If you lead a healthcare organization that's constantly touted as one of the highest quality or most innovative health systems in the nation, congratulations. Just make sure you're not fooling yourself about why that's the case, says Nate Kaufman, managing director of Kaufman Strategic Advisors, in San Diego.
Kaufman, who provides tactical and strategic advice to many of those very same systems, is counseling his clients about misattributing the underlying reason for their success to patient care or innovation. Rather, he suggests, success comes directly from the fact that they are currently able, through their market dominance, to leverage much higher rates of reimbursement than other institutions.
"The reason they're better is they're able to charge more than others," he says.
And that can't continue, he argues.
"It's funny when politicians hold out certain health systems as the model of the future only to find out later that they're getting reimbursed at level that's 60% more than the average hospital," he says. "I don't think that's universally known."
But so what? Of course it takes money to invest in employing physicians, expanding your business footprint outside the traditional hospital-centric healthcare model, and in obtaining the most advanced clinical equipment and services.
And of course, in the largely market-based economy that has been commercial insurance rate negotiation, hospitals and health systems can't be faulted, barring any antitrust enforcement, from driving the hardest bargain they can from the private market.
Just don't get too used to being able to do that, Kaufman cautions. High commercial rates fund innovation, successful employment of a large group of physicians, development of a high-functioning clinically integrated network, and the ability to become nationally recognized for excellence.
But a rude awakening awaits when rate regulation and tiering become more prominent, as he expects.
"This transition we're going through is messy and sloppy," Kaufman says, speaking broadly about the reimbursement shift toward value measurements in determining reimbursement. "Infrastructure costs for clinical integration and the employment of entrepreneurial physicians is a disruptive process and requires sloppy revenue to sort of smooth it over. My message has been that while we talk about ACOs and bundling as some future state, if you're not currently getting 150% of Medicare [from commercial payers], you're not going to be able afford the transition."
Perhaps Kaufman's clients are the ones I hear so often saying that they need to manage to operate at a positive margin even if all of their reimbursement were at today's Medicare rates of reimbursement. It gives them a simple touch point on a goal of removing waste and inefficiency, even if they are currently able to leverage much higher rates of reimbursement from their commercial book of business.
Many, according to the most recent CMS data book, Kaufman says, have already spent a lot of time and effort getting to that point. The book identifies 742 hospitals that actually made money on Medicare in 2010.
"The reason they made money on Medicare is that their costs were 10% below the national average," Kaufman says. "Their profit margin from their non-Medicare business was negative so they had no choice but to modify their cost structure."
Those systems are in good shape to weather rate controls that are already being implemented at the state level in many instances across the country, but many so-called high performers may not be as the practice becomes more widespread.
That's why Kaufman says that if you aren't getting substantially higher commercial rates than your competitors right now, it's time to start thinking about a merger, or at the very least a precursor to a merger that helps your finances survive a big hit to reimbursements. All the higher current commercial rates buy you is some indeterminate amount of time.
Some 37 states, according to Kaufman, already have some ability to approve requests from commercial insurers regarding premium increases, and more will start to do so. Massachusetts has been on the front lines of this trend most recently, but other states are broke too, and increasingly are getting involved when insurers insist that they need to raise premiums at double-digit rates of increase each year.
Executives should take an honest look at their level of preparedness, Kaufman says.
"If, in fact, they've eliminated waste and redesigned care, and taken all the steps necessary to be as efficient as they possibly can, they may be in good shape," he says.
It's up to you to make that determination.
Philip Betbeze is the senior leadership editor at HealthLeaders.