the pay-for-performance model into what looks a lot more like a pay-for-outcomes model with movement toward bundled payment.

Q. HFMA has written extensively about the competencies hospital leaders need for success under payment reform, including the ability to integrate with physicians, cost services, and manage risk. What do you see as the most important steps hospitals should take to succeed as the approach to payment changes?

A. Those three competencies are very important. Let's use bundled payment as an example. The first step in bundled payment is to combine the fee for the physician services-let's say for a surgical procedure-with the hospitalization costs. Integrating with physicians will be paramount in this, because physicians' orders account for most of the expenditure in a hospital and in health care, generally.

Integration can take place in lots of different ways, from owning those physicians' practices-or making them salaried employees effectively-to having alignment of incentives, contracting, and so forth. Because of the uncertainties of healthcare reform, many physicians are reaching out to hospitals to say, "Bring me on board." For many reasons, integration is going on across American health care, and hospitals are on the receiving end of requests as well as aggressively going after physicians to integrate them more formally into their services.

The second competency that HFMA raises is the whole cost management issue. Hospitals will have to learn how to make money on Medicare in the long run. Most of them don't. Very few hospital executives would be capable of running their hospital profitably if they were reimbursed on a Medicare basis. That is the reason the early versions of the Senate and House healthcare reform bills-which had a public option using Medicare rates as the method and level of payment (even if it was Medicare plus 10 percent)-caused the hospital industry to shudder. But leaders in American health care and in the hospital business are preparing their institutions to manage costs to the point where they would be able to survive on Medicare rates. It is not their preference, but they believe that those rates may become the default payment level and that they must adjust their cost of services accordingly.

Managing risk is another important competency. The expansion of what the hospital is going to be responsible for from a risk point of view is going to be quite remarkable, because accountable care organizations-if that's the framework in which all of these payment reforms are going to be laid out-are the right frame for it. Not just integrated care, but accountable care, because we're integrating for a purpose, which is to create accountability and higher performance and higher quality. Embedded in that is the notion that accountability across the continuum of care and across time means that hospitals are going to be managing risk more than they have in the past, as are other providers, such as large multispecialty practices, which are also going to be creating accountable care organizations. But those providers are going to be in the minority, because fewer large physician groups are capable of creating accountable care organizations.

Speed, agility, flexibility, and experimentation are also key competencies hospitals need to develop in this changing environment. Those institutions that are capable and positioned to pilot these models and learn rapidly how to respond under these circumstances are going to have a huge advantage.

For example, a number of hospitals I work with across the country have their own health plan, which often is a legacy of failed attempts at vertical integration from the 1990s. The hospitals bought a health plan because they thought they were going to be capitated. Then many hospitals collapsed or got rid of the plans. But many still get significant patient flow from those plans. They are well-positioned to run some experiments inside that closed-loop framework to learn about how to make money and manage in the environment.

Q. How will the role of healthcare finance change as the healthcare payment and delivery systems change?

A. Hospital finance executives are going to become even more important in the next decade because of the pressures hospitals are going to be under from a reimbursement point of view-not only because Medicare is likely to be constrained in terms of its reimbursement, but also because of these other changes in the method of reimbursement that are going to take place. There will be a lot of action in the way in which hospitals are paid. And quite frankly, there is going to be an enormous juggling act over the next decade in trying to keep hospitals in the black, profitable, as we go through these changes.

The ascendancy of hospital CFOs in terms of importance in hospital management has been clear over the past 20 years, but certainly the next decade is going to be absolutely crucial. CFOs will have to work much more closely with medical staff and chief medical officers in thinking through how care can be transformed. For the next decade, I would envision a robust integration within the hospital of both medical management and the financial management processes, because otherwise hospitals are not going to make it.


About Ian Morrison

Ian Morrison is an internationally known author, consultant, and futurist specializing in long-term forecasting and planning with emphasis on health care and the changing business environment. He combines research and consulting skills with an incisive Scottish wit to help public and private organizations plan their long-term future. Morrison has written, lectured, and consulted on a wide variety of forecasting, strategy, and healthcare topics for government, industry, and not-for-profit organizations in North America, Europe, and Asia. He is the author of Healthcare in the New Millennium: Vision, Values and Leadership (Jossey-Bass, 2002) and The Second Curve: Managing The Velocity of Change (Ballantine, 1996). He has co-authored several books, chapters, and journal articles.

He is president emeritus of the Institute for the Future (IFTF) and a founding partner in Strategic Health Perspectives, a joint venture between Harris Interactive and the Harvard School of Public Health's Department of Health Policy and Management. From 1996 to 1999, he served as chairman of the Health Futures Forum for Accenture (formerly Andersen Consulting). In that capacity, he chaired several international forums on the future of health care.

Publication Date: Monday, March 01, 2010

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