Third-Party Payer Revenue and Operating Model Integration: Provider and Payer Collaboration Strategies

With careful development and common goals, healthcare organizations can usher in a transition to value-based care with a strategic alliance partnership.

As we enter 2017, the market environment for healthcare organizations, including both providers and managed care payers, continues to evolve rapidly across regional, state, and federal levels.
^a Since the introduction of the Affordable Care Act and various Medicare and state Medicaid reform initiatives in recent years, healthcare organizations have engaged in a great deal of innovation and experimentation around payment and care delivery models. In almost every case, these innovation models share the following primary goals:

• To redesign and transform clinical care and payment models across a patient’s entire episode of care, encompassing all care delivery settings
• To develop, capture, and deliver value for the purchasers and users of healthcare services as the outcome of clinical and operational redesign and transformation processes
• To further evolve into an economically sustainable, value-based enterprise

For many healthcare organizations, perhaps the most challenging requirement for achieving these goals is to navigate the transition from a fee-for-service payment model to a risk-sharing payment model. Absent long-term economic sustainability for both providers and managed care payers, the transformation process will fail.

The strategic imperative to deliver value through clinical care transformation to a population health management model, including reducing the total cost of care, is a widely recognized requirement for long-term success and economic sustainability. Yet the industry’s evolving next-generation ecosystem is new territory for many healthcare organizations. Many are ill-prepared to take on the financial, operational, and competitive risks that are associated with these next-generation imperatives. They tend to lack clear guidelines for decision making, and all too often, they have no idea of where to begin the process of transitioning from a stand-alone hospital-centric delivery model to the integrated network of care delivery required for managing patient populations across medical and non-medical service continuums. Nor do they typically understand the types of capital investments that are required for long-term success in such an endeavor.

One of the critical building blocks for this transformative journey is the requirement for providers and third-party managed care payers to move from traditional transactional and purely contractual relationships to partnerships that are strategic, durable, and long-term; that are based on a strategic vision of integration with common guiding principles; and that allow for the creation of product differential and cost advantage value for both parties to strengthen their respective economic models.

The simple fact is that today’s provider-payer contract negotiations over unit price payment are not designed to develop, capture, and deliver value for the purchasers and users of healthcare services. We are, in short, stuck in what is referred to in game theory as the Nash Equilibrium—a scenario in which a party cannot benefit from changing its contracting strategy or tactics unless the other party makes a similar move.

The prevailing fee-for-service model is not designed for a win-win scenario, but rather a win-lose scenario. If we continue down this path, we risk the collapse of major portions of our healthcare system across the country, placing those most vulnerable and with the highest clinical risk in jeopardy. The model simply does not provide the value that third-party payers (ranging from Medicare and state Medicaid programs to managed care health plans) are looking for relative to the dollars they invest and the budgets they have to operate under. Continued reliance on a fee-for-service payment model, which rewards provider organizations the same irrespective of quality, patient outcomes, and the total cost of care, does not support a sustainable pricing-to-value business model.

Many third-party payer organizations now recognize that their sustainable business model of the future will be intricately and inescapably linked to creating greater value for their customer base and that value must be created in part through provider organization accountability for the total cost of care and patient quality/outcomes.

The current situation is simply not sustainable, and if you accept this as a truism for a plausible future scenario in your home market, the nature of the conversation shifts to collaboration and value creation—an approach offering the opportunity for win-win outcomes to contract negotiations between providers and managed care payers.

Anatomy of a Provider-Managed Care Payer Strategic Alliance Partnership Model

A range of alliance and collaboration models are available to both provider and managed care payer organizations. The most commonly executed examples across multiple markets are:

• Accountable care organization (ACO) arrangements with some form of risk sharing
• Narrow network payer line-of-business products wrapped around a provider’s care networks, where the provider often makes price concessions and the arrangement typically is structured within an ACO contract negotiated as a long-term agreement rather than a strategic alliance partnership model
• Provider organizations initiating the development process to build their own provider-sponsored health plan (PSHP) or acquire an existing regional health plan

Provider-payer collaboration models also have a certain maturity life cycle, which may start as a purely contractual relationship but, if the business case is right, can evolve into a strategic alliance partnership.

In the early stages of such models, the clinical/operational focus is on care delivery, network development and maintenance, patient access, primary care physician attribution models, and physician alignment. Meanwhile, the financial focus within these partnerships tends to be on considerations such as methods to process claims, data sharing, utilization/care management and coordination/navigation, and shared savings versus pay-for-performance. As the models mature, payers begin to shift responsibility for population management to providers through direct investments in care, disease, and behavioral management; data infrastructure and predictive analytics; risk sharing and shared data analytics for the total cost of care of attributed lives; and development of clinically integrated networks (CINs). In later stages, the CIN is moving into an advanced capabilities stage and the focus is on managing attributed populations across care continuums, typically under material upside/downside risk payment arrangements, and there can be a number of delegated service relationships in place with the CIN ranging from delegated credentialing and utilization management to claims administration for provider claims across defined geographic areas.

One less common collaboration model—the provider-payer strategic alliance partnership model—is growing in popularity due to its potential for the development, capture, and delivery of value. The development of such a partnership model involves five stages, detailed below.

Five Stages of Strategic Alliance Partnership Development

Stage 1: Define the Strategy, Value Proposition, and Compelling Business Case

The first stage begins with a scenario-planning process that is intended, in part, to develop an organization’s “theory of market.” This strategic-planning exercise assesses the competitive healthcare landscape for providers and managed care payers, with a forward-looking perspective (e.g., what the market dynamics will look like in five years). The assessment takes into account considerations such as market definitions, demographic information, provider and payer market dynamics, and state and federal dynamics. Integrating these considerations can help organizations develop an underlying theory for their market and then construct plausible future scenarios to assess how organizations will fare in a future market landscape under different payment, operating, and clinical care business models.

If leaders determine that their healthcare organization’s market competitiveness and economic model will not perform well in the anticipated future market environment, they must find ways to address the organization’s potential current and future operational, clinical, competitive, and financial risks. One strategic solution that an organization may identify after the initial planning process is that one or more strategic alliance partners is needed. In such an instance, health system leadership should consider several additional strategic questions from their organization’s perspective:

• Will a provider-payer relationship increase service volume growth and re-channel patients to the health system?
• Would the health system become the payer’s Tier 1 network? If the health system does not lead, will it be relegated to Tier 2 network status?
• If the preferred or targeted payer partner enters into a strategic partnership with one of the health system’s primary competitors, what would be the strategic/economic impact on the health system?
• Is it possible for the health system to a have a sustainable value-based enterprise without a true payer partnership and an alignment of incentives between provider and payer organizations?
• What will be the market reaction to a partnership between the health system and the payer, and what are the associated competitive, revenue, and regulatory risks?
• Will the health system’s employed and affiliated physicians support a strategic partnership model?
• What will be expected of the health system and affiliates in terms of payment models, pricing concessions, and transition to a value-based payment model?

If all of these questions are answered to the satisfaction of the health system’s leadership and other key internal stakeholders involved in the strategic alliance planning initiative, the organization will have established the general strategic framework, defined specific value propositions, and made a compelling business case to pursue a provider-payer strategic alliance partnership.

Stage 2: Find the Right Partner

Providers and payers enter strategic alliance partnerships for many different reasons. Finding the right partner can be challenging, however, and the provider or payer with the most brand equity in a market may not always present the best choice for a provider-payer strategic alliance.

The selection process begins with an understanding of what the organization wants from the partnership based on answers to the questions in the first stage of the process, along with research of major payers and providers in the market to understand the competitive landscape (e.g., right product and service configurations, market position, growing/declining service offerings, a reputation for innovation and forward-thinking transformation, etc.). In other words, appropriate due diligence is essential to ensure decisions are made based on facts.

Once choices have been narrowed based on market research, the organizations should examine the remaining strategic partner candidates to ascertain which ones offer the potential for a sustainable strategic alliance partnership. The durability of a partnership will be driven by three key factors.

Partner complementarity of services and products. The organization should determine whether it will gain long-term synergistic value and differential advantage through the partnership, asking whether the two prospective partners have complementary assets and brands.

Partner compatibility. Having complementary services and products is not enough. The two organizations can realize the full potential of that relationship only if they also are similar in their vision, short- and long-term goals and objectives, core beliefs and guiding principles, decision-making processes, and culture.

Partner commitment. Commitment is a critical ingredient to a long-term, sustainable strategic partnership between a provider and payer. It may be years before a provider organization partner is ready to accept a global capitation payment. During that transition, both parties will need to devote people, processes, technology, and capital resources and share risks to achieve their partnership goals. Accomplishing the latter requires an enduring commitment.

Providers unable to find their ideal partner should resist the temptation to accept a lower-level partner that does not meet their needs. Other options might be to bring the right partner into the market (e.g., an out-of-area payer with a solid track record of provider-payer collaboration) or consider forming a PSHP (either within the organization or in partnership with other providers).

Stage 3: Structure the Relationship

Consensus on key structural issues is essential to successful discussions and negotiations around structure. In one or several areas, barriers can serve as effective decision points on whether to continue discussions. The exhibit below illustrates many of the key decision points that must be addressed for a sustainable strategic alliance partnership.

Structure: Alliance Governance and Design for a Strategic Alliance

Once the structure, governance, management, and related elements for a provider-payer strategic alliance partnership have been successfully navigated, organizations will be ready to prepare the initial nonbinding letter of intent (LOI). This document outlines the means by which the organizations will translate structure into action to operationalize the partnership, including, for example, going to market jointly with products and addressing alliance/exclusivity geozones. A geozone is a territory across specific ZIP codes where all payer-enrolled lives are attributed to the provider organization.

Stage 4: Define Mechanics

The mechanics of a strategic alliance partnership address how all the moving parts between providers and payers will integrate to create synergistic value for both organizations, while seeking to gain administrative and operational cost reductions. For example, as separate, unaligned enterprises, both organizations must integrate robust care and utilization management as well as clinical and financial IT infrastructures to avoid duplication and streamline operations.

Whether through existing operational and IT infrastructure platforms or through a jointly owned shared-services operation for both organizations, the following core competencies are required for a long-term sustainable strategic alliance partnership.

Cross-continuum services. An integrated delivery network must be constructed with providers across the care continuum to ensure sufficient geographic, service, and access scope.

Financial sustainability. Existing financial performance must be safeguarded while the partner organization transitions to at-risk payment arrangements and/or capitation.

Network and product development. A robust set of products and services must be offered to local employers, Medicare and Medicaid beneficiaries, and insurance exchange beneficiaries.

IT systems and analytics. The organizations will require a shared IT and analytics platform with sophisticated population health, patient tracking, and reporting capabilities.

Clinical effectiveness and transformation. A robust, sustainable clinical effectiveness program with multi-provider representation will be needed to drive meaningful performance improvement in cost and quality.

Physician economic and clinical alignment. Physician leaders must be engaged to create a physician partnership model that will ensure access to a high-quality Triple Aim delivery model.

Care management and patient engagement. Patients must be engaged in care decisions through a robust care management and medical home infrastructure with a focus on improving the overall care delivery experience for patients.

These competencies will provide a basis for planning the transition from separate, distinct operating models focused on fee-for-service transactional activities and the site of care with the highest payment to an integrated model under which all clinical risk populations can be clinically managed across a network of care with fixed prospectively priced budgets tied to risk sharing.

Stage 5: Execute the LOI and Implementation Plan

The LOI process starts with assembly of the agreed-upon structural and mechanical elements for the strategic alliance partnership. The first step is to arrive at a nonbinding agreement and obtain approval from each organization’s senior leadership and boards. Then, the activity begins to move from a nonbinding LOI to a binding LOI along with the contractual and investment structure. Once the binding LOI is completed, both parties move toward execution and internal and joint planning between the provider and managed care payer organizations to operationalize each component of the agreement and finalize targeted go-live and go-to-market dates.

The implementation plan will flow from the final LOI between parties. Typically, the partners will agree upon a transitional time period (e.g., two years) for the provider organization to focus on how it will transform clinical care delivery and to build provider alignment vehicles such as ACOs or CINs. Providers may use this time to build the necessary infrastructure and organizational competencies required to manage patient populations across complete episodes of care. The execution of an integrated provider-payer strategic alliance partnership model is complex, yet it offers a pathway to true clinical transformation and value creation for the parties involved, along with a differential high-value product offering and cost advantage to the market.

Keep Moving Forward

The best path forward in the years ahead is a collaborative model between providers and managed care payers. The current fee-for-service model that most healthcare leaders are accustomed to and comfortable with simply does not offer the same level of value creation as a strategic alliance partnership between providers and payers.

The power of a collaborative model with a shared vision, complementary products and services, compatibility, and commitment might seem extreme and uncertain by today’s standards, but healthcare organizations that explore the value possibilities of strategic alliance partnerships can stay ahead of the curve.

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Christopher J.Kalkhof, MHA, FACHE, 
is director, strategic solutions, Navigant Consulting, Chicago.

Richard F.Bajner, Jr., 
is managing director, strategic solutions, Navigant Consulting, Chicago.

Footnotes

a. In this context, the term managed care payer refers to national and regional commercial, Medicare Advantage, and Managed Medicaid health plans and provider-sponsored health plans.