Last month in the OPEN MINDS Management Newsletter, a quote from Debbie Cagle, Chief Marketing Officer, Centerstone caught my eye – Ms. Cagle noted, “At the end of the day, everyone is saying FFS is going away. Maybe it is. But today, we are just transitioning to these models of care and we have to step up to all of them” (see The Keys To Negotiating Risk-Based Contracts: Advice From Centerstone’s Debbie Cagle).
Debbie may have stated the obvious – we’re in a time of transition in the reimbursement to provider organizations for health care services. It is a slow uneven transition – that depends on the services an organization provides, its consumer base, and its geographic location (see Value-Based Payment Hits The Tipping Point, Value-Based Reimbursement Models Used For Over Half Of Health Plan Payments, and Is Value-Based Reimbursement Really Here? It’s Hard To Tell). And as we look ahead, when it comes to the goal of the Centers for Medicare and Medicaid Services (CMS) to move to a value-based payment system (see Providers Lag Behind In Transition To Value-Based Payment), only 23% of health system executives expect their organization will be able to meet this target by 2019 (see Medicare Bets Big On Pay-For-Value).
We’re only just starting to see the effects of this change in reimbursement on provider organization finances. Some initial reports capture the challenge. Community Health Systems’ stock fell to its lowest point since 2008 in February 2015; and Tenet Healthcare also reported a drop in profits in February 2015 according to the article Value-based Care is Ripping Into Health System Profits, in HealthLeaders Media. The reason – according to Jeff Hoffman, senior partner at Kurt Salmon’s Health Care Group – is value-based care and the transitional period many provider organizations are going through as they learn to make value-based reimbursements work.
This perspective was reinforced by a recent survey, where 45% of executives at health care provider organizations, payers, and other health care companies anticipate that the move to value-based reimbursement contracts would reduce profits for their organizations (see 45% Of Health Care Executives Anticipate Lower Profits Due To Value-Based Contracts). Among health care provider organization executives, about 52% anticipate that value-based contracts will cause their operating income to drop; 25% believe value-based contracts will result in a modest drop (less than 10%) to their operating income; 21% anticipate a drop of 10% to 50%; and six percent anticipate a drop of more than 50%.
So how to weather this transition from FFS to value-based reimbursement? I like the three-prong model suggested by Bobbi Brown, Vice President of Financial Engagement, and Jared Crapo Vice President of Sales, at Health Catalyst, in The Key to Transitioning From Fee-for-Service To Value-Based Reimbursement:
Proactively maximize shared savings reimbursement – It may sound obvious, but to succeed in value-based reimbursement arrangements, you need to perfect the management of those financing arrangements. Know how you receive “bonuses” and why you will be penalized. Measure those performance metrics, and include them as part of your day-to-day management practices and evaluation processes.
Reduce operating costs by increasing efficiency – The very definition of “value” (see What Do Payers Want? They Want You To Define Your Value! and It’s All About How You Define ‘Quality’) makes this a “must do” management priority. There is the delivery of “unnecessary” services, duplicative administrative activities, and every piece of “rework” due to errors. With slimmer margins, a new focus on “the right service, the right way, at the right time” is essential.
Capture more consumers – While the FFS volume-oriented thinking is slowly being replaced, that doesn’t mean that volume isn’t important. In planning for sustainability, executive teams need to think of many kinds of volume, including volume of value-based contracts with payers, volume of consumers under those new contracting arrangements, volume of consumers remaining in FFS payment arrangements, and service/procedure volumes under all payment arrangements. In most cases, more volume improves margins and sustainability, and organizations need the financial models to identify what volume is important and the marketing expertise to make that happen.
As George Bernard Shaw once said, “Progress is impossible without change….” The health care market is in the middle of a massive transformation – one that’s designed to ultimately improve outcomes and reduce costs. It’s getting there that’s going to be the challenge. For more, join my colleague Sharon Hicks and myself on Tuesday, August 23 in San Diego for the launch of our new executive seminar, Reinventing Your Organization In A Complex Market: A Guide To Building A Sustainable, Performance-Driven Organization.