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Developing Value-Based Payment Models

 |  By Christopher Cheney  
   October 14, 2015


Industry stakeholders are trying new ways to deliver and pay for care, but the shift to value remains an unfinished journey.

The ongoing shift from a volume-based business model to payment for services based on value has prompted a back-to-the-future scramble in the healthcare industry.

A generation ago, healthcare providers were called upon to assume more risk in the delivery of their services, including the first ill-fated formation of health maintenance organizations across the country. Most providers eventually backed away from both the financial burdens of bearing risk as well as a consumer backlash to managed care, retreating to their familiar fee-for-service payment model. But a select few, such as Salt Lake City-based Intermountain Healthcare, have remained at risk in delivery of services to this day.

"We have a long history with full-premium payments—full, at-risk healthcare," says Greg Poulsen, senior vice president and chief strategy officer at Intermountain. "We think at-risk contracting is, by far, the best approach. There are games you can play with almost all the other value-based payment models. For example, shared savings programs frequently end up being anemic in terms of return on investment and don't do enough to overcome the volume incentives for providers. If you simply get bits and pieces of value-based contracting, you may not be able to overcome the inertia that is U.S. healthcare."

Now, with Medicare transforming reimbursement metrics, health systems are taking up the challenge anew to emphasize value rather than volume in their business models.

The Centers for Medicare & Medicaid Services threw down a value-based gauntlet earlier this year, announcing a drive to link at least 50% of Medicare payments to value-based financial models by 2018. This year, about 20% of Medicare payments to providers are linked to programs designed to boost quality and reduce costs, according to CMS.

In Washington, D.C., this past January, with representatives from nearly two dozen healthcare industry stakeholders at her side, U.S. Health and Human Services Secretary Sylvia Burwell described her vision for the shift from volume-based to value-based payment.

"Whether you are a patient, a provider, a business, a health plan, or a taxpayer, it is in our common interest to build a healthcare system that delivers better care, spends healthcare dollars more wisely, and results in healthier people," Burwell said. "We believe these goals can drive transformative change, help us manage and track progress, and create accountability for measurable improvement."

Large health systems, which generally have the most resources among providers, are leading the adoption of new care and payment models. Based mainly on key local factors such as the patient population, market economics, and organizational culture, large health systems are implementing a range of value-based payment models, with many of the early adopters reporting gains in clinical outcomes and cost efficiency. However, setting the pace of transformation is perilous, with public and commercial payers just beginning to roll out payment models that can finance redesigned delivery of services based on value.  

Survey results published in the Premium edition of the March 2015 HealthLeaders Media Intelligence Report, Payer-Provider Strategies: New Rules for Facing Risk Together, show that health systems lead providers in adoption of at-risk contracting for healthcare services; only 12% are not participating in any type of at-risk programs, which is smaller than the 23% among hospitals and 28% among physician organizations. Also, more than one-quarter of health systems (26%) report that they own or operate a payer business unit or health plan, which is greater than the 16% of hospitals and 7% of physician organizations that have that component as part of their business.

Harold D. Miller, president and CEO at the Pittsburgh-based Center for Healthcare Quality and Payment Reform, says the biggest advantage for large health systems in the shift from volume to value is deep pockets. "Are the big health systems doing value-based care because they want to do it or because they are the only ones who can do it?" he says.

Citing Oakland, California-based Kaiser Permanente as a prime example, Miller says health systems achieving the most success in the value-based space have payer business units to help finance value-based care while Medicare and commercial payers develop value-based payment models.

"They have their own health plan. They can at least pay themselves differently for at least some of their value-based business. A lot of these systems are making a bet—it's sort of at a tipping point. They're not making a bet that they are going to be paid for value. They are arranging to pay themselves."

Indeed, the March Intelligence Report indicates that 29% of health systems are considering establishing or acquiring a health plan, more than twice the share reported by hospitals (14%) or physician organizations (10%).

Until more value-based payment models are available down to the physician-specialty level—and more payers deploy more value-based payment models—large health systems are best equipped to lead the drive to value-based care, Miller says.

"It's not automatic that they can do that. Some systems have leadership that really wants to move to better health. Some are able to do it because they have a monopoly in their community. They are reinventing healthcare, which is a good thing. And they have a lot of money to do this thing."

Flexing financial muscle

Kevin E. Lofton, FACHE, CEO of Englewood, Colorado–based Catholic Health Initiatives, says CHI has spent several billion dollars over the past four years on the value-based retooling of the health system—which includes 105 hospitals and 10 health plans with 104,000 covered lives—bankrolling the nonprofit organization's effort with its massive cash reserves. He says CHI made a strategic decision to dedicate a substantial portion of the system's cash reserves toward value-based care rather than generating investment income.

"We're not a bank. We still have about $7 billion in investible cash, even after spending $2.5 billion on [healthcare information technology]," Lofton says. "We're still spending $1 billion to $1.5 billion in capital expenses to make this transition [to value-based care]. We definitely have been utilizing the strength of our balance sheet." The system reported total assets of nearly $22 billion in fiscal year 2014.

CHI's vigorous effort to adopt value-based care features several elements, including direct managed care contracting with large employers, developing its Prominence Health payer business unit (a wholly owned for-profit subsidiary), and physician-led adoption of value-based payment models.

"First, we have made investments knowing we were not going to be paid for our services. We had to begin implementing these investments before payment models were in place," Lofton says. The hit to the balance sheet from these efforts for the fiscal year that ended in June is estimated between $250 million and $300 million. "The second part of it is that we have reached out directly to employers because we can demonstrate how we are gaining with our own employees through value-based care."

Large health systems are large employers, of course, and have a good measure of flexibility with their own employees in redesigning care and finding innovative ways to pay for healthcare services crafted to deliver value. "That's one of our larger value-based programs," says Christopher Stanley, MD, vice president of care management at CHI. "We are using our own employees as a kind of a canary in the coal mine."

Health systems can more quickly overcome the managed care learning curve by establishing such programs with their own employees, Stanley says, citing the importance of "quick feedback" drawn from CHI workers who were among the first to enroll in the health system's new value-based clinically integrated networks. CIN enrollment for CHI employees began soon after passage of the Patient Protection and Affordable Care Act in 2010.


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Christopher Cheney is the senior clinical care​ editor at HealthLeaders.

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