Chad Mulvany

Providers stand a much greater chance today than they did in the past of successfully solving the U.S. healthcare system's imposing cost and quality problems.

At a Glance

Providers should support efforts to reorganize the healthcare delivery system by undertaking four key market-centric activities:

  • Improve customer service.
  • Develop a deeper understanding of utilization patterns and the health statuses of the populations they serve.  
  • Build patient engagement.  
  • Help patients understand value in health care.  

Now that reform is the law of the land, hospital executives are commonly asking two questions. First, will the law actually achieve the anticipated reductions in long-run healthcare cost growth? Second, we have tried many of the proposed solutions to the cost and quality problems during the 1990s, with mixed results. What's different this time that will allow providers to succeed where in the past they failed?

From a cursory review of recently released CBO numbers, the short answer to the first question is, we can't afford for reform to fail. The alternatives aren't pleasant to ponder, leaving providers with a limited window to implement the necessary changes. Regarding what's different this time, a combination of factors-ranging from increased provider experience managing integrated delivery systems (IDSs) to a challenging economic forecast-increases the odds that healthcare providers will be successful this time.

Two CBO Scenarios: Success or Crisis

In June, the Congressional Budget Office (CBO) released its 2010 Long-Term Outlook ( In it, the CBO describes how reform might play out according to two broad scenarios. Let's call the first one success, because it reflects the CBO's "optimistic" scenario. The other we can call crisis, reflecting the CBO's "realistic" view, which is the view many industry analysts share.

Success. In this scenario, federal reforms combined with changes in the commercial marketplace drive providers to restructure the delivery system and improve the value of care-ultimately cutting cost. Congress resists pressure and rolls back cuts to Medicare payment. As a result, the growth rate of public and private expenditures for health care is reduced, "bending the cost curve" and significantly increasing the odds of long-term economic stability.

Crisis. In this scenario, providers are unable to make the necessary changes to reduce cost and improve quality. Congress relents to political pressure to roll back Medicare payment reductions, and cost growth continues unabated. Eventually, purchasers of U.S. Treasuries begin to question the government's ability to make scheduled principle and interest payments, leading to a significant financial/economic crisis. In response, the government is forced to cut all spending and to broadly increase taxes. A similar scenario played out in Greece and other southern European countries this summer.

A narrow window. Many economists believe a debt-to-GDP ratio that approaches 90 percent will trigger an economic crisis (Newhouse, J.P., "Assessing Health Reform's Impact on Four Key Groups of Americans," Health Affairs, September 2010). It is currently estimated the U.S. ratio is between 50 and 60 percent of GDP. Under the CBO's "realistic" scenario, federal healthcare spending will drive that ratio to the crisis threshold during the 2020s. Alternatively, if the optimistic scenario prevails, the debt-to-GDP ratio will remain well below the crisis point beyond 2035. Providers have a limited opportunity to make the necessary changes or the reality of an economic crisis will make hard choices for them.

View Exhibit 1  


Value Focused

The economic incentives in the healthcare delivery system are changing. The Affordable Care Act includes a number of measures designed to reward hospitals that provide high value care, and the commercial market is rapidly following suit.

View Exhibit 2  


In the short term, high-value care is defined as high quality combined with low cost per case or encounter. Within that definition, high quality can be defined as high Reporting Hospital Quality Data for Annual Payment Update scores and low volumes of hospital acquired-conditions and preventable readmissions. However, this definition will evolve over time based on public and private payer efforts to reduce costs by effectively managing patients with chronic diseases. The definition of high quality will expand to include low volumes of preventable admissions (patients with chronic diseases), and cost will be calculated based on total healthcare inputs for up to a year.

For hospitals to meet this challenge, they will have to integrate, become market facing, and collaborate.

The necessary gains in quality and cost efficiency will require a meaningful level of economic and structural integration with physicians. Although this need for integration can mean physician employment, other arrangements such as co-management can achieve the same alignment of incentives and management structures. Only in partnership with physicians will hospitals be able to systematically coordinate and improve care delivery across the healthcare system resulting in higher value care.

However, integration is only one part of the equation. As providers reorganize the delivery system, they also need to support their efforts by developing a market-centric focus centering on four key activities.

Improve customer service.The Hospital Consumer Assessment of Healthcare Providers and Systems survey results will continue to be a key element of Medicare's value-based purchasing program.

Develop a deeper understanding of utilization patterns and the health statuses of the populations they serve. As the payment system increases providers' risk for outcomes, this knowledge will be essential in helping providers both accurately price managed care contracts and develop processes to ensure that patients receive the right intervention in the most cost-effective setting at the appropriate time.

Build patient engagement. Most healthcare spending is driven by patients with chronic conditions-many of them lifestyle-associated. Providers may be able to create a perfect delivery system, but they cannot control the accumulation of patients' day-to-day choices, which is a major force in moving the needle on healthcare spending.

Help patients understand value in health care. Reform will bring about a proliferation of cost and quality metrics that may be confusing to patients. Moreover, early experience from CMS's ACE demonstration has shown that being labeled a high-value provider receives a lukewarm reception from patients at best. This is not surprising. For almost all goods-health care included-the public assumes that high cost equates to high quality, while value is linked in public perception to low or average quality. High-value providers must educate their communities to help them understand how high-quality care can be low cost-unlike most other goods in the marketplace.

In short, to truly improve the value of the care they provide, providers will need to successfully shift from an "intervention" system that treats the sick to a "prevention" system that focuses on keeping populations healthy. The implication for revenue under the current payment system is obvious. This shift will reduce the demand for acute care services, jeopardizing hospitals' long-term viability. To mitigate this risk and ensure the sustainability of the delivery system, hospitals need to collaborate with payers to develop a payment system in which the gains achieved by improving the value of care accrue not only to payers but also to patients and providers.

What's Different This Time?

Given that a number of these approaches have been tried before, finance executives are right to wonder how this time will be different. Lessons learned from the 1990s combined with significant changes in the physician marketplace, technology, and employer actions could greatly improve the odds of success for providers. Many hospitals attempted to acquire physician practices to create integrated delivery systems (IDSs) in response to capitation in the 1990s. These efforts ended with mixed results. An analysis of what generally separated successful from unsuccessful organizations yields three findings.

Understand your market and the timing of reform. In the 1990s, many organizations attempted to build IDSs with an insufficient amount of revenue at risk to support the necessary behavioral and structural changes. The resulting inertia caused these providers to incur significant losses on their risk-based contracts and underperform on their fee-for-service business.

An important difference this time is that Medicare is attempting to drive change, and commercial payers will likely follow suit. However, the transition from a volume-based to a value-based payment system will occur at a different pace in each market. Hospitals will need to develop a strategy that allows them to successfully bridge this transition period while improving the value of the care they provide.

Maintain strategic discipline. In the 1990s, once the "practice land-grab" got under way, many organizations whose stated strategy was to accept risk-based contracts acquired a number of specialty practices that didn't support a strategy aimed at reducing utilization of acute care services. Hospitals need to develop an integration framework that identifies the physician practices that will allow the hospital to improve the value of its care and eventually transition to a prevention system that can successfully manage risk-based payment. Otherwise, hospitals run the risk of repeating past mistakes as they respond to the many practices that approach them looking to sell. Without a preliminary plan, the odds of a counterproductive practice acquisition increase.

Develop a sufficient management infrastructure. In previous attempts to acquire and integrate physician practices into IDSs, hospitals failed to develop the metrics, compensation structures, and data capabilities that would enable the hospitals and practices to align economically and culturally.

Today's environment also presents other important differences from the past that make the environment more favorable to successful physician-hospital integration. These differences include a greater willingness on the part of physicians to partner with hospitals, the steady decline in IT costs accompanied by increasing functionality (Moore's Law), and the increased ability of employers to take actions that promote reform.

Willing partners. The past decade has seen significant changes in the physician marketplace. Generally, physicians from Generations X and now Y are more concerned with work-life-balance and are less entrepreneurial than their predecessors. Indeed, the uncertainty surrounding physician payment coupled with the increased administrative burden and expense of running a private practice have made this prospect less appealing for both new and established physicians. As a result, many physicians are now much more open to hospital employment.

Moore's law. In many instances, during the 1990s, costs made it difficult for hospitals to build the data capabilities necessary to truly integrate with physicians and improve the value of care. Comparatively, today, in accordance with Moore's law, the cost of IT systems has come down significantly while the functionality has increased. (Moore's law refers to a prediction by Intel cofounder Gordon Moore in the 1960s that the number of transistors on an integrated circuit would for a time double about every two years while the associated costs would see a corresponding decline.) This trend, combined with federal electronic health record (EHR) mandates, has made it easier for hospitals to implement the necessary infrastructure. However, such implementation is only the first step.

Hospital IT systems also need to be optimized for value. Clinically, EHRs should be set up so quality improvement staff can easily access the data within them for use in designing evidence-based care protocols. Order entry modules should contain mechanisms that encourage providers to use the protocols, but that do not limit clinical decision making.

Further, cost accounting and decision support systems need to be fine-tuned and standardized throughout the organization. The current cost-to-charge methodology used by many organizations lacks the accuracy needed for process reengineering.

Employer actions. Employers were able to restrain the growth of healthcare costs in the 1990s by offering their employees managed care plans that tightly managed utilization. This constraint fell apart when labor markets became tight at the end of the decade and employers loosened restrictions to attract and retain talent. This situation has changed.

The economic conditions are right for employers to take actions that will ultimately speed the pace of reform. Unemployment has been reported as hovering at 9.5 percent (Rich, M., "U.S. Lost 131,000 Jobs as Governments Cut Back," The New York Times, Aug. 6, 2010). Meanwhile, the CBO's projections of long-term economic growth exceed only the estimated 2.5 percent GDP growth necessary to maintain current employment levels for a three-year period during this decade, as reported in the press (Rampell, C., "With Recovery Slowing, Jobs Outlook Dims," The New York Times, July 30, 2010). Despite this bleak economic outlook, earnings in the second quarter were stronger for most Fortune 500 companies than expected. This feat was achieved through cost efficiencies, not revenue growth. As economic growth continues to stagnate, these companies will have to dig deeper for additional cost cutting, making it more likely that they will attack benefit costs.

View Exhibit 3  


Given the diminished bargaining position of employees, some employers likely will return to narrow, value-based provider networks between now and 2014, when insurance market reforms occur. This trend is already happening on a limited scale in the small group market in Chicago, San Diego, and New York (Abelson, R., "Insurers Push Plans that Limit Choice of Doctor," The New York Times, July 17, 2010). After 2014, some employers-who, absent reform, would have provided insurance-are likely to transition their employees into state-based exchanges.

If employers in any numbers return to limited networks or drop coverage altogether, high-value providers will benefit. In either event, to reduce cost, the employer or the individual purchasing insurance through the exchange will likely look exclusively for plans that use limited networks of high-value providers. To prepare for this eventuality, hospitals will need to build on existing competencies and develop new ones.

Key actions hospital finance professionals can take include:

  • Working with physicians to develop and ensure the accuracy of metrics used to reduce cost and improve quality
  • Developing a conversational understanding of clinical issues
  • Building proficiency in process improvement techniques
  • Beginning conversations with payers to develop a sustainable reimbursement system based on value

Stepping Up

Although there is some uncertainty around how the payment system will evolve (i.e., whether the predominant model will be fee-for-service with withholds, capitation, or bundles), providers that deliver high-value care clearly will continue to be successful. Improving the value of care is a team sport. Most of the heavy lifting will be performed by clinicians at the bedside or in the exam room. Hospital finance professionals, however, will play an important role in guiding and supporting these efforts.

Chad Mulvany is a technical director in HFMA's Washington, D.C., office and a member of HFMA's Virginia Chapter.

Publication Date: Monday, November 01, 2010

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