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Does Innovation Mean Cannibalization?

Philip Betbeze, for HealthLeaders Media, August 13, 2012
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Since implementing such contracting with commercial payers, Fairview has doubled down. It was chosen as one of 32 organizations selected to participate in the Centers for Medicare & Medicaid Services Pioneer ACO program, which is attempting to introduce similar value-based contracting principles into the Medicare payment system. But that transformation of healthcare's traditional business model comes with serious growing pains, and organizations (generally large integrated delivery systems) that are already deep into making these transitions are finding they are taking a hit to the bottom line, at least in the short term.

It was like that for Fairview, Eustis said, adding that he had informed his board of the short-term margin pain the system was likely to endure. He was right. Largely as a result of these changes in reimbursement, Fairview's margins declined to as low as 1% in the 2011 fiscal year because of the adjustment necessary to implement value-based payment reform efforts. He insisted that the quicker the health system made the transition, the quicker it would return to the 5% margins it believes it needs to remain competitive in the long term. He followed that with a hopeful note, saying projections showed a probable 3% margin for 2012 for Fairview—on the right track, in other words.

Eustis told the rapt audience that he was so tired of the way the healthcare business had become divorced from value that, had he and the commercial plans not been able to come to an agreement on value-based reimbursement back in 2008, he would rather have retired than continue to fight with health plans over reimbursement rates in the old way. Less than two months following his ACHE presentation, however, Fairview announced his retirement in May 2012.

Eustis would remain president and CEO until July 31, but his vision of transforming Fairview's business model is in doubt. Fairview's board met in a special session following news of Fairview's contract with Accretive Health and efforts to collect unpaid balances from former uninsured or self-pay patients. That contract and Accretive's practices under it was the subject of a critical report from the Minnesota Attorney General's office.

In a press release following the board's decision to not renew Eustis' contract, Board Chair Charles Mooty, who was to take over CEO duties from Eustis on an interim basis beginning August 1, credited Eustis as "instrumental in spearheading transformation of Fairview's care delivery and core business model." However, Fairview has refused multiple interview requests from HealthLeaders to confirm whether this transformation of the business model would continue following
Eustis' departure.

Given the risks of undertaking such a dramatic change in business model, other hospital and health system senior leaders are worried about how—and when—to embark on similar transformations of their own.

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