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Developing Value-Based Payment Models

By Christopher Cheney  
   October 14, 2015


Then there is everyone else in between.

"These are the physicians who can be convinced that value-based care is better for patients," Stanley says, adding that he sits down and talks with physicians about redesigning care to be patient-centered, prevention-oriented, and outcomes-based. "Most physicians will absolutely get there."

Even with a strong balance sheet, CHI has faced difficult decisions regarding opportunity costs in its four-year-long quest to conquer the clinical and financial dimensions of the value-based world, Lofton says.

"To come through that period, we had to also look at our operating model and look at places to trim back. It was not without turmoil."

Historically, CHI has posted an operating margin of about 3%, but investments in infrastructure for value-based care such as IT and the creation of clinically integrated networks drove the health system's financial performance below that benchmark for the 2013 and 2014 fiscal years, CHI officials say. While Lofton is forecasting that the costs of investing in value-based care will outstrip the financial gains again this fiscal year, he says CHI expects that to improve in 2016. "This is the fiscal year that we told our board that we would get operating performance back to historical levels."

CHI had considered cutting up to 1,500 jobs this year, but the reduction amounted to a loss of about 500 actual jobs and a decision to eliminate about 500 unfilled positions. CHI officials say the workforce reduction was not related to the transition to value-based delivery, but a recognition of the need to reduce the number of employees so the system could become more efficient in certain areas.

Lofton says a measure of turmoil has been linked to opportunity costs and an ongoing effort to wring out $250 million in overhead. "We have certainly looked at costs across the system—personnel and overhead—to become more efficient. Like other health systems, we are adapting to changing times. We have made a huge investment in information technology. That has caused us to ratchet back, at least for a time, some of the capital investments we typically make on a yearly basis in terms of infrastructure improvements, new construction, and upgrades."

Again emphasizing the importance of CHI's healthy balance sheet, Lofton says the health system has been able to help finance the adoption of value-based care with investment income. "During this time, the capital markets have been very strong. We still had a healthy bottom line because of the investment income we earned."

Lofton says it is imperative for health systems to plan carefully and act decisively as they shift from volume to value. "We need to make sure when it's the right time that we have made the right investments to be ready."

Embracing accountability

There is an assortment of options on the value-based menu, including accountable care organizations, bundled payments, capitation, shared savings contracting such as the Medicare Shared Savings Program, and warranty payments. But most models have limited track records, and some have had underwhelming appeal to providers.

Several factors are determining the overall appetite for value-based care at health systems and the taste for particular payment models, including corporate culture and local market circumstances.

Some health systems such as Intermountain Healthcare are enjoying the benefit of a track record of delivering care with assumption of risk.

Operating in Utah and Idaho, Intermountain has 750,000 members enrolled in the organization's health plan, SelectHealth, and the integrated health system features a 22-hospital network on the provider side. Intermountain's involvement with its own health plan stretches back three decades.

Poulsen, the senior vice president and chief strategy officer at Intermountain, says one-third of its healthcare services are tied to value-based payment, and the organization is seeking to double that figure.

"We call our program shared accountability as opposed to accountable care. It's partly the lifestyle of our patients, but it is also medical decisions designed to consume healthcare in the right way—the providers of healthcare have to be fully engaged. When we put those two together, we think we have something really powerful."

Intermountain is engaging providers to generate value by holding them accountable to total-cost-of-care budgets, Poulsen says.

"We create budgets that are essentially regional. We distribute accountability to four geographies, with a risk-adjusted budget for each region. Then the team in each region—doctors, hospitals, ancillary services, care managers—works together within their budget. There are rewards if quality and service measures are met at the team level. We believe value-based care is a team sport. We do not anticipate financial incentives will change any provider's behavior. Instead, financial incentives are simply a nod to the fact that doing the right thing will come with a cost in some cases," such as a lost opportunity to increase volume.

On a monthly basis in each region, Intermountain's Geographic Committees—which are composed of physicians, hospital administrators, actuarial specialists, and data analysts—gauge performance of the four budgetary regions and compare that to other value-oriented organizations recognized for operating with best practices. "They identify weak links and fix them. This is a way to get that information out in a transparent, actionable way," Poulsen says.

Intermountain's shared accountability approach to providing managed care services for 700,000 patients is sustainable financially, he says, noting revenue is outpacing costs. "The margin varies significantly by type of patient: Medicare, Medicaid, and commercial are all part of this group of 700,000. Overall, there is a 2% to 3% margin."

The primary metric Intermountain uses to assess the cost-effectiveness of its managed care efforts is total cost of care, Poulsen says. "We have been focused on total cost of care as a legitimate measure of public benefit for a long time, and population metrics suggest that our populations look pretty good on those metrics."

In the decade before passage of the PPACA, Utah was among the lowest-cost states for healthcare services, according to CMS. In 2009, the state posted the lowest annual per capita cost of care in the country at $5,031.

Local and national leadership

With its vision for a value-based healthcare future, a track record in care delivery innovation, and market power in northern New England, Lebanon, New Hampshire–based Dartmouth-Hitchcock Health has taken a regional and national leadership role in the adoption of value-based payment models.

The academic medical center includes a main hospital, a children's wing, a cancer center, an association with the Geisel School of Medicine at Dartmouth, and community group practices. About half of the health system's revenue is tied to value-based payment models, and it plans to increase that figure to 70% within two years, according to President and CEO James N. Weinstein, DO, MS.

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

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