Eye on Washington

Chad Mulvany

Conventional wisdom among management teams in hospitals is that their facilities will remain the center of the delivery system. However, as former HCFA administrator Gail Wilensky suggested in a recent Eye on Washington column, it's an "assumption of dubious wisdom."a  

Responses to continued cost growth are creating demand for alternatives to the "local" hospital-centric model. Providers that fail to heed market signals and improve the value of their care by reducing the cost and improving quality not only face penalties imposed by the Centers for Medicare & Medicaid Services (CMS), but also risk losing market share.

The Market's Response

In response to unsustainable cost growth, employers and carriers are deploying a number of tactics to reduce healthcare total expenditures and improve quality.

Employer-direct payment bundling. Both Cleveland Clinic and Johns Hopkins Hospital in Baltimore have bundled payment arrangements with separate national employers for a limited range of surgeries (cardiac and orthopedic).b These arrangements differ from the bundled payment pilot being administered by the Center for Medicare & Medicaid Innovation in that the purchasers' savings are not predicated on significant discounts. The improvement in value results from decreased complications (which reduce downstream medical expenditure), increased worker productivity due to faster returns to functionality, and increased satisfaction with outcomes.

Currently, the volume of procedures performed under such arrangements isn't significant. However, employers are showing significant interest in this model based on early results, and at least one other nationally renowned health system is launching a similar product. The number of employers participating in these arrangements is expected to expand along with the range of bundled conditions. As providers model the impact of decreasing rates from public payers, they also need to assess their exposure to this model. The key question is, How many commercially insured cases can an organization afford to lose to a regional center of excellence before it sees a detrimental impact on financial performance?

Steerage to lower-cost sites of service. In some markets, payers are aggressively steering patients to lower-cost sites of service for diagnostic and elective procedures. For example, a payer may contact a beneficiary who has been preauthorized for an elective procedure in a hospital outpatient department regarding the availability of the same procedure in a lower-costing freestanding setting. Some payers may go so far as to give the beneficiary a share of the savings achieved from using the lower-cost setting.

Payers using such tactics target highly utilized services that exhibit significant cost variance across settings with little discernible difference in outcome. Unfortunately for hospitals, these also tend to be high-margin services.

Medical home development. Many hospitals are developing medical homes as part of their value-improvement strategy. Hospitals that are not pursuing this strategy aggressively should be concerned about its impact. Medical home pilots have often realized decreases of 17 percent and 12 percent, respectively, for emergency department and inpatient expense. Improved care management will not eliminate the need for hospital services, but in a model where physicians are rewarded for efficiency, the physicians are likely to start referring only to high-quality, low-cost providers when hospital services are needed.

A prime example is the network created by CareFirst Blue Cross Blue Shield in Maryland, the District of Columbia, and northern Virginia. The model gives primary care physicians access to claims-based health records and other tools to help them understand and manage the risk factors in their patient panels. Significant support is also provided to "virtual" medical homes, allowing smaller practices to band together. Financially, the model is supported by an increase in rates for agreeing to coordinate care, new billable fees for creating and monitoring care plans for patients with chronic disease, and bonuses for quality and efficiency.

Strategically, this approach makes sense for both independent and unaligned physicians and payers. For physicians, it allows them to retain their independence by offering an alternative to hospital alignment. From the payer perspective, by encouraging participating medical homes to avoid high-cost sites of service, it acts as a hedge against the perceived risk of increased hospital market power resulting from merger activity.

The previous examples demonstrate tactics purchasers are using to maximize the value of their healthcare spend. Although the strategies don't specifically exclude "local" hospitals, they are designed to circumvent providers whose quality and outcome measures do not support higher payment rates relative to the market. Insurance products that incorporate these tactics into their benefit and network design will have lower premiums and be more attractive to both employers that continue to provide insurance as a benefit and individuals within an exchange.

Steps for Providers

Providers that do not significantly improve the value of the care they deliver will suffer financially not only from CMS penalties, but also from loss of commercial market share. In particular, hospitals will need to leverage two key capabilities to successfully reduce cost and improve quality: performance improvement and contract/risk management. Yet many have been slow to integrate these two capabilities tightly into their organizations. Improving the linkage between performance-improvement efforts and contracting creates a feedback loop that increases value. A regular communication channel between the two will allow performance-improvement teams to focus their efforts on areas that are important to purchasers while helping the contracting function identify opportunities for quality-based bonus payments.

Chad Mulvany is a technical director in HFMA's Washington, D.C., office, and a member of HFMA's Virginia Chapter (cmulvany@hfma.org).


a. Wilensky, G. R., "Reforming the Delivery System," hfm, January 2012.

b. "Cleveland Clinic and Lowe's Arrange Bundled Price for Heart Surgery," HFMA Payment & Reimbursement Forum, Feb. 23, 2011; and Walker, A. K., "PepsiCo to Pay for Employee Surgeries at Hopkins," The Baltimore Sun, Dec. 11, 2011.

Publication Date: Friday, June 01, 2012

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