Hospital and health system leaders see clear financial benefits from Medicaid expansion. But that's not the whole story. A deeper look reveals that Medicaid expansion is a critical, but perhaps not vital component of post-PPACA financial viability.

Depending on whether your state has expanded Medicaid, your hospital or health system likely either has sharply better financials or the same old bad ones. But the decision on whether or not to expand, though not in their control, is weighing heavily on hospitals.

In a side conversation at a recent HealthLeaders Media Roundtable, I asked a group of CFOs the consequences to their bottom lines of states' decisions either to expand Medicaid eligibility—and insure federal funding for the lion's share of the cost for the first few years—or decline that opportunity.

As of the end of August, 28 states had accepted Medicaid expansion, and two more, Utah and Indiana, were still debating whether to join. That leaves plenty of hospitals in states that have opted to forego expansion.

Medicaid expansion has two clear benefits to the bottom line, according to the CFOs I've talked with:

• Charity care drops immediately and significantly.
• Bad debt drops significantly.

But here's the surprising thing: revenue and net income pretty much hold steady. What gives?

Well, for one thing, it's early. Enrollments can be expected to extend to a greater share of the previously uninsured as time passes.

For another, uninsured or not, these patients are going to come to hospitals for treatment. In the past, such hospitals may have erred on the side of an admission, for example, because it was going to be paid for, so that revenue is going away—a negative, financially.

But the huge difference is now there's a payer—even if it's a poor one—where before there was none, for those who truly do need an inpatient admission. So far, for some, the net is near zero, but the hopeful takeaway is that people are likely being treated more appropriately.

What's clear is that the classification of revenue has changed, however. That has real impact.

A Tale of Two Systems
One CFO who has hospital operations in 20 states, seven of which have expanded Medicaid, says 80% of his previously self-pay patient population is now Medicaid-eligible, and 20% is now health insurance exchange-eligible. So the expansion of Medicaid has become a very important component of reducing the self-pay population of those hospitals to potentially almost nothing.

Think about the time and effort that used to go into collecting those balances which is now freed up.

Even though he says adoption rates into the health insurance exchanges were initially low—about 25–30 percent of the population, and eligible Medicaid expansion adoption is far from 100%, it has led to a real reduction in the self-pay population.

For this CFO and his system, that translates to revenue that falls directly to the bottom line and benefits cash flow. In real terms, that means this health system has seen a 60% reduction in self-pay ED visits and a 67% reduction in self-pay admissions. Folks, that's real progress both financially and likely in clinical effectiveness.

Moving the Needle?
Anecdotally, I have heard from other providers who say they have seen increases in volume, but that's occurring mostly on the outpatient side, and even where it is growing, inpatient admissions, generally, are increasing only to a small degree.

But does it move the needle, in terms of whether a hospital or health system feels it can survive without strategic partners in the long term?

For one health system CFO, the answer is no.

This organization, which has $750 million in annual revenue, sees itself as besieged with local competition, and with capital needs for its hospitals, its EMR, and equipment. Therefore a Medicaid expansion (that still has not yet come) could have deferred the decision to seek a strategic partner for as much as 18 months, but wouldn't have really changed the underlying equation.

It would have helped, but it wouldn't have gotten the organization to a 4% annual operating margin, which is the minimum its leaders feel it needs to continue in its current organizational structure.

So Medicaid expansion is a critical, but not necessary, component for thriving in the post-PPACA world.

Expect more upheaval.

Managing the entire continuum of care may be beyond your organization's current capabilities, but that doesn't mean you can't try risk-based reimbursement through Medicare's bundled payment program.

Hospitals and health systems at the vanguard of managing a patient's entire spectrum of healthcare needs are few. Years of fee-for-service reimbursement combined with a desire to focus on their core competency has left many hospitals and health systems without owned components for managing the post-discharge experience for patients.

But a model that focuses exclusively on inpatient or acute care makes less and less sense as healthcare reimbursement makes the slow transition from fee-for-service to so-called value-based purchasing of healthcare services.

To a large degree, hospitals and health systems can still choose whether to participate in such value-based contracts—in other words, they're not being forced to change—yet. But even those that choose not to participate in such experiments generally acknowledge that it won't always be that way.

Eventually, they will have to learn to be accountable for outcomes.

Even those few organizations that do have experience in managing the post-acute side of care for patients discharged from their acute care settings are tilling new ground. Increasingly, there's money attached to managing a group of patients' healthcare needs such that the costs of managing that entire population will fall.

Hospital case managers have had some experience in arranging post-acute care for their patients, but those care settings have traditionally been detached from a continuum of care, and the hospital was not accountable for whether that care was delivered appropriately, safely or cost-effectively. In a majority of geographical areas, that remains so.

But it is changing.

Taking risk for the health of populations is the goal for many healthcare organizations—eventually. But ramping up the ability to take risk on populations is fraught with potential minefields. What if there was a way to sort of dip your toe into that world without betting the health of the entire organization on the outcome?

There is. Partnerships can provide a relatively low-risk way to begin dealing with risk. Medicare's Bundled Payments for Care Improvement (BPCI) initiative provides just such an opportunity.

Rich Roth, vice president of strategic innovation with Dignity Health, which has more than 40 hospitals and care centers in California, Arizona and Nevada, has taken the approach of partnering with a so-called "convener," a company that helps with tracking, coordination of care and improving metrics for organizations at the post-acute care level.

"It's really part of a broad move toward population health," says Roth. "There's a phenomenal opportunity with novel organizations that have deep expertise in one area, like patient engagement or coding, to marry those organizations with the deep healthcare expertise Dignity has and trying to figure out this new world together."

Roth says that within Dignity, there are certain geographic areas within the system where it makes sense to move toward a population health posture. In those areas, Dignity has signed a partnership with naviHealth, a convener.

NaviHealth works with Dignity's case management teams to work on readmission goals with the help of the company's depth of tech support and case management. It also uses that information and skill to help arrange and follow up with patients and their physicians on their post-acute rehab responsibilities.

"The opportunity we have in terms of care coordination allows physicians and hospitals to work together better than ever in history," Roth says. "These models really support aligning physicians on joint goals of quality, safety, and reducing the cost of care from a structural and economic standpoint. We're early but based on what we're seeing, we're rapidly expanding this to multiple other sites within the Dignity system."

Dignity is working in the Model 2 program, which includes the inpatient stay plus post-acute care bundle. The patient's care episode ends in 30, 60 or 90 days. Dignity had to meet CMS benchmarks on quality and on its clinically integrated physician network, but once accepted, enthusiastically went about working on aligning physicians, the hospital and post-acute care.

"We need to hit base levels of quality improvement," says Roth. "Above those, there's opportunity to share savings based on better management of the patients and overall reduced cost of care."

Healthcare organizations may apply to participate in the program's four available models. But that's just the beginning. The program can be a way to experience risk, but if it's not run well, with proper coordination of care with post-acute entities, for example, the hospital or health system could record lower revenues than by staying on Medicare Inpatient Fee for Service, which is their right.

I won't waste space here detailing the four models, but for those who aren't already intimately familiar with them, they can be found here.

More than 500 hospitals, health systems and other providers have enrolled in the program. NaviHealth's Clay Richards, the company's president and CEO, equates CMS's bundled care initiatives with "dipping your toe into risk-based population health management."

The company serves not only as a repository for technology, analytics, and highly skilled clinicians adept at navigating the continuum of care efficiently, but importantly, as a risk partner, says Richards. The focus on coordination of care can serve two purposes outside of the financial, he adds.

"This is a competitive advantage from the hospital because their service delivery through 90 days will be very differentiated from their competitor down the street," Richards says.

Also, a big selling point for the partnership is the fact that it can serve as a way to drive higher levels of integration with physicians, particularly independents, who bring volume to the hospital.

"We're looking for someone who really wants to collaborate around this, and we will go in and help set up some of those integrative arrangements with physicians," says Richards.

Historically, a bigger focus of naviHealth's business has been its work managing the care of almost 1.8 million members of Medicare Advantage plans. He says the move toward post-acute care coordination in the bundled payments initiatives involves much of the same type of work.

"Rarely do we talk to a CEO who says this isn't the way they want to go, but it's a matter of timing," says Richards. "The nice thing about this is it allows them to move closer [to taking risk] without requiring that they radically change their operating model."

Alan Pope, MD, vice president of medical affairs and chief medical officer for Lourdes Health System, a two-hospital system based in Camden and Willingboro, N.J., sees the BPCI project his system is doing with naviHealth and CMS as both an opportunity to improve the quality of care across the post-acute continuum, and as a way to experience "where things are headed" in terms of more expansive risk-based contracting that the hospital expects to have to deal with both from government payers and the commercial market.

That said, currently the system hasn't yet seen much interest in risk-based contracting from the commercial side.

Pope and the leadership team at the health system felt comfortable enrolling in some of the BPCI programs thanks to success it had with a recently completed three-year gainsharing effort it undertook through the New Jersey Hospital Association with CMS.

That program offered an opportunity on the acute side, but not the post-acute side to reward physicians if care was more efficient and better quality, he says, very similar to Model 1 of the BPCI program. That project got physicians' attention on both quality and financial incentives.

"It made the physicians aware that there's another world out there other than fee-for-service," says Pope. "It was a successful project for us in that we saw quality gains, decreased cost and length of stay in certain areas."

For Lourdes, the BPCI program represents a graduated, bite-sized approach to taking risk.

"Gainsharing was one step, this bundled care project is another step, and shared savings with commercial payers will be another step," Pope says. "Once we have a better feel for how we can manage, and we have a better handle on cost across the continuum in the post-acute setting, we would like to take on some risk fairly quickly—within next few years."

Pope says such projects have a definite appeal because of the potential financial rewards, but they may prove even more beneficial in forging stronger relationships and alignment with independent physicians.

"We developed this with independent primary care physicians in addition to our employed physicians to work together on our shared savings programs," he says.

As part of the program, the system has begun piloting using its hospitalists to provide post discharge dialog with home health agencies, for example.

Hospitalists' Numbers Quadrupled in Last Decade

"In doing that, we have better insight into what's going on with the patient and we believe it will reap rewards in better healthcare for the patient coming out of the hospital," he says.

What's unique about the convener partnership is that naviHealth has experience and data with post-acute market, and can prove utility in helping guide the patient to the next best step for post-acute care, Pope says, whether it's home health, skilled nursing, or acute rehab that will get patients back to functional status more quickly and with fewer complications.

The best part, he says, is that it "allowed us to manage the project without investing a lot of new resources and developing our own case management program for this," he says. "Instead we fall back on their experience."

Healthcare providers are discovering strategic opportunities with large employers that are self-insured, but they need to be willing to partner more directly with payers and employers.

This article first appeared in the July/August 2014 issue of HealthLeaders magazine.

Delivering value is paramount to any healthcare executive who is fighting for his or her organization's place in the industry going forward. But the devil is in the details, and how you get there is dependent on a wide variety of factors. Two organizations—one that has already made the transition and one in the early stages of it—show that any executive who is hanging on to what currently works in healthcare (still largely volume-based fee-for-service reimbursement) is in a very dangerous situation.

So says Robert Mecklenburg, MD, medical director for the Center for Health Care Solutions at Virginia Mason, a Seattle-based system that includes a 336-licensed-bed hospital, a 460-plus multispecialty physician group practice, and a network of regional clinics. He knows of what he speaks; years ago, he and his colleagues at Virginia Mason found themselves in the kind of crisis that many of their peers are now facing. In fact, the Center for Health Care Solutions owes its very existence to a frank meeting between the health system's executives and local large employers that dates to 2004.

"They appreciated our innovations on adapting the Toyota production system to healthcare, but they said our healthcare was not affordable. They said, 'We're going to consider a variety of choices, including taking you off our network of providers,' " Mecklenburg says.

Quite a threat.

And quite an opportunity.

For all healthcare consumers, whether that consumer is a patient, a health plan, or an employer, one thing is clear: Seeking closer cooperation from employers and treating them as a partner to help reduce their cost of healthcare is a winning strategy.

A sense of urgency

"There was an immediate sense of urgency, and you could call it even a crisis," says Mecklenburg of that initial meeting. "Not only would we not want to lose the business from these iconic multinational employers that are so important to our economy, but people say don't waste a good crisis. My job [at the time] as chief of medicine was to lead the change to a systems-based practice."

Mecklenburg first met with employer representatives and those of their third-party administrators in August 2004. In November 2004, representatives of those employers met with Virginia Mason's physicians and showed the physicians the cold market forces that were driving employers to consider other options.

"These were the people who were writing their checks," Mecklenburg says, noting that getting physician buy-in for making drastic changes in care protocols was immediate; he thinks a lot of that urgency developed because the doctors heard directly from the source. "Following that meeting, I asked them to come inside Virginia Mason in February 2005 and begin working on this together."

Mecklenburg says at this early stage, well before the Patient Protection and Affordable Care Act and well before health plans began working directly with providers to help lower the cost of care, all constituencies in the Virginia Mason meetings realized health plans had to change the way they were paying for healthcare, and employers had to change the way they were buying it.

"If we just changed the production model, and purchasing and payment didn't change, we would get nowhere," Mecklenburg says. "All three had to happen."

To address this, the three partner groups (employers, the health system, and payers) created what they call marketplace collaboratives, where the groups would come together to mutually support and hold each other accountable in terms of delivering value to their common customers, defined as patients. That's a critical change, in that healthcare as an industry still lacks consistency on who the customer is. While the patient is always the one receiving the care, different areas of the health system might see the hospital as the customer, or the physician, or the employer. That problem still exists.

Defining the customer as the patient, says Mecklenburg, allowed the three groups to sit down together and work out the complex issues of curtailing unnecessary utilization or finding more cost-effective ways to move patients through a variety of care protocols, depending on the patient condition or diagnosis. The significant indication of the progress, he says, can be found in the fact that the employers have stuck with Virginia Mason and are convinced that it offers the best available value for their employees.

Managing populations

Much has been learned since Virginia Mason began its journey 10 years ago, but healthcare is regionally variable, and some areas of the country are just getting started on their value journey. They have seen that, often, they are their own worst enemy.

Troy Thibodeaux, CEO at Covenant Health-Lubbock in Texas, didn't need to have a meeting with local employers to know that his health system—with four hospitals and 977 licensed beds—needed to be more efficient. He just needed to look at the escalation in cost to cover the health system's own 5,000 employees. He hopes eventually to be able to work closely with employers—Thibodeaux attributes slow progress in that area in part to a lack of "large" employers (defined as employing 500 or more) in his region—but for now, the system is working more closely with insurers to help design care pathways that will eventually enable it to take risk on patient populations beyond its own employees.

Covenant certainly qualifies as a large employer, and that group represented the system's first shared savings experience. The partnership came relatively easily not only because it featured Covenant's own employees, but because the third-party administrator is the system's own health plan, FirstCare. Covenant Health Partners, a physician hospital organization with 320 physicians, is also heavily involved in helping move physicians from volume-based to value-based care protocols.

"We were successful in achieving significant savings," says Thibodeaux, who adds that since then, the health system has entered into "a couple" of other agreements on shared savings, one with the Centers for Medicare & Medicaid Services that feature local populations. The system is just starting those programs and, unsurprisingly, is focusing on moving toward population health management.

Thibodeaux says the system is not yet ready for total risk contracting, but it's getting closer through its work with local populations to better coordinate care for the chronically ill, where much of healthcare expense is found. It's using a population health management tool called Crimson and is extracting data from the health plan to help identify and intervene with such populations.

"There's two segments of that population we're focused on: navigating the chronically ill and the next category of patients, those at high risk of slipping into a chronic disease category," he says. "That's the key population. If we can reach them, it's less costly to apply preventive measures to that population, and the savings are huge."

Integration critical

None of this work is possible without physician cooperation on an unprecedented level. It helps to either have a clinic model of care, where all physicians are employees of the health system, as in Virginia Mason's case, or to have a strong and complete primary care network and alignment mechanism, as Covenant Health Partners does.

"That's absolutely critical," Thibodeaux says, "but you also have to have information sophistication at your fingertips to manage a population of patients. We're making significant investments in each of those, including patient and physician portals for health information exchange, as well as a significant increase in primary care and clinic integration."

Covenant Health is further preparing to take on risk for populations through formal partnerships with the federally qualified health centers in the area.

"Through one of these partnerships, we are utilizing care navigators in our ED to connect patients with the FQHC and a primary care provider," Thibodeaux says. "That's been very successful, and we've seen a 6% reduction in ED visits as well as a reduction in unnecessary return visits to the ED."

Of course, that means patient volume will inevitably decline.

"It's a double-edged sword," Thibodeaux says. "Our volume has gone down this year, too. But we track the patients we refer to them, and those patients are utilizing the ED less and becoming more compliant taking care of themselves."

Covenant began four evidence-based protocols a year and half ago, and Thibodeaux stresses that is a work in progress.

"We had success with two and were not so successful with two others," he says, mentioning general surgery and gastrointestinal departments as the bright spots. "We're hoping our new EMR will help drive more compliance with evidence-based protocols."

He sees particular opportunity in courting employers and payers, though.

"We are seeing employers, local ones, shopping the networks looking for lower cost and higher quality," he says. "We've already developed a narrow network product that we offered on the exchange through our owned insurance company."

Covenant intends to sell that narrow network not only to individuals but also to employers. It can be a mechanism to bid for school district contracts and some other employer contracts immediately. An important caveat to Covenant's current narrow network offerings, says Thibodeaux, is that they are not competitive from a price standpoint with Blue Cross and some of the other larger payers. The differentiator, he hopes, is that "with Crimson, we can demonstrate the quality and efficiency metrics. Premium's not everything."

Worrying about making the transition to value-based care can be debilitating. This transition fundamentally risks putting your organization out of business. If you do it right, your organization will definitely see lower inpatient volumes, and the risk of lower revenue is great. That's why executives have such a hard time knowing when to act and how strongly. But like Virginia Mason 10 years ago, they may find that once they dive in, revenue can be managed.

"While Virginia Mason did not have a decrease in revenue or patient volume to due value-based care, our real, fundamental problem was we had become burdened with a huge amount of waste," says Mecklenburg. "We could not support all that waste even with the ample revenue stream we had."

But Mecklenburg's challenge, as well as that facing his fellow executives, is that his job is to ensure optimum quality of care and reduce waste, while being attentive to the financial condition of the institution.

A helpful way to think about it, he says, is that some of the waste you're focused on eliminating represents part of the revenue stream. "In some cases, reduction in the waste in healthcare delivery is associated with reduced revenue. However, this is more than offset by increases in patient volume and a reduction in production costs, as it is a cost reduction strategy."

With that in mind, he says, "be mindful of revenue but take the cost structure down."

That means, among other changes, fewer FTEs, less imaging equipment, and using advanced registered nurse practitioners instead of doctors in certain cases. Further, you have to have the ability to have frank discussions with your payer and employer partners to make sure the journey is fair to the provider.

"When you start to look at these value streams, you may find that value-added care does not receive adequate reimbursement," he cautions.

He cites an example with Starbucks and its payer Aetna. Virginia Mason's team saw that for a true evidence-based process to be implemented for imaging, the decision rules for ordering MRIs would drop MRI volume by 20%.

Also, instead of using specialty consultants for back pain, Mecklenburg says, "we could reduce the cost of giving the care by using physical therapists instead of a specialist for uncomplicated back pain. When we did this, we improved cost for everyone; however, when we looked at the physical therapy visit, we actually lost money on that visit."

Mecklenburg says that with an open process, Starbucks and its benefits director were able to see proof that Virginia Mason had taken costs out, Starbucks saved money because of that, and the health plan had a better product to sell.

"But you can't get around the fundamental fact we needed a few more dollars for PT visits," Mecklenburg says. That boost in reimbursement was agreed to quickly through Starbucks and Aetna.

The key to making the transition is involving employers, payers, and when possible, providers, on the journey, Mecklenburg says.

"There's plenty of opportunity for everyone and there's no reason all three partners can't make contributions," he says. "But those who have a yestercare attitude do so at their peril, because market-based health reform is moving much more rapidly than the legislated agenda."

Reprint HLR0814-6

We're in the "gradually" phase right now. The "suddenly" part will be upon us before we know it.

Imagine you built a lemonade stand at which you could sell all the lemonade you could make for a dollar a cup. Wouldn't you do everything you could to produce as absolutely many cups of lemonade as possible?

If you were economically rational, you would. There would theoretically be no limit to your revenue, and by selling each cup of lemonade you simply add to your profit ad infinitum. While the way healthcare is bought and paid for is infinitely more complex than how lemonade is sold, for years, it has operated on a very similar economic model to my theoretical lemonade stand. (Sometimes you have to give the lemonade away for free, for example.)

Economic theory holds little sway in such a business, which is one reason why healthcare is on a crash course to try to inject the right incentives and measures into how decisions are made about healthcare services for individuals.

Now things are changing, but fee-for-service is still the dominant pay mechanism for health plans, government payers, and hospitals and health systems to this day. Many geographical regions seem to have plenty of pilot-type projects going on, but relatively few have gone further, at least up to now.

The lemonade-stand analogy is mired in fantasyland, of course. In no business can you infinitely grow through production alone—even in healthcare, there are limits to how many people you can reasonably say need drug-eluting stents, for example.

But the fact remains that no other business I can think of (except possibly college education, though that may be changing, too) has a system where to a large extent, suppliers have such power to create demand for the products and services they supply.

Of course, such an economic model is unsustainable—it requires a buyer that is as irrational as the seller is rational. But though it must fail, it can persist for a long time, as it turns out.

For a long while, that's what many of us thought about healthcare. Deep down, we knew it was not sustainable over time, yet runaway healthcare inflation was sustained for decades. Long enough that we got comfortable with it, ingrained in it, and maybe figured it would always be that way.

We're collectively finally seeing the bottom of the pit of money required to sustain such a model, so changes must be made.

But how, and how quickly? The major sources in a recent cover story I wrote for HealthLeaders magazine are either smart enough or naïve enough to try to innovate and play a part in changing this economic model both because patients, employers and payers are increasingly demanding it, and not least because it's the right thing to do.

This transformation is something I ask execs about no matter what the subject matter of the interview I'm conducting. Almost to a person, they freely admit they may be early, but suggest in the same breath that history will be on their side.

We fill the pages of the magazine each month with ideas and solutions from those who are pioneers in moving toward demonstrated value. This story is no exception. These people are betting their careers on change.

We do research that helps them understand where their peers are on the transformation and our daily news is filled with stories of innovative partnerships that may be able to bend the cost curve and deliver a more rational economic model for the provision of an essential set of services that we will all need at one point or another.

My June cover story attempts to profile a few organizations that are taking the operational risk of being accountable for outcomes and cost of care. That's something, I've found in my reporting, that's simple to say, but immeasurably difficult to ingrain in your organization, no matter how insistent the call to change might be.

Yet value is making inroads into this hidebound, expensive, and dangerous historical economic model. As I often think about this transition—a stock question for CEOs I interview is how the transition from volume to value is going—I'm often reminded of what Mike, a character in Hemingway's The Sun Also Rises, says in response to a question about how he went bankrupt:

"'Two ways.'" Mike said. "'Gradually, and then suddenly.'"

I've not had a CEO phrase the healthcare transformation journey in quite that way yet, but I keep hoping. To put a more positive spin on that quote as it applies to healthcare accountability, I suspect we're in the "gradually" phase right now. The "suddenly" part will likely be upon us before we know it.