One of the many challenges that healthcare organizations face is the complex and fragmented reimbursement landscape. Broadly speaking, payment comes either from government contracts such as Medicare and Medicaid or from commercial insurance contracts that have paid on a fee-for-service basis. This model has become unsustainable, and carriers are looking at alternative methodologies, including capitation and value-based payments. Medicare, for example, pays a hospital a fixed fee based on the patient’s diagnosis- related group. If the cost of care is less than that payment, the service is profitable; if the cost is more than that payment (as is frequently the case), the service is not profitable.
Assuming a baseline level of appropriate and efficient care, the strategy for managing government-insured patients looks very different from that for managing privately insured patients. With government insurance, the priority is delivering highly efficient care and minimizing costs while optimizing outcomes. With private insurance, there is less pressure to be efficient; thus many healthcare systems prioritize optimization of charges because they represent the vital margin for institutional financial viability.
The striking discrepancy in reimbursement between government and commercial payers would be even larger if not for the Medicaid Disproportionate Share Hospital (DSH) payment system, which is intended to minimize the impact of low reimbursement on hospitals that care for large numbers of uninsured patients. Government efforts to reduce DSH spending can be expected to further accentuate the difference between government and commercial reimbursement of services, increasing the burden on hospitals that care for aged and uninsured populations.
Another consideration is the paradox that higher-cost tertiary and quaternary hospitals face: They emphasize complex—and thus expensive—interventions, but may therefore be at increased financial risk. To address this situation, they may partner with multiple payers to create preferential referrals in large regions for these services. Patients and payers benefit from such arrangements because outcomes are optimized. Payers also are able to project and plan around their financial risk because the contracts can specify the payment structure for a procedure. This, in turn, puts pressure on hospitals to be efficient in their delivery of care because such contracts may not be fee-for-service in nature.
Care must be provided regardless of reimbursement. As a result, the strategic priorities around margin and mission frequently leave physicians bewildered as to how they should direct their efforts because most medical systems have a payer mix of both government and commercially insured patients (Exhibit 1). The two feature articles in this issue of Frontiers of Health Services Management describe different approaches adopted by two institutions working through these challenges. The efforts shared by Freese Decker of Spectrum Health and Purves of Maricopa Integrated Health System (MIHS) represent important examples of alignment and preemptive transparency. If one draws analogies to highly integrated systems such as Kaiser Permanente, creating alignment and sharing the benefits of increased efficiency are easier when the system is both the payer and the provider.
In Praise of Novel Approaches
Historically, physicians have been trained to focus only on their patients to provide the best care possible. As conversations about controlling costs in healthcare dominate the policy landscape, physicians find themselves newly accountable as stewards of a scarce resource that they have not been adequately trained to manage financially, and in the use of which they compete against two imperatives: mission and margin. The articles by Purves and Freese Decker bring together these two imperatives and demonstrate novel approaches to engaging clinicians and others on the front line of healthcare to optimize both mission and margin.
From a policy perspective, lowering the costs of care is frequently seen as the only viable way to provide sustainable healthcare in the United States, which spends a considerably higher portion of its gross domestic product on healthcare than other high- income countries do (Papanicolas, Woskie, and Jha 2018). To this end, hospitals and payers are experimenting with value-based reimbursement models in which providing better outcomes at lower costs is rewarded. Against this backdrop is the imperative to ensure the financial health of the organizations in which physicians work, and for private-practice physicians to protect their own bottom lines. Many are still reimbursed on an “eat what you kill” basis and have no incentive to do less. Assuming (as appears to be the case nationwide) a slow transition to value-based reimbursement, the current strategy appears to be to work toward reducing the costs of care while maximizing revenue through legacy fee-for-service agreements. These imperatives can result in an incoherent approach to financial and care management. New tactics are needed, such as the one Purves describes to maximize the served population’s insurance coverage by facilitating enrollment in Medicare and Medicaid.
In the current state of confusion, physicians are simultaneously challenged both to reduce expenditures without much insight into how best to do so and also to maximize revenue through aggressive application of billing codes, which increases the total costs of care to payers and, ultimately, to patients. In a perfect world, cost reduction alone would defend an institution’s margin, but in our experience—perhaps because the activation energy to achieve cost reduction is high and relies on teamwork—physicians may find it easier to focus on fee-for-service opportunities that require minimal systemwide behavior changes. Both Freese Decker and Purves describe approaches to these cultural challenges, starting with clear messaging from leadership about institutional priorities. On the patient-facing side, they describe the positive effects of providing up-front price estimates before care is delivered to increase the chances that patients will pay their out-of-pocket expenses and engage in dialogue with their doctor about preferences, expectations, and cost.
In addition, although tracking physician productivity by work relative value units (RVUs) can incentivize production of those RVUs and thus potentially interventions that do not add value (Dieleman et al. 2017), in practice those same charges (particularly in the case of well-insured patients) support the hospital’s bottom line and permit institutions to make up for revenue losses on government-insured patients where payment may not cover the hospital’s costs.
Managing the Complexities
Under these circumstances, how do hospitals and physicians best manage the frequently competing imperatives of reducing costs and defending their margin through fee-for-service agreements? Can physicians and hospitals both optimize their bottom lines and simultaneously function as responsible stewards of healthcare resources? We believe the answer is yes. However, achieving these objectives requires strategy changes like those at Spectrum Health and MIHS, as well as a willingness on the part of physicians to evolve in their roles and responsibilities beyond only focusing on the patient and toward also supporting changes focused on the financial health of the system in which they work.
See Clinicians as Partners
As Spectrum Health and MIHS have demonstrated, systems must work with clinicians as partners, looking horizontally across the organization to develop patient- and disease-centered care models, reduce waste, increase efficiency, and apply evidence-based standards. Ideally, models should be developed that share gain and risk. Ultimately, the changes required to achieve these goals will be good for an organization’s health regardless of how it is being reimbursed: Margin will be increased if reimbursement remains flat or increases and defended if reimbursement falls. The classic example of Geisinger’s guaranteed cardiac surgery cost model set the stage for simultaneous improvements in cost, outcomes, and patient satisfaction (Casale et al. 2007). Although logical from a profit-and-loss perspective, operationalizing these kinds of approaches is more difficult in practice because it relies on hospital finance departments aligning closely with clinicians to understand their respective contributions to value (Warsh and Nurok 2016). This means a shift away from the traditional view that hospital administration must simply support clinicians’ needs. To this end, Freese Decker describes Spectrum Health’s “systemness” initiative, which aligns clinical and administrative functions across the enterprise. Achieving this alignment requires recruiting clinicians who are mindful of their commitment to, and skills in, providing interdisciplinary care.
Review Cost Accounting
To accomplish these aims, hospitals must unpack their cost-accounting models in ways that create intuitive levers on which clinicians can pull (Warsh and Nurok 2016). In many institutions, clinicians are simply unaware of the costs that an episode of care entails and work under opaque assumptions about fixed costs. For example, even heroic efforts to decrease utilization of chest X-rays by an individual clinician may have no impact on cost because the X-ray machines have already been paid for and the X-ray technician’s time is already budgeted. Alternatively, a concerted effort across the institution to decrease use of X-rays may allow the hospital to buy fewer machines in the future and not replace personnel when X- ray technicians retire. Clinicians must also reorient themselves as caregivers with duties, rights, and responsibilities that remain patient centered but also include responsibility to the institutions in which they work and the US healthcare system more broadly. The traditional view of responsibility to just the patient is no longer adequate. Indeed, as Purves describes, accountability for stewardship of resources is now one of MIHS’s core values.
Institutions need to provide strategic direction to their physicians about where to prioritize their efforts. As Freese Decker notes, compensation should be linked to maintenance of efficiency, quality, and appropriate standards. Hospitals that decide an organizational efficiency strategy is the correct approach will need to develop better physician compensation models that incentivize good stewardship and reduce the reliance on generating RVUs (Wolk and Apple 2017). Such an approach includes actively incentivizing care that is patient and disease centered, efficient, team based, and evidence based so that healthcare resources are optimally used. Notably, the behaviors of physicians who function best in this care model are quite different from those of physicians in fee-for-service reimbursement models (Nurok, Sundt, and Gewertz 2018), and leadership choices must be predicated on which model is prioritized.
How to incentivize good citizenship among private physicians who rely on hospitals for inpatient care—and frequently on their own network of private specialists—is a difficult but not impossible challenge. Ultimately, as payers become more attuned to discrepancies in the prices they are paying for services, market forces should align private physicians with the institutions in which they provide inpatient care. Hospitals must then put mechanisms in place that empower physicians to understand the financial consequences of their clinical decisions. This move will ensure that care is of an appropriate standard, that overtreatment is minimized, and that billing practices are fair. For example, our efforts at Cedars-Sinai to provide clinicians with data on the cost consequences of their decisions to order medications, implants, or other consumables have yielded positive effects: Clinicians now choose lower-cost alternatives without prompts from administration.
Partners, Not Managed Entities
As healthcare reimbursement transitions from legacy fee-for-service models toward value-based payments, hospitals need to ensure that their business model is financially viable and can meet the needs of the population they serve. Along with value-based reimbursement must come a reconsideration of the antikickback and other statutes that have had the unintended consequence of inhibiting physicians and hospitals from working together and jointly benefiting from the delivery of high-quality, cost-efficient care. The era of hospital administrations being firewalled from the daily work of caregivers must come to an end. Hospitals must work with their physicians as partners—not just as managed entities—to provide clear direction about the work required in a value-oriented healthcare system. This means that hospital cost- accounting systems must be clinically relevant so that clinicians can understand and act on the financial effects of their bedside decision-making. In addition, physician incentives must be aligned to ensure value-based care and not the production of RVUs. All of these tactics have a central role in a strategy of providing better care for our patients at lower cost. The financial benefits to the US healthcare system (hospitals, patients, and payers) are desired consequences—not drivers—of change.
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