The shift to value-based care adds new investments, including outpatient facilities.
This article first appeared in the November 2016 issue of HealthLeaders magazine.
The shift to value-based delivery of medical services has boosted investment in outpatient capabilities, which has added a new element to the capital-project mix at health systems and hospitals.
"The ways of paying for capital projects are not changing all that much, but what we are buying is changing. There's a movement toward a different model, so we are investing in new capabilities, like patient-centered medical homes," says David Smith, senior vice president and CFO at Hollywood, Florida–based Memorial Healthcare System.
Two of the biggest capital projects underway at MHS are construction of outpatient facilities, Smith says. "We are expanding our geographic footprint. Our board has approved the building of two urgent care centers, on the east side and the west side of our district."
Operating in a state-chartered district, MHS features six acute-care safety-net hospitals. The health system posted patient service revenue at $1.8 billion for the fiscal year ending April 30, 2016.
MHS will wholly own the new urgent care centers, which will both be located in new buildings. However, the health system is only constructing one of the new structures. "The one we're building from the ground up is about 5,000 square feet, and the cost is $2.5 million, which includes equipping it," Smith says. "What drives up costs a lot in South Florida is we are in Hurricane Alley, and we have different codes here. You have to construct the buildings to be hurricane-resistant, which makes them a much more expensive proposition."
In addition to growing its market footprint, MHS recognizes the need to invest in outpatient facilities, he says. "There's already retail clinics. Urgent care centers are popping up all over the place in this market, and there are ambulatory care facilities, so the future of healthcare will include these shorter-stay patients who are no longer going to be in the hospital. That means hospitals will become at least somewhat more capital-intensive because they will be the place where the high-tech care is rendered. What we're seeing is not necessarily a lessening of the hospital side of capital projects, but more of an overall growth in capital investment because we need to account for the outpatient world as well."
Consumerism in value-based healthcare puts a premium on convenience, Smith says. "The whole idea is to make it easier on the patient. One of our affiliates has a partial ownership in a couple of ambulatory surgical facilities, and we see in the future where those will also become recovery care centers, where patients we need to have stay one night or even two nights can come in and not have to receive care in a hospital."
Local market conditions can dictate that a health system embrace a more traditional approach to capital projects, says Ben Spence, CFO of Lee Health, based in Fort Myers, Florida.
"Our investment in acute care is heavily weighted on the age of one of our facilities and the growth in our population. Lee Health serves Lee County, Florida, an area of rapid growth that also is twice the national average for population over age 65. Seniors have higher use rates for inpatient care and often have multiple chronic conditions. We also have an aging 400-plus-bed facility that was built in the 1960s and 1970s that needs to be replaced. We do feel that our efforts to improve health in our population will reduce inpatient use rates that will result in less demand for new beds, but we will still require hospital-bed expansion to replace and allow for modest inpatient growth," Spence says. "Other areas with slower growth, newer facilities, and younger populations are better situated to avoid future bed expansion."
Lee Health has a total of 1,426 licensed beds distributed across four acute-care hospitals, a rehabilitation hospital, and a children's hospital. In 2015, the health system posted patient service revenue of $1.4 billion.
While Lee Health is forecasting an ongoing need for capital projects on its hospital campuses, the health system has been increasing investment in outpatient facilities, Spence says. "During the past 10 years, we have allocated a growing share of our capital spending to outpatient services and will continue to do so going forward. We believe that expanding outpatient services will help keep patients out of the hospital and reduce our future capital needs for new bed towers."
For capital projects, planning is paramount
Growth in capital projects at health systems and hospitals makes planning for capital investments as important as ever, says R. Edward Howell, professor of public health sciences at the University of Virginia School of Medicine and former CEO of University of Virginia Medical Center in Charlottesville.
"Taking the longer-term approach creates the opportunity to make sure you are giving enough attention to infrastructure—electrical, plumbing, and HVAC—because healthcare institutions put a lot of drain on infrastructure," Howell says. "It's all too easy to say that we will spend on initiatives that make our physicians and board happy, or that add a lot of glitz to our patients, and forget the infrastructure. But the infrastructure is important. It doesn't take too many days of having your operating rooms closed because your HVAC crashed, or your imaging center closed because your electrical system failed, to realize just how important your infrastructure is to your organization."
For the fiscal year ending June 30, 2015, University of Virginia Medical Center posted patient services revenue of $1.4 billion. The teaching hospital has 584 licensed beds.
Howell says he prefers planning for capital projects over a span of 10–15 years, with a three-pronged approach. "First is taking an inventory of your physical plant; you should do it all the time. You get some sense of the age of your facilities. Second is the demand on your facilities—the percentage of utilization of your operating rooms. For example, if you have 80% utilization, you have operating capacity; if you have 95%, you don't have capacity.
"Third, look at capital from a financial perspective over the long term. You need to make some determinations on how much you are going to be spending on equipment and spend that amount consistently. For 12 years here, we spent between 8% and 9% of our operating budget on capital equipment and related renovations for capital equipment every year, just like clockwork. That gives you a nice steady stream of funded depreciation," Howell says.
Smith says MHS plans on a shorter time horizon for most capital projects, but the health system's five-year plan is updated on an annual basis. "We look out at a five-year horizon that includes what projects we feel we're going to need to do, either expansion of services, product lines that need to be enhanced, or major equipment purchases."
Financing recipes for capital projects
When health systems and hospitals are determining the form of financing for a capital project, size definitely matters.
MHS is financing the health system's two new urgent care centers with internal sources of funding, including operating revenue, Smith says, noting larger projects require at least some external financing. "We financed the urgent care centers through internal funds. We are very lucky that we are financially able to do that. For projects that are $3 million to $5 million, we would typically just finance those through operations. If we have a very large capital purchase, like when we built our children's hospital in 2011, we float a bond issue," he says. "There was also fundraising for the children's hospital—we had a huge capital campaign." The children's hospital cost more than $100 million to build, says Smith.
Howell says a wide range of options should be considered when selecting the optimal mix of financing for capital projects.
"You need to fund capital with all of the options available. First is operating margin. Most people believe that you need a minimum of 3% just to maintain your capital position. You should have as much as 5% operating margin in order to have adequate capital capacity," he says. "Combine that with funded depreciation: Make sure you fully fund your capital items—each and every one of them that qualifies for funded depreciation—and make sure you don't confiscate your funded depreciation for operating needs. You adequately invest both your reserves from operations and your funded depreciation, then maximize your interest revenue stream. You combine all of that with debt."
Nonprofit health systems and hospitals have multiple financing options for capital projects, according to Spence. "New hospitals or large-scale projects are often funded with bond issues that provide low-cost financing to health systems with good credit ratings and can spread the debt payments over 30 to 40 years at a variable or fixed rate. Smaller-scale projects can be funded through direct bank loans that also offer very attractive interest rates and terms for providers that are viewed as low-risk due to their long-term financial results and stability. Cash flow from operations is also a great source of funding for providers that have a strong balance sheet and cash position," he says.
For-profit healthcare providers have a keen sense of the financing market, Howell says. "The for-profits are acutely aware of capital markets, especially rates, and tend to go to the bond market when the rates are the best."
Nonprofit and for-profit organizations each have strengths and weaknesses in securing financing for capital projects, Smith says. "From a financing perspective, the for-profits have somewhat similar vehicles. They can't do tax-exempt debt like we can, but they have the opportunity to do equity financing that we do not have the ability to do. They can just sell common stock and raise funds that way to finance their capital needs."
It may be tempting for some healthcare executives to allow a large capital project to develop into a crisis that can serve as a rallying point for fundraising, but preparedness is a far safer strategy, Howell says. "The quick and easy is facing a capital crisis and turning to debt financing. But I have seen numerous hospitals that over-borrow. They are the ones that become the 'mergees' in a lot of mergers because they find they had little or very limited debt capacity."
Patient data informatics can improve clinical outcomes, but stakeholders will have to build a seamless flow of information and win over skeptical patients.
The digital revolution in the healthcare industry is spreading far beyond the boundaries of the hospital walls.
"People are using smart phones and they are using their Fitbits and other wearables such as the Apple Watch. So people are tracking the basics—how many calories they burn in a day and so forth," says Sanket Shah, a University of Illinois at Chicago adjunct professor in the school's Department of Health Informatics and Health Information Management.
"That activity has exploded over the past five or six years. We are seeing from these examples that there is a market for this technology, and people are willing to engage and interact in generating information that is critical to their health," Shah says.
Health systems, hospitals, physician practices, and healthcare payers are already seizing opportunities to realize the potential of home-based data collection technology, he says. Shah lists weight scales, pedometers, blood pressure cuffs, and glucose monitors as tools for targeting obesity, hypertension and other chronic conditions.
"Better clinical outcomes also generate better financial outcomes. You are avoiding unnecessary hospital admissions and visits to the ER because you have a pulse on the patient population."
Data collection through home-based technology is destined to become a key component of the financial mechanisms that support value-based care, Shah says.
"A lot of measures are tracked and leveraged to distribute incentives for not only health systems and other providers but also for patients. Common measures, such as diabetics' a1c levels, will be monitored across all government programs, all ACOs, and all pay-for-performance contracts.
"So if you are leveraging these [home-based] devices that are targeted at core chronic conditions, and the majority of financial measures are tied to these chronic conditions, there is opportunity," Shah says. "You can get a step ahead."
Deploying home-based data collection technology has tremendous potential to boost clinical outcomes and generate financial opportunities. However, there also are tremendous challenges, he says.
Having the proper strategic plan in place—across multiple areas—is crucial.
"First and foremost, you have to pilot programs. You have to identify a particular patient population and start small to see how your patient population is reacting to these medical tracking devices and what you are receiving in terms of data," he says.
"Ultimately, you learn, adapt and evolve to roll out to a larger scale and gain more efficiency and profits."
The adage that you have to spend money to make money applies to securing a return on investment from home-based data collection, Shah says.
"You have to have the right infrastructure. These devices have to be integrated not only to your own analytic environment—your claims warehouse and your [electronic medical record]—but also integrated with your online patient portals.
"That seamless flow of data is critical. If you connect those dots properly and lay out a plan, there are opportunities for financial gains."
However, building the robust analytics capabilities to harness the home-based data is a challenge.
"We are getting all this information from these devices, and it is going to take a lot of expertise to sift through it and to identify the salient information so you can make use of it," Shah says.
"You need to create algorithms and predictive modeling based on all of this data that is being collected."
There also is the challenge of helping more older patients to embrace new technology. "It is a challenge, but it is not an excuse… You have to have a willingness to work with the individual patient and to establish family support to get our older population more connected," he says.
"If you can show that there is a real benefit, then there is an opportunity to overcome the generational barrier."
A proposal to create a new track in the Medicare Shared Savings Program (MSSP) with limited downside risk is drawing guarded optimism from a pair of healthcare-provider trade associations.
As part of the 2017 final rule announced earlier this month for the Medicare Access & CHIP Reauthorization Act of 2015 (MACRA), federal officials signaled their intention to create MSSP Track 1+.
Under current regulations, MSSP Track 1 bears no downside risk for accountable care organizations (ACOs); MSSP Track 2 and Track 3 feature both upside and downside risk.
"It is a pretty big jump in terms of downside risk to Track 2; so it would be helpful, particularly to retain ACOs that are already in the program, to give them something in between Track 1 and Track 2," says Melissa Myers, JD, MPA, senior associate director of policy for the Chicago-based American Hospital Association.
CMS provided few details about MSSP Track 1+ in the 2017 MACRA final rule, with only one paragraph on one page devoted to the proposal in the 1,746-page document.
That paragraph indicates CMS is considering "developing and testing a "'Medicare ACO Track 1+ 'Model" starting for the 2018 performance year".
The Track 1+ Model would test a payment model that incorporates more limited downside risk than in Tracks 2 or 3. CMS envisions Track 1+ as an on-ramp to Tracks 2 or 3. The model could be open to:
Track 1 ACOs that are within their current agreement period
Initial applicants to the Shared Savings Program
Track 1 ACOs renewing their agreement that meet model-eligible criteria
However, until CMS provides more details about MSSP Track 1+, physicians, hospitals, and other ACO stakeholders will have to look to current rules for MSSP and the 2017 MACRA final rule for possible guidance, says Laura Wooster, MPH, interim senior vice president of public policy for the Chicago-based American Osteopathic Association (AOA).
In the 2017 MACRA final rule, CMS pegs the downside-risk cap associated with most Advanced Alternative Payment Models such as MSSP Track 2 and Track 3 at 3% of total-cost-of-care spending benchmarks.
"If the losses are staggering, you don't owe CMS all the money. It's capped. They don't want to put you out of business," Wooster says. "Reading between the lines, I am going to speculate that the Track 1+ ACO will have a total risk of 3%."
If CMS moves ahead with creating MSSP Track 1+, federal officials should do more than just make the downside risk lower than the levels set in Track 2 and Track 3, say Wooster and Myers.
"If they have any additional adjustments for physician ACOs or additional assistance, that would really help get this going and get more practices interested in getting involved, says Wooster.
"Right now, a lot of ACOs are viewed by physicians as big hospital things that are out of reach or unattainable"."
CMS has put several adjustments and assistance measures in place for shared-savings programs with downside risk, and MSSP Track 1+ should include similar measures, says Myers.
"CMS has made tools available for higher-risk tracks, such as waivers for Medicare payment rules, the geographic limitations on telehealth, and three-day inpatient stay requirement for skilled nursing facility coverage.
"We strongly urge CMS to make those tools available to all ACOs, not just ACOs that have a high level of downside risk"," Myers says.
The most popular track of Medicare's largest accountable care organization program should be included under MACRA, the just-finalized payment system for physicians, a healthcare policy researcher says.
Net savings generated through the Medicare Shared Savings Program in 2014 were understated by at least $398 million, a researcher at the Harvard Medical School Department of Health Care Policy says.
"It is a pretty good guess and certainly not a wild overestimate," J. Michael McWilliams, MD, PhD, told HealthLeaders last week. He penned an opinion piece which was published last week in the Annals of Internal Medicine.
Launched in 2012, MSSP has drawn more healthcare provider participation than any other ACO program created by the Centers for Medicare & Medicaid Services. This year, 434 ACOs are participating in the payment program, providing care to more than 7.7 million Medicare beneficiaries, according to CMS.
On an annual basis, CMS sets a total spending benchmark for each MSSP ACO's attributed patient population. An ACO can earn a shared-saving bonus payment from CMS if total spending is significantly below the organization's benchmark. The bonus payments are reduced if an MSSP ACO falls short on the program's three dozen quality measures.
For 2014, MSSP generated $287 million in net savings for Medicare, according to a research paper McWilliams published last month in the Journal of the American Medical Association.
In last week's Annals of Internal Medicine opinion piece, the Harvard Medical School researcher wrote that the CMS data understates the net savings that MSSP generates for three reasons:
It is likely that MSSP ACO contracts not only reduce healthcare spending on Medicare patients attributed to the ACO, but also on other patients who are treated by the ACO. "Such spillovers would have added upward of $126 million in savings to Medicare in 2014."
In the year-to-year benchmarking process, CMS understates actual savings that MSSP ACOs generate. "ACO spending reductions—regardless of offsetting bonuses—reduce ACO benchmarks because they lower the spending growth rates used to update benchmarks each year."
MSSP is designed to promote reduced fee-for-service spending by giving ACO's a bonus payment if they beat their spending benchmark. As a result, MSSP drives down spending rates for Medicare Advantage patients because Medicare Advantage payment rates are linked to local fee-for-service spending levels. In 2014, he estimates this indirect financial impact of MSSP cut Medicare Advantage spending about $272 million.
On Friday, CMS released the MACRA final rule (Medicare Access & CHIP Reauthorization Act of 2015).
The final rule does not recognize MSSP Track 1, which is the most popular track of the program because it has no downside risk, as an Advanced Alternative Payment Model. However, the final rule says CMS is considering creation of MSSP Track 1+ in 2018: "It would test a payment model that incorporates more limited downside risk than is currently present in Tracks 2 or 3 of the Shared Savings Program but sufficient financial risk in order to be an Advanced APM."
MACRA's new payment system for doctors is set to be implemented in 2019.
Before the release of the MACRA final rule, McWilliams said that CMS would miss a significant opportunity if the agency barred MSSP Track 1 ACOs from attaining Advanced APM status under MACRA.
"Downside risk will not be appealing to ACOs with unfavorable benchmarks. This will include ACOs with spending above their regional average in the MSSP and smaller organizations that may not have the financial reserves to assume downside risk. These groups of ACOs have driven the bulk of the savings so far."
"Thus," he continued, "one could certainly argue that limiting the Advanced APM bonus payments to ACOs taking downside risk may do little more than increase Medicare prices for organizations that have not consistently demonstrated the ability to lower spending and that already negotiate higher commercial rates."
With bundled payments and other lean value-based payment models spreading across the country, relationships between hospitals and post-acute-care organizations are tightening.
Market forces are driving closer collaboration between hospitals and their post-acute-care providers, says Audrey Weiner, president and CEO of The New Jewish Home.
"We have had an intensive level of collaboration for the past three years. Before that, we had a discharge planner who sent you patients. Now, it really is thinking about what is best for the patient, with feedback in both directions. The hospitals want the feedback, and the post-acute-care providers want the feedback. Everybody is stepping up their game," she says.
A pair of reports published last month reflect the daunting challenges facing the post-acute-care sector. The Journal of the American Medical Association published a research paper that concluded Medicare's bundled-payments program for hip and knee replacement has reduced spending mainly through lower spending on skilled nursing facility (SNF) services.
In a report based on data collected from 2011 to 2016, the Annapolis, MD-based National Investment Center for Seniors & Care (NIC) found patient-census levels at more than 1,400 SNFs have fallen sharply over the past five years. Patient-census levels fell from nearly 85% in 2011 to 82.2% this year, the NIC report says.
The New Jewish Home operates two SNFs in New York: a 514-bed facility with 139 post-acute-care beds in Manhattan, and a 300-bed facility with about 38 post-acute-care beds in Westchester.
With strong market fundamentals such as New York City's aging affluent community and longstanding partnerships with several tertiary hospitals, TNJH has maintained high patient-census levels, which are currently pegged at 97.95%, Weiner says. "Clearly, that is higher than national occupancy and New York state occupancy," she says.
Despite having a relatively strong market position, TNJH has embraced the necessity to boost collaboration with its hospital partners and to offer an expanded suite of services, Weiner says.
"We have always worked very closely with our hospitals. But as the world changed and the Affordable Care Act went into place and everybody was focusing on prevention of re-hospitalization, it became clear to us and clear to our hospitals that we needed to have a closer relationship."
The New Jewish Home's efforts to expand SNF-based services and launch new services have included creating advanced rehabilitation units, building a substance-abuse prevention program, and piloting an FDA-approved online physical therapy service, Weiner says.
"At our Manhattan campus over the past several years, we have created specialized rehab units in our SNF in collaboration with two hospitals. With NYU Langone, we created a cardiac rehab unit. With Mount Sinai Medical Center, we created an ortho unit."
"Having those kinds of programs not only embrace, but also continue the clinical pathways that the hospitals have put into place: weekly calls with the hospitals about the patients, warm transitions and warm handoffs. People actually talk with each other vs. it all being on paper. All of that allows us to be more responsive to the needs of the hospitals."
TNJH's substance-abuse program helps give the organization a competitive edge in the evolving post-acute-care marketplace, Weiner says.
"It allows hospitals that are thinking about how they are going to prevent re-hospitalization for a certain segment of their population who are abusing alcohol or drugs to say, 'Jewish Home is a place where not only can they address their hip fracture, but also they will attend an AA meeting. They will have special counseling; they will have follow-up with a substance-abuse counselor, and these added services will ensure to the best possible degree that patients do not end up back in the hospital."
In partnership with Seattle-based Jintronix, Jewish Home is piloting software that helps patients continue their rehabilitation at home, she says. "We are committed to working with our hospital partners in creating 'hospitals at home' to the degree that they are ready to do it."
All post-acute-care providers should be embracing change, Weiner says.
"The post-acute-care providers who are going to do well are going to be those who have well-trained clinical teams, are able to collect the data, provide feedback, and listen to the needs of their referral sources and their patients."
Embarking on a "quest for unparalleled value," YNHHS has pared down spending system-wide in four categories.
This article was originally published on May 2, 2016.
A health system associated with one of the country's most respected institutions of higher learning is learning how to adapt to leaner times in the healthcare industry.
Last week, Yale-New Haven Health System, which operates three hospital campuses in the south-central region of Connecticut, co-hosted the first annual National Symposium on Value Innovation at Yale.
During a break at the symposium, Stephen Allegretto, CPA, MPH, who serves as vice president of strategic analytics and financial planning at YNNHS, told me the health system's leadership saw reimbursement cuts coming to Medicare and Medicaid in 2012. "We looked to the future and said, 'Whoa, our revenue is going to dry up. We need to look at this and see how we are going to get money out of the organization,' " Allegretto said.
In her keynote address launching the Yale symposium, YNHHS President and CEO Marna Borgstrom, MPH, said the health system's leadership has been committed to generating value for patients as opposed to emphasizing cost-cutting alone. She described the effort as a "quest for unparalleled value."
"It's not about what we can do, or what we need. It's about generating value for our patients," she said.
On the quality and patient safety side of the value equation, YNHHS has adopted several initiatives over the past four years such as the development of rapid response teams and the deployment of predictive analytics in clinical settings that have contributed to significant gains in patient outcomes. At YNHHS's St. Raphael Campus, those actions have generated a 30% mortality rate reduction.
In September 2012, YNHHS spent $160 million to acquire the former Hospital of Saint Raphael, a struggling safety-net hospital in New Haven located about a quarter mile from the Yale-New Haven Hospital campus. The deal created a 1,541-bed, dual-campus hospital in the heart of the city.
Largely through consolidation of clinical services and achieving economies of scale linked to the Saint Raphael acquisition, YNHHS was able to achieve a one-time cost-savings of about $200 million from the acquisition deal, Allegretto said. According to Richard D'Aquila, executive vice president of YNHHS and president of Yale-New Haven Hospital, regulatory commitments helped drive the consolidation strategy, he told a symposium audience. "There was one hospital, one provider number, one model for clinical services."
Sustainable Cost-Cutting Initiatives
YNHHS was able to additionally reduce spending by about $150 million from 2012 to 2015, and the figure was a focal point at the symposium.
The organization had set a target for $125 million in cost savings over the four-year period, primarily in four categories:
Human resources
Clinical redesign
Non-labor
Labor
"We beat our target, and it is sustainable," Abe Lopman, senior vice president of operations at YNHHS, told an audience at the event.
Patient care accounts for about 83% of the health system's annual spending, so cost savings from clinical redesign were the biggest slice targeted for spending reductions, at $60.8 million. Actual costs savings from clinical redesign were $33.4 million, but the shortfall was not surprising, Lopman said. "This is something that has to be part of your culture. It takes time to do it. Over time, we expect it to be better."
The health system was able to exceed its cost-savings projections in three areas: human resources, labor and non-labor. The total cost savings targeted in those areas was $64.2 million, with $116 million in actual cost savings achieved.
Allegretto told me the $150 million in spending cuts were modest when calculated on an annual basis—he estimates the annual impact on YNHHS's total budget at less than 1%—but meaningful for the health system, nonetheless. "For us, it sounds like a lot of money, but we are a $3.2 billion organization," he said.
Furthermore, the spending reductions, combined with the Saint Raphael acquisition and other positive impacts on the health system's bottom line associated with value-based initiatives, has enabled YNHHS to eliminate 250 open positions and avoid laying off as many as 250 employees over the past four years, Allegretto said.
"It's going to get increasingly more difficult to avoid laying people off as [reimbursement] cuts continue; so when you look at that $150 million dollars, I look at it as an incredible achievement. And we've kept it out of the system, and that's the most important thing."
Although several initiatives have helped YNHHS get closer to achieving success in the health system's quest to provide unparalleled value for its patients, he told me a handful of factors made the launch of the effort four years ago possible, including the adoption of a Quality Variation Indicators methodology.
The QVIs feature 27 summary categories of negative clinical outcomes such as implant complication, transfusion reaction, air embolism, drug poisoning, shock, infection, and obstetric trauma. "We had this external urgency [from declining reimbursement]. We had EPIC going in, so we would have the capacity to standardize care. We had just come up with the QVI methodology. And then we were at a place where people started trusting the cost-accounting data… Those four things came up at the same time, and because the leadership saw the future, we started our cost-value initiative."
'Change is Going to be Difficult for Healthcare'
As is the case with any Herculean quest, YNHHS has faced several challenges implementing value-based initiatives over the past four years.
Convincing the health system's clinical staff about the importance of cost accounting to help secure the organization's ability to serve patients well into the future has been among the hurdles, Allegretto told me.
Teaming financial analysts with clinical staff has been an essential element in educating frontline caregivers about cost accounting, he said. At YNHHS, there are at least two financial analysts working in every service line, and they are paired with senior nursing staff. "It's a team approach to that education. There is not a sheet of paper that you give them, and say, 'Here are the concepts.' It's relationship-building. I can't point to three pieces of paper and say, 'Here are the educational materials that we gave to physicians.' "
From October 2015 to April 2017, YNHHS is hoping to generate as much as $3.5 million in cost savings from hip and knee replacement procedures in the federal Bundled Payments for Care Improvement program, Allegretto told me. But the anticipated spending reduction has come at the cost of lost volume because one orthopedic surgeon refused to give up his favorite implant when the health system reduced the number of device vendors from seven to two.
The cost savings from standardizing hip and knee implants is estimated at a minimum of $2.3 million through April 2017, according to Keith Murphy, executive director of corporate supply chain at YNHHS.
As of Jan. 1, the surgeon who bucked implant standardization has taken 90% of his cases to a competing hospital, Allegretto said. "If we hadn't done that, we wouldn't have saved the $3.5 million across the system that we are going to save over the next couple of years."
Even the loss of one orthopedic surgeon to a competitor reflects the broader difficulty of adopting value-based initiatives in the healthcare industry, he said. "This kind of change is going to be difficult for healthcare, because where is he going to go? He is going to go to another organization and they're going to give him the implant that he wants."
Mary O'Connor, MD, director of the Musculoskeletal Center at the Yale School of Medicine and Yale-New Haven Hospital, told a symposium audience that the surgeon believed he was making the best decision for his patients, but the health system had indisputable data and value calculations in hand when negotiations reached an impasse. She recounted her pivotal remarks to the doctor: "Show me the data that shows your implant is better. You don't have it. I know you don't have it. So let's talk about cost, quality, and value."
Healthcare providers are finding financially sustainable ways to spend big dollars on improving the health of their patient populations.
This article first appeared in the October 2016 issue of HealthLeaders magazine.
While a universally accepted definition of population health is elusive, David Kindig, MD, PhD, and Greg Stoddart, PhD, took this scholarly stab at characterizing the concept in a 2003 issue of the American Journal of Public Health: "The health outcomes of a group of individuals, including the distribution of such outcomes within the group."
Kindig and Stoddart also asserted that "the field of population health includes health outcomes, patterns of health determinants, and policies and interventions that link these two."
Healthcare providers are collectively investing billions of dollars to support the "policies and interventions" deemed necessary to help boost the collective health of their patient populations, says Robert Massenburg, senior vice president and healthcare industry manager at SunTrust Bank, a corporate and investment bank based in Atlanta. "There are two areas where hospitals, health systems, and physician practices are investing in population health. One is information technology, and the other is infrastructure."
Electronic medical records dominate the information technology sphere of investments in population health, he says. "If you look at a single-site hospital with 200 to 500 beds, you're going to spend somewhere between $30 million and $75 million on an EMR system, which includes all the hardware, software, and the increased staff. You're not just buying hardware and software and using the same staff that you had—you're creating a new information group at the hospital.
"If you look at multisite hospitals, with between five and 10 hospitals, you're looking at exceeding $200 million in investment. If you're looking at a large academic medical center, with a large faculty practice, I have seen investments over a half-billion dollars. Those are sizeable investments, and most of the time, those investments are paid for over the first two or three years. … You're looking at somewhere between $50,000 for a single-physician practice, and for a group, in the low hundreds of thousands," Massenburg says.
"Hospitals and health systems are looking at decompressing their campus—moving certain levels of care and services off of their campus closer to where their patients are living and working."
He says infrastructure spending at healthcare providers that is designed to support population health goals focuses on two areas: brick-and-mortar investments in outpatient facilities off hospital campuses, such as urgent care centers, and revolutionary staffing changes that the healthcare finance consultant calls "the human element."
"Hospitals and health systems are looking at decompressing their campus—moving certain levels of care and services off of their campus closer to where their patients are living and working," Massenburg says of brick-and-mortar investments in population health capabilities.
"The human element" is a diverse collection of new or expanded healthcare staffing roles, he says. "When you're thinking about the patient's care team, it's going to be quarterbacked by the primary care physician and you're also going to have nonclinicians including financially minded members. Their roles will include data analytics for clinical protocols and pathways, assisting the team on the most effective and efficient means to deliver healthcare to the patient. In addition, caseworkers will continue to work with the uninsured and underinsured patients to either qualify them for government assistance and/or navigate the healthcare exchanges. You'll have others on the care team who will conduct door-to-door assessments, actually visiting patients in their homes. They will work with patients to make sure they are taking their medications, provide guidance on better nutrition, and encourage daily exercise.
"While this will add incremental cost to the delivery of care, in the long run it is expected to reap financial benefits by reducing readmission of patients including those with chronic illnesses such as diabetes, hypertension, and COPD. The expectation is that this team approach will promote a health-and-wellness concept, thereby reducing their overall need for healthcare services."
For health systems and hospitals, self-funding is the financing method of choice for investments in population health capabilities, Massenburg says. "We have worked closely with our clients to vet all of the funding options, including public debt, bank debt, leasing options, and self-funding. … Given the size and resulting net operating cash-flow levels along with the internal liquid reserves of most of the health systems, the majority have ultimately decided to self-fund."
Physician practices generally do not have the resources to self-fund investments in population health capabilities, he says. "Most of it is bank financing. Most of these physicians don't just have $50,000 sitting in a bank."
Pleasant population health surprise for rural providers
In rural areas, the federal Centers for Medicare & Medicaid Services has invested more than $100 million to help physician practices fund investments in population health, says Lynn Barr, MPH, CEO of Caravan Health and chief transformation officer of the National Rural Accountable Care Consortium based in Austin, Texas. But that investment of taxpayer dollars has not been sufficient to finance population health investments at rural practices, particularly regarding care coordinators, she says.
"Rural practices are having to come up with some of the money themselves. Ultimately, when a care coordinator builds a full panel, which we tag at about 200 chronically ill Medicare patients, then that care coordinator generates about $100,000 per year of revenue for the practice, and their costs are about $75,000."
The ability of care coordinators to drive new revenue from outpatient services that boost population health such as wellness exams, mammography, colonoscopies, and other preventive care services has been a revelation at rural accountable care organizations, Barr says. This is especially true for hospital CFOs who have been bracing for lower inpatient service and emergency department utilization as the overall health of their patient population improves, she says.
"What we are finding—and this was not expected because what we feared is that if you started coordinating care and the rural hospital started losing business, the whole thing would fall apart—is that we are hearing from the CFOs that even though their total inpatient utilization for their population went down and their total costs decreased, the local spending on healthcare services increased."
Digital retinal exams help control total cost of care
At safety-net healthcare providers such as Harris Health System, which includes 23 community health centers, five school-based clinics, a rehabilitation and specialty hospital, and two full-service hospitals, cost control is the prime financial benefit of investing in population health capabilities, says Jennifer Small, AuD, MBA, CCC-A, vice president of ambulatory care services at the Houston–based organization. Over the past three years, she says Harris has launched several population health initiatives aimed at improving clinical outcomes for patients with diabetes, including group diabetic visits and digital retinal imaging exams.
In 2012, Small proposed purchasing three digital retinal imaging camera systems at a cost of about $18,000 each along with a full-time technician to run each camera at an annual salary of about $35,000, she says, adding that the COO at Harris liked the idea so much he gave the nod when she suggested more than doubling the proposed purchase. That COO, George Masi, is now Harris Health System CEO. "George Masi asked how many cameras we would feel comfortable with. I said eight, and he approved it. Even with the financial constraints with the payer mix that we have, he saw the value and agreed that this was something that needed to be done," Small says, noting about two-thirds of the health system's patient population is uninsured.
The cameras have been deployed at primary care clinics.
"We are functioning on the assumption that the financial impact will eventually become net neutral. Certainly, with the retinal camera, it is identifying more patients that have retinopathy, and that means these patients will need to see more advanced ophthalmologists or other specialists. When you look at the costs of managing a patient who has a severe condition and it's caught early versus being later in the process and the condition exacerbates, it really makes sense to detect these things earlier. … There is the initial investment, but avoiding the downstream costs of care certainly warrants moving forward with the program."
Harris is planning to purchase five more of the cameras, so that most primary care clinics in the health system can be equipped with the devices, which are superior to traditional retinal exams because the cameras capture images of nearly the entire retina in seconds and store the data digitally for comparison to future annual exams. In addition to helping the health system reduce total cost of care for about 50,000 diabetics in its patient population, the digital retinal cameras are boosting patient access to retinal exams. Under the Healthcare Effectiveness Data and Information Set (HEDIS) measures developed by the National Committee for Quality Assurance, retina exams are a quality-of-care metric for patients with diabetes.
"Our providers and primary care physicians were doing an excellent job. About 96% of them were ordering an eye exam for their diabetic patients. The problem for us was access," Small said of the retinal exam challenge before Harris purchased and deployed the digital cameras in 2013. "We determined that the best way to improve our outcomes was to have a retinal camera because 96% of our physicians were ordering retinal exams for their patients, but only about 60% were getting the exams."
Now, about 72% of the health system's diabetes patients are getting the digital retinal exams, she says.
Urgent care centers playing a role in population health
Urgent care centers have become a powerful and profitable part of the population health strategy at the Our Lady of the Lake health system based in Baton Rouge, Louisiana, that includes a private, not-for-profit 800-bed Regional Medical Center, dedicated Children's Hospital, and 350-provider physician group and primary care network, says CEO K. Scott Wester.
"We have a clinically integrated health network called Health Leaders Network, and we are managing almost 100,000 lives. When you think about the population health aspects of it, the urgent care fits very nicely into the overall capabilities of managing a large patient population. … It gives another access point for those who have an urgent condition to seek care at a very affordable location—rather than to be seen in a very expensive location—then be able to have a quick follow-up visit with a specialist if that is needed."
Our Lady of the Lake has a dozen urgent care centers in a joint venture partnership with Premier Health, which is also based in Baton Rouge and manages the facilities. The cost of building and equipping each clinic was about $600,000, Wester says. "Being a joint venture company, we try to make sure that our urgent cares stand on their own two feet. Like any organization, we review typical financial metrics as well as patient service and clinical outcomes. Today, all of our urgent care centers have been very profitable—more profitable than running a hospital today, with hospital margins usually ranging less than 5%."
Urgent care centers not only support a health system's population health strategy but also generate a healthy return on investment, says Steve Sellars, MBA, Premier Health's CEO. "The contribution our joint-venture urgent cares can make to a health system's population health strategy maximizes ROI across the board. It starts by helping our health system partner reduce emergency room costs. … Up to 40% of patients treated in the ED could have been seen in an urgent care setting. When you consider the Center for Improving Value in Healthcare estimates the average cost of an ED visit is seven times what it would cost to treat in an outpatient setting, the potential for downstream savings is tremendous," he says.
Regulators should guard against unintended consequences linked to bundled payments and post-acute-care providers should brace for revolutionary change, says the chief of The Dartmouth Institute for Health Policy.
Bundled payments research published last week fires a double-barreled shot across the bows of federal policymakers and post-acute-care providers, the author of an editorial accompanying the research says.
In the Journal of the American Medical Association study, lead author Laura Dummit, MSPH, and 13 other researchers examined hip and knee joint replacement data from the Bundled Payments for Care Improvement (BPCI) initiative, Medicare's largest bundled-payments voluntary demonstration program.
Although the researchers found that reduced skilled nursing facility utilization among BPCI-participating hospitals cut episode-of-care spending without sacrificing quality, the data also indicates significant risk of negative unintended consequences, says Elliott Fisher, MD, MPH.
Fisher was interviewed by HealthLeaders Media last week.
The BPCI research, which included a control group of 841 nonparticipating hospitals, can be interpreted from polar opposite perspectives, according to Fisher, director of The Dartmouth Institute for Health Policy and Clinical Practice, in Lebanon, NH, and a professor at Dartmouth College's Geisel School of Medicine in Hanover, NH.
Beware of Unintended Consequences
"In one interpretation of the study, if the comparison groups were identical, it would suggest that you can improve care and lower cost without compromising quality," he says.
"The other interpretation of the study is that in a bundled-payment initiative it is possible to save money, especially if you select patients who will be cheaper to treat. That is a mechanism to reduce the cost within the bundle, but it undermines value because value is about delivering services that are needed to people who want them," Fisher says.
In addition to the temptation to cherry-pick healthy patients in the BPCI initiative, another potential unintended consequence of the bundled-payments model is perpetuating fee-for-service financial incentives that spur service volume, he says.
"The move to bundled payments may require a major correction, where they must be embedded within some form of accountability for the total cost of care. That could be accountable care organizations or primary-care-focused care payment models that hold primary-care physicians accountable for the total cost of care."
Policymakers at the Centers for Medicare & Medicaid Services bear an enormous responsibility as they launch and regulate mandatory bundled-payments models such as the Comprehensive Care for Joint Replacement (CJR) program, Fisher says.
"CJR will allow a much better evaluation because of its mandatory nature, but we should be looking carefully to see whether what happens is that fewer people who really need joint replacements end up getting them."
Post-Acute-Care Providers Face Business Model Disruption
As bundled-payments and other value-based payment models spread across the country, revolutionary change is bearing down on post-acute-care providers, he says.
Acute-care facilities are eager to have post-acute-care providers shoulder a share of the cost-cutting burden associated with bundled payments, Fisher says. "In hospitals, they are looking for ways to reduce costs within the episode that will not adversely affect the hospitals and physicians themselves but look to achieve the savings elsewhere."
A growing body of evidence shows post-acute-care is a prime area to cut total cost of care, he says.
"We know from lots of research, our own and others, that there are remarkable variations across the country in utilization of hospital services and post-acute care. The Institute of Medicine has claimed that regional variations in facility-based post-acute-care utilization are the major driver of regional differences in per capita healthcare spending… There is no question in my mind that there are opportunities to reduce discretionary utilization in the post-acute-care sector."
Post-acute-care providers need to embrace a business model that emphasizes value rather than volume, Fisher says.
"If I were managing a post-acute-care facility, I would be thinking carefully about how I could partner effectively with hospitals so that for those patients who do need post-acute care—whether it is higher level or lower level—I would be seen as the preferred partner within my market as relationships are built and hospitals and the physicians who are managing patients work to manage the total cost of care for an episode."
How two Kentucky hospitals are helping employed and independent physicians embrace population health and prepare for value-based care models.
At Our Lady of Bellefonte Hospital, preparing for the business-model shift from volume to value has been like a surfer paddling wildly to catch and ride the wave of a lifetime.
"The market you are in is important," says Kevin Halter, CEO of Ashland, KY-based Bon Secours Kentucky Health System, which operates the 215-bed acute-care hospital.
"We're not in a real aggressive market. My biggest challenge is getting my physicians educated on the front end because they all see the wave coming. And that's true for any of the new initiatives—bundled payment and financial changes like MACRAare in the journals, but it's not right in front of them as it is in places like Richmond, Virginia."
Bon Secours Kentucky Health System is part of the Marriottsville, MD-based Bon Secours Health System, which operates 19 acute-care hospitals in six states.
In Ashland and other markets that are just starting to fully embrace value-based delivery of medical services, the relationship between hospitals and physicians is absolutely critical, Halter says.
"Hospitals have been in value-based purchasing for five-plus years, now it's going to go to physicians, and my physicians are just now starting to see it. The reason they are seeing it is I am putting it in front of them. We had a board retreat with about 40 physicians to start educating them.
The message, he says is "This is coming, you need to get prepared, we are going to help you get prepared by putting in a clinically integrated network.' Now, we are helping them work through the change so they don't find relief in the channels outside the hospital."
Our Lady of Bellefonte has 250 physicians on staff, with 30% of the staff hospital-employed. Employment status has had a significant impact on adoption of value-based care models among physicians at the hospital, Halter says.
"Employed docs get force-fed. They are in these programs. Bundled payments for instance, and MSSP ACO. We sign them up. As part of being an employed physician, some of your freedom of choice goes away, which is good and bad. The employed docs are much further along in the continuum of healthcare reform than our independents."
An Emphasis on Primary Care
Halfway across The Bluegrass State in Elizabethtown, Hardin Memorial Health is also devoting significant effort to working with physicians to ensure the shift to value-based care is as successful as possible, says President and CEO Dennis Johnson.
Hardin Memorial Health has a 300-bed acute-care hospital and is affiliated with Louisville, KY-based Baptist Health.
Investing in primary care capabilities and building relationships with independent primary care physicians are crucial for hospitals to thrive—or at least survive—as the healthcare industry adopts value-based care models and embraces population health, Johnson says.
"You don't have to employ every physician on the planet, but you do need to drive the primary care referrals... And if you have good primary care, you are going to be able to manage a population's health."
Primary care should be a central component of strategic planning at health systems and hospitals as they prepare for value-based care models, and healthcare provider leaders should be open to enlisting help from outside their organizations, Johnson says.
In 2011, Hardin Memorial and Baptist Health engaged the Healthcare Strategy Group, a provider of physician integration services, to assist with their strategic plan.
"That plan was approved in early 2012. We've seen a lot of gains from the strategies that were outlined in that plan, and we've just engaged HSG to do a refresh of our plan," says Johnson.
"HSG assisted both Baptist and Hardin on a primary care strategy about three years ago to help identify those markets where we had an opportunity."
He is bullish about Hardin Memorial's future. "Our investments in population health are good in either a fee-for-service world or a fee-for-value world. Primary care is really a low-risk, high-return investment."
Hospitals that have case mixes with relatively high numbers of medically complex patients face unfair financial penalties, researchers say.
The Comprehensive Care for Joint Replacement model, a mandatory Medicare bundled-payment program, is financially flawed and will unfairly penalize hospitals that treat medically complex patients, University of Michigan researchers say.
In a study published last week in Health Affairs, researchers call on the Centers for Medicare & Medicaid Services to risk-adjust CJR's financial performance reward-and-penalty mechanism to reflect the high costs of treating frail patients.
Case mix has a fundamental impact on hospital operating costs, Chandy Ellimoottil, MD, a clinical lecturer in Ann Arbor and practicing urologist who is the lead author of Health Affairs study, told HealthLeaders over the weekend.
"Case mix matters across hospitals," he said. "That's called warranted variation, which is essentially differences in methods and costs that are due to complexity of patients. Unwarranted variations should be the target of bundled payments programs and most performance programs—the use of discretionary services and the unmonitored use of skilled nursing facilities, those are kinds of unwarranted cost variation and they should be targeted."
"You should want to adjust for as much warranted variation as possible just to be equitable," Ellimoottil said.
The Hospital Readmissions Reduction Program is among the prime examples of CMS performance programs that feature financial penalties and risk-adjustment for medical complexity, Ellimoottil said.
CMS began implementing CJR in April, with upside-only risk this year and two-sided risk set to kick in next year. About 800 hospitals in 67 metropolitan areas are participating in CJR on a mandatory basis.
Under CJR, healthcare providers such as orthopedic surgeons and hospitals receive standard fee-for-service payments from Medicare for all claims through 90 days after discharge.
To determine gainsharing payments and financial penalties, CMS will compare healthcare provider spending on a patient's 90-day episode of care against a target episode price.
This year, target episode pricing is based mainly on historical spending patterns. In future years, target episode pricing will be based increasingly on regional spending patterns.
The University of Michigan researchers contend that risk-adjustment for the medical complexity of patients is needed in the CJR program to help ensure that hospitals with high concentrations of frail patients are not subjected to unfair financial penalties.
As CJR shifts from target-price benchmarking based on a hospital's performance history to benchmarking on a regional basis, financial inequity in the program will increase, Ellimoottil said.
"Risk-adjustment only matters when you are comparing hospitals to one another. Risk-adjustment did not matter so much for previous bundled payment programs like Bundled Payments for Care Improvement. CJR is unique because it utilizes a regional benchmark and because it is a mandatory program. These two points often get buried when trying to understand why risk-adjustment is important for CJR."
The Health Affairs study is based on data collected from 23,251 Medicare beneficiaries who had hip and knee replacement procedures in 60 Michigan hospitals from 2011 to 2013.
According to the study, Ellimoottil and his co-authors compared the impact of historical vs. regional target-price benchmarking and "found that reconciliation payments were reduced by $827 per episode for each standard-deviation increase in a hospital's patient complexity. Moreover, we found that risk adjustment could increase reconciliation payments to some hospitals by as much as $114,184 annually."
The University of Michigan researchers developed a modest risk-adjustment mechanism for CJR that steers clear of disputed risk factors such as socio-economic status (SES).
"It touches SES a little bit because the risk-adjustment model includes a variable for dual-eligible status, but we don't include race and a lot of other more controversial factors. It really is more about medical comorbidities, and most CMS programs have some kind of risk-adjustment program. What we're looking at is just basic risk adjustment."
