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Transitioning to Bundled Payments

June 24, 2014

Taking a more strategic approach to payer relationships may be the key to surviving new reimbursements models.

This article appears in the June 2014 issue of HealthLeaders magazine.

As the healthcare industry moves away from fee-for-service reimbursements toward a bundled payment model that holds providers financially accountable for an entire episode of care, hospitals and health systems need strategies for maintaining cash flow and economic viability during the transition.

Despite the urgent need to adapt to the new reimbursement environment, healthcare organizations do not appear to be rethinking their payer relationships in large numbers. In the HealthLeaders Media Industry Survey 2014: Forging Healthcare's New Financial Foundation, while 39% of respondents cite reimbursement as being among the top three areas where their organization must improve in order to reach their financial targets within the next three years, only 25% include forming strategic partnerships with payers in the top three.

Innovative approach to payers

Barnabas Health, a $2.5 billion system based in West Orange, New Jersey, is one of the organizations that is beginning to take a new tactic in its negotiations with payers—something the chief operating and financial officer, Jay Picerno, says is critical because of how quickly traditional payment structures are evolving.

"I would love to hang on to the fee-for-service model, but reimbursements are moving at a faster pace than we expected, and we are seeing a large decline in volume," Picerno says, noting that, statewide, New Jersey hospitals have experienced a 4%–6% drop in inpatient volume in recent years.

"It's like a wave on the beach, and this thing just came up very quickly. I don't know if that was the president's intent with healthcare reform, but he's definitely changed the fabric of reimbursements for hospitals across the country," he says.

As Picerno sees it, providers should view payers as partners in the transition of healthcare delivery instead of as adversaries in the battle over revenue.

"We approached our payers differently this year," he says. "Historically, we have always gone into negotiations and said we want a certain percentage of rate increase. This year, we were not looking for rate increases; we were looking for market improvement. We tried to flip this into a partnership discussion rather than a difficult negotiation," he says. "The mistake [providers] are making is trying to negotiate the old way with leveraging these deals. That is not going to work anymore. It's a partnership now. Payers have significant control over volume, and they have the ability to protect hospitals."

In its latest negotiations with payers, Barnabas is rethinking the math and focusing on volume improvements rather than rate negotiation.

"We are actually working with payers diligently to figure out how payers can guarantee our revenue going forward," Picerno says. "We say to payers that if they commit to driving outpatient lab, outpatient surgeries, and outpatient radiology to us, then we'll discount our rates to make it competitive. … We can do it at a much lower rate if they drive a significant piece of new business to us. I'm protecting my cash flow. My margin may go from 4% to 2%, but my overall cash flow is protected."

While bundled payments offer an opportunity for shared savings between payers and providers, Picerno says Barnabas is not taking on any risk with these new contracts.

"We got very quantitative in the process with looking at what the effect would be and how it would impact our bottom line," he says. "We really tried to hedge against risk. We said to payers that we will not take any downside risk on this and that they have to guarantee our overall numbers."

Reducing overall care costs

In order to thrive in the new bundled payment environment, Picerno says it will be crucial to reduce the overall cost of providing care. Barnabas will use data analytics tools to identify its physicians who use more resources than average without producing better patient outcomes.

"The old method of cost cutting by just trying to slim down here and there isn't sufficient for this pace of change," he says. "We are focused on the cost of clinical variation. We are looking at the disparity of physicians and finding the outliers and finding more efficient ways to deliver care. The big opportunity is in the doc who has a 40%–50% longer length of stay and heavier utilization. In this new model, that is where all the revenue is and quality enhancement opportunities."

Barnabas is partnering with physicians to encourage proper utilization of expensive services and increased standardization across the spectrum of care.

"Barnabas and insurers also are trying to align with physicians for the proper utilization of resources," Picerno says. Yet, achieving buy-in throughout the clinical team is not easy, he acknowledges. "It's a battle, doc by doc. There is a small minority that get it, and they are willing to participate, but, unfortunately, there is still a majority that want to stay within the fee-for-service structure, and that is a big problem. A hospital can only be as efficient as its medical staff."

New readiness among payers

At CHE Trinity Health, an 86-hospital system based in Livonia, Michigan, efforts are also underway to find strategies to work with payers around bundled payments. The $13.3 billion system has recently created a new department called Payer Strategy & Product Development to focus, in part, on these initiatives.

Benjamin R. Carter, executive vice president of finance and chief financial officer, says there is a new openness among many commercial payers to join forces with providers because the rules of the game are changing.

"I think part of what has happened is payers are under pressure to reduce costs. They traditionally would come to providers and expect us to take a rate cut and that was the way they reduced costs," Carter says. "This new model is really aligning our incentives and reducing the total cost of care in a collaborative way. We are sharing information and really getting down to more appropriate utilization and better care."

Jenny Barnett, the former executive vice president of finance and treasurer at CHE Trinity, agrees.

"It is a different time in healthcare because payers are willing to have the dialogue with us as partners now," she says. "Historically, it has been more of a vendor-based relationship that was strictly about the contract. … With the focus shifting to value-based purchasing, the whole purpose is to provide better care at a lower cost so we have to work together with payers. It begs a whole different conversation now. The whole payment model has changed, and that is what is opening up a lot of the discussion."

Data is critical to success

Like Barnabas' Picerno, Barnett says data is the "key to success" when it comes to bundled payment models and finding ways to take cost out of the system.

"It's not just financial data. It's also clinical data, quality data, market data, and how all of that is integrated so that you can pull it all together and know what your true cost is and what your true outcomes are. That will drive how you are able to enter into these agreements," Barnett says. "It's all about using data and data analytics to better manage attributed lives and the health of populations."

As CHE Trinity moves increasingly toward population health management and takes on more bundled payment contracts, it will continue to use its data in a forward-looking way, Barnett notes.

"We are working to integrate all our analytics so we can develop population health tools so we can manage those expenses and hopefully keep people from having expensive episodes," she says.

One challenge CHE Trinity is currently working to overcome is that much of its data is stored in different places, making it difficult to use it to gain a full picture of its patient population in terms of utilization and costs.

"We are trying to integrate the information into a meaningful data warehouse and we are investing in those resources."

Carter says CHE Trinity's new relationship with many of its payers will also help the system acquire all the data it needs to manage the health of populations.

"The power of partnering with payers is that we find with some attributed populations we have, they don't always necessarily come to our facilities so we don't get a complete data set," Carter says. "By partnering with payers, we get that data so we can work directly with patients and their families to work for better ways of providing care."

Additionally, CHE Trinity is investing heavily in human resources by doubling its IT analytics staff in fiscal year 2014, Barnett says.

"We are hiring people, including actuaries, which is an absolutely critical resource that we'll need in the future," she says, adding that the additional staff is "probably our biggest increase in our data analytics budget."

All told, CHE Trinity is increasing its dollar investment in IT analytics this fiscal year by 65% compared to last year's budget.

Because CHE Trinity is in the early stages of working under the parameters of new payer contracts, it has been careful not to take on risk, opting instead to move to a shared-savings model within the bundled payment structure.

"As we work with payers that are interested in partnering with us, we are structuring it initially where it is not a risk-based contract but a shared-savings situation and an opportunity to share an upside," Carter says. "We want to ease our way into it and make sure we know how to manage in the new payment environment.

"Because we are focused on reducing the cost of care," Barnett adds, "we have to approach it very carefully using data to understand the types of risk we can accept and take on while protecting our cash flow stream and financial health."

A successful start

Although it's too soon to analyze the success of the new payer contracts, Carter says he is confident that they represent a movement in the right direction. "I know in several markets where we have worked with payers around the total cost of care, there has been a reduction in overall costs. We and payers view that as a successful start."

Despite the challenges associated with finding ways to thrive under new bundled payment models, Picerno also says this reimbursement model is pushing healthcare in the right direction.

"The overriding issue is the demand for quality on every side," he says. "The conversations with payers are always about high quality now. I think we are heading to forced efficiency with quality being an issue that will not be compromised, which is great for everyone who uses healthcare."

Reprint HLR0614-9

This article appears in the June 2014 issue of HealthLeaders magazine.


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