Healthcare Business Models Clash with Reforms

Healthcare executives responding to a survey say the nation will see major changes in the way healthcare is delivered and paid for in the next five years as providers and payers struggle to do more with less.

Most of those executives, however, also believe that the fee-for-service-based business models they're using now will be at least "somewhat sustainable" or fare even better in the face of new challenges brought on by healthcare reform.

KPMG LLP consultants surveyed more than 200 senior leaders in healthcare and found that 73% of health systems executives, 81% of health plan executives, and 79% of drug makers said their business models were somewhat sustainable or better over the next five years.

Brad Benton, national account and advisory leader for KPMG Healthcare, says that despite the acknowledgement that huge changes are underway, a significant number of executives may be falling back on old reliable models in the face of uncertainty.

"There are some very contradictory observations in this survey that go to the idea that it is really complex and these executives are at some level uncertain about what this is going to look like," Benton told HealthLeaders Media. "We have a hardwired healthcare system that is for all intents and purposes driven by fee-for-service and the transition to these value-based models is complex, it's threatening and it's really hard work."

For example, the survey shows that 82% of health system executives understand that they will have to reduce costs anywhere from 14% to 32% over the next five years if they hope to break even on reduced Medicare reimbursements.

"The 'do better with less' mantra seems to be coming more into focus. It is that path to effective execution that gets us there," Benton says. "Clearly this is going to be about how we practice medicine and do it in a way that recognizes that there are not unlimited resources."

However, many of those health system executives also say in the survey that can leverage their market position to maintain or increase payments from commercial plans. Benton says health plan executives say that's a non-starter.

"Effectively, what the health systems are saying is 'we know to retain our traditional profitability we have to maintain or increase commercial reimbursement rates.' Four out of five say 'we have the market power to do that,'" he says. "How can you map out that against the results from the health plan perspective and what the employers are saying in the marketplace? You cannot connect the dots."

"Looking in the mirror is very difficult because the real work is around clinical integration, driving value out of technology, and thinking about sites of service," Benton says.

Even with suspect business models in place, KPMG found that 47% of health system executives and 49% health plan executives said they would prefer to see a rapid implementation of value-based payment models over the next five years. In roughly the same percentages, however, those executives believe that the process will be more incremental.

"They desire rapid integration even though they may not be sustained after five years in terms of the dollars," Benton says. "Because of what we think is the lack of sustainability in the U.S. economy in terms of overall spending we still think the drivers are in place to move us more quickly to something that is more economically sustainable and that will be some kind of value based purchasing."

Benton says heath systems executives would be well advised to generate a number of financial and budget models within the traditional planning and budget cycle.

"It's not really sexy, but one thing we strongly believe is that the depth and level of financial modeling and how you use spreadsheets to make sure the planning you are doing contemplates the future we are talking about and this transition to value-based payments," he says.

"I think of it as war-gaming and scenario planning. What we're really talking about is understanding your revenue at a level that a largely fee-for-service world has not had to contemplate. It's not just inpatient, outpatient and payer."

Successful modeling will drill down into operations to speculate on how they might be affected by the shift away from fee-for-service. "It's segmentation," Benton says.

"It's getting into a much more complex level on the demographic and understanding what do the levers and switches look like as you begin to think about owning value-based payment; having the data points and understanding the range of scenarios and understanding your market, where the large employers are, who is coming into the marketplace, what are the innovative projects that could emerge?"

Benton concedes that the modeling could be hobbled by considerable unknowns and guesswork on new markets and new players in the region and hybrid business models that meld payers and providers. However, he says uncertainty shouldn't be used as an excuse to do nothing.

"With modeling at least you have a basis for discussion across all stakeholders, whether it's clinical staff or governance at the board level," he says.

"All of these folks are all deeply invested from a mission perspective in one fashion or another and they have to have the information to be able to think about these issues in an intellectually honest fashion."