Value-Based Healthcare Needs New Bond Rating Metrics

Hospitals and bond rating agencies will likely spend the next decade adjusting to the transition from volume-based to value-based payments. Moody's Investors Service is trialing 20 new value-focused indicators to evaluate hospitals.

As hospitals move away from volume-based reimbursement models to less-tangible value-based reimbursements bond rating agencies are trying to figure out the best way to measure it.

Moody's Investors Service this year issued a report that outlined 20 new indicators that the rating agency will use to evaluate hospitals. Lisa Goldstein, associate managing director at Moody's, says the new indicators focus on value and measuring demand in ways other than admissions.

"For example, one of the new metrics is called unique patients. In addition to measuring your admissions every year, let's say Mrs. Jones comes to the hospital five times in one year. She would count as one unique patient, not five visits to the hospital," Goldstein says.

"It is a way of measuring market capture and under this new world of population health management, what is the population that comes into your hospital."

The push for value under the Affordable Care Act, Medicare reimbursement cuts, and the resulting tighter margins all are pressuring providers to reduce cost growth. Even though the major provisions of the ACA take effect in 2014, healthcare systems across the nation are in wildly varying states of readiness, says Standard & Poor's Managing Director Martin Arrick.

"This whole value orientation is very tricky for everyone," Arrick says. "Hospitals are moving carefully, and some of the better hospitals are moving faster and want to take full risk because they think they are going to do better. It does amp up the risk but the information around all of this is better than it was 20 years ago."

"But insurance risk is still insurance risk. We are going to find out how you are managing. First and foremost now we are interested in are you prepared for reform? What does it mean in your market? Where is it going? Talk to me about risk in your market. Talk to me about capitation in your market," Arrick says.

Goldstein says hospitals and bond rating agencies will likely spend the next decade or so "operating in two worlds; volume-based and value-based payments" as the transition period unfolds.

"It will be two orbits at the same time," Goldstein says. "It is not as if there is a magical date and everything switches on that date to all value-based no more volume. Hospitals are going to be operating in two different worlds concomitantly. They are going to go through a big transition. We have introduced new ways of measuring this new world."

Even though the reimbursement model is shifting, Goldstein says that doesn't mean that every metric now in use will suddenly become obsolete.

"Much of our analysis is based on the audited financial statements. The audits aren't going to change because healthcare reform is here," she says. "There is going to be a (profit and loss) statement, revenues, expenses, and a balance sheet and a cash flow statement. These are our core financial metrics at this point and we are not anticipating will change. You still look at leverage. You still look at liquidity. You still look at operating margin and profitability, just like we have been looking for 30 years now."

Moody's other new indicators for value-based care include covered lives, employed physicians, Medicare readmission rates, all payer readmission rates, and risk-based revenues. Goldstein says that could change.  

"This is just the beginning. There may be more introduced as we learn more," she says. "Some of the 20 we may discontinue. We may learn they aren't showing us what we need to know. This is very organic. We aren't done yet. There is more to come."

In addition, Goldstein says Moody's is pressing four objectives for hospital managers responding to the shifting business model: Achieving breakeven performance with Medicare rates; building scale through non-traditional methods; improved patient experience; and cultivating informed leadership.

Arrick says that despite the upheaval, the healthcare sector is attempting to position itself to succeed under a number of different uncertainties. He says the only certainty now is that change is the new normal in healthcare.

"The secret is if you can lower your costs faster than the revenue pressures coming at you, your numbers are going to be better," he says. "You look at the balance sheets and people haven't been borrowing quite as much. There is more cash on the balance sheets. This is all getting ready for what people perceive will be harder times ahead."