Clinical Integration: Déjà Vu All Over Again?

by Nathan S. Kaufman, June 1, 2012

Last year, the Centers for Medicare & Medicaid Services (CMS) published proposed regulations for the formation of accountable care organizations (ACOs). Release of the regulations represents the latest of many efforts by the federal government to encourage healthcare providers to become “clinically integrated” and work together to coordinate care, thus reducing the cost and improving the quality of care provided to patients.  

The Federal Trade Commission (FTC) considers physicians who work in different practices to be competitors; thus, under most circumstances, joint negotiation by independent physician practices is considered to be illegal price fixing (Casalino 2006). In a 1996 statement, the US Department of Justice and the FTC provided a new antitrust safety zone to enable independent providers who work in separate practices to jointly negotiate with payers if they are sufficiently “clinically integrated”—that is, if they have formed a network in which there is an organized process to control costs and improve the quality of care resulting from a significant investment of monetary and human capital (Casalino 2006).

According to Gosfield and Reinertsen (2010), the FTC has been “fairly unwilling to define the boundaries of clinical integration, because they wish neither to stifle innovation, nor to encourage anticompetitive behavior.” In her remarks to the American Hospital Association in April 2009, FTC Commissioner Pamela Jones Harbour (2009) stated:

The essence of clinical integration is the interdependency among health care providers. Put simply, each provider must have a vested interest in the performance of the other providers such that their financial and other incentives are closely aligned to meet common objectives.

Since the publication of the guidelines in 1996, several provider networks have been deemed to be clinically integrated by the FTC. These networks have several key common factors:

• Clinical practice guidelines or protocols to measure performance
• Information technology to monitor care
• The ability to evaluate provider performance and to act on the findings
• The willingness to share data with payers

Medicare’s Physician Group Practice (PGP) demonstration (Iglehart 2011) and mature clinically integrated networks such as Advocate Physician Partners (Shields et al. 2011) have demonstrated that clinically integrated networks have been able to improve performance for select quality indicators. Even so, there is little empirical evidence that these networks have affected the overall cost of care. Even Advocate Physician Partners, one of the most mature clinically integrated networks, notes that a number of its inferred medical cost savings “are based on the achievement of key clinical outcomes that have been demonstrated in the literature to reduce costs” (Shields et al. 2011). One must question whether networks that were developed in part  to use their market clout to negotiate premium rates with payers are able to achieve significant measurable cost savings.

Compliance with FTC legal guidelines provides no assurance that a clinically integrated network possesses the competencies to improve quality, reduce cost, or remain a viable business model over the long term. As was the case in the mid-1990s, many “first-generation” clinically integrated provider networks can be expected to delude themselves into voluntarily taking economic risk for the care they provide. Because few possess the necessary competencies and culture, many will experience financial distress or worse.

The Law of Reciprocal Economics states that one person’s cost is another person’s revenue. In order to reduce the cost of healthcare, someone has to get paid less. With hospitals and physicians accounting for over 80 percent of health insurance benefits spending (PwC Health Research Institute 2011), one must assume that in order to reduce the overall cost of care, revenues for hospitals and high-end specialists, in aggregate, will have to decline.  

Implications for Hospital Leaders

To truly impact costs, provider networks must be committed to reducing utilization of high-end services and must possess the “second-generation” clinical integration competencies that are essential to create a financially successful, sustainable provider network. These competencies include:

A common electronic health record (EHR) with point-of care protocols. In order to monitor cost and quality and coordinate care, it is essential for providers to share a common electronic record. Embedding evidence-based care plans in the EHR can encourage their use by an entire provider network. Geisinger Health System has demonstrated that compliance with care plans can be enhanced by “hardwiring” the protocols into the EHR (Paulus, Davis, and Steele 2008).

As an interim step, networks have created data warehouses to which providers submit their encounter data for analysis and reporting. Transparent reporting of accurate data in near–real time is essential if a clinically integrated network is going to reduce cost and improve quality.

Sufficient primary care capacity. The primary care office serves as the “medical home” for the patient, ensuring that the patient receives appropriate preventive care and monitoring. Given the anticipated shortage of primary care physicians, a model of care involving physician extenders—for example, physician assistants and nurse practitioners—will be essential.

Engaged physician champions. By definition, a clinically integrated network requires independent physicians to work as a team to coordinate care. The evidence from first-generation clinically integrated networks is that physicians will volunteer to surrender their autonomy only to a physician-led enterprise.

Evidence-based inpatient and outpatient care plans. The high variability in the cost and quality of care for specific diagnoses is well documented in the Dartmouth Atlas (Brownlee et al. 2011). Looking at length of stay, compliance with core measures, and readmission rates, my personal experience indicates that this high degree of variability exists within local health systems as well. To have a predictable impact on the cost and quality of care for a population of patients, it is essential that all providers use a common set of evidence-based care plans.

Proactive programmatic approaches to chronic disease. There is some empirical evidence that patients with diabetes and congestive heart failure who participate in disease management programs have better outcomes at lower costs than patients who do not participate in these formal programs (Stock et al. 2010; Russell and Chambers 1999). Home visits, telephone coaching, and web-based monitoring are components of disease management programs that can improve health status and prevent expensive hospital admissions.

Dedicated, sophisticated, mature infrastructure. In addition to the aforementioned information technology solutions, infrastructure will be needed to develop care plans, enroll and train physicians and their office staffs, design disease management programs, and report results. Most health plans possess this infrastructure. Facing a make-or-buy decision, many clinically integrated networks are exploring the prudent approach of joint venturing with one or more payers.

Performance-based rewards and consequences. A fundamental requirement for being clinically integrated is a process for evaluating individual provider performance and acting on the findings. Positive incentives usually involve financial rewards for compliance with key metrics. It is also necessary to sanction providers for poor performance and ultimately eliminate noncompliant providers from the network.

Pilot-testing network performance with health system employees and their beneficiaries. Most health systems are self-insured, giving them significant latitude in structuring benefits and provider incentives. Reducing the use of high-end  services  by employees and their beneficiaries has an immediate positive impact on the health system’s financial performance. Only after a clinically integrated network successfully manages the care of the system’s employees should it consider taking risk for other patient populations.

Proceed with Caution

Compliance with the legal requirements for clinical integration does not guarantee that all participating providers will be better off in the long term. Many providers are forming clinically integrated networks so they can negotiate better rates. But rate pressure on health insurance premiums and the formation of narrow, low-cost networks will limit the ability of clinically integrated networks to negotiate premium rates in the future. 

To succeed over the long term, clinically integrated networks must possess the second-generation clinical integration competencies listed above. They must be flexible enough to adjust to a rapidly changing healthcare landscape, and they must truly be committed to improving measurable quality and lowering the cost of care regardless of the short-term impact on provider revenues.

Getting Started

Clinical integration requires a significant investment in both human capital and dollars. It requires:

• Strong physician leadership committed to reducing cost and improving quality
• Sophisticated, proven infrastructure, including personnel and IT similar to that existing in most health plans
•  A strong, geographically distributed base of primary care physicians
• Access to a comprehensive set of acute and postacute services.

Healthcare provider s learned in the early 1990s that if a health system does not possess the attributes and competencies necessary to succeed in a new delivery model (which at that time was capitation), it is better off seeking a partner that does, or saving its money and doing nothing.

References

Brownlee, S., J.E. Wennberg, M.J. Barry, E.S. Fisher, D.C. Goodman, and J.P.W. Bynum. 2011. “Improving Patient Decision-Making in Health Care: A 2011 Dartmouth Atlas Report Highlighting Minnesota.” [Online information; retrieved 8/24/11.] www.dartmouthatlas.org/downloads/reports/Decision_making_report_022411.pdf

Casalino, L.P. 2006. “The Federal Trade Commission, Clinical Integration, and the Organization of Physician Practice.” J. Health Politics, Policy and Law 31 (3): 569–85.

Gosfield, A.G., and J.L. Reinertsen. 2010. “Achieving Clinical Integration with Highly Engaged Physicians.” [Online information; retrieved 8/23/11.] www.reinertsengroup.com/publications/documents/True%20Clinical%20Integration%20Gosfield%20Reinertsen%202010.pdf

Harbour, P.J. 2009. “Clinical Integration: The Changing Policy Climate and What It Means for Care Coordination.” [Online information; retrieved 8/23/11.] www.ftc.gov/speeches/harbour/090427ahaclinicalintegration.pdf

Iglehart, J.K. 2011. “Assessing an ACO Prototype—Medicare’s Physician Group Practice Demonstration.” New Engl. J. Med. 364 (3): 198–200.

Paulus, R.A., K. Davis, and G. D. Steele. 2008. “Continuous Innovation in Health Care: Implications of the Geisinger Experience.” Health Affairs 27 (5): 1235–45.

PwC Health Research Institute. 2011. “Behind the Numbers: Medical Cost Trends for 2012.” [Online information; retrieved 8/24/11.] pwchealth.com/cgi-local/hregister.cgi?link=reg/behind-the-numbers-medical-cost-trends-2012.pdf

Russell, B., and D. Chambers. 1999. “Congestive Heart Failure Disease Management Program.” [Online article; retrieved 8/23/11.] www.dcmsonline.org/jax-medicine/1999journals/sept99/chf.pdf

Shields, M.C., P.H. Patel, M. Manning, and L. Sacks. 2011. “A Model for Integrating Independent Physicians into Accountable Care Organizations.” Health Affairs 30 (1): 161–72.

Stock, S., A. Drabik, G. Buscher, C. Graf, W. Ullrich, A. Gerber, K.W. Lauterbach, and M. Lungen. 2010. “German Diabetes Management Programs Improve Quality of Care and Curb Costs.” Health Affairs 29 (12): 2197–2205.

A Practical Roadmap for the Perilous Journey from a Culture of Entitlement to a Culture of Accountability

By Nate Kaufman, May 4, 2012

In a culture of entitlement there is the belief that one deserves certain rewards, rights and privileges based on tradition or past achievements. In contrast, in a culture of accountability rewards, rights and privileges are only earned based on the merits of one’s current behaviors and actions. The transition from a culture of entitlement to a culture of accountability is a perilous journey for rights and privileges are no longer automatic, the ‘entitled party’ usually feels disappointed, angry, or mistreated.

A culture of entitlement is deeply embedded in the US healthcare system: patients believe they are entitled to state of the art care regardless of their unhealthy lifestyle; physicians believe they are entitled to a high degree of clinical autonomy and historical levels of compensation; hospitals believe they are entitled to be reimbursed at the highest rates in the world regardless of their inefficiencies or the results they produce; and suppliers e.g., insurance and pharmaceutical companies believe they are entitled to high margins regardless of the value they provide to the system.

This culture of entitlement has driven per capita healthcare spending in the US to twice what our “peer countries spend on healthcare (commonwealth fund.) It has driven healthcare costs to a point where neither the public nor private sectors can continue to absorb the historical rate of cost growth. And it has called the question as to whether the U.S. healthcare system is creating sufficient value, i.e., outputs per unit cost.

In recent years, data on the value created by the US healthcare system has become more available and the early numbers are not good. According to McKinsey, “In 2006, the United States spent $2.1 Trillion on healthcare, more than twice what the nation spent on food and more than China’s citizens consumed for all goods and services. In addition, adjusting for economics, health status etc, the US spent $650 Billion more on health care than expected base on comparison to peer countries.  Hospital and physician care accounted for almost 85% of the spending above expected levels, with drugs, health administration and insurance comprising the remained components of excess spending.

The primary driver of this excessive cost appears to be the salaries and revenues of providers and suppliers. For example, McKinsey estimates that for inpatient care, “Revenue per equivalent admission” accounts for $54 Billion in excess costs compared to peer countries. This is driven in part by the cost of nurses who are paid 36% more than their peers in other countries. Drug prices are 50% higher in the US than in other developed countries. Based on a multiple of per capita GDP, primary care physicians in the US are paid 46% more than physicians in peer countries and US specialists are paid 67% more than their peers. It is no wonder that the global fee for a normal delivery in the US is twice that of most peer countries (international federation of health plans 2010)

Given the relatively high investment in “input costs” one would expect a commensurate benefit in outcomes; however this does not appear to be the case. According to the Commonwealth Fund Study:

The U.S. health system is the most expensive in the world, but comparative analyses consistently show the United States underperforms relative to other countries on most dimensions of performance.

Data on life expectancy vs. cost by country is further evidence that the outcomes produced by the US healthcare system are not commensurate with the investment.

Finally, the high variability in care raises questions as to whether everyone is getting appropriate care:

1. The rate of mastectomy vs. lumpectomy in North Carolina varied from .4 per 1000 Medicare Beneficiaries in the Wilson HSA to 2.7 in the Goldsboro HSA (Dartmouth)
2. The rate of Coronary Artery Bypass Surgery ranged from 8.9 per 1000 in McAllen to 1.9 per 1000 in Pueblo CO. (Dartmouth)
3. Non-radiologist self referrers of medical imaging are 2.48 times more likely to order imaging than clinicians with no financial interest in imaging equipment
4. 53 percent of the heart attack patients underwent a procedure to restore blood flow to the heart through a blocked artery that caused a heart attack more than 24 hours earlier despite clinical practice guidelines recommending against it.

The often quoted disparity in the per capita cost of care of Medicare patients in McAllen vs. El Paso has raised many eyebrows. Recent research from Franzini et. Al. shows that while per capita Medicare spending was 86% higher in McAllen than in El Paso, the per capita  spending for Blue Cross patients in McAllen was actually 7% less than in McAllen. The authors concluded that their study is “consistent with Gawande’s finding that our healthcare system can create a “culture of money, – increasing the use of profitable Medicare services when there is [unconstrained] diagnostic and procedural discretion and clinical latitude.” 

In a recent study of ‘value’ of healthcare services in Massachusetts conducted by the Attorney General, it was found that the difference in prices paid by insurers to its lowest paid physician group vs. highest paid exceeded 145% and the difference in hospital payments exceeded 170%.  The Attorney concluded that this wide variation in the payments made by health insurers to providers is not adequately explained by differences in quality, complexity of services or their characteristics that might justify variation in prices. “Instead prices reflect the relative market leverage of health insurers and health care providers.”

In his recent speech to the American College of Surgeons, Senator Mark Kirk (R-Ill) summarized the government’s position on the current healthcare system when he stated that “every group that relies on federal funding should expect a 10% to 20% drop in that funding.”  When Dr. L.D. Britt, President of the ACS, warned that such cuts could send some healthcare providers into a "tailspin," Kirk replied that “the tailspin is the U.S. economy. There is a new audience at play," Kirk said, referring to U.S. creditors. "The judgments they render, they are swift and severe.”

Shifts in culture are painful but if not recognized, and managed they can be terminal for an organization. Through the implementation of value based purchasing, reduced reimbursement, data transparency health systems are being steered on a perilous journey from entitlement to accountability. The healthcare literature is overflowing with tactics and strategies that sound great on paper and/or may be working in Cleveland or Chicago or Rochester MN after decades of trial and error, however there is little evidence that these proposed solutions will work in most healthcare communities in a reasonably short time frame. Michael Porter provides excellent advice on how to increase the value of the healthcare. He notes that:

“Improving performance and accountability depends on having shared goals that unite stakeholders

In healthcare, the absence of clarity about goals has led to divergent approaches, gaming the system and slow progress in performance improvement

Rigorous, disciplined measurement is the best way to drive progress”

The following are practical steps that a health system can implement to begin the long journey of transformation.

1) Conduct regular briefings for the board members, physicians, employees and the community on the structural changes in healthcare occurring at the local, state and federal level

2) Designate a group of physician leader to be the clinical transformation task force. Use this group as a sounding board and to lead implementation efforts

3) Develop accountability measures for every specialty and hospital department. Initially this data should be blinded but designate a time in the future when all results will be transparent. Note: the health plans and the government have already begun publishing an ever increasing amount of un-blinded outcome data by hospital and physician.

4) The Chief Medical Officer or his/her should actively manage the performance of hospital-based physicians.

5) Select a few high volume Medicare DRGs and initiate a process for designing care to improve cost and quality and reduce readmissions. Pick a redesign methodology health systems are using LEAN. Consider a bundled payment demonstration if the health system and physicians share a common vision for decreasing cost and improving quality (and probably getting paid less per unit of service than under fee for service)

6) ACO-Caveat Emptor --buyer beware. Webster defines ‘risk’ as “hazard, danger, peril; exposure to loss, injury or destruction.” While it is true that there is a theoretical opportunity to make more money by doing less, we learned in the mid-nineties that organizations that take the financial risk for the health of the population can end up much worse off than if they did nothing. After decades of successfully taking risk in California it is clear that the critical competencies needed to successfully take risk include:

a.  Physicians that share a common electronic health record system,
b. A culture focused on reducing utilization of hospitals and high end interventions,
c. A strong base of primary care physicians,
d. Selective use of specialists based on the efficiency of the care they provide, and
e. Robust, mature infrastructure.

Since most of the health systems do not possess these competencies they should limit their exposure to risk and test these competencies on the employee population of the health system. If a health system wants to be in the Medicare risk business consider joint venturing a Medicare Advantage Plan with a local payer.

7)      Finally, every journey requires a roadmap and every health system needs to define its strategic direction, a.k.a. “true north.” To maximize performance under the traditional model most health systems strategic behavior can be  characterized as:

Operating a financially strong health system by maximizing revenues through pricing and volume growth, the provision of a broad range of services and meeting the individual clinical and financial needs of each physician

                The new “true north” is clear:

To operate a financially strong, high functioning health system that consistently achieves optimal measureable value, i.e., outcomes/cost, for every patient.

                Define your ‘true north,’ and begin the journey by taking practical, incremental steps described above. Enjoy the ride! 

Three ‘Brutal Facts’ That Provide Strategic Direction for Healthcare Delivery Systems- Preparing for the End of the Healthcare Bubble

By Nate Kaufman, April 10, 2012

In August 2005, David Lereah, chief economist of the National Association of Realtors stated “All of the doom-and-gloom forecasts of a housing debacle are not only irresponsible, but downright  wrong” Lereah was not alone,  economists from Goldman Sachs, National Association of Home Builders and the Mortgage Bankers Association all stated similar opinions. Wall Street firms such as Lehman Brothers and Bear Sterns bet their companies on the strength of the housing market. Eventually the lack of financial sustainability inherent in sub-prime mortgages burst the housing bubble and the industry collapsed. (shilling)

 The lack of acceptance of the housing bubble by industry leaders is a clear example of “cognitive dissonance”.  The theory behind cognitive dissonance is “the more we are committed to believe something is true, the less likely we are to believe its opposite is true, even in the face of clear evidence that shows that we are wrong.”  (Marshall Goldsmith)  Refusal to recognize new market realities is a fundamental strategic flaw that has lead to the demise of many organizations. As Admiral Stockdale noted in his discussion with Jim Collins:  “You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be” (see Collins web site)

The recent passage of the Patient Protection and Affordable Care Act (PPACA) has created uncertainty about the future of the nation’s healthcare delivery system.  Regardless of how PPACA is implemented, or funded or modified, there are certain ‘brutal facts’ regarding the future of healthcare delivery in the United States.  In order to prepare for the ultimate impact of these ‘brutal facts,’ healthcare organizations must begin today to modify both their core beliefs and clinical practices.  By focusing strategy on these new market realities (regardless how brutal they may be), a healthcare organization can begin to position itself for success in the future.

Our Healthcare Bubble Will Eventually Burst

In their open letter to the American people published in November 2010, several months after PPACA became law, the bi-partisan Debt Reduction Task Force:

“The federal budget is on a dangerous, unsustainable path. Federal debt will rise to unmanageable levels, which will push interest rates up, endanger our prosperity, and make us increasingly vulnerable to the dictates of our creditors, including nations whose interests may differ from ours…. we must take immediate steps to reduce the unsustainable debt that will be driven [in part] by the aging of the population and the rapid growth of healthcare costs...”

Even the Congressional Budget Office (CBO) appears to be skeptical about PPACA’s ability to reduce the deficit as was reflected their original ‘base line’ projections. As a result, the CBO produced an “alternative fiscal scenario” using the more realistic assumptions that: 1) tax revenues would remain at historical levels (i.e., 19% of GDP) and 2) cost control features of the new law would only have a moderate impact. (Frakt)  This more realistic scenario further supports the Debt Reduction Task Force’s assertion that healthcare costs will contribute to the destabilization of the economy.

 Richard Foster, the Chief Actuary for CMS supported this concern when he testified before congress that the new law will increase the nation's overall spending on healthcare by $289 billion through 2019. (Modern Healthcare)

The State Budgets are in no position to absorb the cost of PPACA.  According the Wall Street Journal,

“PPACA puts cash-strapped states in a tenuous position, forcing them into one or more unattractive policy choices: cut spending in crucial areas, such as public safety and education, to compensate for the additional health care costs, raise taxes to fund the new spending, or borrow money to pay the bill and sink further into debt. (WSJ)

Thus it is a brutal reality that we are in an economic healthcare bubble that will eventually burst.  Out of necessity, both State and Federally-funded healthcare programs will intensify their pressure on providers to reduce the per capita cost of care. In the immediate term this pressure will take the form of draconian reductions in fee schedules (as we are currently seeing from some states Medicaid programs.) Over the longer term, government-funded healthcare will move from the fee for service reimbursement methodology to either bundled/episodic or population based payments. Given the historical pace with which government implements changes in payment methodologies, one  can expect these new payment systems to be phasing in between 2016-2018.

Both the Shared Savings ACO Program and ‘First Generation’ Clinically Integrated Networks Will Not Produce Desired Results - Buyer Beware 

An Accountable Care Organization (ACO) is a group of providers (physicians, hospitals etc.) that share accountability for the cost and quality of care they provide. PPACA established a “ Shared Savings Program” for Medicare fee for service patients in which ACO providers would share in cost savings should the ACO meet certain quality and cost benchmarks.

The ACO concept has been pilot tested under the “Physician Group Practice Demonstration Project.” (PGP.)  Ten of the nation’s most integrated medical groups participated in the PGP demonstration. The demonstration provided groups the “opportunity to earn performance payments derived from savings for improving quality and efficiency of delivering health care services through better coordination of care and investment in care.” (CMS fact sheet)

After four years, these ‘all star’ group practices achieved a 40% success rate. That is, during the first year only two groups received a shared savings payment. By the fourth year five groups received a payout. Ultimately, over the four years, only sixteen shared savings payments were distributed out of a possible 40. (i.e., 10 groups times 4 years.) Among the brutal facts from the PGP demonstration project are:

1. It is difficult for even the most integrated medical groups to generate significant savings on Medicare fee for service patients
2. When a group received shared savings payments, the magnitude of these payments were not sufficient to cover the infrastructure cost associated with operating an ACO.

The Center of Studying Health System Change recently noted:

"the economic and market rewards [for ACOs] may not materialize for a long time, if ever,"… "None of the organizations [in the PGP] indicated positive return on investments related to improvement activities,"  (Modern Healthcare)

There is little hard data documenting the primary source(s) of the cost savings that generated the shared savings payments. Both the PGP participants and CMS reported anecdotally that the savings came from reductions in both admissions and high cost procedures e.g., imaging. It is a brutal fact that ROI for the ‘successful’ PGP participants was negative even before accounting for the loss of admissions and procedural revenue.  From a financial perspective, the PGP participants would have been much better off not participating in this ACO-like demonstration.  From the PGP experience it appears that the only parties that will receive financial benefit from the establishment of a Medicare-ACO are the lawyers and consultants retained for this purpose- buy beware!

Many physicians and hospitals have formed ‘clinically integrated’ networks which they believe will evolve into ACOs. While these networks have noble goals and some have positive results, few have demonstrated the competency to significantly lower the cost of care. Even Advocate Physician Partners, a joint venture clinically integrated network in operation for over 15 years could not document “medical cost savings” in real green dollars but stated that improvements in the cost of care are “inferred.” (see health affairs)

One could argue that even though it is unlikely that ACOs and first generation clinically integrated networks will fail to achieve cost saving benchmarks, these ACOs will eventually evolve into an effective delivery model. However, as the noted futurist Jeff Goldsmith points out, the track record for past efforts for physician-hospital collaboration has been ‘dismal’ and there is no reason to assume that this time it will be different. (goldsmith)

Based on the brutal fact that ACOs and ‘first generation’ clinically integrated networks’ will not generate sufficient cost savings to be relevant, it is recommended that healthcare organizations skip the first generation models and move towards the creation of ‘second generation clinically integrated networks’ capable of managing risk and targeting the 20% of the population that consume 80% of the cost. The most current research on reducing the per capita cost of treating Medicare patients conclude:

“Health reform policies currently envisioned to improve care and lower costs may have small effects on high-cost patients who consume most resources. Instead, developing interventions tailored to improve care and lowering cost for specific types of complex and costly patients may hold greater potential for “bending the cost curve.” (Reschovsky)

 Also, rather than pilot test an ACO model on Medicare and/or commercial fee for service patients where reductions in admissions will impact the revenue of the health system, it is recommended that these networks ‘cut their teeth’ on the self-funded pool of hospital employees and dependents, where a reduction in admissions/cost results in savings for the organization.

Critical elements for a successful ‘second generation’ clinically integrated network include: primary care-based medical homes, digitally connected electronic medical records with point of care protocols, disease management programs and a culture committed to improving the cost and quality of care for a population of patients vs. maintaining individual provider income and autonomy. (Kaufman)

Physician Autonomy and the Organized Medical Staff Will Become Less Relevant

On January 13, 2011 CMS published the proposed rule for the Value-Based Purchasing Program for Medicare inpatient services (VBP.) Starting October, 1 2012, hospitals can earn incentive payments based on the care they deliver to Medicare inpatients. These incentive payments will be funded by a one percent reduction in the base DRG payment. Thus hospitals that underperform will see a relative reduction in their Medicare payment rate. The VBP incentive will be based on adherence to clinical processes, (e.g., Aspirin prescribed at discharge for AMI patients) and patient experience ( e.g. communication with doctors, responsiveness of staff etc.) CMS will eventually include mortality-related measures in VBP as well. In addition, as part of the National Patient Safety Initiative, by 2015 9% of a hospital’s Medicare reimbursement will be “tied to public reporting of errors and provision of safer more reliable care with particular focus on hospital acquired infections and readmissions.” (cms proposed regs)

Traditionally the  medical staff had the responsibility for monitoring and maintaining high quality care within a hospital. While hospitals have always borne the financial risk for the cost of care ordered by its physicians, VBP now puts a hospital’s revenue at risk for their physicians’ clinical practices and communication skills. The evidence is clear from Geisinger, Thedacare, Virginia Mason and others that the standardizing care through thoughtful process redesign can improve efficiency, quality, safety and patient satisfaction. Most medical staffs have been unwilling to tackle an issue associated with the variability of cost and quality of care unless it exceeds broad limits.

It is a brutal fact that hospitals can no longer afford to delegate the responsibility and accountability of the cost and quality of care to the independent medical staff composed of physicians practicing and promoting the traditional autonomous, highly variable model of care. Hospitals will have to develop a work with the members of their medical staffs to:

1) modify bylaws to require conformance to patient safety, patient satisfaction, process and quality metrics as a condition of keeping hospital priveleges, and

2) develop the clinical infrastructure with a new breed of physician leaders in which medical directors will have the authority and accountability for cost, quality and patient satisfaction in their serviceline.

Not If But When

The nation’s rate of spending on healthcare is unsustainable. As with the housing bubble, the fundamental economics cannot support the status quo and yet many healthcare thought leaders and politicians dismiss claims of a healthcare bubble as “doom-and –gloom.” Others choose to ignore the brutal fact that AAPACA may exacerbate the cost crisis rather than moderate it.

Those that recognize the existence of a bubble and prepare for its brutal realities can actually benefit when the bubble bursts. This was clearly the case with the housing bubble where Michael Burry and his investors earned hundreds of millions of dollars betting against mortgage-backed securities (Wikapedia.) Healthcare organizations that believe in the brutal realities of the healthcare bubble can also position themselves for success when the bubble bursts. These organizations will dismiss the incremental approaches such as Medicare Shared Service ACOs, first generation clinical integration, physician co-management and focus on meaningful transformation into a provider system that is comprised of data driven, digitally connected, physician-lead TEAMS consistently delivering  evidence-based, patient-centered health care, able to treat higher volumes of patients, at lower predictable costs per episode, demonstrating measurable high quality and providing an exceptional patient experience.. As Don Berwick stated Healthcare is hungry for something truly new, less a fad than a new way to be. (VA Mason) 

Changing Economics in an Era of Healthcare Reform

By Nate Kaufman, April 2, 2012

Health systems are beginning to prepare for healthcare reform.  Significant resources are being focused on developing Accountable Care Organizations, medical homes, and preparing for bundled payments and population-based reimbursement.  However, current economic trends combined with an analysis of the impact of key healthcare reform initiatives, will require health systems to take significant cost out of their system in order to maintain positive financial performance. Few organizations have the culture or the expertise to implement a cost reduction effort of this magnitude.

These are the Good 'Ol' Days (For Cost Shifting)

Since the late 80’s the hospital industry has subsidized losses from Medicare and Medicaid by demanding premium rates from commercial payers. In 2008, the hospital industry’s aggregate payment to cost ratio from Medicare was 90.9% ;  88.7% from Medicaid and 128.3% from commercial payers.[1] The impact of cost shifting will be diminished as a result of the new healthcare reform law, the aging of the population, continued compression of government/ private reimbursement and increased patient responsibility.  This will require most health systems to reduce their current operating cost structure by 10-15%. The following is a discussion of the key factors driving the need for more focus on efficiency.

Change in Payer Mix

Over the next five years there will be a significant shift in the number of people covered by highly profitable private health plans to deficit-generating government-sponsored plans.  Expanded coverage for the uninsured will not be sufficient to mitigate the negative impact of this shift.  CMS estimates that by 2016, as a result of the new healthcare reform act (PPACA) and the aging of the population, the number of beneficiaries covered by the relatively high margin private insurance will decline by approximately 9 million.  These profitable patients will be lost to government-sponsored plans with non-negotiable provider rates (i.e., Medicare, Medicaid and exchanges.) The financial benefit of providing coverage for the 25.3 million uninsured, most of whom will receive government-funded insurance, will not be sufficient to offset the deleterious effects of the shift away from commercial health plans[2]

Declining Medicare and Medicaid Margins

Future payment increases from Medicare and Medicaid will not keep pace with the historical trend in hospital cost inflation. This will further suppress the margin contribution from government-funded reimbursement making the cost shifting hurdle for private insurance even higher than in the past.  In their 2010 Report to Congress, Medpac acknowledged that since 1996, hospitals margins from Medicare have declined by approximately 1 percent per year.[3]  Their data shows that the average hospital lost 7.2 cents on every dollar of care provided to Medicare patients in 2008. (Note: the Medpac methodology is different from AHA.)  Even before the $155 Billion hospital payment reduction in PPACA, Medpac expressed its intention to force hospitals to operate more efficiently by continuing to provide updates to hospitals at rates that are significantly below cost inflation. Medpac believes that it is possible to provide quality care and breakeven on Medicare:

Medicare margins are low and expected to remain negative… however...a set of hospitals has been able to maintain relatively low costs, while maintaining relatively high quality of care. Roughly half of these providers are [currently] generating a profit on their Medicare business.[4]     

With respect to Medicaid, the Kaiser Family Foundation reports that for FY 2010, a total of 33 states restricted hospital payment rates including 14 states that froze rates and 19 states that reduced rates. For FY 2011, 17 states plan hospital rate freezes and 13 states plan hospital cuts for a total of 37 planned rate restrictions.[5]

Increased Patient Responsibility Will the Limit the Ability to Cost Shift

As patients are forced to pay a greater percentage of their healthcare costs, higher provider charges will result in increased bad debt and lower utilization rather than increased income.  The fastest growing component of bad debt in hospitals is unpaid co-payments and deductibles from patients with insurance.[6]  One health system studied by McKinsey reported that their unpaid balance for patients with insurance was growing by 30% per year, much faster than bad debt from patients without insurance.

 Enrollment in high deductible employer-sponsored health plans climbed from 9% in 2009 to 11% in 2010. Low-income families with high deductibles are more likely to “delay or indefinitely postpone medical procedures.”[7] The increase in patient financial responsibility combined with the poor economy have contributed to the year over year decline in physician visits[8]  and  an unprecedented decline in admissions to not-for-profit hospitals.[9]

Increased Regulatory Oversight on Private Health Plans Will Create Downward Pressure on Provider Rates

The healthcare reform environment has not been kind to the private insurance companies. A number of states have laws or are preparing legislation to enable their insurance commissioners to block or reduce proposed premium increases.  In addition, PPACA gives the HHS Secretary the authority to regulate excessive rate increases.  Last year in Massachusetts, when proposed rates of increase in private insurance premiums were rejected by the Department of Insurance, the insurance companies proposed freezing or reducing payments to hospitals and large physician groups.[10]

The Cost of Physician Integration

The mad dash towards the development of ACOs will only exacerbate the cost issues in most health systems. The infrastructure costs associated with forming and operating a high-functioning ACO are significant and return on this investment is uncertain at best. The law stipulates that ACO’s will be rewarded for improving quality and reducing cost. The majority of these cost reductions will come from reductions in the volume of specialty consultations, high-end procedures and hospital admission.  There is no evidence that the health system’s “shared savings” payments from its ACO efforts will offset the infrastructure costs, the loss in volume, revenue or the political capital being invested in this effort. 

If You Keep Doing the Same Thing, Don’t Expect Different Results

Many health systems continue to operate as though cost-shifting will remain a viable strategy in the long term. Their primary focus is fiddling with ACOs as their organizations begin to bend under the stress of flat to declining revenues.  A new radically-intense focus on the cost of care is essential if a health system is going to succeed in the future.  Getting in shape for 2016 will require the following:

1. Define the efficiency targets for the organization and stick to them. Leadership is critical for setting the course for the organization.
2. Engage the physicians and hospital staff in discussions about the need to significantly reduce the cost of care in the organization.
3. Hold all members of the organization (including medical directors) accountable for:
   
   
   1. non-negotiable, performance based, cost budgets based on industry best practices and
   2. attracting profitable growth in their service lines
4. Develop a plan to reduce the cost structure of the organization to breakeven on Medicare rates. Note: Private payers will continue to pay at rates above Medicare but the ability to absorb declining Medicare margins through cost shifting will be limited.
5. Rationalize your portfolio of services and facilities, eliminating duplication and divesting of services that generate deficits  the organization can no longer afford to absorb.
6. Workforce reductions will not generate sufficient savings. Employ established redesign methods e.g., LEAN to eliminate waste and unnecessary variability of care.
7. Use objective critical analyses to ensure optimal performance of IT, revenue cycle, supply chain and clinical documentation systems. This usually requires an audit by an independent third party
8. Using physician leaders,  create a culture within the employed physician group that is aligned with the objectives of the health system.
9. Begin a process of true clinical integration with your physicians focusing on the basics of  redesigning the delivery of care, but don’t try to be an ACO by 2012. Most health systems will not be ready by 2012.  The only thing worse than not having an ACO, is operating an ACO that fails to achieve desired results.  Eventually  every health system will be held accountable for their cost and quality, either on a per episode or per capita basis but most current models of clinical integration involving retrospective review will not be sufficient.  Becoming an effective clinically integrated organization will take time, discipline and ultimately a cultural change among members of the medical staff. Critical success criteria for  clinically integrated  delivery systems must include the following:
   
   
   1. Physicians in critical specialties must participate and be willing to standardize their clinical practices based on the best science in medicine.
   2. All providers must be able to share an EHR that includes hardwired point of care protocols.
   3. There needs to be sufficient primary care capacity using extenders as the first line of care.
   4. Engaged physician champions must drive the process.
   5. There should be a programmatic approach to chronic diseases such as diabetes, CHF etc.
   6. Hospitalists, intensivists and other key physicians in the care process must be trained in the latest care delivery techniques and be evaluated based on cost, quality and service metrics.
   7. Physicians that do not meet key cost and quality metrics must be sanctioned.
   8. There must be an infrastructure able to manage the delivery system, monitor metrics and report outcomes.

The healthcare delivery system will not change overnight. Organizations that begin repositioning today can phase in the cost reduction strategies necessary to succeed under the post-reform environment.  Transforming a health system will be expensive.  Healthcare leaders will need to optimize income in the fee for service delivery system in order to fund long term investments in their physicians, IT systems, process redesign, clinical integration, etc. The irony is that the primary source of the dollars to fund this transformation will come from cost shifting... get it while it lasts.

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[1] AHA; Trend Watch Chartbook 2010, Table 4.4

[2] Center for Medicare Services (CMS);  Richard Foster Memo | Apr 22, 2010, Table 2

[3] Medpac; Report to Congress: Medicare Payment Policy| Mar 2010; Hospital Inpatient and Outpatient Services, Assessment of Payment Adequacy, Updating Payments,  pp 41-66

[4] Medpac; Report to Congress: Medicare Payment Policy| March 2010; Hospital Inpatient and Outpatient Services, Assessment of Payment Adequacy, Updating Payments,  pp 60

[5] Commission on Medicaid and the Kaiser Family Foundation;  A Look at Medicaid Pending Coverage and Policy Tends Results for a 50-State Medicaid Budget Survey for State Fiscal Years 2010 and 2011; Prepared by Vernon K. Smith, Ph.D., Kathleen Gifford and Eileen Ellis, Health Management Associates; Robin Rudowitz and Laura Kaiser,  | Sep 2010

[6] Mckinsey Quarterly; The Next Wave of Change for us in Healthcare Payments| May 2010,  page 2

[7] Reuters; Cost-Sharing Health Plans Lead Poor to Make More Tough Choices | Nov 23, 2010

[8] www.AMEDNEWS.com; American Medical News | Sep 20, 2010

[9] Moody’s; Flat Admissions Put Pressure on Not-for-Profit Hospitals | Oct 20, 2010

[10] Boston Globe, Insurers May Slash Rates to Hospitals | May24, 2010