CEOs responding to HealthLeaders Media's 2015 Industry Survey seem to be undecided on whether healthcare really is headed to a value-based future. One prominent hospital CEO, Ron Paulus, MD, says it's a big mistake to think value-based care won't make big inroads or that it has already happened.

Some hospital and health system CEOs are making two critical mistakes: They either think value-based healthcare is a passing fancy that will fade away or that the biggest disruption in healthcare is already behind them.

That's the view of Ron Paulus, MD, president and CEO of Mission Health in Asheville, NC. He sees his peers making these strategic mistakes as healthcare transforms due to a variety of factors.

Paulus and I reviewed together some of the results from the Premium Edition of HealthLeaders Media's 2015 Industry Survey, which debuted in January. Indeed, it seems as though respondents, including the CEO subgroup, haven't quite made up their mind whether a value-based future is really where healthcare is heading, despite all the indications that it is gaining traction in fits and starts.

In Figure 1 of the survey, 37% of CEOs characterized their organization's transition to value-based care as at the investigation stage. Only 28% of the total group of survey respondents said that. So maybe Paulus is onto something when he says many leaders think—erroneously, he says—that value-based care won't make big inroads (certainly the 10% who chose "not pursuing" fit in this category) or that it has already happened (possibly the 7% who say the full rollout is complete or nearly complete).

"I take away from this response that pretty much everyone is just beginning, but in every CEO meeting I'm in, this is the No. 1 issue on the agenda," Paulus says. "As for Mission Health, we are underway with active pilots and some of them are being rolled out."

Table stakes for the value-based game seem to include a substantial investment in data analytics, whether in-house or with a partner that can help dissect and disseminate data. And CEOs are well aware of the need for that investment in order to be able to compete in a value-based world. In Figure 6 of our survey, 77% of CEOs cited data analytics as among their top three investment priorities, while only 62% of all respondents chose that item. Still, both groups picked data analytics most often among their top three investments, outpacing even other value-based or accountability tools, such as investments in care redesign (53% of all respondents), in patient experience improvements (51%) or in nurse navigators and care coordinators (45%).

For Paulus and Mission Health, data analytics is a "top priority for me." As for the difference between the CEO group and all respondents, he attributes that largely to the "siloization effect."

"Everyone's kind of touching the elephant in a different way," he says. "If you're not working on the data, you're less likely to see it and feel it. But at the CEO level, I feel it because that's where we're putting a huge amount of money."

He says most of that money goes to two things: trying to get better analytical data out of the electronic medical record, and integrating that data so that it can be used effectively in treating patients. Mission has a Cerner platform, but because Paulus says his health system "can't wait," he's made a separate investment in HealthCatalyst as the data analytics partner in the "medium term."

"In the long run I want one solution," he says. "We're using the Cerner platform for certain aspects, like health information exchange, while HealthCatalyst is generating a vendor-neutral data warehouse. Building the databases is like shoveling snow, but integration of the data is like building snow castles," he says.

Because moving to value-based care takes a war chest, CEOs are looking for the best way to fuel financial growth over the next five years as they hope to make a transition to reimbursement that is also predominantly value-based.

The most popular answer for both groups of respondents was that they will fuel financial growth through expanding outpatient services: 63% of all respondents and 60% of CEOs. But other strategies were less similar. Some 32% of CEOs said they would fuel growth at least partially through developing their own or partnering with existing convenient care facilities, while only 22% of total respondents chose that as a strong growth area. Developing a health plan business unit was also higher on the priority list for CEOs than for the entire group of respondents, at 27% and 18% respectively.

Paulus was surprised that only 27% of CEOs expected to acquire or develop a health plan business unit. At a recent eight-CEO dinner he attended, he said all eight, including himself, were interested in getting into the health plan business in some fashion, whether that means building a Medicare Advantage plan, participating with proprietary plans in the exchanges, or even commercially, with employers.

What's different this time

But haven't hospitals and health systems tried to get into the health plan side of the business before? And didn't they lose vast amounts of money on the experiment two decades ago?

"That's a fair concern," Paulus concedes, harking back to his experience as Geisinger Health System's chief technology and innovation officer, prior to becoming CEO of Mission Health. During his tenure, Geisinger was one of CMS's Physician Group Practice Demonstration participants (CMS's first pay-for-performance initiative).

"At Geisinger, we had an interesting control trial because we were able to compare the PGP demo and our MA plan side by side," he says. "We saw that we were very successful on the MA plan and only marginally successful in the PGP demo."

He says the PGP project earned money in early years, "but when you net out not just what you spent but what you cannibalized, it was at best neutral and may have been a loss."

Conversely, on the Medicare Advantage side, "you get 100% of premium, not just a percentage after a threshold, but also important, you can directly interact with the consumer; you have all the data stream immediately, and when you have a delivery system, you can intervene on those consumers."

That's difficult in an ACO model with retrospective attribution, he says.

"I realize there's prospective plan, but it was really the partnership with doctors and patients that made it work," he says of his Geisinger experience. "It wasn't always true that the health plan and the clinical enterprise got along, but in the Medicare Advantage plan, one of our department chairs who had been most antagonistic toward the health plan realized that across 20 clinical parameters, we were statistically significantly better in 19 of the 20 in our Medicare Advantage plan. He stood up in a meeting and said with the data, we now know the Medicare Advantage plan is like a drug that works and it would be unethical to withhold this drug because patients do better with it than without."

That's why providers should really consider developing a health plan, he says.

Paulus says he tries to avoid making any of the top four strategic mistakes he's identified by measuring how well leadership is focusing on avoiding them every day. They are:

• Not focusing on the patient first: "Not in a flippant way, or holier than thou—we have our own struggles—but sometimes we can be so caught up in all our own troubles that we're not doing the things the patients most need and want, and that includes focusing on the service experience, convenience, access, and price. That's hard because it's asking us to change our model before we have the incentives to change it, and in ways our docs and nurses or administrators may not like."
• Focusing on cost reduction and not quality improvement: "You get cost reduction by improving quality. Cost and quality go hand in hand. They are friends. Yes, it's harder to lower costs by improving quality than it is to just cut things, but it is the only sustainable way."
• Thinking that things aren't going to change: "This is living in denial."
• Thinking they already have changed: "Another form of denial. We're like a chimera right now—part one animal and part another. At least partially, we're still living in the fee-for-service world from the '60s. But change is here."

You're as at risk for the self-pay or indigent populations you serve and their overall health as any of your bundled payment-taking, direct-to-employer-contracting, Pioneer-ACO-participating peers.

During my visit to the American College of Healthcare Executives' annual Congress event in Chicago this week, sessions predictably focused on the intersection of volume-and value-based reimbursement. To their credit, many organizations are taking this threat of lower reimbursement, higher patient acuity levels, and lower utilization to heart.

Not me, you may say. We steer clear of CMS demonstration projects and Medicare ACOs. And our commercial payers aren't even interested in any value-based determinant to reimbursement. So we're just fine.

But what about your own employees? What about the self-pay or indigent population? You're as at risk for those folks and their overall health as any of your bundled payment-taking, direct to employer-contracting, Pioneer ACO-participating peers.

It just may not show up the same way on your financial statements. But money is being spent—and lost—for this cohort of patients, especially if you're not strategically trying to manage the unhealthiest of these people so they don't over consume costly healthcare services, to say nothing of improving their health and quality of life.

That was one of the main points from representatives of a health system that is being proactive about risk-based reimbursement, where it can, even though in the sense of formal structures with government of commercial payers, risk-based contracting has not made inroads.

"All of you are at financial risk if you have a high percentage of self-pay and Medicaid patients," said Ed Rafalski, Memphis-based Methodist Le Bonheur Healthcare's senior vice president of strategic planning and marketing, in a session addressing fellow health systems at ACHE Congress earlier this week. "This is all about managing complex patients in a different way. That's how we're building our population health strategy."

Because the health system loses money on Medicaid and self-pay patients, reducing their acuity could pay big benefits in both patient outcomes and the system's financial health. So Methodist began working on a community faith-based network back in 2006 that by 2010–11 became a vehicle for better managing the health of high-acuity multiple comorbid patients in the area, Rafalski says.

Though the network was created as an outreach program for all faiths, Methodist staff soon realized they could use the network and geographical and demographic data from the system's patient encounters to help pinpoint the highest concentrations of self-pay and Medicaid patients.

Familiar Faces
The belief was that use of a trusted patient navigator would lead to better, more tailored care, and eventually, to better self-and family-management of chronic conditions. Most of these patients are familiar to any health system—they used the emergency department exclusively as a one-stop-shop for all their healthcare needs.

Methodist discovered that the top 10 ZIP codes consumed 56% of all charity care costs.

Further, the "hot spot" of utilization and cost came from South Memphis in one ZIP code, 38109. In 2010, this ZIP code, which had but one federally qualified health center safety net clinic, accounted for only 9% of inpatient visits, but 65% of total charity care costs for Methodist.

Methodist calls these folks "familiar faces," while other healthcare organizations often call them "frequent flyers." Whatever the moniker, they and the poor management of their chronic diseases figure heavily in the healthcare cost equation. Therefore, concentrating resources on this ZIP code would have a big impact on the charity care population.

Commercial payers in Memphis, where the eight-hospital Methodist Le Bonheur Healthcare is based, weren't and still aren't particularly interested in introducing value-based reimbursement structures at this point, although Cigna did provide some of the funding for the program. At this point, it has one patient navigator for about 70 patients, mostly in that one ZIP code.

In support of the goal of moving patients toward better chronic disease self-management and better health generally, the navigator offers nonclinical support, such as managing doctor's appointments, arranging transportation, securing meals or groceries, getting prescriptions filled or financial aid for prescriptions.

About two thirds of the patients approached with the offer of help with these functions have accepted the invitations thanks in part to the trust built from the interfaith network, which counts almost 600 houses of worship in the area as members. Results through 2014 show decreased per-patient costs by 43% compared to the 2010 baseline. Not surprisingly, ED utilization has decreased 23% for this group of patients managed by the care navigator.

Now that the program has shown such promise in high-risk patients, Methodist would like to expand it to those it considers "rising risk" patients. That is, those who are on track for high utilization absent intervention.

"We know the approach works, so we want to expand to the next level of patients who are at risk of becoming familiar faces," says Razvan Marinescu, MD, the director of planning and business development at Methodist.

Methodist leadership recognized the issue and did something to combat it, and the beauty is that it's a model that can be effective no matter your organization's payer mix or patient mix.

Obviously, this type of high intensity intervention is not cost-effective for most patients, but it can make a huge difference in cost and quality of life for some. That's what's known, annoyingly, but quite appropriately, as a win-win.

Your strategic vision for how your organization should fit into the care continuum should be realistic, but aggressive. Here's a North Star: Think of where you can add the most value and then focus.

Of all the megatrends affecting healthcare, from ICD-10 to consolidation, from Medicare demonstration projects to partnerships with payers and employers, one thing hospital and health system leaders can count on is the inexorable march forward, broadly, of value-based purchasing.

By that I mean that those who are paying for healthcare represent a lot of different constituencies—from employers to traditional payers, to the government, to individuals—but what unites them is that they want verifiable value for the money they're spending.

And they're getting better at determining the factors that influence value. Can your organization provide better outcomes than the competition? How can you prove it? What's the secret? The answers to those questions should inform every strategic decision leaders make.

For last month's cover story in HealthLeaders magazine, I wrote nearly 7,000 words on defining your place in the care continuum and I feel like I barely scratched the surface. I found several diverse examples of how some innovators are employing their time, talent, and vision toward demonstrating value.

But even given the unique nature of each of their stories, I kept coming back to one thing—the confidence of the people I interviewed and the clarity of purpose they demonstrate for finding how their organizations will fit in going forward, whether we're talking about a regional health system, a small hospital, or a giant nationally focused health system.

They all have the confidence of their convictions, and critically, a detailed plan to get there. Some important themes are common, regardless of their vast differences in size, scope and scale:

1. Inpatient is not a growth area.

Sure, inpatient is the most expensive site of care, and thus holds a big share of revenue, but organizations are trying to think more holistically—adding outpatient, ambulatory and even "e" modalities (telemedicine is growing) in the hopes of building a cohesive and coordinated system of care with the idea that commercial contracting will take on a more capitated style of reimbursement.

Further, many heretofore provider-only organizations are entering territory that was one reserved only for health plans. "Capitation is our friend," says Curt Kretzinger, Mosaic Life Care's chief operating officer.

The beauty of growing beyond the inpatient space is that it can be a good strategy even if value-based purchasing has not made inroads locally, by providing investment opportunities in growth areas such as primary care and outpatient surgery. But the continuity-of-care aspect of operating in a capitated environment should not be discounted.

2. For big systems, loose confederations are out—true operating company structures are in.

Ascension owns one of the largest health systems in the country, but it has largely operated as a loose confederation of regional systems that have been free to find their own way in many respects—especially in clinical standardization.

As taking variation out of medical care becomes a more important contributor to value, the organization is taking a big risk by building out and rolling up modalities like post-acute care and home health. That takes huge investment, but dovetails into Ascension's larger strategy of "taking care of millions of lives from birth to death," according to Anthony Tersigni, the system's president and CEO.

He believes that standardization of clinical practice and other operational priorities are more difficult under a holding company model.

3. Hospitals and health systems must become more paternalistic toward patients.
Navigating healthcare can be complex for even the most educated individuals. Ellis Medicine President and CEO James Connolly says the most recognizable healthcare authority in a given region needs to take responsibilities that it hasn't in the past. For instance, in helping patients make thoughtful and efficient decisions with their healthcare.

In some ways, this means getting into areas of social services and social work that hospitals have traditionally not been involved in. Building these linkages, in Ellis's case, with more than 50 local agencies and partners, helps patients avoid readmission or expensive follow-up care that happens when their social needs are neglected.

It's a tough learning curve, but Connolly says it's necessary given value-based reimbursement that is coming on ever more strongly in both the commercial and government payer sectors. "What we built is equally applicable to Medicare, Medicaid or commercially insured people," he says. "The main thing we were developing was the ability to coordinate and manage care in the community. That's a cornerstone toward being an ACO."

Not that every hospital or health system should become an ACO, or even should become part of a larger one. That's a decision that can only be made based on the facts as you see them and on the details of the possible deal.

Accountability, by contrast, will not be optional.

When a hospital is caught in the middle of a fight between a multi-state for-profit hospital chain and state leaders, the result is chronic, long-term uncertainty. That's no way to run a business.

Tenet's long-running attempt to buy five hospitals in Connecticut was a struggle between behemoths. Born from a smaller-scale deal between Vanguard Health Systems, which was acquired by Tenet Healthcare in the middle of negotiations with the state, the deal would have expanded the population of for-profit hospitals in Connecticut from one to six of the state's 29 total hospitals.

That caused problems. Lots of problems.

At times, it seemed the deal would go through imminently. But another regulator, another issue, would inevitably pop up, complicating things. Ultimately, after governors, attorneys general, a state healthcare commission and the legislature all had their say, it wasn't meant to be.

Final restrictions placed on Tenet over staffing, service, and pricing at the five hospitals prompted it to withdraw its application to buy the hospitals. Two years of work between state leaders and the national for-profit chain, not to mention expense and chronic uncertainty for the hospital went up in smoke.

Tenet's final decision to walk away came only shortly after the state's Office of Healthcare Access made it known that changes in staffing, services, and pricing would be prohibited for five years following the acquisition of the hospitals by a proposed partnership between Tenet and Yale New Haven Hospital. That proved a bridge too far.

The deal lived through two legislative sessions, many different proposals and players, and at least two resuscitations before ultimately dying over the latest demands from the state.

There's blame to go around on both sides, but very little rancor, at least from official channels, even though the future of financially troubled Waterbury Hospital, also part of the deal, is now in serious question.

Other hospitals that were involved, including 154-bed Bristol Hospital, are in much more stable situations financially, but still suffered as a result of the failed deal. "Part of the reason we're in this situation is that we need to get some economies and other resources," says Bristol Hospital President and CEO Kurt Barwis, whose hospital was one of the proposed acquisitions by Tenet. "I get that communities have opinions and feelings, but they all came together and were heard and we thought there was an agreement."

Barwis recounts how one year into the process, when Tenet was first on the verge of abandoning the deal, Governor Dannel Malloy (D) encouraged the company to see it through, and insisted that differences could be bridged.

Tenet did return to negotiations only to hear about the strict terms of acquisition insisted upon by the state Office of Healthcare Access. Ten days later, Tenet issued this media release. This time, it looks like there will be no reprieve. That's just fine for Barwis, who supported the deal that would roll up his hospital and four others from the outset. But despite that support, and more importantly, after two years plus of uncertainty, he is relieved that finally, there is resolution.

Although he regrets nothing about his organization's part in the process, ultimately, its outcome robbed the hospital and its leadership team of critical time to reposition the hospital for a very different, value-based future. It will take years to recover, he says.

Barwis and his board started that process with the Tenet deal three years ago, in the middle of a financial downturn, amid problems with the state budget in which there were more recipients for Medicaid while resources were being pulled away, he says.

"So my board went out and found a way," he says.

But as the process dragged on, a couple of things changed.

"One, our financial situation improved so much, that the first time Tenet pulled out a year ago, we went out and were able to secure refinancing of our debt and borrow for our strategic plan. And at the same time, we had signed a network relationship with Yale New Haven and service lines were developing very well," he says.

Tallying the Costs of Uncertainty
When the process of reeling Tenet back into negotiations restarted, however, it was tough for Bristol Hospital to "get on with our life," as Barwis puts it.

"We wanted to get back to building our emerging clinically integrated network," he says. But you can't do that as long as the lenders of capital think they're going to get knocked out when Tenet comes back. "So you start to reflect on all you can't do, and the list starts to grow longer and longer in your mind," says Barwis. "I'm in nowhereland and I can't execute."

Not only that, but employees are caught up in the uncertainty, too. Barwis says local media always asked him how much was spent on legal fees and consulting surrounding Tenet's proposed acquisition, but he says that's absolutely dwarfed by the problems the long-term uncertainty created.

"I'm a finance guy by training and people ask me all the time how much we spent on legal and consulting fees, which is easy to quantify. But the other thing people don't quantify is the need to close the transaction," he says.

There was, for instance, a defined benefit pension plan that had to be frozen. To reduce risk as the transaction moved toward completion, the manager had to move from a long position to very short position aimed at removing risk of not having the cash needed at closing of the transaction. As a result, that fund missed a huge run in equities.

"We missed a whole bunch of upside in the defined benefit pension plan, which has nothing to do with what we've spent on the deal, but everything to do with our viability going forward," he says.

Bristol has also always had great corporate partners in philanthropy, says Barwis. When it became likely the hospital would be bought by a for-profit, they changed their giving.

"The moment we say we're going for profit, that money gets reallocated to someone else," he says. "Now this deal's not going to happen, so how do I get that back? It will literally take years."

And the uncertainty and opportunity cost also rears its head in the little things no one thinks of, says Barwis. Last summer, during one of his regular lunches with rank and file employees, two maintenance workers mentioned that they wanted to borrow from their pension plan for college tuition in one case and to purchase a home in the other.

Barwis had to strongly advise against borrowing because any loans would become due on a change in ownership, and workers would also be subject to a 10% tax penalty.

Despite the reluctance of investors to refinance the hospital's debt, Bristol was able to finally refinance on favorable terms once it became clear the Tenet deal was verifiably, "nail-in-the-coffin dead," says Barwis.

Lenders should have been happy to step up. Bristol finished 2014 with 8.5% revenue growth.

"At least for us, we had something to fall back on," he says. "I've talked to the other CEOs, and some of them are in great shape, but others have laid off people," he says.

"It's really unfortunate for those that are struggling right now. You had to get your medical staff convinced, prepare them, and part of that journey is you try to give them a clear indication of why that [Tenet-owned] future is better, and then you're stuck with saying now we have to make some hard decisions. Two of those hospitals will have to figure out the future without a capital infusion."