John Fryer, Vice President and Head of Market
Paul Keckley, Managing Editor of The Keckley Report and industry expert*
As healthcare faces unprecedented challenges in light of COVID-19, it is clear that the industry must prepare for short- and long-term changes as the industry emerges from the pandemic. In particular, the need to move away from the status quo fee-for-service reimbursement model will be central to how care delivery systems transform into a value-based delivery system. In this first of a monthly series of perspectives, we highlight the market trends driving the need to embrace risk models and where health systems may want to focus strategic efforts in accelerating their efforts to evolve toward a more value-based delivery system.
In 2021, as the economy recovers and vaccines and therapies for the coronavirus are expected to be available, we believe payers will accelerate their use of alternative payment models for three reasons:
- Heightened concern about healthcare costs. The Congressional Budget Office forecasts total healthcare spending will increase 5.4% per year through 2028—higher than inflation targeted by the Federal Reserve’s Monetary Policy and higher than overall Gross Domestic Product forecast to increase 2.5-3.0% annually starting next year. Under current funding, a shortfall could occur as early as 2024; in monetary policy there are many aspects of future Medicare funding that are unknown at this point. Lowering healthcare spending without compromising patient safety is a priority for payers.
- Enrollment growth and medical inflation will limit Medicaid and Medicare funding and induce payment cuts to providers: Medicare covers 61 million today; Medicaid covers 71 million. While Medicaid spending is forecast to increase at 3.0% annually, Medicare is forecast to increase at 6.4% per year and is already 28% of the federal budget. State and federal elected officials will look for ways to cut healthcare spending for these programs to fund other government programs. Changing incentives to reward providers for optimizing outcomes and patient safety, reducing waste and coordinating care more effectively vis-à-vis new payment models is accepted by policymakers as the key to containing spending in these programs. Increased participation in modified accountable care organizations and bundled payment models and expansion of Medicare Advantage and Managed Medicaid programs are expected.
- Employers will accelerate cost-containment efforts. Employers anticipate their health costs to increase at 7% next year and after. They believe the root cause for the health cost spiral is wasteful spending for unnecessary or non-evidence-based treatments. It’s justified: studies show 25-30% of spending is unnecessary but incentives for hospitals and physicians encourage doing more. Employers believe provider incentives should be based on value (outcomes, cost-effectiveness), not volume. As employers evaluate their health benefit strategies, they are likely to increase their use of risk sharing arrangements, reference pricing, and benefit design changes in their health benefits plans for their 141 million covered lives.
Replacing fee-for-service reimbursement with value-based models requiring hospitals and physicians to assume financial and clinical risk is an imperative for payers and an opportunity for providers.
Today, value-based payments to providers in healthcare account for 30% of total spending; by 2028, it will exceed 80%. Except for a set of highly complex conditions involving 5% of the population, payments to hospitals and physicians will be based on contracts with payers that link outcomes, patient safety, efficiency and targeted cost reductions to compensation. Capitated payments coupled with bonus payments and/or financial penalties will be the primary form of compensation by payers to providers.
For most hospitals and physician organizations, managing the transition to value successfully will require investment in three core strategies:
- Primary care “fencing”: A “fencing” strategy is required to protect health systems from threats posed by national physician aggregators, virtual care alternatives, and other vehicles that aim to attract the most profitable segments of business away from the health system. For most provider organizations, there are two immediate opportunities to convert patient relationships into continuous relationships with individuals where their health and wellbeing is the aim and comprehensive primary care services the focus:
- CMS Primary Cares Initiatives: Access to primary care is a key aim of CMS to improve the health and wellbeing of Medicare enrollees and, in so doing, reduce overall Medicare costs. It has implemented five alternative models to encourage participation: two options under Primary Care First (Primary Care First – General and Primary Care First – High Need Populations) and three under Direct Contracting (Direct Contracting – Global, Direct Contracting – Professional, and Direct Contracting – Geographic). Terms of participation for new entrants and application deadlines are available at https://innovation.cms.gov/innovation-models/primary-care-first-model-options and https://innovation.cms.gov/innovation-models/direct-contracting-model-options.
- Direct Contracting with Employers: Akin to CMS’ efforts, the provision of comprehensive primary care services to employers is a growing trend. Today, 43% of the U.S. population depend on employer benefits to access the health system. A popular hedge against health cost escalation are on-site/near-site primary care clinics that provide preventive health services and treat minor injuries/conditions and act as gatekeepers by channeling referrals to high-performing hospitals and specialists.
- Positioning a high performing multispecialty physician network to assume full risk: To successfully navigate the transition to value-based payments, a closed network (team) of medical and surgical specialists needs to:
- willingly assume financial risks with payers
- collaborate in patient care with peers/li>
- adhere to evidence-based practices/li>
- value credible data about clinical performance, patient experiences and outcomes
Physician leadership is key, confidential data sharing across the network is fundamental, and an enlightened approach to patient engagement is imperative.
- Creating a contracting organization to negotiate, measure and monitor performance risks with payers: The tools necessary to successfully engage payers in value-based contracts are these:
- Management expertise in payer contracting including but not limited to terms, conditions, risks, underlying actuarial assumptions about utilization and medical costs, and administrative overhead.
- Information systems that facilitate data sharing across the network while protecting security, privacy and decision-rights of users.
- Data aggregation and analytics to evaluate and predict risks associated with costs, outcomes, patient experience and adherence, contract compliance, etc.
- Digital connectivity in patient homes, at workplaces and through wearables to reduce administrative inefficiency and facilitate patient self-care.
Couple the pandemic with an election year and the uncertainty in the healthcare ecosystem is understandable. The current public health crisis has only accelerated and exacerbated trends that were present at the beginning of 2020. In the next installments, we will consider the implications of the upcoming Presidential election, the new federal fiscal year and the impacts of the COVID-19 pandemic. Regardless of the outcome in the election, the transition from volume to value will accelerate. Participation in the transition from volume to value is a strategic opportunity if executed effectively and led by physicians.
Lumeris assists provider organizations in navigating the transition from fee-for-service reimbursement to value-based contracts with payers. In today’s environment, we are focused on helping systems Come Back with Confidence™ from the pandemic and prepare for a sustainable future. We provide the essential operational capabilities and enabling technology to help health systems deliver high quality, coordinated care with an engaged care team to improve clinical and financial outcomes. For more information, visit www.lumeris.com.
*Paul H. Keckley is Managing Editor of The Keckley Report and a well-known healthcare policy analyst and industry expert. In The Keckley Report, Paul provides weekly insights around key health policy and industry trends. For more information, visit https://www.paulkeckley.com/.