Already operating in one of the most labor-and capital-intensive of industries, healthcare leaders are caught at a critical strategic crossroads. As an army of payers arrays against the predominant fee-for-service payment system that has supported healthcare for more than 50 years, leaders can be paralyzed in determining how transformational they're prepared to be, and how quickly they'll take steps to get there.
And of course, by the time the right answer is easily apparent, it will be likely too late to make the changes necessary.
This is the key strategic issue facing healthcare leaders today: moving away from a system dedicated to paying for specific actions and toward paying for results.
It sounds simple, but only if you're looking at healthcare from the outside. One of the problems inherent in making the transition is that the entrenched business practices and operational imperatives that worked for one payment system will be huge disadvantages in the other.
Profit centers become cost centers. The pace of the change is uncertain. Capital and labor expenses need a fresh look under a different reimbursement scheme. And that's just the beginning of the transformation that so many healthcare leaders expect. Transforming too quickly can get you just as fired as not transforming quickly enough.
Timing, it seems, is everything.
Finding the answer to this question was the basis of a story in this month's issue of HealthLeaders magazine. Trouble is, I'm still not sure even now that I know the right answer on what the pace of change should be.
Perhaps there is no right answer.
"This is the biggest dilemma there is for hospital leaders going forward because it puts them between a rock and hard place," says Doug Fenstermaker, a managing director and vice president of healthcare at Warbird Consulting Partners. "The problem in the short term is that they need to begin preparing and working toward a number of complex issues—pay for value, and how that affects physicians in particular—that's transformational in how they're going to be paid going forward, and changes the mindset in how physicians will be dealing with patients."
Fenstermaker, an 18-year veteran healthcare chief financial officer, speaks from experience. He "grew up under capitation," and says much of reform is simply capitation under another name.
The difference this time, he says, is that in the ‘90's, only part of the reimbursement system was capitated. Government-based reimbursement was largely uncapitated—especially for physicians who, when working in the hospital, were paid fee-for-service, while DRG-based payments introduced some capitation to the hospital payment portion. All of this is to say that incentives weren't aligned.
They're still not, he argues, which is why as they become more aligned through payment incentives, leaders still have the difficult determination of how to change work processes just quickly enough to keep up with the staggered pace of change among payers.
"If you move too quickly to behave as if you're capitated and the rest of the world is fee-for-service, you go broke," he says flatly. In the same breath, however, he says, "but I think there's a way."
For instance, he offers up the Kaiser model, under which payer, provider, and hospital are under the same business entity. It can work, he says. But what about the vast majority of leaders at hospitals and health systems that have no hope of duplicating the Kaiser model?
"It's not so easy to do in communities where docs remain independent, and this is particularly true on the specialist side," he says. "They spend 90% of the money inside the hospital, and they're not thinking about whether there are less expensive alternatives to doing what they need to get done."
In the short term, he says, the majority of senior leaders he works with are trying to figure out a way to manage through on their own by cutting costs and becoming more efficient. And increasingly, their simple target is coming up with a game plan that manages their average cost per case to Medicare-level reimbursement rates.
"That's the strongest thing they can do in the short term," he says. "Some of the more strategically advanced systems are integrating clinical process improvement driven by the physicians as a way to drive down costs."
But for some hospitals and systems, this could mean a 20% or 30% adjustment to the revenues they are used to, including many of the top hospitals and health systems in the country—at least according to public opinion.
Fenstermaker says whether most or even many hospitals and health systems will ultimately be able to navigate such a drastic change depends on coordination of the shift between private payers and the government, although perhaps that's wishful thinking—sort of like betting that Congress will cooperate.
"The government and [commercial] payer side need to move at the same pace," he says. "If you have half on capitation but the rest is fee-for-service, that's going to create a mess. That's what happened in the 90's and it made HMOs fail."
A further shift toward paying for value will come with so-called bundled payments, though despite their prominence in public discussions and in industry circles such as HealthLeaders magazine, they have yet to be widely or even narrowly, implemented.
"The system has to change in this direction," says Fenstermaker. Combined payments will drive out costs…but unless the system gets integrated, where specialists' and hospitals' incentives are aligned, the whole thing will fail."
Philip Betbeze is the senior leadership editor at HealthLeaders.