Financial Sustainability

Transitioning health systems to accepting more risk: Key steps to ensuring financial sustainability

June 24, 2021 10:10 pm

Orry Jacobs, MBA

Kevin Sears, MHA

A key lesson U.S. healthcare providers gleaned from the COVID-19 pandemic is that over-reliance on fee-for-service (FFS) clinical revenue can be a risky business strategy. The experience of huge declines in FFS revenue has caused them to reconsider the benefits of pursuing a population health strategy.

Providers have seen large volume swings in scheduled non-urgent cases since the start of the pandemic due to patient safety concerns and disruption caused by new digital market entrants, even as payers holding the premium dollar have seen their profits soar.

Although volumes have recovered from 2020’s lows, provider’s FFS revenue faces continued pressure from two primary sources:

  1. High-deductible employer-sponsored health plans and other cost-sharing efforts designed to motivate consumers to shop for their care
  2. Government efforts to promote price transparency and value-based contracting

These trends have impressed upon providers the need to earn a greater share of the premium dollar to protect themselves from the impact of volume swings on revenue. As a result, the healthcare industry may see an acceleration in health system efforts to establish the incentives and infrastructure needed to successfully take on risk.     

A compelling rationale for a population health strategy

The case for adopting a population health strategy is reinforced by existing strategies that have been shown to improve care and reduce costs by eliminating defects in value. An article in the January 2021 issue of NEJM Catalyst described such a strategy, which included a framework for addressing what the authors referred to as value defects, which include:

  • Not coordinating care
  • Not providing evidence-based care
  • Using suboptimal sites of care
  • Not preventing avoidable readmissions

The authors found that when the framework was partially (25%) deployed in one health system for the 57,000 beneficiaries in its Medicare Shared Savings Program (MSSP) ACO, per-member-per-year cost decreased by 9%, even as the cost of care in the U.S. increased by 6%.

The article reported that drivers of lower costs for the 57,000 MSSP beneficiaries included:

  • 22% reduction in hospital admissions 
  • 44% reduction in ED visits 
  • 30% reduction in 30-day hospital readmission rate
  • 32% reduction in SNF spending

Despite such proven benefits, progress toward widespread adoption of population health initiatives has remained slow. Health systems that are taking renewed interest in population health need to focus on removing two significant obstacles that have impeded rapid expansion of this care model:

  • The lack alignment of incentives across all constituencies, including providers, members/enrollees and payers (See the sidebar below, “A broader transition to population health starts with aligned incentives,” for more about this obstacle.)
  • Insufficient infrastructure for managing population health

Following are key steps health systems must take to ensure the success of their population health initiatives.

Aligning incentives for providers and patients/enrollees

Incentives for both providers and patients/enrollees are needed to support the behaviors required to improve health and reduce healthcare expenditures. Following are specific recommendations for these groups.

Clinical providers. Financial incentives based solely on productivity, like relative value units, are not appropriate for population health programs. Providers also should be given incentives to focus on prevention and quality — for example, by following evidence-based protocols and delivering care in the lowest-cost appropriate setting. Examples of metrics include:

  • Percentage of patients with controlled blood pressure, glucose level and/or cholesterol
  • Percentage of patients discharged home after hospital stay
  • Percentage of patients with PCP follow-up x days after discharge (e.g., 7 days)
  • Patient satisfaction levels

Patients/enrollees. Patients/enrollees also need to have strong incentives to adopt consistent behaviors focused on improving and maintaining their health status and making cost-effective use of health services. Examples of cost-effective use of health services include:

  • Having an annual wellness visit with a primary care physician
  • Following through on recommended diagnostic screening
  • Receiving recommended vaccines
  • Seeking needed health services in lowest-cost appropriate setting
  • Having the initial pre-natal visit within first trimester

Aligning incentives among various payer segments

The considerations around aligning incentives with payers differ depending on the payer segment that will reimburse the health system for delivery of population health services. Health systems can receive payment for delivering value-focus care from a variety of payer segments. Each segment requires a tailored strategy for aligning incentives to account for the various features outlined below.

Health system employees. Many health systems assume financial risk by self-insuring their employees for health, which creates an incentive for them to help their employees and their covered dependents stay healthy. This approach is ideal for a health system to pilot test and fine-tune a population health strategy.

MA plans. The population covered by Medicare Advantage (MA) plans is a priority because its members’ personal healthcare expenditures are roughly three times higher than those of the working-age population (age 19-64). Because healthcare expenditures for this population largely relate to chronic diseases for which effective interventions exists, a well-managed population health approach has a strong potential to reduce health expenditures and improve outcomes. MA plans can provide additional services not covered by traditional Medicare, including dental and vision coverage as well as some high-value non-medical interventions. 

MA plans receive capitated payment for the covered enrollees. The payer receiving the capitated payment, whether it is a provider-owned health plan or a private insurance company, has a strong incentive to ensure MA beneficiaries receive high-quality health services at the lowest cost possible. These incentives are direct to the health system if it owns the health plan. If another entity owns the plan, the health system must negotiate an agreement to share in any cost savings resulting from the population health program. The agreement can be anything from a true partnership to a percentage-of-premium arrangement for the health system to deliver designated services.

Traditional Medicare. Health systems can enroll in CMS’s MSSP or NextGen program to assume partial risk for Medicare enrollees attributed to their health system (although this option may not be renewed by the current administration). They also have the option of participating in CMS’s Global and Professional Medicare Direct Contracting program. Such programs offer health systems increased financial flexibility, with incentives similar to those offered by MA plans to increase Medicare beneficiary involvement and attract risk-sharing providers to compete in the Medicare FFS market.

Medicaid managed care. Taking partial or full risk for a Medicaid population though an effective population health program offers health systems two primary benefits:

  • By reducing unnecessary or avoidable health services, it can improve the bottom line for health systems that have a negative contribution margin for services delivered to Medicaid patients.
  • By creating capacity, it can open up space for commercial patients who typically have the highest contribution margins.

Medicaid managed care plans also can offer specific high-value non-medical services, such as transportation and homemaker services, which can promote health and help avoid unnecessary use of hospital services.

Direct contracts with employers. If the health system can demonstrate improved health status and lower costs for its own employee health plan, it can target employers with many covered lives for direct contracts to deliver health services for employees and their dependents who choose that option. Health systems can access this option using a third-party administrator or an agreement involving an insurance company with a provision to share savings based upon a pre-determined benchmark/target. Health systems and employers have considerable flexibility for designing incentives to promote health and reduce costs, including many of the same incentives offered by MA and Medicaid managed care plans.

Commercial payers. This can be the most challenging segment for aligning payer-provider incentives, and the opportunity to generate savings through population health management is relatively small compared with Medicare. Given that commercial populations generally have the highest contribution margin, the focus for these populations is generally not to take risk, but to focus on marketing to grow the commercial market share. Incentives for health systems generally involve meeting quality and utilization targets. Some payers offer health systems grants to support infrastructure needed to support population health programs.

Essential infrastructure for population health

In addition to aligning incentives, health systems committed to a population health strategy must have in place or build the infrastructure for an effective program, including the capacity of virtual as well as in-office visits. Health systems that have already invested in digital innovations will probably adapt to these changes most easily because such investments will position them best for delivering appropriate, high-quality care at lower cost. Included in, or advocating for, that infrastructure are the following elements.

Organizational structure and commitment. The commitment to population health should be shared by all the organization’s major constituencies, including the board of directors, senior management, medical staff, nursing and other clinical staff. An executive leader (often the CFO or senior vice president for population health) should be appointed to spearhead the move to population health, and members of the leadership team should clearly understand their role in the population health effort.

Robust home care program. The COVID-19 pandemic prompted a significant immediate shift of healthcare service delivery in patients’ homes through telehealth services and home care services. Having a robust home care program, either directly or in partnership with an existing home care agency or agencies is an essential component of an effective population health program.

Hospital-at-home program. Adoption of hospital-at-home programs has accelerated after years of slow growth. It is clear that a significant percentage of traditional inpatient care can be delivered at home with comparable outcomes to inpatient stays.

Documentation and coding. Accurate documentation and coding are critical elements for maintaining a financially viable population health program. The patient risk-adjusted payment that is an essential element of the Medicare, Medicare Advantage (MA) and other payment programs is driven by the documentation and coding for each enrollee.

Patient attribution. Health systems should ensure they have an effective program in place to link patients to their primary care physicians.

Robust data base and analytics. A good population health program  requires the availability of comprehensive data for each enrollee and the population as a whole. Upcoming interoperability regulations will eventually make it easier to amass and integrate data from the electronic health record, claims, pharmacy, ancillary services, post-acute care and other venues. Having data analytics as a core competency will be necessary for population health leaders and the individual care teams to make informed decisions that best reflect the fundamental objectives of value-focused care. In keeping with these data requirements, any population health agreements with payers should include provisions that provide claims data for the covered populations.

Program for at-risk populations. Using data analytics and artificial intelligence, organizations can identify enrollees who are at-risk or likely to become at-risk of major health problems, based on the well-documented premise that 20% of enrollees account for 80% of total healthcare expenditures. Organizations also will require well-developed protocols for these at-risk populations.

A growing imperative

The possibility of improving the health of populations while decreasing healthcare expenditures is not in question. It only requires shifting the focus from caring for people when they become sick or injured to keeping people healthy and providing needed healthcare services in the lowest cost appropriate setting.

Yet making that shift is not possible without aligned incentives among provider, patients/enrollees and payers. Provider organizations have been slow to take these steps, despite the clear benefits. The COVID-19 epidemic has been a wake-up call for providers suggesting it’s time to accelerate the transition.

A broader transition to population health starts with aligned incentives

Despite the proven ability of a population health approach to improve care and reduce healthcare costs, a significant obstacle continues to impede health systems’ progress toward fully implementing such an approach: A lack of aligned incentives across the healthcare continuum. For many health systems, fee-for-service commercial and Medicare payment still account for a majority of their revenue, and almost all their profit.

Much of the savings that result from effectively implementing population health strategies come from reduced hospital inpatient admissions, lengths of stay (LOS) and emergency department (ED) visits. If a health system lacks offsetting revenue from a shared savings type program, it may find implementation of population health strategies to be financially detrimental to its financial health and viability.

Past moves toward value-based payment, therefore, have recognized the importance of financial incentives for promoting improved care and reduced costs. CMS’s MSSP is a good example. But private insurers also recognize they need to offer health systems significant financial incentives to implement population health strategies. Whether these incentives are sufficient to compensate providers for the costs and risks associated with their population health strategies has remained an open question.

For commercially covered populations, financial incentives offered by insurers related to population health are generally limited to minimal quality incentives. To date, many healthcare reforms have died because the underlying healthcare economics haven’t provided a viable option to fee-for-service cross-subsidization, which keeps the current system afloat.

If a health system operates its own health insurance plan with a robust enrollment, or if it is operating at full inpatient capacity and can backfill capacity that is created, then it may not need other incentives to fully implement a population health initiative. But that is not the case for most health systems.



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