Preparing for the shift from fee-for-service (FFS) to value-based care is one of the top strategic initiatives for almost every healthcare leader—and with good reason. The Centers for Medicare & Medicaid Services (CMS) announced in 2016 its plans to tie 50 percent of all Medicare FFS payments to alternative payment models by 2018. CMS also announced a goal of tying 90 percent of all Medicare FFS payment to quality or value measures by that same year.
Today, healthcare leaders face one of the first major pushes toward value-based care: the rollout of the Medicare Access and CHIP Reauthorization Act (MACRA), for which performance measurement began this year. Preparing for the transition to value as MACRA and other programs emerge will require important financial, operational, and clinical decisions that likely will determine whether organizations will operate effectively under value-based care agreements.
Improving Financial Efficiency
According to one analysis of the American Hospital Association’s annual survey data in 2013, about one-third of hospitals are losing money on operations, with average margins at only about 5 percent. There are a number of approaches executives can take to improve cost efficiency and increase revenue.
Reducing nonessential labor and business expenses. Executives should scrutinize all line items on a hospital’s ledger, not just medical supplies and other physician preference items. Traditional hospitals tend to be heavy on administrative staff and other positions that are not directly tied to patient care. Preparing for value-based care presents an opportunity to perform a detailed labor analysis and see which positions are truly necessary. Generally speaking, an organization’s expenditure on labor should not exceed 50 percent of overall costs.
However, a detailed labor analysis is not possible if an organization lacks an adequate IT system to effectively track labor distribution and benchmark against peers. Although such business intelligence is an investment, the return can be substantial. Beyond reducing inefficient overhead, it will help ensure appropriate staffing levels as hospitals begin to take on increasingly complex care and payment programs tied to quality.
Business expenses not directly related to patient care also can provide an unexplored trove of savings opportunities. Western Connecticut Health Network identified opportunities to save $1.5 million annually when it embarked on a cost-cutting program spanning utilization, clinical operations, and purchased services. Just by zeroing in on nonperforming print management and credit card programs, the health system saved $7.6 million in purchased services alone over a five-year period.
Optimizing service lines. Growing competition for patients has spawned focused service lines at hospitals, enabling them to specialize and excel in defined practice areas. But hospitals don’t always manage these service lines optimally. Underused and legacy services lines can quickly become a significant financial liability. To achieve an effective service-line approach, hospital leaders must understand the organization’s current market, utilization patterns, and future growth potential. In some cases, that can mean eliminating a service line that a competitor has developed and potentially seeking a partnership instead.
In their reviews of service line profitability, hospital executives may have noticed that cardiac surgeries, for example, have dropped significantly, and that many programs no longer have the volumes necessary to maintain quality standards and financial viability. Even though these surgeries are rebounding in many markets, such circumstances already have prompted executives to consider joint ventures to consolidate cardiac surgery programs, sometimes even teaming with a past competitor. One noteworthy example is a recent partnership between Rhode Island Hospital and The Miriam Hospital in Providence, RI, to create a combined open heart surgery program.
In some cases, a service line may need to continue at a base level to serve community needs. In these situations, developing a plan that lays out the investment to maintain the service will ensure that services are funded appropriately and that large capital investments in new cutting-edge tools and technologies, as well as dedicated administrative and clinical staff, are prioritized. Communicating long-term service line management plans to staff is essential to setting expectations and achieving operational alignment.
Building a Stronger Operational Foundation
Beyond streamlining capital expenditures and improving operational efficiencies, it’s important to understand where to invest resources in preparation for value. Three key questions can help healthcare organizations focus their attention.
What do our patient population and payer mix look like? The answer will influence how an organization manages risk exposure and strategizes care delivery to meet the needs of its community. Population characteristics such as multiple comorbidities, frequency of patient transfers, and socio-economic status have significant influence over key measures evaluated by value-based care programs, including hospital readmission rates and length of stay.
Do we have an adequate care management or disease management model that is ready for high-risk patient management (both inpatient and outpatient)? Once an organization has identified key population characteristics, the next step is to conduct an assessment of its acute care and chronic disease management programs, and whether they match the needs of the community. It is well understood that complex patients with chronic illness make up a significant portion of inpatient care. However, it is important to keep an eye on shifting utilization patterns.
According to analytics-based consulting firm Sg2, outpatient volumes are projected to eclipse inpatient admission volumes over the next decade, increasing nationally by 15 percent. Hospital executives planning for value-based care will need to focus more on coordinating care that takes place outside the walls of the hospital, including post-acute services for disease management, care compliance, and rehabilitative services. Now is the time for organizations to test their level of integration with services conducted in an outpatient care setting.
Are the physicians on board and prepared for more risk assumption? A number of recent studies suggest that physicians will require significant engagement throughout the transition to value-based care. Perhaps most telling is a recent survey by Deloitte, which found that half of U.S. physicians are currently unaware of MACRA. Moreover, a 2015 survey conducted by the American Academy of Family Physicians and Humana found that nearly 70 percent of physicians believed that value-based payment would not improve patient care. Clearly, significant work remains on behalf of hospital leaders to educate and support physicians. Healthcare organizations should begin by identifying physician champions within their network who can help advocate for changes taking place.
The transition to value-based care is a significant departure from long-ingrained FFS care practices. But with the first performance year for MACRA now underway, healthcare organizations that have not begun the transition may find themselves behind the curve. Executives who have fully considered opportunities to strengthen their bottom line—and those that have invested in understanding their patient populations, market trends and current physician sentiment—will be better equipped to manage risk and plan for long-term sustainability under value-based care.
Tawnya Bosko, DHA, MS, MHA, MSHL, is vice president at Sg2, a Vizient company, Skokie, Ill.
