Providence’s Deepak Sadagopan says providers should look to Medicare Advantage for labor cost solutions

As the economy emerges from a period of historic inflation increases, labor costs continue to affect health systems’ financial performance in many ways. HFMA asked Deepak Sadagopan, MHCDS, COO, population health management at Renton, Wash.-based Providence, about solutions to labor costs and how to keep value-based payment from exacerbating those pressures.

Q: Are we past the acute labor crisis of recent years and its financial drain on healthcare?

Sadagopan: Absolutely not. Our policymakers and others should be very conscious of the fact that hospital finances remain very precarious as we’ve had in the last couple of years. It’s well-known and well-documented that across the industry the drivers contributing to that [are] labor cost inflation [and] supply cost inflation. All of that is in addition to the constraints on reimbursement that are actually contributing to that situation.

We were looking to multiple aspects to create a recovery path. Part of that includes making sure we are doing what we can to right-size our delivery system to make sure that our cost posture is responsible. But we also need to make sure that resources across the industry are aligned at the point where they are supporting delivery of care.

We find, for example, that there is a significant amount of the premium dollar that sits on the payer side, especially in Medicare Advantage [MA]. And we are hoping that we create the pathway to expansion in value-based care to shift some of those dollars so that we have the dollars to support care delivery.

Q: Has your organization found any specific labor innovations ?

Sadagopan: One of the key strategies that our organization has been pursuing is basically [a] reduction of agency to the extent possible and an increase in our key network caregivers. [The strategy has included] attention to decreasing burnout, increasing engagement [and] increasing alignment with our mission. All of these are contributing to an alleviation of pressure. But we still think it hasn’t gone far enough.

Q: How are you handling value-based care labor demands?

Sadagopan: There’s a real risk if we don’t create the right infrastructure in the industry to support value-based care, [we] will actually increase the labor demand and increase administrative need in value-based care, rather than decrease it. And the reason I say that is we’ve for decades used fee for service [FFS] as our de facto reimbursement mechanism. So, we have [an] entire industry and ecosystem that’s been built around it, ranging from claims systems [to] revenue cycle systems. Both on the provider and the payer side, there’s workforce that’s prepared to deal with that.

On the value-based care side, it’s different. The information that flows between payers and providers is different; the information that is presented to doctors in many cases is about care gap closures, needs for completion and documentation.

And all of that stuff is very different than what has been [presented] previously. And because of that, there is incomplete focus on analytics systems, interoperability [and] automation of the back end. And fee for service has evolved over decades to reach a point of optimal efficiency in that space. That’s why that model is very efficient. Value-based care hasn’t had that kind of focus to develop the same type of process efficiency that fee for service has had. So, you see a lot of inefficiencies on the back end especially.

The type of inefficiency varies by the type of value-based care model. If you look at the different types of financial risk that the organization can take on — if you look at category 3 risk — the foundation of the service is still FFS, but then there is accountability to total cost of care and then retrospective adjustment in financial incentives to adjust that.^a The fee-for-service component still leverages all of the resources that we have.

And there are additional value-based care components related to shared savings that you earn: care coordination fees, quality bonuses, etc. They come through separate channels that don’t currently have a clear way of getting reconciled into the mainstream of the delivery system. That creates a disconnect of sorts that needs to be solved — from a capacity standpoint, a process standpoint and a workforce perspective.

Q: Are there any labor initiatives you might look to in the future?

Sadagopan: It’s a huge area, and there’s a lot of focus on different areas. We’re focused on the conversation with our financial workforce and with HFMA and on the economic aspects of these impacts. There needs to be a significant change in the types of skills that we bring into financial management of the healthcare delivery system.

It’s not enough if you focus just on the core aspects of the delivery system — just traditional hospital or physician or clinics or medical group management — in terms of financial management and outcomes. You have to understand that delivery systems need to develop the muscles and workforce to think more like payers, manage risk pools and understand the economics of the risk pools and what drives top-line and bottom-line growth in the risk pools. What are the key levers that actually drive performance in that?

That’s because the more that delivery systems take on financial risk, the more performance of those risk pools will be directly proportional to how the delivery system performs. So, allocation of resources is largely contingent on how resources flow through the risk pools.

Q: How should providers approach the different downside risk in VBP models?

Sadagopan: Most delivery systems that participate in MA actually have fee-for-service models: category 3, downside risk, has a fee-for-service foundation. Category 4, which is a fully capitated arrangement, is only a small proportion of risk that’s out there when you look at the latest LAN survey.

Two things stand out: One, over 90% of payers exhibit a lot of confidence that value-based models are going to continue to grow in popularity. And [two], you will see most of that growth concentrates in category 3 rather than category 4, which is very interesting.

There’s also this misconception that managing category 3 risk is different than managing category 4 risk. How these risk pools and populations are funded is identical across categories 3 and 4. And that’s the change that delivery systems ought to zone into. They need to go to the sources on how many dollars are flowing in.

When you take MA, what dollars and resources are flowing from Medicare into the MA plan? And how is that resource then flowing down into the delivery system? How is that premium getting broken down and allocated to Part A or Part B resources? And then how is that subsequently being expended to medical expenditures and what it means to either surplus or loss? That can then be attributed to the financial performance of the delivery organization that’s taking on liability for those patients.

I find most health systems don’t have insight into that chain of funding. And if you look at it from that perspective, a category 3 or 4 arrangement really is downstream to that.

So, you can take that risk pool financing model and say, if you are the payer, “I’m going to contract with hospital A or delivery system A on a pure fee-for-service basis, and I’ll negotiate rates with them, and I’ll pay claims out of that risk pool.”

But with delivery system B you will say “I’m going to give them 1,000 patients and hold them accountable for total cost of care for all of these lists of services.”

So, even within category 3, a delivery system that’s downstream has the option to say, “I’m taking on full risk for all of these premium dollars.” And if they had the right actuarial skillset and medical economics skillsets within their organization, they could sit down and negotiate with the payer how much of the premium dollar should be allocated to the services they are taking responsibility for.

Whether they get paid prospectively or retrospectively is irrelevant other than cash flow issues to consider. For the most part, it is the same funding model that can be applied in a different way based on an organization’s preparedness to take on prospective or retrospective payment.

Even if an organization does not have a whole workforce dedicated to processing claims and paying downstream claims to organizations, they can still take on full risk in category 3 and get that entire section of the premium dollars if they negotiate that with the payer. It would be no different than negotiating a category 4 arrangement. It really comes down to how much risk are you willing to take on.

And that’s the part that I don’t think organizations understand. There’s too much focus on the idea that MA risk needs to be category 4 and needs to be prospectively paid. And I don’t think that’s the case. 

Footnote

a. Category 3 risk as tracked by the Healthcare Payment Learning and Action Network [HCP-LAN]