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Transforming Business and Operating Models

[By Russ Richmond MD]

Dr. Marcinko and ME-P,

The US healthcare system’s myriad of problems again seized the headlines recently with the release of an Institute of Medicine report, which found that 30 percent of healthcare spending in 2009 – around $750 billion – was wasted. Citing the “urgent need for a system-wide transformation,” the report blamed the lack of coordination at every point in the system for the massive amount of money wasted in healthcare each year.

One critical area in particular need of transformation is the business and operating model that drives healthcare in the US. There is broad-based agreement across the healthcare industry that the current fee-for-service model does not work, and needs to be changed. The sweeping health reform law enacted in 2010 included a range of more holistic, value-based payment structures that are now being referred to as “populatiobn health.”

Population health is an integrated care model that incentivizes the healthcare system to keep patients healthy, thus lowering costs and increasing quality. In this value-based healthcare approach, patient care is better coordinated and shared between different providers. Key population health models include:

• Bundled/Episodic Payments – This is where provider groups are reimbursed based on an expected cost for a clinically defined episode of care.
• Accountable Care Organizations (ACOs) – This new model ties provider reimbursement to quality and reduction in the total cost of care for a population of patients.

Both of these care approaches aim to reduce care utilization through prevention programs, case/disease management and integrated care coordination, including better information transfer across different providers. Equally important, they are focused on reducing the cost of treatment by managing physician misuse and overuse and driving volumes to lower cost settings of care.

The shift to coordinated care is rapidly picking up steam across the country. According to a recent American Hospital Association survey of hospital chief executives, some 98 percent of respondents agree that hospitals should investigate and implement population health management strategies. Anecdotally, the hospital leaders participating in the survey indicated that it is not “if” they will have to pursue these risk sharing strategies, but “when.”

Even with healthcare providers now realizing that migrating to a population health approach is inevitable, there is still significant confusion about the crucial details of implementing these models. Hospital managements are worried about being left behind in the headlong rush toward adoption of ACOs and other value-based reimbursement models. Against this backdrop, healthcare providers now confront a growing list of urgent questions:

• Which of the emerging population health-based care models is right for our hospital?
• How much risk is prudent for our hospital with these new reimbursement models?
• Should we move to an ACO, or is that too big of a jump for our hospital?
• How does our management team even start to plan effectively to make the shift to a prevention-focused care and reimbursement model? Where do we begin?
• What is the optimal time-frame for making these changes?

Using a “Scorecard” to Assess Your Population Health Readiness

So, how do hospital leaders break through the confusion and uncertainty to put their institutions on a clear path toward a successful population health-based future?

An effective way for hospitals to manage this process is by using a “scorecard” based on industry benchmarks to assess their relative readiness for – or current performance in – adopting a value-based reimbursement model.

The scorecard contains metrics that quantify the financial and volume impact on a hospital when it transitions to a population health-based reimbursement model. These metrics can be grouped into a range of key categories – i.e., top 5% high-cost patients, non- urgent emergency department visits, avoidable admissions, readmissions, physician overuse, outpatient procedures performed in lower cost settings, and proportion of one-day inpatient procedures done as outpatient. Hospital managements can address each of these categories in order to reduce per-member, per-month costs of care.

For example, new risk-sharing models have created more impetus for physicians and health systems to work together to prevent avoidable admissions. In 2011 alone, potentially avoidable admissions accounted for 10-14 percent of total inpatient admissions for most hospitals. With the growing push to reduce avoidable admissions, an average 300-bed hospital could potentially lose $9.5 million in annual contribution, as they would no longer obtain volume/revenue from these avoidable hospitalizations. On the flip side, if a hospital doesn’t prevent avoidable hospitalizations, they would be penalized for these unnecessary visits.

The emerging population health landscape has also resulted in hospitals experiencing growing competition from lower cost settings such as Ambulatory Surgery Centers (ASCs). Over the past decade, the number of ASC operating rooms has doubled. Historically, ASCs and hospitals shared in the growth of common procedures such as shoulder arthroscopy. But, with 60 percent of hospitals now within a 5 minutes drive from an ASC, and given the industry’s accelerating shift to population health models, ASC’s price advantage puts hospitals at a competitive disadvantage.

The scorecard gives hospital executives the ability to accurately assess the financial and volume impacts of population health-based reimbursement models to their institution. This is critical in identifying opportunities for improvement, setting priorities, and making key strategic and operational decisions that will help guide a hospital through periods of great change and uncertainty.

Key Principles for Implementing Population Health

Through our work helping hospitals to prepare for a coordinated care future through strategic assessment tools like scorecards, we have identified three key principles that help to drive a successful transition:

1. First, the entire organization needs to embrace change – To engineer a successful shift to one of the new risk sharing business models, your hospital’s management team – indeed the entire organization – will need to embrace change. The fact is, much of that change is already happening right now, so it makes sense to manage it in a way that works best for your hospital’s specific needs and culture. The scorecard process will help your senior management team to clarify goals, assumptions and priorities around where the hospital needs to go, and how best to get there, in the population health future.

2. Plan for “evolutionary” change – Moving to a new value-based health system need not involve a wrenching “revolution” for your hospital. Indeed, jumping headfirst into the unknown is a recipe for disaster for most providers. Taking well planned, incremental steps is usually the best and least disruptive way to evolve to a fundamentally different reimbursement and care model like population health. For example, some hospitals are starting with their own employee populations to experiment with ACO-like care models.

3. Learn to love data – It’s an article of faith in management that you can’t improve it if you can’t measure it. At the core of the population health scorecard assessment approach is the imperative to collect the right data, analyze them, and then continually measure your actions and results as your hospital travels along the population health journey. Data are essential for effective decision making, and also for implementing a new risk sharing reimbursement model at your institution.

Implementing the fundamental changes necessary to meet the historic challenges now confronting healthcare providers has been compared to swapping out the engines in a jet plane – while it is still airborne! As daunting as that metaphor sounds, hospitals can successfully evolve to the population health-based future if they take the right steps to plan for the changes and implement them in a methodical, data-driven fashion.

Careful planning and practical assessment tools like the scorecard help hospital leaders make smarter strategic decisions around value-based healthcare.

About the Author

Dr. Russ Richmond is the CEO of Objective Health, part of the global McKinsey healthcare practice, which serves hundreds of public- and private-sector organizations worldwide. He is passionate about the use of data to manage health and to improve healthcare performance. Dr. Richmond holds an MD from the University of Cincinnati and a BS in Biology from the University of Michigan.

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Filed under: Health Economics, Health Insurance, Health Law & Policy, Practice Management | Tagged: Accountable Care Organizations, ACOs, Population Health, Population Health-Based Reimbursement Model, Russ Richmond MD | 3 Comments »