Recently, the Centers for Medicare & Medicaid Innovation (CMMI) announced changes to its Bundled Payment Care Improvement Initiative that could make pursuing its model untenable and even cause some applicants to drop out of the program, according to a CMS reviewer of bundled payment applications.
But is dropping out really an option? Bundled payments are multifaceted, and regardless of the payer—commercial or governmental—it is the payment model of the future. So what did CMS change that's cause for consternation?
Although some of the CMS changes will ease bundled payment execution, such as standardizing episodes, discounts, and readmission exclusions, others will shift more risk onto participants, such as the broader definition of related readmission to include all medical DRGs. The latter may prove too much for some providers, says Deirdre Baggot, MBA, RN, who is vice president with healthcare consultancy The Camden Group and an expert panelist for CMS bundled payment applications.
"Payment reform is actually care reform, so to make it work you have to first reform the way you deliver care. But you also need to understand the risk," says Baggot.
Baggot explains that CMMI has proposed not only a standardized approach to discounts based on episode condition, but the program's design now includes a standardized approach to defining conditions for which it will test bundling under the improvement initiative. Additionally, CMMI proposed 48 standardized or converged episodes which comprise 70% of hospital admissions. It also issued a new definition for related readmissions that blankets inclusions and exclusions at both a DRG and diagnosis level.
For healthcare providers, there are several downsides to the changes, according to Baggot:
Discount requirement. CMMI has standardized its discount requirements based on clinical condition ranging from 2% to 3.25%. Previously it allowed applicants to propose their own discount amount.
Related readmission. For nearly all of the 48 converged episodes, CMMI elected to impose a broad definition of a related readmission to include all medical DRGs, regardless of whether the readmission conditions are related to the index condition or take place in- or out-of-network.
For some episodes of care, historical readmissions may be low, so this change would pose a small risk, Baggot says, but for other episodes, such as with congestive heart failure, readmission rates may exceed 20%.
Gainsharing. In order for the revised program to be financially viable, healthcare organizations will need to use gainsharing. Baggot believes without an approved gainsharing program in place, providers are unlikely to participate in the Bundled Payment Care Improvement Initiative.
She notes that gainsharing can promote better alignment within organizations and improve care transitions, as well as decrease overutilization and out-of-network utilization. Moreover, a shared savings approach could reduce internal hospital costs such as length of stay, supplies, drugs, and medical devices, all of which will offset program costs and the cost of discounts required under new BPCII design. But many healthcare leaders have been wary of embracing gainsharing because of the legal stickiness.
Beneficiary incentives. CMS' bundled payment pilot included beneficiary incentives that were dropped from the initial BPCII model. These incentives have been added back into the model, but it's up to the applicant to develop, test, and fund this feature. Any beneficiary incentives would need to be factored into the financial model and gainsharing expectations of providers, Baggot explains.
"Applicants need to understand the risk that some of these changes can cause for their organization," she says.
Consider the example of a cardiac patient receiving treatment at Hospital A 80 miles from his or her home. Upon returning from the hospital, the patient fails to take medication. The patient starts having some mild pain and calls the primary care provider. The PCP knows the history of heart problems and immediately directs the patient to go to the nearest hospital—Hospital B. If this episode occurs within 30 days of the first admission, then Hospital A is responsible for the effects of any care given at Hospital B.
"Asking hospitals to take on risk for things like this where they have no control is going to be a non-starter for applicants," believes Baggot.
Baggot says a positive change to the CMS bundled payment program is the ability to preview the financial impact before signing an agreement to participate. CMS has agreed to collect six months of data for applicants, from January to June 2013. The data will help the applicants see their financial and readmission rates based on the new CMS guidelines, and allow the applicants to decide if this type of payment model is a viable option for their organizations.
That's a considerable plus for the many healthcare organizations that don't know where their patients go after they leave their building. Now hospitals will be able to see data on how different physicians would influence reimbursements.
"A big concern applicants have is that they don't have access to the physician's billing data—unless they own the physician practice. So the hospitals have the Part A information but not the Part B ... but that data is going to have an impact on [the hospital's] level of risk for readmissions and on the amount of the discount," says Baggot. "Managing across the continuum of care is new for many hospitals, so many hospitals still don't have much of an idea on what's happening with physicians outside of their own four walls—but with [Medicare] bundled payments it will affect them."
The bottom line is that CMS' revised CMMI bundled payment model has increased the level of risk for provider organizations, Baggot says. However, it is still one of the most advanced payment models for a provider organization to participate in. She notes that CMS has spent several years consolidating fiscal intermediaries so that all providers in a region are on a single fiscal intermediary for Part A and B billings. That means CMS is more prepared to make a single bundled payment to an organization than perhaps many commercial payers.
"Some people think it will be easier to work with a commercial payer. I don't think it's easier. What's challenging there is that many payers aren't prepared to execute on this [payment model]. They have the data but they can't figure out how to get at it. And the commercial payers' readiness is so variable across the country," says Baggot. "Regardless of these changes, I don't believe hospitals and physicians can do nothing [with bundled payments]. However, they need to scale their level of participation in bundling logically. Don't jump into it with both feet, but don't do nothing either."
Compensation is usually a taboo conversation in every industry. Interestingly, healthcare leaders don't mind talking about how they calculate physician salaries, but don't ask them to chat about how they calculate their own. That conversation quickly runs dry.
When I landed my first job as a teenager, my father, a business owner, instructed me not to talk to any of the other employees about how much I earned.
"Why not?" I inquired.
"It's no one else's business but your own," he responded. "And it can cause a lot of problems if people are earning drastically different wages."
I thought perhaps I'd find some willing sources from our survey, but that was not the case.
I contacted 10 of the nation's largest and most prestigious hospitals, and received 10 "No, thank you" responses. Except for unusually transparent organizations, it's definitely not something they want to talk about.
Or even necessarily act on—many healthcare organizations haven't yet made adjustments to their executive compensation models. Yet the shift toward incentivizing executives to meet quality and patient satisfaction goals must take place in the near future in order for true healthcare reform to take hold throughout an organization.
"[Hospital] boards are now weighting incentive goals for the CEO and other members of the team. However, we're not seeing the move away from annual incentive goal-setting; rather, we're seeing the board take an additional interest in how to structure and add in long-term performance planning goals," says Sally LaFond, a senior consultant with Sullivan, Cotter and Associates.
LaFond notes that she is seeing new compensation measures in some healthcare organizations, such as quality, safety, and patient satisfaction being added throughout the C-suite incentive structure. Still, these incentives are being applied annually instead of long-term.
One organization that is approaching executive compensation with an eye on the future is Cincinnati-based The Christ Hospital, a 555-bed, nonprofit acute care facility with more than 90 outpatient and physician practice locations. The hospital changed its leadership compensation structure five years ago in anticipation of healthcare reform. Instead of targeting only physician compensation plans, however, the organization began making structural changes to how everyone was compensated, starting with the CEO and on down to the rest of the staff.
The Christ Hospital's board decided to restructure its compensation plan to incent quality outcomes and patient service, along with strong financial performance. The specific measures were based on annually revised critical success factors and metrics tied to the incentive plan for the executive team.
"Our value chain begins with having executive leadership define our strategy and goals and setting our incentives around it. Having that information also helps us attract great leaders, physicians, and employees that can help us grow the business in a positive way—that want to help the organization achieve financial performance and advance the enterprise overall," says Tolson.
To encourage clinical improvements, for instance, Christ Hospital uses metrics to look at overall outpatient ratings from Press Ganey and inpatient metrics for HCAHPS. Each area is weighted 10%, or a total of 20% out of 100%. In order for any incentive to be paid out, the executives must reach predetermined targets. That's a sharp contrast to how most organizations structure their executives' incentives, based solely on overall financial performance. Of course, it would be foolish for any organization—regardless of its tax-exempt status—to think it could survive without encouraging its team to strive to keep a strong bottom line. The Christ Hospital didn't ignore that fact in its structure. No incentive bonuses are paid unless the organization reaches its financial performance goal.
Not unlike many other hospitals, The Christ Hospital has endured some tough economic times, and during those years the organization did not pay incentive bonuses. Even then, the organization's compensation structure still acted as a catalyst for employees to pursue quality and patient satisfaction goals, Tolson says.
Also in contrast to many of its healthcare peers, The Christ Hospital's compensation structure moves away from using only annual incentives. The idea is to encourage the C-suite to think long-term and not undercut the organization's future performance while trying to hit the current year's targets. To do this, it established a three-year rolling incentive plan tied to its 7-10-year strategic and financial plans.
"Our [compensation] approach was to find a way to more tightly align our people and our goals by rewarding for quality, patient satisfaction, and financial performance. I think in the future more hospitals and health systems will need to do this, too. In the past, compensation has been about sustainability and maintaining the status quo. Now it's about much more; we all need to row in the same direction to succeed," Tolson says.
For organizations to succeed with population health management, physicians are not the only healthcare leaders who must move away from fee-for-service and toward pay-for-performance. Ultimately, for an organization to continue to achieve financial success in the reform era, the compensation of its leadership must also change.
Today is Cyber Monday, so don't be surprised to see a few of your staff stealthily shopping for that perfect holiday gift instead of toiling for the organization. Though it's an online retail event, Cyber Monday does offer healthcare CFOs some important reminders about their own operations.
Use technology to save money. I often interview financial leaders who talk about needing the right data to drive decision-making. If your organization hasn't bought in to the idea of using analytics for decision support, then you'll be left behind as healthcare reform hits its stride in 2014.
In the September edition of HealthLeaders magazine, Cleveland Clinic's CFO Steven Glass explained how the multispecialty academic medical center handles 4.6 million patient visits annually. Glass uses data dashboards to continually gauge how the organization is performing. He's able to look at volume, occupancy, patient satisfaction, quality metrics, utilization, cost, and numerous other areas. Cleveland Clinic deployed its first dashboards eight years ago. Today, dashboards update data every 30 minutes.
"It's critically important for executives across the organization. It is a way that, as the CFO, I know are we having a good month or a bad month," Glass told HealthLeaders Media. "Long before you see revenue numbers and expense numbers, if you really know your business and you track it pretty closely, you can see where you've got trends in different parts of your organization."
Comparison-shop. Most hospitals assess their vendor contracts periodically, but don't forget that brand loyalty isn't a bad thing—especially if you want to secure a great price.
Vendor selection should encompass numerous phases, from a spend analysis to price comparison to product efficacy, and then result in a contract. But the work doesn't stop once you sign the agreement. if you want to truly reduce your revenue cycle costs, cultivate supplier relationship management (SRM).
SRM is an approach to managing interactions with the vendors that supply goods and services by creating a common communication and goal-setting structure between the hospital and supplier. Typically, buyers and suppliers use different business practices and terminology. The objective is to increase the efficiency in acquiring goods and services, managing inventory, and processing materials for not only the hospital but also the vendor.
Intermountain Healthcare, the 22-hospital, $3.6-billion healthcare system headquartered in Salt Lake City, usesd an SRM approach in working with a sterilization vendor over a six-year period. The result was reduced costs by $2 million per year. Intermountain and the sterilization vendor were able to share information and track monthly performance metrics against annual goals.
"This trusting relationship has provided excellent benefits for both parties," said Brent Johnson, vice president of supply chain and imaging services and chief purchasing officer at Intermountain.
Negotiate a win-win. While it's important for healthcare CFOs to manage their vendor relationships, it can also be crucial to work with physicians to help them manage their vendor relationships. A tried-and-true way to keep costs down is to establish some type of gainsharing arrangement with providers.
St. Luke's Health System, a six-hospital health system based in Boise, ID, successfully used gainsharing at two of its hospitals, said Cam Marlowe, the system's director of contracting and sourcing for supply chain management. After an analysis showed that combined spending at St. Luke's for cardiology, spine implants, and total joint implants totaled $39 million, Marlowe worked with physicians to implement a gainsharing plan beginning in 2009.
After a year of trial and error and limited returns, he says, the initiative showed fruit in year two. The organization reduced the cardio, joint implant, and spine implant spend by $1.3 million for the two participating hospitals, and garnered another $450,000 in rebates from implant device vendors. By year three, St. Luke's had saved another $7.1 million, and it anticipates an estimated savings of an additional $3.7 million by the end of this year.
"We needed to reduce our costs and wanted to get the doctors involved to help us determine how we could lower our cost while maintaining or improving quality. The gainsharing program was the best way to jump-start that collaboration," says Marlowe.
21st Century Oncology, which provides cancer care services in 16 states and seven countries and has a network of over 250 facilities, began testing bundled payments when its leaders foresaw changes in healthcare reimbursement. "For over two years, 21st Century has felt that the payment model is going to evolve. We've been working with CMS closely to pilot this [type of payment model] in the Medicare space; we had those discussions going prior to reaching a commercial agreement," said Kurt Janavitz, senior vice president of managed care and network development.
"Rather than have this [payment] model thrust upon us and have to react to it, we decided to take a leadership position to gain the experience with it, and to use it as a differentiator for payer groups wanting to use it," Janavitz told HealthLeaders Media.
To arrive at a fair bundled price for its procedures, 21st Century Oncology had to review costs and provider utilization levels and then benchmark each organization regionally and nationally to look for possible savings in anticipation of a bundled contract.
"We're experts for treatment, so we said we should come up with the right overall [payment] rate, and then that gets the nonsense out of the process of delivering care to the patient. The cash flow is up-front as opposed to claim-by-claim. We decided to do this as a national case rate contract as opposed to doing a different contract for each of Humana's individual markets," explained Janavitz.
'Tis the season for shopping and giving, and in that spirit, CFOs should aim to give their organizations a lasting gift: a strong bottom line.
How does the country's economic future look as we peer over the edge of the "fiscal cliff"? Will Congress take action and avoid the expiration of tax cuts and sequestration? And how will all this impact the Patient Protection and Affordable Care Act? These are questions that every financial leader should be pondering. A legal and a legislative expert offered their thoughts on what may happen next.
Mark E. Lutes, a healthcare attorney with the national law firm Epstein Becker Green and William C. Oldaker, a member of the Washington, DC–based consultancy National Health Advisors, discussed the post-election regulatory agenda in a webcast last week.
One of the most intriguing points which the pair agreed on is that, although the reelection of President Barack Obama would seem to protect the PPACA from additional scrutiny, the need for bipartisan support to prevent sequestration may spark additional changes to healthcare reform. While the PPACA cleared two significant hurdles this year—the Supreme Court's decision to uphold the law and the Presidential election—Lutes said there are more bumps in the road ahead.
"After those [hurdles], many thought it would be smooth sailing—the land of milk and honey for healthcare reform," said Lutes. "It will probably come as a rude shock to health reform supporters that portions of the ACA may not be out of the woods yet. There may not be a legislative majority for appeal, but issues could still arise because key elements of the ACA's axis could be a tempting target during deficit reduction discussions."
Oldaker and Lutes speculated that many aspects of the PPACA could become pawns in the budgetary negotiation process during the current lame-duck session. While House Republicans want to avoid the defense cuts that are lined up if sequestration takes effect, the Democrats would like to avoid domestic spending cuts and bring in some "upper-income revenue to the party," Lutes says.
"For me, the $99 question is: What are the chances that the lame-duck deal will affect ACA funds, such as the funds slated for Medicaid expansion or the funds for the [health insurance] exchange enrollment subsidies?" questioned Lutes.
Democrats will seek to protect these funds, Oldaker said. "They are down at the bottom of the list that the administration will agree to, but they'll be on the list that the Republicans put forward. The President will try to protect both the exchanges and Medicaid expansion as much as possible."
With such a tight popular vote for the Presidential election, Oldaker believes we can expect to see President Obama more willing to work with Republicans and "in the mood to negotiate" to get bipartisan support to resolve the fiscal cliff before it transpires.
"The day after the election, [House] Speaker [John] Boehner [R-OH] fired the starting gun on this race ... saying he was ready to work with the President to resolve the fiscal cliff but that ‘real change to the structure of entitlement programs' needs to be a part of the solution, along with spending cuts and revenue increases from tax reform," said Lutes.
President Obama has vowed not to allow sequestration to occur, but he'll need to woo Republicans in order for that to happen, which will require compromise and that puts tenets of the PPACA in play.
"Republicans don't want the $1.2 trillion cut—which is half domestic and half defense—to go into effect, either. So, there has to be negotiations to figure out how to get this done," said Oldaker.
Lutes noted, however, that the President seems to be sending signals to Republicans that he's "open to compromise and open to new ideas," as long as the approach is balanced.
Despite the negotiations to come over the specifics of healthcare reform, Oldaker said the law unquestionably here to stay. "What's unassailable from this election is that the ACA is now going to be permanent and the regulations will be implemented," he says. "Watch for a flurry of regulations coming out in the near future. And the [health insurance] exchanges will be implemented to the extent that each state wants to implement them."
Beyond PPACA
Oldaker noted that what's going to happen in healthcare in the coming year goes well beyond PPACA. Healthcare, as a part of the national budget, will be subject to rigor as legislators look to make cuts.
"Beyond reform, healthcare is such a substantial portion of the federal budget that it will be under attack in the coming year," said Oldaker. "The discussion [between Republicans and Democrats] will go in two parts: one on sequestration and the other on revenue. The President realizes if he can't get agreement on revenue and then the tax cuts expire, it will be an issue."
Of the $3.6 trillion the U.S. government spent in 2011 (which accounts for nearly 24% of the nation's gross domestic product), $2.2 trillion was financed by federal tax revenues and $83 billion by excess profits on assets held by the Federal Reserve. The remainder—$1.3 trillion—was financed by borrowing, which will be paid with future tax revenue. The largest share of that $3.6 trillion, 21% ($769 billion), went to healthcare: Medicare, Medicaid, and the Children's Health Insurance Program (CHIP). In comparison, 20% ($718 billion) went to defense and international security assistance, 20% ($731 billion) went to Social Security, and 13% ($466 billion) went to safety net programs. The government also spent $230 billion (6%) on interest on the national debt.
Currently there is a 2% across–the-board cut on Medicare reimbursements, and Oldacker says healthcare organizations can expect that to remain in effect at least for a few months into next year.
Though politicians have talked about compromise after the election, over the last four years Democrats and Republicans in the House and Senate have failed to do so, which has stalled numerous pieces of legislation. With the political landscape changing very little after the 2012 election, the question looms: can legislators set aside differences to keep the economy from sailing over the edge of the fiscal cliff? That's perhaps the most unpredictable element of attaining a resolution to the problem.
"At the end of the day, I think Congress will act in a way so as not to allow sequestration," says Oldaker. "But that's only part of the problem; they'll still have to get a budget agreement to lower the deficit."
Healthcare leaders have told HealthLeaders Media that, regardless of the outcome of the 2012 elections, most planned to carry forward with a reform agenda. But CFOs say the looming "fiscal cliff" could derail their efforts if not resolved.
I asked three financial leaders—Kendall Johnson, CFO at Baton Rouge (La) General Medical Center, Debbie Bloomfield, CFO for the Central Division of Catholic Health Partners and Mercy Health in Cincinnati, and Rick Hinds, executive vice president and CFO at UC Health in Cincinnati—about their plans in the months ahead, and how sequestration threatens those.
HealthLeaders Media: Now that there's more certainty around the government's healthcare agenda, is it influencing how your organization moves forward with its strategic agenda? Kendall Johnson:There is one positive that comes from there being no change in the administration or in the balance of power: now we can stay focused on where we want to go under these new laws. The results of the election didn't change or accelerate our strategy at all, and the results weren't going to change our path either way. We realized that the path we're on is the future of healthcare, and so we're moving as fast as we can on it. We are focused on sharing information internally and externally and building a collaborative network with our managed care [payers] to control the health of populations and to improve the quality of care and safety of patients.
Kendall Johnson
We didn't plan for every [financial] event that could come out of this; there were too many unknowns. ... We're getting ready to go to the market to refinance $180 million, and I'm not concerned about raising the capital to grow, but [I am concerned] about the industry continuing to react to the need to make cost reductions through mergers and acquisitions.
Debbie Bloomfield: The election hasn't influenced our approach. We made an organizational decision that, regardless of what happens with the election, we're going to keep moving forward. So the work we've been doing developing our network, and becoming a Medicare Shared Savings Program participant is on track, and we have no intention of varying what we were doing. Also, our project for rolling our EMR out throughout CHP wasn't dependent upon the election results, so we'll keep that moving forward too.
Debbie Bloomfield
[In terms of financial gains or losses] some of that is still yet to be determined. However, we do recognize that no matter what, the cost for healthcare is a problem for everyone. That's why we knew we had to move forward with the [strategic] initiatives we'd already planned. However, we realize there's a [federal] budget to be balanced, and that'll require [political] give and take. That's where we're skeptical as to whether it will be positive for providers from a financial standpoint.
Rick Hinds: Regardless of who won the election, it was going to be a rough few years for the healthcare industry, and we'll just need to work through it. President Obama isn't going to have to worry about getting elected a third time, so he doesn't have to worry about pushing his agenda. What's really going to matter is the alignment between the House and the Senate to be able to push any of their agenda items. But at least we know where we're heading with Obama's re-election, and I think that will help all of us move forward in terms of healthcare reform. But the election hasn't changed our plans; we're still moving along full force on all of our initiatives.
Rick Hinds
On the cost side, we'll continue our cost reduction strategies and partnering to make sure we have the breadth of services that we need. We're also dipping into the risk side of the business in terms of contracting with the payers, particularly on the commercial side, and the work that we need to do around pay-for-performance initiatives that the government's rolled out. Lastly, we're looking at some patient populations that we might want to do some Medicare waiver projects on—again, so we can get into the risk-sharing side of the business. [Financially] the most immediate thing for us is the "fiscal cliff"—sequestration—that may happen next year. We've budgeted for that.
HealthLeaders: How are the $600 billion fiscal cliff and the threat of sequestration influencing your plans for 2013?
Johnson: I'm concerned with the balance of power in the House and Senate... are we going to be able to enact polices that are going to move the country forward and solve the fiscal cliff problem? I'm also worried, though, about how the elections will impact the country's ability to stimulate jobs and grow the economy. How will we get back into a growth mode and decrease unemployment?
Bloomfield: I'm a little on the pessimistic side about this. When you hear about what some of the Republicans are saying now in the House, I'm worried that [the politicians] won't be able to come to an agreement by year–end and that some of the automatic provisions will kick in. I'm trying to stay optimistically hopeful, but we're less than two months away from that point. We've gone ahead, in our financial plan for next year, anticipating [sequestration] would impact us, and we've planned accordingly. We took out the revenue, which meant we had to look at our own expenses again. We've had many things in place around cost-reducing initiatives in traditional areas, but from this summer through the fall our group looked into how we could increase the efficiency in our organization. We looked at how we could increase standardization utilization of vendors—not just supplies but purchased services across the board, and how we approach utilities management—to help offset those anticipated reductions in reimbursement.
Hinds: [The political configurations in the House and Senate] are going to make it harder to reach an agreement balancing the budget. I'm assuming we're going to have sequestration because I don't think we'll be able to reach an agreement by December. Sequestration is going to hit us hard just like everyone else [in healthcare]. But if something happens beyond a vanilla sequestration, it could be a plus or a minus for us, depending on which specific components the government cuts. For example, we're an academic medical center, so if they decide to cut GME and IME [graduate medical education and indirect medical education] reimbursements, that could hit us worse. We assume that it's going to be an across-the-board cut, but something might happen the last two months of the year that could change it.
HealthLeaders: For those healthcare organizations that may not have embraced healthcare reform over the last four years, how quickly can they catch up?
Johnson: IT is the key, and if an organization hasn't achieved Stage 1 of meaningful use by now, they are truly behind. You should be talking about Stage 2 by now; you need to know how you'll work with an Exchange, how you'll communicate [patient] information within the community and through a patient portal. All of these are important parts of the future of healthcare. For those that aren't too far along, they'll really need to accelerate their pace of change greatly. Also, it takes a significant [capital] investment into infrastructure in order to succeed with these [healthcare reform] strategies. They'll need to be ready for it.
Bloomfield:When I look back at our journey, I realize just how long it takes to prepare for this transformation. It will be interesting to see how fast [those that haven't made strides toward reform] can increase their pace if they haven't started before now. There's a lot of work that goes into evolving an organization in this new direction. I'm grateful we made our decisions independent of what might happen politically with the election.
Hinds:What I think we'll see [in the industry] is a lot more risk-sharing [payer contracts], which [healthcare leaders] have been holding back on. We in healthcare, especially on the provider side of the industry, haven't had a lot of experience in risk-sharing. It's a new concept for us and it's not where we have a lot of depth and experience. It's an area that all of us have been worried about getting into, but we'll have to get in there and figure it out. Reform was always going to happen in our industry anyway—it was only a matter of timing.
This article appears in the October 2012 issue of HealthLeaders magazine.
Addressing a litany of government mandates while dealing with a sluggish economy and decreasing patient volumes and reimbursements have created a challenge for CFOs looking to raise large amounts of capital. Only a handful of organizations have the wherewithal to generate enough cash from existing operations, reserves, or endowments, leaving most to weigh the options. Small and large hospitals and health systems are turning to mergers to find financial strength. However there are other opportunities, including joint ventures, venture capital, bank loans, and blends of these that can provide the critical dollars needed to stay competitive.
As value-based care and bundled payment systems take root, the demand for often expensive organizational competencies, such as IT, can put slow or underperforming hospitals at risk for faltering long-term. It's the precarious financial situation that some providers are now in that is limiting access to badly needed capital and that has sparked a jump in healthcare mergers in the past two years. But that avenue is not attractive for many organizations, and so they are looking at new ways to deal.
"Actually there's nothing new or different in capital financing that has occurred for at least 10 years, but now there are lots of shades of gray in how deals are created," says Robert Shapiro, senior vice president and CFO at North Shore-Long Island Jewish Health System in Great Neck, N.Y. In April the system, which has approximately $1.3 billion in long-term debt, issued about $50 million in tax-exempt fixed-rate debt to save money by taking advantage of low interest rates. With a $6.7 billion annual operating budget and 16 hospitals in the system, North Shore-LIJ has consistently used what Shapiro describes as a traditional capital allocation model, with cash generated from operations, fundraising, and borrowing; but that's changing.
"We've tried to take an approach our investors are comfortable with, and when you have access to the capital markets it's a pretty efficient way to access capital," he says. "However, we are looking at making acquisitions as we feel the need to expand into markets sooner than we may have before healthcare reform. Now we're starting to consider alternatives such as healthcare partners or joint venture dollars. We haven't done it yet, but we're likely to do so in the next year or two."
Until 2009, debt financing—or raising money for working capital or capital expenditures through the sale of bonds, bills, or notes—was considered an easy process, but those days have passed. Now, finding the scale and financial resources to secure a top-notch public credit rating can prove challenging, especially for hospitals with finances hit hard by the recession and in dire need of facility or infrastructure upgrades. A hospital's inability to secure a BBB- or better credit rating can stymie access to capital.
For the organizations that fall below that rating, mergers can be a good pathway to get access to capital for infrastructure upgrades or technology updates. Buyers tend to look beyond the credit rating and balance sheet and at the hospital's leadership, market position, and long-term viability.
For instance, in May 2010, North Shore-LIJ initiated an agreement to acquire the 652-bed Lenox Hill Hospital, which represented its first hospital in Manhattan. (The deal was finalized
in April 2011.) The partnership offered financial refuge for Lenox Hill Hospital—one of the last independent hospitals in New York City. Having no affiliated hospitals or networks of primary care doctors to feed patients into the 10-building complex, Lenox Hill found it was fighting a tide of declining admissions and carrying an operating loss with a five-year total of $165 million. Then in 2009, Moody's Investors Service downgraded Lenox Hill's credit rating to outlook "negative" and projected a possible $20 million operating loss for the hospital by the end of 2012. Shortly thereafter, the organization responded by putting out an RFP for potential partners.
"We had no presence in Manhattan, and we felt it was important to be there. So this was a very good opportunity from a strategy standpoint," Shapiro says. "But we also had to look at the organization to be sure we were compatible culturally, and we do monthly post-acquisition check-ins."
While the Lenox Hill merger allowed North Shore-LIJ to expand its market a strategic alliance with Hackensack (N.J.) University Health Network announced in March should serve to strengthen the credit standings of both organizations. But the outcome will depend on the programs generated by the endeavor through Hackensack University Medical Center, which is a leading tertiary provider that has created the clinical strength and depth of services that has allowed it to maintain a dominant (28.8%) market share in its service area, according to Moody's.
The alliance will allow both organizations to create joint programs and initiatives, but each entity stays independent and continues to be responsible for its own assets, operations, and liabilities. The as yet undefined programs will be jointly developed and the funding and operational management determined by a joint operating committee.
The alliance of North Shore-LIJ and HackensackUMC is an opportunity created by the current healthcare and economic environment, but HackensackUMC is also at the forefront of trying some unique capital lending transactions. In a recent transaction, Hackensack University Health Network, the parent company of HackensackUMC, created a joint venture with Dallas-based LHP Hospital Group, Inc., a for-profit company that forms joint ventures to own, operate, and manage acute care hospitals with not-for-profit partners. LHP served as an equity partner for the opening of two Hackensack-UMC hospitals: HackensackUMC at Pascack Valley in Westwood, N.J. and HackensackUMC Mountainside Hospital in Montclair, N.J.
In late 2007 and early 2008, HackensackUMC purchased a hospital's assets out of bankruptcy and negotiated a joint venture arrangement with LHP to reopen and refit the community hospital The agreement transitioned the former not-for-profit Pascack Valley Hospital into a for-profit one, and not-for-profit HackensackUMC holds a 35% interest in the facility and operations.
The HackensackUMC and LHP joint venture is written so HackensackUMC didn't need to invest any additional capital into the hospital; however, LHP is expected to contribute approximately $95 million, according to an LHP statement. Additionally, LHP and Hackensack partnered in a similar structure to take over the license for 365-bed Mountainside Hospital, a move that was approved by the state's attorney general in June.
"There's no high-quality organization out there that isn't also financially strong; to get there you need to grow. We started on these transactions over five years ago and the regulatory process for the first initiative took a long time; the second hospital took just four months," says Robert L. Glenning, executive vice president and CFO at HackensackUMC. "We looked at our situation and did an honest assessment of how we could achieve multiple and sometimes competing strategic goals for capital. We decided we needed to find a way to address how we could take on a new hospital without jeopardizing ourselves financially or losing sight of our mission."
Glenning says that by engaging LHP as a partner to help manage and operate these hospitals, HackensackUMC could keep its pocketbook out of risk and still align with the organizations.
"It was $190 million to just purchase HackensackUMC Mountainside; if we did that by ourselves that would've significantly impacted HackensackUMC's credit rating, and it would've only developed one community hospital. But our larger goal is to bring some stability to the region by being a well-run network that our community can depend on," he adds.
The HackensackUMC capital approach may be unique, but it's also on point with the industry trend toward consolidation. In the January HealthLeaders Media Intelligence Report M&A: Hospitals Take Control, 80% of healthcare leaders said they will have an M&A deal under way or will explore one in the next 12–18 months, and the prevailing reason was to shore up existing geographic markets. Also, HackensackUMC's use of private equity funds is in keeping with the widely reported slow and steady uptick in use of these firms in the healthcare space, though not all financial leaders see it as the right opportunity to pursue.
"Venture capitalists need to generate a substantial return," says Richard Magenheimer, CFO at Inova Health System in Falls Church, Va. Inova is a not-for-profit system that serves more than 2 million people per year and consists of five hospitals with more than 1,700 licensed beds and 16,000 employees. "Venture capital is probably one of the most expensive forms of financing; it can easily be 15%–20%. That's a very expensive form of financing, especially when you're talking about a bricks-and-mortar hospital. Plus, the venture capital hurdles can vary depending on the project; it can be very difficult to structure something with venture capital that works from a compliance standpoint."
In 2010, Inova Fairfax Hospital broke ground on the first phase of an $850 million campus improvement project. The three-phase, multiyear project is intended to upgrade the campus to meet increasing demand for services—particularly for senior patients and obstetrics patients—and continued population growth in the hospital's catchment area. It also took years to get under way; though ready to go to contract in 2009, and costing an estimated $1 billion, the project was deferred following the market downturn in 2008–2009.
"Following the capital markets' disruption in the fall of 2008, we determined we could not move forward with construction until we had confidence that we could access public debt markets as part of our financing plans," says Magenheimer. "In order to mitigate the financial risk of the project, we broke it down into three distinct phases and contracted separately for each phase. We had set aside $200 million in a special portfolio as a capital contribution toward the project. When the market meltdown hit, the portfolio retained its value."
To finance phase one of the project, a $225 million patient tower, Inova borrowed $190 million in the public debt markets. It's a financial approach Magenheimer says serves the organization well. "Generally, the public markets still tend to provide the best pricing compared to private financing. We have one bond issued as a private placement with TD Bank—and it was competitively bid—but in most instances our best pricing is in the public markets," he says.
In August, Inova completed a $400 million offering in the capital markets. Magenheimer says $300 million of that financing will go toward phase two of the south patient tower and a portion of phase three—a renovation of the existing campus slated for 2015.
"We are confident that Inova will have the necessary capital to complete all three phrases of the project. There's always a balance needed between borrowing at competitive rates and retaining some internal liquidity," he says. "One should first look at internally generated funds for project financing. However, we think the public markets in general will offer the most competitive cost of capital, provided an organization has to have the financial performance to access those markets," Magenheimer notes.
Though Shapiro and Magenheimer agree that commercial lenders tend to be better for short-term capital rather than long-term capital, such institutions are, nevertheless, viable lenders. Banks generally lend by directly purchasing tax-exempt debt with fixed or variable interest rates. The American Recovery and Reinvestment Act of 2009 widened the definition of bank-qualified debt, which encouraged approximately $70 billion of direct tax-exempt loans in 2009 and 2010, according to The Bond Buyer.
Although the temporary debt provisions under the ARRA ended with 2010, banks have continued to actively lend to healthcare organizations. "We're seeing a lot more activity, but the conversations are different," says John Hesselmann, specialized industries executive for Bank of America's Global Commercial Banking.
With borrowing, generally, the overall interest rate on direct bank loans is competitive when compared to public debt issuance levels. The interest rate varies with the borrower's creditworthiness and the credit spread. Hospitals have become more strategic about their borrowing approach, Hesselmann says, with more willingness to access lower-cost medium-term financing options, as opposed to longer-term borrowing for short term-needs.
In addition, cost savings from focusing on efficiency gains in the revenue cycle are getting more attention than ever. "Where we are having more conversations is as it relates to counseling clients on creating efficiency through treasury solutions, going end-to-end through the payment mechanism, and accelerating the receipt of cash and optimizing the back end by using the products that do that," Hesselmann says.
To gain savings within their true financial picture, hospitals are focusing on improvement in the revenue cycle, striving to reconcile their claims data with their reimbursement payment dollars to the highest automated degree possible, he adds.
Deciding which capital lending approach to take is individual to the organization and the project, says Glenning.
"There's no system that's grown significantly without a trail of tears in the learning process," says Glenning. "For those who want to avoid that, my best advice is to figure out what's important to your organization's core mission. For us it was our academic and tertiary service. … Investing in a community hospital was a way to ensure that goal, and this joint venture was the way to do it."
Reprint HLR1012-8
This article appears in the October 2012 issue of HealthLeaders magazine.
Elections are just a day away, and the results will have a huge impact on the future of U.S. healthcare. But whether President Barack Obama remains or former Massachusetts Governor Mitt Romney is elevated to our nation's highest office isn't the only race that healthcare CFOs need to watch. The Senate races will also influence the policies adopted and enforced in the coming years.
The fate of health insurance exchanges (HIX) is particularly dependent on which party controls the Senate. I spoke with a health and public policy expert to find out how the Presidential and Senate elections could impact HIX.
"Exchanges are like a Travelocity for health insurance, and aren't political except that it is a feature of 'Obamacare.' The exchanges concept wasn't a politically partisan one, though. It's found in Romney's Massachusetts plan too," says Dick Cowart, chair of the health and public policy department at the Baker Donelson law firm.
Healthcare executives are more supportive than suspicious of HIX, according to our HealthLeaders Media annual industry survey. Just under half of the 823 leaders in the survey say they view HIX as an opportunity, while 19% see exchanges as a threat.
Last week, communications firm ReviveHealth and Catalyst Healthcare Research released results from another survey of healthcare executives. Among the findings:
A third of respondents say HIX will move forward regardless of who wins, while 46% say that if Romney wins they still expect exchanges to proceed, but only if administered by the states, not the federal government. Nine percent of respondents say a Romney win will mean a halt to HIX. Some respondents speculated about a year's delay of the exchanges or a rollout of private exchanges with states contracting with them for certain target populations.
Hospital executives also expect all the national health insurance carriers to participate in state HIX, as well as strong participation from managed Medicaid plans.
Cowart notes if Romney is elected, the "artwork" will be in separating out HIX from the Patient Protection and Affordable Care Act without necessarily eliminating them. "I believe that exchanges will continue," he says. But, Cowart notes, the Senate elections can influence that outcome as well.
"If Romney is elected, but the Democrats still control the Senate, in that case the repeal and replacement of the Affordable Care Act becomes much more problematic," he says. "Republicans have to run the table to have a clean repeal and replace, so it's not just the presidential race that matters. And the Senate races are close, too."
If Obama is re-elected, Cowart says, HIX will continue as a policy, regardless of who controls the Senate. But if Republicans control the Congress and try to repeal or replace PPACA, then the president would very likely veto the attempt.
If HIX go forward, then most healthcare executives will need much more education on the details, Cowart says. Selecting a rate for the exchanges is a complicated process. First the governor of each state must determine what the essential health plan benefits will be. Then the payers have to organize their networks around those benefits, and then both the commissioner of insurance in each state and the HIX have to oversee the adequacy of that network and the premium pricing to buy that plan.
"What's not in [the law] is oversight on what a plan pays a provider. So it's certainly plausible, in regulations that aren't written yet, for there to be some oversight as to what [rate] is 'reasonable,'" he says."And many governors won't make a decision on how to proceed with exchanges until after the election."
If rates prevail at Medicaid levels or below, then 57% of healthcare executives in the ReviveHealth/Catalyst survey feel the impact on the bottom line would lead them to make substantial cuts to operating costs or do something drastic such as "merge, cut service lines, or close units." Nearly a quarter of respondents say they would decline to participate, while other responses included assertions that they "would go out of business" or "go bankrupt."
That's a grim possibility for some hospitals and health systems Regardless of the election outcome, Cowart says, "On November 7, we're all going to have to have a very adult conversation about exchanges and Medicaid expansion."
As a healthcare organization moves from fee-for-service reimbursement to population health–based care, it must accurately define how sick its population is—not only to take good care of these individuals but also to be reimbursed correctly. If clinicians undervalue the population through the clinical documentation, then the government and payers will follow suit, and that can cost a hospital or health system millions.
Borgess Health, a health system based in Kalamazoo, Mich., was able to uncover more than $6 million in reimbursement by getting physicians to improve their documentation. Chances are that for your organization, it's as simple—and complicated—as that.
Anthony Oliva, DO, CMO at Borgess Health, is no stranger to clinical documentation improvement. In 2004 he was vice president of medical affairs at Bayhealth Medical Center in Dover, Del., where the organization refocused its documentation process by taking a clinical perspective rather than concentrating on primary coding.
Bayhealth added a clinical documentation management program from J.A. Thomas to help get to the heart of assessing and reporting severity of illness (SOI) and expected versus observed mortality rates, to more accurately determine hospital and physician performance. So when Oliva arrived at Borgess Health, it was only natural that he looked at clinical documentation.
"Borgess Health was working to decrease observed mortality through quality care initiatives, but had overlooked another critical point: improving documentation to improve the SOI expected mortality part of the ratio," says Oliva, who adds that the healthcare industry has traditionally viewed mortality as a quality problem, largely ignoring the role documentation plays in outcome metrics.
Having gone through the process of assessing and correcting clinical documentation at Bayhealth, Oliva was intrigued at how changing Borgess Health's documentation approach might influence the organization's metrics. Borgess Health, part of the Ascension Health network, includes more than 120 care sites in 15 southern Michigan cities, as well as five owned or affiliated hospitals, a nursing home, ambulatory care facilities, home health care, physician practices, a cancer center, and an air ambulance service.
Implementing a new clinical documentation improvement program had to be done carefully to ensure that changes didn't negatively affect the system's overall quality of care. Once the J.A. Thomas clinical documentation program was in place, Oliva carefully monitored SOI and mortality for changes.
"If you're moving the severity number and increasing the expected level of severity of patients and your observation indicators, such as mortality, don't move, then you're not having an impact. But if it does move, then you know you're impacting your denominator and not doing anything to impact your quality," he explains. "The first measurements I took after J.A. Thomas was added, there was dramatic move in CC [complications or comorbidities] pairs, and our mortality dropped 30%. That told me the program was working."
To determine how large the opportunity was in the organization’s clinical documentation, Oliva needed to do a measurement gap analysis by comparing Borgess Health’s MS-DRG codes against a benchmark.
"I looked at a couple of different variables and measured the MS-DRG couplet and triplet percentage performance at Borgess Health based on high-to-low severity within 40 MS-DRG groups," he explains. He compared those numbers against his experience and data he'd seen while working at two previous organizations of similar size and make-up.
"That comparison showed me that there was a potential reimbursement increase of about $6 million if we took a more clinically focused documentation approach," he says.
But doing so required Oliva to get physicians to see where they were missing documentation and to work with documentation specialists and coders on accurately coding clinical work. No easy task, since it meant that physicians needed to spend extra time to do this, but it was the physicians’ outcomes that were the key to moving this program forward.
"With the data I'd gathered, I could show the physicians how putting their clinical documentation into a language that coders can understand would affect their outcomes," Oliva says. "With CMS and Healthgrades now tracking physicians' individual performance data, including individual physician mortality rates, seeing this information really hit a nerve."
Once Borgess Health physicians recognized they needed to document that their patients were sicker in order for severity adjustments to apply, it sunk in, Oliva says: "If you don't get the information into the documentation, it doesn't accurately reflect the patient that was treated. And if that physician is compared to another physician that is [documenting accurately], then that doctor's outcomes will look worse. Eventually we'll be paid for outcomes. So I tell them, 'Get the documentation right and you’ll get credit for what you're doing to care for your patients.'"
Physicians were not asked to memorize any codes, just to work more closely with the clinical documentation specialists when more information on the clinical notations was requested.
"We asked them to be part of the team that’s there to help them get their outcomes to where they should be. Over time, the physicians will learn where they need to put in more information to do a better job documenting," explains Oliva. "This is helping encourage a conversation between the coder and the physician."
Coders and clinical documentation specialists were also put through two weeks of clinical documentation training to grow their knowledge and improve the relationship between these two departments. "You have to build a team between the CD specialists and coders and the physicians so they don’t see their worlds as separate," says Oliva. "This is all really basic stuff, but it's effective."
The financial and clinical results speak for themselves: Since the implementation of the program in August 2011, Borgess Health has picked up over $6 million in reimbursements, and with a 25% improvement in severity-adjusted mortality, which has placed the organization in the top 10% performance category of the Premier, Inc., outcome database.
"In healthcare, it's a positive to identify patients on a more granular level," Oliva says. "We need accurate information if we are to manage populations in the future."
Eligibility and enrollment programs at hospitals and health systems are often a costly mess. Fixing these problems can come down to setting the right metrics and monitoring the data in real-time.
Centra Health, a three-hospital system based in Lynchburg, Va., took control of its eligibility and enrollment data, and as a result cut uncompensated care by $9.1 million and saved a total of $11 million.
Many organizations use multiple, disparate data silos that span departments and in some cases multiple hospitals. That makes it challenging for healthcare leaders to get at accurate and actionable performance data. Some organizations rely on in-house departments to screen self-pay patients and enroll them in Medicaid or other assistance programs, while others use third-party vendors.
Four years ago, Joseph Koons, Centra Health's managing director of revenue cycle, sought to change how the organization approached its insurance eligibility and enrollment program. Uncompensated care had reached 7% of Centra Health's gross revenue.
He pushed to have all eligibility and enrollment data centralized. That would give the ability to pull together, in real-time, the needed data: stats on payer, provider and hospital performance measures, outside referrals, and hospital incurred expenses. From there, Centra Health could benchmark against goals and targets that prevent small revenue leaks from turning into huge ones.
The first step was deciding on key performance indicators (KPIs) to track. "We started by deciding which process points were critical to the outcomes, and decided that one of them was eligibility," says Koons. "Eligibility is tied to significant dollars, and our uncompensated care was running at over 6.5% on over $1 billion gross revenue—so even a 10% movement in that [uncompensated care] number would be significant."
Centra Health needed to screen not only its inpatient population, but also outpatients and visitors to the emergency department. Centra Health fields over 92,212 emergency department visits annually and 26,824 admissions across the system.
"Prior to us implementing the use of KPIs, from an eligibility standpoint, most of the data we gathered was subjective and not at all measured. We made a decision that we would measure as much as we could to identify those metrics that would bring the most value to the revenue cycle, and from there put together a KPI strategy with a hierarchy approach. So, depending on [the person's] level of accountability, that's the data they have access to," says Koon.
Koons was tasked with identifying and tracking the KPIs, such as bad debt and charity care as a percent of gross revenue, insurance acceptance and approval rates, cycle times from referral to insurance approval, and approval to pre-certification authorization.
After adding a dashboard to compile data from their systems, Koons worked with Chamberlin Edmonds, a consultant that is a subsidiary of Emdeon, to establish best practices for its eligibility and enrollment program and the ability to work with a third-party vendor who could track quantitative measures to prove success.
Their first step was to screen as many self-pay patients as possible entering the system, explains Koon.
"Doing this would require us to improve our overall contact rate on our inpatient referrals. We needed the [eligibility and enrollment staff] to see more patients face-to-face. We know that the higher the contact rate, the higher the likelihood that the [insurance] applications get completed and approved," he says. "We were at about 80% in terms of face-to-face time with patients, and we needed to consistently be at 98% to 100%. We were able to do that."
Centra Health worked with its vendor to increase the level of contact and to track it. Koons says that just by increasing personal contacts, the organization was able to reduce uncompensated care from 7% to 5.4%—which accounts for that $9.1 million savings.
Besides the uncompensated care savings, it also increased point-of-service collections by $2 million—from $3.4 million to $5.4 million—for a total savings of over $11 million.
"We've seen a positive shift in our percent of charity as a part of gross revenue and the percent of bad debt," says Koons. "Before we had this robust eligibility program, our bad debt as a percent of our gross revenue was always greater than our charity. We knew we needed to do a better job identifying patients who were truly unable to afford care but could qualify for funding sources instead of allowing them fall under bad debt."
There were other bonuses. The organization found that this personal approach improved the patient satisfaction. Centra Health also used data-driven KPI to constantly monitor the eligibility program's performance, for areas such as bad debt as a percent of gross revenue, the amount of charity care provided as a percent of gross revenue, and the percentage of shift from bad debt onto the system's charity care program.
The KPI dashboard also served to motivate internal staff, Koons notes. "When you start to measure things, it brings a greater state of awareness to the people who are being measured, and they're more likely to be in compliance and accountable," he says.
Centra Health used the eligibility and enrollment data to implement a staff incentive program for some departments, such as registration, to further encourage the successful collection of data and dollars. People are incentivized on productivity, accuracy of information gathered, and point of service collections. Since the ultimate goal is to get accurate information, the team must meet accuracy goals in order to trigger their bonus.
"The primary reason we tackled this area was to drive down uncompensated care, grow revenue, and increase our cash flow, but we also found making the added effort to help the patients really improved their—and our—levels of satisfaction," says Koons.
Bundled payments may be the reimbursement model of the future—but deciding if the "future is now" for your organization, or if you should wait until more of these models are tested, is a key strategic decision. In August, 21st Century Oncology, the largest radiation therapy provider in the nation and a cancer treatment network, announced it was pursuing a case rate reimbursement model with Humana for its radiation therapy services. Financial leaders should keep an eye on this specialty bundled payment model.
The decision of when to move forward with a bundled payment model isn't a simple one. At the recent HealthLeaders Media CFO Exchange in Kiawah Island, SC, I asked 18 of the nation's top financial leaders how far along their organizations were in the pursuit of bundled payment models. The response was mixed, but most had little in the works. Many leaders felt it was still too early for their hospital or health system and/or the payer's organizations to establish these agreements.
But a few hospitals were in the early stages, such as Trinity Health in Novi, MI. "We are applying for one of the bundled payment demonstration projects in one of our markets, but we don't yet know if we'll be chosen and how that will pan out," said Benjamin R. Carter, CPA, FHFMA, senior vice president and CFO at Trinity Health, who attended the CFO Exchange. Trinity owns 35 hospitals, manages 12 others, and has a vast network of outpatient, long-term care, home health, and hospice programs in 10 states.
"We are developing accountable care networks and working hard at clinical integration, but we really don't have much in the way of risk-based contracts yet. We just don't know that we're ready yet to manage effectively in that space; we don't want to see the industry achieve the same outcomes it did in the late 1990s. We just don't want to repeat the same mistakes, so we are being cautious," Carter explained. "This work has really been a greater benefit to the insurance companies than to our system because we have a number of patients in our patient-centered medical homes, and they've been effective at reducing hospital utilization. At the same time, we do not have the benefit of a gainsharing contract."
For Trinity, the puzzle is how to arrive at a bundled rate across providers, various clinical areas, and the system as a whole. Some financial leaders at the CFO Exchange noted that bundling across a health system is highly challenging, especially when it comes to dividing up payment. So approaching bundled payments through a specific specialty may prove more successful in the early stages of these payment models—which is why the reimbursement model between Fort Myers, Fla.–based 21st Century Oncology and Louisville, KY–based Humana is one to watch.
The partnership is intended to bundle all the procedures performed during a particular episode of care, with the goal of streamlining the claims payment process, eliminating administrative waste, and facilitating better care coordination across providers.
"For over two years, 21st Century has felt that the payment model is going to evolve. We've been working with CMS closely to pilot this [type of payment model] in the Medicare space; we had those discussions going prior to reaching a commercial agreement," says Kurt Janavitz, senior vice president of managed care and network development at 21st Century Oncology. "Rather than have this model thrust upon us and have to react to it, we decided to take a leadership position to gain the experience with it, and to use it as a differentiator for payer groups wanting to use it."
21st Century Oncology provides cancer care services across multiple modalities, is the nation's largest radiation oncology provider, and has the second-largest group of urologists in the U.S. The physician-led company operates in 16 states and seven countries, has a network of over 250 facilities, and is affiliated with over 500 physicians, including a range of specialties from radiation oncologists to other cancer-related specialists.
Janavitz explains that the organization has spent over 30 years delivering advanced integrated cancer care, but a little over five years ago some payers began to push for more tightly managed cancer and radiation benefits. As these payers scrutinized providers' decisions around treatment modalities offered to patients, paperwork for both providers and payers increased and payments were slowed or decreased.
"There was a lot of micro-managing of benefits. Payers spent a lot of time looking at each action that was delivered, and a lot of clinical time was being spent providing supporting evidence around why we were doing a specific treatment. It was administratively burdensome for everyone," says Janavitz. 21st Century Oncology wanted to decrease the burden and ensure that its patients received treatment based on clinicians' recommendations rather than payers' reimbursement policies.
"We're experts for treatment, so we said we should come up with the right overall [payment] rate, and then that gets the nonsense out of the process of delivering care to the patient. The cash flow is up-front as opposed to claim-by-claim. We decided to do this as a national case rate contract as opposed to doing a different contract for each of Humana's individual markets," he explains.
Humana opted to partner with 21st Century Oncology for similar reasons. "We believe this partnership can improve administrative efficiencies with healthcare providers in Humana's national network," said Bill Barnes, Humana's vice president of national contracting, in a press statement.
Calculating the bundled rate required the organization to comb through historical treatment data and arrive at an average price for each type of treatment.
"We have a large database, and we have the resources and expertise to determine what an appropriate clinical bundle should look like [when deciding on bundled rates]," says Janavitz. "That's not to say that there can't be a deviation [in a standard treatment], but we can come up with a standard treatment that's followed 85% of the time for patients, and know that the other 15% may not conform and accommodate for that."
The partners also needed to define the bundle for each treatment modality. For instance, 21st Century Oncology decided not to include things like consultations and proton therapy in its bundle.
"You don't want to make it too complicated for the payer to administer, and you also want to understand it. It's one of the simpler types of agreements we've seen, actually," Janavitz says.
Which payer to select for testing the case rate model was also a consideration. "Humana is a big payer but we do have bigger. But they're large enough to give value to the experience, but not to [financially] cripple us if it doesn't go as expected," he says.
Janavitz adds that 21st Century Oncologist's chief medical officer was instrumental in working with the medical advisory board and developing care pathway protocols for providers to follow, and addressing provider questions about the protocols and the case rates.
In anticipation of the bundled contract, the organizations also looked at their costs and provider utilization levels, benchmarking each organization regionally and nationally to look for possible savings.
Even with these efforts, Janavitz says the 21st Century Oncology is anticipating a reduction in patient volume and some services as a result of the bundled contract. How greatly these decreases will influence the book of business is perhaps their largest unknown in this process.
"There is a slight unit revenue reduction, but no payer will spend time on this unless there's some sort of unit revenue change out of the gate. We think it will be relatively minor, but we'll evaluate this after a year to see if [these national case rates for standard treatments] are living up to our financial expectations," he says.
In the meantime, 21st Century Oncology is looking for opportunities to enact bundled payment with other payers. How quickly more contracts follow will tell CFOs whether this is a good model to emulate.