GE Healthcare Camden Group Insights Blog

Improving Payer, Provider Dynamics: 4 Critical Components

Posted by Matthew Smith on Jun 24, 2016 9:24:08 AM

The core principles of the healthcare business model are changing in the Affordable Care Act world we live in. Less commonly will the “cat and mouse” game between payers and providers persist—the time has come for both parties to collaborate and seek to achieve optimal outcomes in terms of cost, quality, and accessibility.

There are four key components at the root of the changing dynamic between payers and providers: 

  1. Trust
  2. Cost and charge transparency
  3. Incentive structures
  4. Care management

As that dynamic continues to shift, and both parties work with one another, as opposed to against one another, we will continue to see improvements in the cost, quality, and accessibility of healthcare services.

Here’s more on the four key components, and what payers and providers should do about each of them.

1. Trust between payers and providers must improve

Historically, lack of trust between healthcare providers and health plans is rooted in the way that business has been conducted for decades. At the core of standard fee-for-service agreements, incentives are misaligned between the two entities, and providers are (by law) shielded from understanding the competitive landscape, in terms of reimbursement rates other competitor hospitals are receiving from health plans.

On the contrary, health plans typically have more available resources to understand whether their contracts (specifically, fee-for-service reimbursement rates) are in-line with the market.

According to a recent HealthLeaders survey, 39% of provider respondents noted that trust with commercial payers needs improvement, which is imperative as contracts move from a standard fee-for-service structure to risk-based, or outcome-based arrangements.

Providers should look for signs of trust from payers during value-based contract negotiation, such as a payer’s willingness to provide utilization or spend data broken out by in-network and out-of-network.

Providers will need to learn to reciprocate this good faith by no longer making unjustified, blanket demands for rate increases, and instead come to the negotiation table ready with cost and quality data that clearly illustrates a system’s value proposition to the payer and the members it serves.

2. Providers must be able to justify charges and costs

The hospital chargemaster has been a highly debated topic in recent years, specifically due to the notion that chargemasters are priced arbitrarily—which in many cases holds true.

Healthcare is the only industry where there is a defined price list of goods and services, and when those goods and services are delivered to the consumer, the total price is rarely ever paid (by any party).

Chargemasters, which were historically priced relative to Medicare rates (to avoid getting paid less than Medicare), in many instances, have not been well-maintained as reimbursement rates and methodologies have changed over the years. 

As a result, many hospitals struggle to justify how their cost structure correlates to what they charge for services rendered, and the result has yielded very high charge variation, even among hospitals belonging to the same health system.

As providers engage in value-based conversations with payers regarding what the payer should be paying the provider versus what it actually costs the provider to treat the patient, providers need to be able to support their chargemaster and have confidence in their cost accounting systems.

Hospital finance, revenue cycle, and managed care departments should work collaboratively in performing a thorough chargemaster pricing analysis, and ultimately, assess both price and cost to confidently justify to payers (and consumers).

3. Payers and providers must explore new incentive structures

As new forms of collaboration between payers and providers take shape, so do the types of incentives. Historically, providers have been incentivized to drive volume in a fee-for-service model, but in a value-based environment, there is typically greater emphasis on capturing covered lives, and managing that population effectively (i.e. capitation).

These types of arrangements offer varying degrees of risk, which depend on a number of factors, including demographics, regulatory environment, and market dynamics. Moving forward it will be important for payers and providers to work together in managing these factors through various techniques, such as risk-adjustment.

Before entering into any value-based contract negotiation, a provider should be able to determine their organization’s “tipping point,” which is the point in a mix between fee-for-service and capitation, that it no longer financially benefits the provider to focus on volume as the primary revenue driver. Not only should providers be able to calculate their tipping point, they should also be able to clearly articulate this to a payer in order to drive desired contracting outcomes.

Understanding the underlying economics and incentive structures from both a payer and provider’s perspective is an essential building block of payer-provider partnerships in value-based arrangements.

4. Providers must prioritize care management  

When one takes a step away from the business side of healthcare, providers are there to care for patients, and payers are there to cover the cost of care. As healthcare fundamentally shifts from “treating the sick” to “keeping people healthy,” the role that care managers (from both payers and providers) have is going to be increasingly important.

As contracts move to value-based, and payers and providers are financially incentivized to care for patients effectively and efficiently, care managers will play a crucial role in managing populations, both in care delivery and preventive care.

Furthermore, care management, which has typically been handled by payers, will take place closer to the point of care (providers).

As providers begin value-based discussions with payers, they should look to set up a care management structure to enable discussion and resolution of issues such as the delegation of care management services, and how varying levels of delegation may change current or planned care management infrastructure, and any future payments allotted for care management activities.

Success in a value-based environment will be challenging if care is delivered in silos, so an effective, longitudinal care management program can be the key to delivering affordable comprehensive care across the continuum.

This article was originally published by Managed Healthcare Executive on June 17, 2016.

Topics: Payment-for-Value, Payer Strategy, Payer Provider Relationship

Thinking Payer Strategy? Think Care Delivery Networks Instead

Posted by Matthew Smith on Jul 7, 2015 4:30:29 PM

Today, healthcare providers are facing several challenges related to the ongoing industry transformation from fee for service to fee for value. Physicians and hospitals alike are feeling the squeeze at the margin as increases in payment continue to flatten while expenses continue to rise. To offset these trends, providers are seeking new ways to increase their patient base and access newsources of “value” revenue. So how are successful providers achieving both these objectives? Instead of focusing on negotiations with payers, they are starting to consider their options in terms of participating in care delivery networks.

Why Do Care Delivery Networks Matter?

In the past, employers that provided health insurance to their employees—especially the large group employers—preferred a broad network that would appeal to the masses. Price (or premium) for the network also was an important consideration when evaluating product offerings, but employers would often value choice over price (although just slightly more) as they sought to remain competitive on employee benefits offerings.

Although some of these dynamics still exist today, the value proposition has changed as employers are faced with complying with the “Cadillac Tax,” which is scheduled to take effect in 2018. The need to be more cost competitive has prompted health plans to engage in two key strategies: value (or tailored) networks and private exchanges. In many cases, both of these strategies include a tiered approach to the network through the benefit design. Meanwhile, the Medicare program is accelerating its plans to further its value-based programs by 2018 and has announced that it will be accepting applications for the Next Generation Accountable Care Organizations ("ACOs").

All of these changes are designed to support the Triple Aim and demand that providers offer a value proposition, which, in turn, will be determined by the networks in which they participate. Thus, as they have come to share the same aims, payer strategy and network strategy both should address three types of networks: local, regional, and health plan.

The Networks

To be successful, each network should have a strategy that addresses the needs of each commercial segment—i.e., individuals, small group employers, and large group employers—which are very different and therefore require distinct approaches.

A local network would, preferably, provide a clinically integrated network ("CIN") and would center on a single hospital or health system. The local network would make direct connections with small group employers and some large employers (with a localized labor force). Because this segment tends to be most concerned about containing costs, the local network would offer a narrow value network that not only would be cost-efficient, but also would meet the network needs of the employees. The local network would essentially be a product sold to the employers through a health plan, with the local network placed in the first tier of the benefit design. The local network would manage the population through the CIN and contract to gain access to value revenue (shared savings or premium risk).

A regional network would entail a CIN, as well, but it would involve a partnership among multiple hospitals and or health systems across a defined geography or state. This network would have a similar approach to the benefit design (tiered), but would target large employers that are seeking a network to start to bend the cost curve, all while providing the geographic coverage that a local network could not. Regional networks also would be more likely to assume greater financial risk for their attributed population and would offer additional services such as on-site employee clinics, telemedicine, same-day access, and wellness programs. The regional network could be directly contracted with an employer, provided through a health plan or offered through a private exchange, or in some cases, could involve all three approaches. The local network could also be a subset of the larger regional network.

A health plan network would provide services for the remaining population that falls outside of the local and regional networks. Here, providers would more likely be placed outside of the tier-one position of the benefit design and have limited access to revenue from value programs. They also would be subject to higher copays and deductibles, thereby limiting potential volume of price-sensitive services.

What Is the Network Strategy?

In any of these cases, a network strategy must exhibit five hallmarks to be effective.

  1. Network partners that have been wisely chosen. Choosing a regional network means choosing a long-term partner(s). Providers should partner only with those that add value to the network. Attributes such as a strong brand, critical geographic coverage, service need, and population health capabilities should all be considered.
  2. A pluralistic approach. Providers should participate in all three networks with multiple payers, because no one payer or network will meet all the needs of all employers and individuals in a providers’ market.
  3. Effective use of metrics. Being placed in the first tier of a benefit design will likely mean a discount on rates. Local and regional networks should be clear on market share and value revenue goals before engaging in a product that requires a discount to participate.
  4. Limited reliance on the broad health plan network. Maximizing the population in the local and regional network will lead to better quality, market share, and financial performance.
  5. Knowledge of the local market. Providers should stay ahead of the game by fostering strong relationships with brokers and employers to better understand the local dynamics and products being offered.

Topics: Payer Strategy, Care Delivery Networks

Design Your Payer Strategy to Meet Your Financial and Market Goals

Posted by Matthew Smith on May 28, 2015 9:46:14 AM

As hospitals and health systems consider the shift from fee-for-service to fee-for-value in their strategic planning efforts, they face the challenge of better understanding what their organization should look like in the new world. This means incorporating new concepts to the strategic planning process, including a payer strategy, and the recognition that the organization will need to change how it will generate revenue. In an effort for the organization to better understand how it will compete, questions to be answered include: In what types of risk products should my organization be participating, if any? How will my organization use alternative payments or differentiating payer arrangements to move market share? What is our current contribution margin of each payer type? Will our access points (e.g., primary care, retail clinics, e-health) be adequate to reach the population base we need? Should my hospital be considering expanding our range of services to include other care settings such as post-acute?

The answers to these questions will vary depending on the payer focus and patient population (market of segments) to be served, as illustrated in the diagram below. In this article, we discuss a refreshed approach to strategic planning that helps answer these questions and connects an organization’s long range financial plan (“LRFP”) to its strategic plan so that LRFP targets are realized.

Pyramid_of_Success_2.pngTo help arrive at the best approach, providers should begin the strategic planning process by first evaluating the expected future utilization trends for each major payer (e.g., Medicare, Medicaid, commercial) for all of the care settings that are relevant to the organization (e.g., acute care, ambulatory care, physician practices, post-acute). For instance, organizations should consider the following as it relates to their market: What if inpatient utilization rates (per thousand) continue to decline? What if value-based programs continue to move more imaging and outpatient surgeries into non-hospital facilities? What if expanded urgent care sites and retail centers continue to impact the emergency room? By answering these questions and quantifying the financial impact, hospitals and health systems can then begin to better understand their goals related to

  1. How much more market share they will need (grow the population served),
  2. In which care settings should they consider participating,
  3. What their pricing strategy and pace of change to alternative payment models should be, and
  4. Determining if they need to expand into new geographic markets.

Ultimately, this approach will help each organization gain a clearer picture of what they will look like in a fee-for-value world and while reaching their financial goals.

Considerations for each of these goals are described in further detail below.

Increase Market Share

How much more market share can the organization attain? One percent? Three percent? Based on what? Sometimes a hospital’s LRFP reflects a growth target of five percent year over year. How does one attain this in an environment with decreasing inpatient volumes? Does the organization plan to increase access points in terms of additional clinics, a health plan, and physician providers? Will there be increased outreach to the community and providers? Will the organization enhance services within existing service lines or add new ones to attract a new segment of the market? If so, what is the incremental volume that will be realized, and how does that compare to the investment required? Will participation in a tiered network enable increased market share? An organization can partner with other providers to create a broad provider network that could be marketed to both health plans and local employers. Within the network, tiered pricing with payers could be established which would, in turn, drive both greater market share and premium revenue dollars to the organization. What is the cost of these strategic initiatives? What is the return on investment? These are key considerations when quantifying the impact of increasing an organization’s market share. Once the impact is estimated, how much more of the gap remains, and what other strategic goals should be considered? 

Enhance and Diversify Care Delivery Sites

What service lines or care delivery sites should be added in order to meet the demands of the population targeted and cost effectively deliver care? Which service lines may need to be closed or consolidated? The addition and diversification of sites of care or service lines not only enable additional volumes and revenues but also facilitate the higher quality and leaner expenses that result from offering a comprehensive scope of services across the continuum of care as effective care management is implemented. The addition of business units should consider extending beyond traditional acute service lines to post-acute and ambulatory services. Of course, additional services require some investment and typically different business skills and capabilities. Whether the organization builds its own infrastructure or partners with another provider, each option should be considered, and the return on investment and likelihood of success should be measured. The impact of additional business units or service lines should then be compared to the gap to see how much more is still needed to be filled.

Increase Top Line Revenue

Under a shared savings environment, expense savings and/ or quality improvement resulting from effectively managing care can result in incentive payments (pay for performance) on top of the baseline fee schedule that directly improve an organization’s margins. Through a defined provider network and effective care transitions and care management, the health system will be able to demonstrate value, therefore increasing market share (previously mentioned) and potentially access to new sources of revenue. Of course, if the organization decides to pursue full-risk or plan-to-plan arrangements, or even develops its own health plan, that comes with the opportunity to capture the benefit of effective population health management. With the potential for higher reward, also comes greater risk, so assuring the organization’s readiness for risk will have to be weighed carefully. All programs that include financial risk should be evaluated to determine the expected and actual return. In the future, most health systems will require some access to sharing in the benefits of reducing overall healthcare costs through either shared savings or direct participation in premium dollars to be successful.

Increase Population Reach/Service Area

stratgoals.pngUp to this point, we have assumed the service area remains as is. In some instances, an organization may need to increase the service area and its reach to capture a larger population. Generally, this is difficult to do and may require significant investment in terms of outreach efforts, and the resulting gain may be minor. Successful outreach may require partnering or collaborating with other providers or through expansion of relationships with physician groups in those markets. Regardless, organizations should evaluate the cost/ benefit of expanding its service area and use this in making an appropriate decision. It is important to note that the strategic goals above are not mutually exclusive; interdependencies do exist. Adding a service may not only result in higher revenue due to incremental volumes for that new service line, but also incremental revenue that results from effective care management across an enhanced continuum of care. An analytically-driven payer strategy that considers financial, market, and organizational capabilities will help organizations identify what will be required to achieve their goals. An objective approach will guide the prioritization of strategies to enable the achievement of the organization’s LRFP and its desired position in the market. 

Topics: Payer Strategy, Population Reach

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