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Value-based Care is Ripping Into Health System Profits

By Gregory A. Freeman  
   September 12, 2016

"Remember that one of the major goals of value-based care is to improve the outcomes and reduce the total cost of care as well as each individual episode of care. And ironically, it costs a decent amount of money and significant time to set up the health partnerships and technologies to make that work," Hoffman says. "So for a long time, healthcare providers will be trying to reduce the number of customers they have and how much those customers pay. That's not a recipe to increase profits."

But once those base investments are made, Hoffman says, health networks can start driving new sources of revenue, use data analytics to target care to individuals who use an outsized amount of the network's resources, and even create their own insurance plans or partner with insurers to target their narrow network populations. That's the promise of population health management, which is distinct from value-based care and which most providers won't achieve for some time, if at all, he says.

"So we're unlikely to see profits jump back up in the near term, but once the leading healthcare entities start diving into capitated risk models, we will see those organizations finding new ways to drive profits in the new value-based health care paradigm," Hoffman says.

Pressures Mounting on All Providers
The falling profits are not surprising in light of the ongoing reimbursement pressure and increasing competition, says Chad Sandefur, a director and healthcare analyst with AArete, a management consulting firm that helps companies increase profits without reducing headcount.

"The top line is affected by challenges in reimbursement, whether that comes from CMS or the new contracting mechanisms in the market. The portion of receivables from Medicaid also affects the quality of the top line," Sandefur says. "Added to that are various incentives and penalties regarding value-based purchasing, readmissions, quality indicators. When you factor in that up to 10% of reimbursement from Medicare can have a penalty associated with it, you're going to continue to see a challenge to the top line."

All sectors are affected by those pressures, but Sandefur says the impact may be greatest on independent or community-based facilities that have not aligned with larger healthcare systems, urban facilities that have a large Medicaid population, and children's hospitals that traditionally have been supported largely by foundations. For-profit health systems usually have the advantage of greater size, which gives them the ability to negotiate favorable terms in the market and to more easily absorb financial setbacks, Sandefur says. They also have the capital to invest infrastructure, such as IT systems and standardized purchasing, that allow them to be more efficient and squeeze every penny out of their reimbursement.

Nonetheless, the recent profit slides from Kaiser and other big players demonstrate that no one completely escapes these pressures, Sandefur notes.

Gregory A. Freeman is a contributing writer for HealthLeaders.

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