One independent physician practice in Texas has deployed a retrenchment strategy to contain costs in the unsettled atmosphere of federal healthcare policy.

Physician practices are among the weakest links in the healthcare provider sector.

Practices rarely have the deep financial pockets of health systems and hospitals.

Unlike at health systems and hospitals, where resources can generally be marshalled, at physician practices, regulatory compliance, revenue cycle management, and other administrative functions are heavy burdens.

In terms of bargaining power relative to commercial payers, only the largest practices and physician organizations with market edges have an expectation of cutting sweet deals on reimbursement rates.

Now, after enduring several years of financial challenges during the rollout of the Patient Protection and Affordable Care Act, the challenges continue under a cloud of uncertainty as federal healthcare policy teeters on chaos.

• The ACA could be repealed and replaced, or not.

• Medicaid expansion under the ACA, which is providing coverage to millions of low-income adults in 31 states and the District of Columbia, could be scrapped entirely, retained in some states, or continue to spread nationwide.

• Under the Trump administration's leadership, the implementation of value-based payment models at the Centers for Medicare & Medicaid Services could continue, or not.

• President Trump could take on the pharmaceutical industry to curb prescription-drug price increases such as allowing Medicare to negotiate with drug makers, or not.

Financial strains at practices are having record-breaking consequences. Physician groups were the hottest healthcare-industry sector for merger and acquisition deals in the first quarter of this year, according to HealthCareMandA.com.

With 48 transactions in Q1 2017, physician group M&A deals increased 78% over the last quarter of 2016, and posted 109% year-over-year growth compared to Q1 2016.

James "Larry" Holly, MD, has been coping with financial pressures at his practice since the early years of PPACA implementation. Holly is CEO and founder of Southeast Texas Medical Associates (SETMA), a group practice based in Beaumont, TX.

SETMA has had an electronic health record system for nearly two decades, and Holly is confident of success in Medicare's new value-based payment system under the Medicare Access and CHIP Reauthorization Act (MACRA). His practice, however, is in a weakened financial state.

---

Related Link: Top 10 MACRA Considerations for Providers

---

"From 2011 to 2017, simultaneously with the deployment of the Affordable Care Act with its taxes on healthcare organizations, Health and Human Services began a seven-year, 4% annual reduction in reimbursement on Medicare Advantage plans," Holly says.

"With this 28% reduction in MA reimbursement, continued rising cost of delivering care and the ACA tax, which for SETMA's IPA is $1.7 million annually, we were tipped over into being unable to sustain some of the programs we had put into place."

SETMA is struggling to maintain access to services for its most vulnerable patients, Holly says.

"We were unable to continue our annual $500,000 contribution to the SETMA Foundation for the support of our poorest patients. Even some with insurance could not afford their co-pays and medications. We still have money in the Foundation, but it will be exhausted in another year."

Holly says the foundation "[turns] no one away and we never dismiss patients due to debt, but without relief and/or without additional decreases in reimbursement, we will not be able to sustain SETMA."

Retrenchment

To remain solvent and gird for ongoing financial challenges, the practice is running lean. It has:

• Reduced partner salaries by up to 56%
• Been unable to regularly pay partner salaries [all other staff are regularly paid]
• Reduced employee hours by 8%
• Reduced services such as care coordination and hospital care teams by an unspecified amount 

"We have delayed planned innovations, closed our behavioral health clinic, and reduced patient-centered medical home accreditations from four agencies to two," Holly says.

SETMA's fate is tied to the uncertain outcome of the healthcare-reform debate in Washington, he explains.

"We believe that within the next year, we will see a turnaround in our economic situation, not because of increased payments, but because of the cumulative effect of our retrenchment."

"If we [could] have relief either from the ACA tax, or from HHS reductions in MA reimbursement, we would be fine. The effect of both makes the future questionable for us and others like us," Holly says.

Healthcare providers find that up-front investments are necessary to achieve success in accountable care contracting.

This article first appeared in the May 2017 issue of HealthLeaders magazine.

For organizations that have not participated in programs like the Medicare Shared Savings Program, the longer they wait and do not build up experience, the harder it gets to be successful in the more advanced risk-based programs,” says Elizabeth Johnson, MD, MS, president and CEO of MaineHealth Accountable Care Organization.

The Portland, Maine–based ACO joined the MSSP upside-risk-only Track 1 in July 2012. MaineHealth ACO was among the Top 10 shared-savings earners in calendar year 2013 —the first performance year of MSSP— serving 48,273 Medicare beneficiaries and receiving shared-savings payments totaling $9.4 million. The ACO features several hospitals including Maine Medical Center in Portland, rural health clinics, federally qualified health centers, and primary care and specialty care physician practices.

Newton, Massachusetts–based nonprofit Atrius Health has achieved shared-savings success in Medicare’s two-sided risk-model Pioneer ACO because the organization invested in ACO-related capabilities over many years. This limited the size of up-front investments, says Emily Brower, MBA, vice president of population health at Atrius Health, which has 30 medical practice sites, more than 50 specialties, and 875 physicians.

“A majority of our revenue is in full-risk, global-budget, outcomes-based contracts. So we had an existing structure on the commercial side to take in claims data and activate care management resources for our patients. We were also doing full risk in our Medicare Advantage partnership, so we had a lot of foundation that we could build on. We did add some capacity in our data warehouse and data analytics team, just because operating an ACO is like adding another big payer,” says Brower.

In Pioneer ACO’s 2015 performance year, Atrius earned $4.4 million in shared savings. In the 2014 performance year, Atrius earned $2.8 million in shared savings.

Unlike MaineHealth ACO, which Johnson describes as “an ACO that has everybody under the tent,” Atrius’ strategy for participating in the Pioneer ACO is focused on physician practices. Last year, more than 1,000 physicians in the Greater Boston area participated in Atrius’ Pioneer ACO.

Essential up-front investments

There are several essential administrative and clinical capabilities required to operate a successful Medicare ACO model, says Cassidy Tsay, MD, MBA, vice president of business development at Sacramento, California–based CAPG, a nonprofit association that represents physicians practicing capitated, coordinated care.

Over the past five years, the Centers for Medicare & Medicaid Services has launched a handful of ACO models. MSSP is the most popular model, with 433 healthcare provider organizations participating in the program last year.

“On the administrative side, someone has to take on the role of submitting information to CMS. You have to have some kind of data-collecting infrastructure, either through an existing EMR system or through a separate system,” she says.

Establishing the ability to collect and analyze data often is the biggest up-front investment for healthcare providers launching governmental and commercial ACOs, according to Tsay.

“You need to know who your patients are, what quality measures these patients are going to be measured upon, and where the patients go for care,” she says. “You also have to have a way to track the physicians in your organization and how you are going to reward them for their performance. The IT infrastructure is the main component that usually has to be built, or purchased, or added on.”

On the clinical side, evaluation of existing clinical personnel and ACO-related staffing needs is vital to success, she says.

“It depends on what you have already. If you are part of a health system, sometimes the system will repurpose some of its staff to do the care continuum and care management work. If you have a de novo physician organization and you are trying to build from within, that is definitely more difficult,” says Tsay. “For care coordination, you may need to hire an RN; you may even need to hire social workers, who are crucial in some parts of the country where there are many social determinants that affect patient care and patient access.”

CMS has offered limited financial support to help healthcare organizations make up-front investments in ACO capabilities, Tsay says, noting the ACO Investment Model (AIM) launched last year has been one of the most significant sources of direct federal financial support.

For most healthcare providers, the best approach to financing up-front investments in ACO capabilities is leveraging internal resources to limit the size of cash outlays or loans, says Tsay.

Paul McBride, MSPH, CEO at Hartford, Connecticut–based Aetna Accountable Care Solutions, says there are “three key areas we see that create a successful ACO relationship and where ACOs should focus resources” in commercial accountable care contracting:

1. Membership growth, such as collaborating on marketing, broker activities, and member retention
2. Clinically integrated network support, such as physician practice support and education initiative support
3. Population health clinical services such as complex case management, patient-centered medical homes, and pharmacy management

Aetna Accountable Care Solutions is a business unit of Aetna Inc., which had established more than 1,800 value-based arrangements with healthcare provider organizations across the country as of December 2016, including more than 280 ACO contracts.

At Atrius, devoting more resources to postacute care settings was the most significant up-front investment required to succeed in Pioneer ACO, Brower says.

“Once we had our ACO claims data, we bumped it up against our Medicare Advantage data for the population for which we had been held accountable previously, for over a decade. That is how we identified the gaps and started building new capabilities. The biggest variation that we saw in medical expense was in postacute care.

“We expanded the number of skilled nursing facilities where we employed doctors, nurse practitioners, and case managers,” Brower says. “We started building a number of new ways of working with our home health agency partner to better manage our ACO patients who were getting home healthcare.”

Technology has been a key element of that heightened cooperation. “We are leveraging our home health partner’s experience in home telemonitoring to help prevent acute exacerbation of chronic illnesses.”

One essential area of up-front investment was more about expending staff energy than spending money, she says.

“With the Medicare population, so much of the care and the intensity of care—and therefore the cost of care—is outside of your walls. So, while we did do a lot of work inside our primary care facilities to make sure we were delivering good geriatric care, we also went out into the community and built strong partnerships with hospitals, skilled nursing facilities, and our home health providers to make sure the care across the care continuum was delivering the quality, outcomes, and cost levels we were looking for.”

At Atrius, gauging the return on investment from up-front investments linked to participating in Pioneer ACO is more complex than tallying shared-savings payments.

“It’s a couple million bucks, when you put it all together,” Brower says of the up-front monetary investments that Atrius made to launch its Pioneer ACO. “Atrius took on the cost of expanding our medical management, care management, and population health infrastructure as part of our clinical and management operations planning and budgeting process.”

“I built a small team to manage the work—to pull together the clinical leaders and the data analytics leaders and the resources in our Epic team—to be able to design and implement the changes. Then we had the additional care managers—the RNs, the social workers, and doctors and nurse practitioners who take care of patients in skilled nursing facilities. We also have a new home-based primary care program to take care of our frailest patients, who could not necessarily get the care that they needed inside the practices.”

Shared-savings payments alone would not have been financially justifiable for Atrius to participate in Pioneer ACO, she says.

“The shared-savings payments have also been a couple of a million dollars. If all that we were banking on was our ACO revenue, then the ACO would not have made a lot of sense. What we got was improvement in our entire Medicare population. We were able to be successful in the Pioneer ACO model, and we were able to see improvements in Medicare Advantage. So when you put it all together, we definitely have had a positive return on investment.”

Improved Medicare patient outcomes have been observed in several areas, Brower says. “Key utilization metrics—including avoidable hospital admissions, postacute episode expense, and patients recovering sooner and at home—have improved for the Medicare population broadly, as they improved for our ACO-aligned population.”

A different set of challenges

MaineHealth ACO has faced a different set of accountable care investment challenges, says Chief Operating Officer Jen Moore, MBA.

“We had been doing value-based risk contracting for about 20 years and had the core components for success. We had a clinical registry that all the primary care physicians were using; we had nurse care managers that were deployed for our primary care practices; and we had a data infrastructure. What we didn’t have—and [this] was one of our early investments—was effective communications and population health management to present the data to physicians. We hired a communications specialist to help us get the word out. We knew engaging physicians would be essential to achieving success in MSSP.”

Caring for seniors poses hurdles to successfully operating a Medicare ACO, she says.

“A year or so into the MSSP, it became clear that we needed to modify some of the programs that we had in place. Although we had a robust infrastructure, we realized that managing the Medicare population was different than the commercial populations that we had been managing.

“Particularly on the care management side, it required a multispecialty team approach rather than the straightforward nurse care–manager approach that we were doing for chronic illness care,” says Moore. “So we transitioned from a chronic illness focus to more of a complex illness care focus. We broadened the care team to include social workers, health guides, and tapping into community resources. … Care transitions became an additional focus, too.”

That modification process required significant monetary investment and ongoing staffing costs.

“For several years, we were financially supported by CMS to build our team out to improve the care transition providers. That program has since ‘sunsetted,’ so we had to figure out how to preserve this important aspect of care delivery. We did not want to lose these FTEs [full-time equivalent employees] that were so critical to our success. We absorbed the FTEs that we had brought on for the care transitions project. That investment alone was about $700,000,” Moore says.

Nearly 10 FTEs were on the line when the CMS funding dried up. MaineHealth ACO absorbed five FTEs in the organization’s operating budget and filled the rest of the positions through attrition, she says.

Direct ROI can be elusive

Realizing direct ROI from investments in accountable care capabilities has been difficult for MaineHealth ACO.

“The reality is that in terms of pure numbers, the ROI is difficult to establish. It was challenging to come up with the $700,000, but we did. We invested those resources in places where there was high need and complex patients where the downstream financial effects will be felt, but we are not going to see those effects immediately. That is a challenge,” Johnson says.

The financial challenges MaineHealth ACO has faced as an MSSP participant could have been insurmountable if the organization had not established a solid accountable care foundation before joining the program.

“Other ACOs that formed solely in response to MSSP had a whole lot of building to do,” Johnson says. “Our initial build was not enormous because we were able to build off our existing 20-year-old physician-hospital organization.” 

As a wave of consolidation continues to inundate healthcare providers and payers, M&A transactions among healthcare vendors and suppliers also are moving at a brisk pace.

For many of the companies that offer goods and services to healthcare providers and payers, bigger is better.

Both the volume and the value of healthcare M&A transactions increased in the first quarter of this year compared to the last quarter of 2016, according to HealthCareMandA.com. Volume increased 7%, to 395 deals. Value increased 56%, rising from $37.8 billion in Q4 2016 to $58.7 billion in the first quarter of 2017.

Information technology was among the hottest healthcare sectors for M&A activity to open the year, with a 57% increase in transactions compared to the last quarter of 2016. Only physician medical groups posted a higher increase in M&A activity, with a 78% increase in transactions.

Vendor and supplier consolidation activity is already off to a hot start in the second quarter. On April 18, Cardinal Health announced the $6.1 billion cash acquisition of the patient care, deep vein thrombosis, and nutritional insufficiency divisions of Minneapolis-based Medtronic.

The primary drivers of consolidation among healthcare suppliers and vendors are tied to their provider customers, including the industry's shift to value-based care models, Russell Davis, managing director at The Advisory Board Company, said last week.

"Strategically, it is a fundamental shift. Some of this is being driven by economies of scale—that is the obvious stuff. But increasingly, what we have been seeing is that some of the acquisitions are being driven by a supplier needing to add broader capabilities to its portfolio, so it can more holistically serve customers in the value-based world."

The uncertainty associated with the shift to value-based care models and other major healthcare reforms has helped spur supplier and vendor M&A transactions, he says. "As a supplier, you never want to be without a tool in your toolbox that your customer needs… Generally speaking, the more capabilities you have, the better."

Nashville, TN-based Intermedix Corporation acquired a machine-learning company this spring mainly to expand the data-analytics firm's capabilities and service offerings for healthcare providers, according to Joel Portice, the company's CEO.

"When I look at our business and the WPC Healthcare acquisition, we have strong data-analytics capabilities, and a strong understanding of data and the action-ability of data to help our customers make good decisions. What we wanted to do was adjacently expand from our core capabilities, and machine-learning functionality within WPC was not a capability that we had developed internally."

Portice declined to disclose the terms of the WPC acquisition, but said the deal reflects Intermedix's financial strength and hefty scale. "Intermedix has about 2,500 employees. We do business in 29 countries. We have large scale and growth. Our year-over-year bookings trend above market averages."

From the perspective of healthcare providers, Davis says there are advantages and disadvantages associated with supplier and vendor consolidation.

"The suppliers who get this right should be able to offer a much better product at a competitive price. They should be able to offer a better value to their customers than they have in the past. In some cases, it will be lower prices. In other cases, prices may be similar or higher, but the value delivered will be greater."

There are two primary risks, he says.

"One is in the M&A transaction itself. Relationships ultimately exist between people. When a company is acquired, that transaction is typically followed by a reorganization and existing business relationships get disrupted."

"The other risk on the provider side is too much concentration can leave you beholden to an individual supplier. Some organizations fear that; some organizations embrace that."

The electronic medical record (EMR) business is a prime example of a highly concentrated vendor marketplace and the associated risks, Davis says.

"By definition, every provider had to make a bet on one and only one EMR vendor. So, you have seen tremendous concentration of market share among EMR vendors."

"Once you get to that place, you better trust the people you are working with. Plan B is always expensive."

Next year's proposed rule for Medicare hospital-inpatient payments is expected to increase the federal government's spending on services and capital by $3.1 billion.

For the 2018 fiscal year, the Centers for Medicare & Medicaid Services is projecting a 2.9% increase in spending on hospital-inpatient services and capital.

The spending forecast is a highlight of the 2018 Inpatient Prospective Payment System proposed rule filed by CMS last week. The anticipated 2.9% spending increase has two elements:

• A 1.7% increase linked to proposed payment rate and policy changes
• A 1.2% increase linked to proposed changes to uncompensated care payments

The 2.9% hike would increase Medicare spending $3.1 billion, according to a CMS fact sheet For the 2017 fiscal year, which began with hospital discharges on Oct. 1, 2016, the IPPS final rule  projected $746 million in increased Medicare spending on hospital inpatient services and capital.

The IPPS sets Medicare's payment framework for 3,330 acute care hospitals and 420 long-term care hospitals across the country.

For the 2018 fiscal year, the proposed 1.7% spending increase linked to payment rate and policy changes is based mainly on several adjustments to next year's projected increase in the IPPS hospital "market basket," which is coincidentally, also calculated to be 2.9%.

The market basket figure, which is calculated annually, reflects changes in the costs of inpatient goods and services provided at acute care hospitals.

Three of the four primary adjustments to the 2018 IPPS proposed rule's market basket figure have a negative impact on the payment rate:

• -0.75% adjustment under the Patient Protection and Affordable Care Act
   
• -0.6% adjustment to offset costs tied to the "two midnights" admissions policy
   
• -0.4 adjustment for productivity
   
• +0.46% adjustment under the 21^st Century Cures Act

Under the 2018 IPPS proposed rule, CMS is set to spend $7 billion on uncompensated care for inpatient services, which would be a $1 billion increase over this year's projected spending.

Other highlights of the 2018 IPPS proposed rule:

• For long-term care hospitals (LTCHs), the proposed rule projects a 3.75% decrease in Medicare payments in the 2018 fiscal year, with the $173 million payment reduction linked mainly to the introduction of a new dual payment rate system.
   
• Changes to the "meaningful use" electronic health records policy such as shortening the 2018 reporting year to 90 days and creating exemptions for healthcare providers who offer "substantially all" of their services at ambulatory surgery centers.
   
• Four changes to the Inpatient Psychiatric Facility Quality Reporting program, including the addition of a measure based on claims data for "medication continuation following inpatient psychiatric discharge."
   
• Easing enforcement of the Critical Access Hospital (CAH) 96-hour certification requirement, which mandates physicians to certify that patients will be discharged or transferred to a larger hospital within 96 hours of admission to a CAH. CMS is proposing that the 96-hour certification requirement should become a low priority in medical-record reviews conducted on or after Oct. 1.
   
• Extension of the Rural Community Hospital Demonstration (RCHD) program for an additional five-year period. The RCHD program is designed to develop a cost-based Medicare payment methodology for inpatient services provided at rural hospitals with less than 51 acute-care beds that do not have the CAH designation.

The deadline to file public comments on the 2018 IPPS proposed rule is June 13.