Increasingly gloomy credit rating forecasts threaten to cast a cloud over the not-for-profit health system sector. Traditional business models are under serious pressure and as value-based care and payment accelerates into an unavoidable but crucial strategy, these are the questions progressive Board Members are asking themselves:
1. What resources are dedicated to managing risk today – does our spend match our commitment to deliver higher value?
As the percentage of system revenue continues to tilt towards value-based arrangements, is our organization treating risk and value-based care as its own line-of-business? Or as we did a decade ago – from the corner of a desk? As managing cost and quality has increasingly become a vital competency in healthcare organizations, typically the infrastructure to deliver value-based care has been slowly developed across the organization out of necessity. Therefore, determining what organizational resources are devoted to risk management and the impact of those investments is often impossible.
Maybe it’s time for an internal audit – is value-based care a “hobby” or a competency for our organization? To determine whether resources are optimized and calculate an ROI on value-based programs, it is necessary to centralize infrastructure and manage cost. In fact, best practice suggests that the formation of a dedicated business unit for value-based care with its own P&L to track expenses, manage at-risk revenues, and measure outcomes is most effective to achieve substantial return on value-based commitments.
Furthermore, as capital budgets are developed, what trends should executives get in front of in regard to value-based care? Financing inpatient capacity and other assets should be given extra scrutiny as incentives shift to reward the management of the rapidly growing Medicare population. Health systems will begin to put their credit ratings at risk as debt service ratios narrow because of capacity built for a fee for service (FFS) environment. Boards may say the right things about recognizing the shift away from an inpatient focus and towards becoming an innovative and readily-accessible platform for the community… But the question remains – are we putting our money where our mouth is?
2. What’s our Medicare strategy?
How will we handle the “Silver Tsunami”? The United States population is aging rapidly, with 1 out of every 5 persons expected to be over the age of 65 by 2030. CMS has responded by creating innovative programs through the Medicare Shared Savings Program to encourage the development of vital population health management skills to better manage the cost and delivery of high-quality care for seniors. Meanwhile, Medicare Advantage (MA) has become the fastest growing payer segment due to increasing consumer preference for the program (benefits) and the aforementioned aging trend. This has led to more than a third of the Medicare eligible population choosing an MA plan in January 2019, a total of almost 22.4 million beneficiaries .
The health system response to this trend has largely been twofold. Many have turned to MA as a way to better manage the booming senior population through more aligned financial incentives. Others have elected to still treat MA payers as simply another contract to negotiate the most advantageous FFS rate possible even as margins are often underwater. This should be re-evaluated.
The structure of MA creates opportunities to demonstrate financial and clinical healthcare outcomes that are achievable with the right alignment.
MA value surplus dollars are created mostly by providers. But too often, value generated is disproportionately captured by traditional payers; accessing this pool of the premium surplus must be a focus of any value strategy for a health system. What value could we bring to our community or strategic initiatives could our system pursue through the efficiencies generated from a value-based MA strategy?
3. How collaborative are the payers in our market – are we getting our fair share?
Some would consider the phrase “collaborative payer” to be an oxymoron. A true collaborative payer relationship may seem unlikely, but in value-based arrangements, there is an opportunity to grow the overall pie through close cooperation between payers and providers instead of the zero-sum environment of FFS. Provider organizations must look to shift the negotiation paradigm toward value share in MA products as the potential benefits far outweigh unit price increases.
What hurdles does our organization face with respect to market payers? Lack of cost transparency, misaligned incentives, inadequate resource support, static reporting, delayed sharing of data? While all markets are unique, most provider executives who are involved with payer strategy know which organizations are inclined, and more capable of, enhanced collaborative relationships—and the ones best suited for win-win contracts with attractive value share arrangements. However, key information sharing and cooperation are necessary to generate the positive outcomes that make truly collaborative payer relationships so mutually beneficial. What do payers share with our organization?
Also consider that health systems hold unique value to payers as they enter markets. Systems can define and enhance relationships with new payer entrants in return for network access, membership, and management of medical costs. In fact, in this “DIY” (do-it-yourself) era, many organizations are going a step further and making necessary strategic investments to create that collaborative payer relationship themselves by launching their own provider-sponsored health plan. And among leading health systems surveyed that own their own health plan, 89% expect their membership to continue to grow in the coming year.
If we feel we are putting in a greater-than-fair share of the effort, then why shouldn’t we reap an even greater share of the rewards?
4. Do we practice what we preach – do executive incentives align with our long-term strategic interests?
Do our executives get paid for value-based outcomes and success? Wonder why the transition to value is slow for some… When thinking about linking compensation to value-based metrics, attention is usually at the provider level. However, as the reimbursement environment shifts toward value, incentives for executive compensation should be directly linked to preparing and advancing the organization towards value-based care goals.
CMS and other payers are committed to value and shifting risk to providers; without the proper incentive structures, executives are unable to focus on a long-term strategy and capitalize on value-based opportunities. Defining a system’s value-based care strategy is a great and necessary first step but doing so without ensuring accountability at the executive level is a recipe begging for suboptimal results.
5. How aligned are our physicians to our system?
Is our relationship with our physician partners as strong as we think it is? A rapidly changing healthcare environment has prompted increasing levels of physician employment/affiliation by health systems. 58% of leading health systems surveyed report acquisition activity in the last quarter of 2018, primarily geared around physician practices and medical groups. This trend represents an expensive avenue for physician alignment with multiples for acquisition rising and competition looming. Non-traditional entrants into the physician sector, such as private equity-backed physician aggregators and payer-owned organizations, are also entering markets and offering attractive value-propositions to physicians through acquisition or partnership.
This is a dangerous reality for health systems as the business model of these new entrants is to enable physicians to accept risk and create value by limiting utilization and ‘commoditizing’ hospitals to compete on price for volume. Priority should be placed on creating new models for financial alignment with powerful value propositions and significant clinical leadership that make health systems indispensable to their physician partners to prevent these new entrants from gaining a foothold or leveraging their aligned provider assets against the health systems. If we remain passive and do not seek innovation in the physician alignment arena, are we putting ourselves at-risk for undesirable disruption?
Bonus Question: Does our Board have the right mix of competencies and experience to provide oversight as financial risk for outcomes shifts to providers?
Has our Board evolved with healthcare? It’s well-understood that Board level oversight is essential to the long-term health of any organization. But as the business model in healthcare evolves, Boards must include members with the right competencies and experiences to hold executives accountable.
Value-based care is often described as being paid for clinical and financial outcomes. However, to perform successfully at an organizational level, it is essential to effectively manage risk across a portfolio of business. Boards must evolve to include membership with experience across critical disciplines such as risk management, quality improvement, customer satisfaction, actuarial, and insurance. Without these key competencies, health system boards will have significant (and growing) blind spots. What expertise does our Board lack?
Boards play a vital role in holding health systems accountable and pushing advancements in an ever-evolving healthcare landscape. In a climate where performance risk is increasingly being passed to their organization, failing to ask the tough questions just might represent the greatest risk of all.
For more information about engaging in your organization’s value-based care strategy, please contact Philip Ikoku or Dan Juberg.
 Moody’s Investors Service (link)
 Centers for Medicare & Medicaid Services (CMS.gov)
 On behalf of Lumeris, The Health Management Academy conducts a quarterly survey of health system executives. In Q4 2018, respondents indicated that 23% of health system revenue was tied to value, up from 15% in Q4 2015. Executives also believe this trend will continue, with respondents predicting the percentage of revenue linked to value will increase to 26% within 12 months.