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Big Ideas: Outsourcing Improvement: The Relationship Between Vendor Contracts and Provider Performance

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   January 05, 2016

An innovative arrangement means that the provider effectively outsourced data warehousing, analytics, and performance improvement technology, plus content and personnel to the vendor.

This article first appeared in the December 2015 issue of HealthLeaders magazine.

When Allina Health, the $3.7 billion health system headquartered in Minneapolis, signed a $100 million deal with Health Catalyst at the start of this year, the terms of the deal were unusual, to say the least.

As part of the agreement, Health Catalyst—a Salt Lake City–based health IT vendor founded by former Intermountain Healthcare leaders that provides data warehousing, analytics, and outcomes improvement—took dozens of Allina employees onto its payroll, and Allina received a tantalizing potential upside. About 20% of the contract cost is dependent on better outcomes and lower costs at Allina hospitals and clinics. In essence, Allina's vendor partner proposed to share some of the risk that its technology would pay off.

This arrangement differs from and goes beyond the typical healthcare system spinoff, where a technology developed in-house is spun out into a separate company in which the incubating healthcare system retains an investment. In Allina's case, it started out as Health Catalyst's first customer, but Allina did not take a financial investment in Health Catalyst until the two organizations announced the risk-sharing arrangement at the start of 2015.

Health Catalyst builds and operates analytics technology for healthcare organizations. The 10-year agreement will combine technologies, some of which Allina developed since it became the first customer of Health Catalyst technology in 2008. The Health Catalyst data warehousing architecture uses a just-in-time approach to data binding to resolve many of the problems encountered using traditional data warehousing methodologies. The warehouse combines that architecture with a set of sophisticated analytic applications.

In the agreement, the partner organizations established a specific sharing ratio such that for every $8 of savings or revenue enhancement Allina realizes, $2 flows to Health Catalyst. This "shared outcomes improvement bonus" is capped at $2 million per year.

The shared savings does not kick in until calendar year 2016. Year one of the 10-year contract, 2015, is focused on integrating the team members who moved from Allina to Health Catalyst, and deploying a series of analytics applications. Once a year, a governance committee of the Allina–Health Catalyst partnership will identify a prioritized list of improvement projects, each designed to provide measurable care improvement and financial value to Allina. As the partnership achieves each goal, both partners will share in the benefits of that success.

The deal also means that Allina effectively outsourced data warehousing, analytics, and performance improvement technology; content; and personnel to Health Catalyst to accelerate advances.

The $100 million represents the cost of what the staff and tools were costing Allina, says Penny Wheeler, MD, president and CEO of Allina Health, a not-for-profit organization with more than 90 clinics, 12 hospitals, and related healthcare services that provide care for nearly 1.5 million people across Minnesota and western Wisconsin.

"We weren't falling back on hope as a strategy," Wheeler says. "We have a lot of confidence in our partner in Health Catalyst. Eighty percent of that $100 million is standard costing, but 20% of it is at risk, based on how we perform on key indicators—like how well the tools perform, for example, on reducing readmissions or unnecessary admissions for people who can spend nights in their own bed."

Wheeler says use of Health Catalyst technology has permitted Allina clinicians to significantly reduce readmissions, elective inductions of labor, time required to diagnose breast concerns, and sepsis rates.

"Our agreement with Health Catalyst says that if we find a better tool out there, we can use it," she says. "So, for example, if Epic analytics and reporting software Cogito excels at the capabilities that we work with, then we use that. So it's more about what can you use the best to improve care than any exclusivity. That just speaks to the confidence level we both have in our ability to partner and make things better, despite what else is out in the market.

"I'm pretty confident that we're going to have a 10-year agreement and beyond due to that commitment to healthcare," Wheeler says.

"Structuring a relationship with a health system around outcomes improvement, and even being willing to put your money where your mouth is and put a significant portion of your financial upside and your economics at risk, it's further motivation."

For Health Catalyst, which now has multiple other clients, putting so much of its yearly income at risk involved discussion and debate.

"Structuring a relationship with a health system around outcomes improvement, and even being willing to put your money where your mouth is and put a significant portion of your financial upside and your economics at risk—it's further motivation," says Dan Burton, CEO of Health Catalyst.

"We needed to have many discussions about it as a company, with our board of directors, and that includes our major investors," Burton says. "We had a rigorous debate about this business model. One of the things I've appreciated about our company and about Health Catalyst—and this includes the support that we have from our board of directors—is that great strategy is usually about being different. It's about being differentiated, doing something unique that is valuable and that you can do better than anyone else."

Calculating the actual dollar value of outcomes and performance improvement amounts to an exercise in truth-telling between vendor and customer.

"Great strategy is usually about being different. It's about being differentiated, doing something unique that is valuable and that you can do better than anyone else."

"Foundationally, we trust each other," Burton says. "Allina Health is actually one of the most advanced health systems that we have seen, and also it's one of the more enlightened health systems, in terms of being willing to essentially do the right thing from an efficiency perspective, regardless of the current payment model."

The Allina Health finance group will be responsible for measuring these outcomes, and the governance committee will be chaired by Duncan Gallagher, executive vice president, chief administrative officer, and chief financial officer.

Health Catalyst executives also had some convincing to do—of its investors. "When we suggested this model, it was something that our board and our investors really had to think about it and wrap their arms around, because it was new and unfamiliar, and because it involves risk," Burton says. "We had a rigorous debate about this business model."

Health Catalyst is also considering similar at-risk arrangements with many of its other customers, which include Stanford University Medical Center, Indiana University Health, Kaiser Permanente, and it most recently signed at-risk contracts with The Queen's Health Systems in Hawaii and Partners Healthcare.

Wheeler also recently took an unpaid position on the Health Catalyst board of directors, the first provider on the company's board, at least so far.

"It was their idea," Wheeler says. "They wanted a provider on the board. We were basically their first client, so I've seen this organization from its inception."

As for the specific quality goals for the first year, Wheeler says, "We actually start with an assessment of our performance and what the external environment is looking for, and how regulations have changed and other impacts of community measurement. … We'll line that up with the Health Catalyst contract and that 20% that's at risk for them."

The goals toward which Allina and Health Catalyst are striving are in line with those of the healthcare industry's pivot from fee-for-service to value-based care. When asked how much of Allina's payment currently comes from value-based care, Wheeler responds: "Not enough. When you look at our contracts, about 80% of them have some [element of] pay for quality or pay for cost of care, so that seems like that's a lot, right? When you look at what that translates into absolute risk, in terms of revenue, it's about 3%.

"We have a goal to try to work in concert with payers … to disrupt that and move more toward outcomes-based risk. The biggest challenge in healthcare right now is that the waste in the system is somebody's revenue."

Wheeler likens the pivot to a dance with some fancy footwork, aided by Health Catalyst technology. "We say we're willing to shoot ourselves in one foot to try to change the model, but we obviously can't shoot ourselves in both, because we need the margin to reinvest in care," she says. "That said, we're using a lot of the data and information from the Catalyst relationship and things we had developed here to say, 'What things can we even do to decrease internal costs?' "

As one of the CMS Pioneer Accountable Care Organizations, Allina also has dozens of measures in place for such things as optimal diabetes control, optimal vascular control, prevention measures on breast cancer and colorectal cancer screening, and care coordination, Wheeler says.

The innovative partnership with Health Catalyst gives Allina "a way that we can maintain quality or improve quality while reducing internal costs … so you lower somebody's length of stay, because they don't have an untoward complication," she says. "That actually is good for the patients, saves us internal costs with the length of stay, and leverages our data capability to do just that."


Scott Mace is the former senior technology editor for HealthLeaders Media. He is now the senior editor, custom content at H3.Group.

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