Hospitals, health systems, and physician practices must find ways to adapt to the quickly changing market forces around them. Sources of change include value-based contracting, provider competition, consumerism, changes in government and commercial payment models, health system regionalization, government regulation, and technological innovation.
Health systems and physicians increasingly are finding it in their best interests to affiliate with one another in new ways, but how they collaborate depends on specific forces in their market. Some markets have larger populations and more significant provider competition than others. Some are more likely to have health plans that want to implement value-based payment models.
For a given market, the x-axis of the exhibit below indicates the level of competition for patients and physicians. The y-axis reflects the level of interest by health plans in products that reward cost-effectiveness or value. We will examine affiliation strategies that pertain best to each market scenario.
Low Value Pressure, Low Competition
The quadrant on the lower left of the grid represents markets with limited nearby competition and health plans and self-insured employers that have not shifted their expectations to value. The risk of losing patients and physicians to local competitors is low. Commercial insurers tend to rely on PPO fee-for-service contracts, but Medicare and Medicaid still provide incentives for waste reduction.
This environment may not be right for establishing a clinically integrated network (CIN) because relatively small patient populations make bearing actuarial risk more difficult and geographic dispersion makes care coordination inefficient.
Low competition favors the status quo delivery model, although physicians and hospitals are still incentivized to develop mutually beneficial partnerships and work together to satisfy the needs of the community. The biggest incentives to deliver value-based care in this scenario come from government programs: Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) physician payment reforms and, in many states, managed Medicaid.
Hospitals and physicians in this quadrant benefit from patient loyalty. There may be a need to compete at the edges of catchment areas and to protect referral patterns, but the primary challenge here is to respond to payment reforms from Medicare (primarily MACRA for physicians and the value-based purchasing, readmissions reduction, and hospital-acquired conditions reduction programs for hospitals). Hospitals and health systems are required to respond to these federal programs.
Hospitals can help physicians do well in MACRA by providing quality measurement, health IT platforms, and patient-centric programs (e.g., chronic disease management) to improve success in MACRA quality metrics.
Physicians can help hospitals by coordinating care to prevent unnecessary admissions and readmissions. Even putting aside the penalties that apply for unnecessary 30-day readmissions for designated conditions, each avoidable Medicare or Medicaid admission may amount to a loss to the hospital because the Medicare DRG payment or Medicaid payment does not even cover the variable cost of care. Stabilizing these patients in the outpatient setting is not only good for the patient but also fiscally beneficial to the hospital.
Third parties can help physicians in these markets through the development of management services organizations or other services that can provide billing, staffing, technology support, imaging, or credentialing services in aggregate more efficiently than practices can provide for themselves. This type of market also can benefit from messenger-model contracting support or the establishment of a health information exchange. Hub hospitals can serve their communities and help secure their referral bases by developing telehealth programs.
High Value Pressure, High Competition
This position is where Advocate Health found itself in the early 2000s. The Chicago-area has population density, a diversified economy, many provider organizations, and many health plans. The insurers were interested in creating value-based products in response to pressure from employers.
Competition between physicians was high—patients could find an alternate primary care physician (PCP) or specialist within several square miles. PCPs were concerned about having enough patients to support their practices. Specialists had a great interest in protecting their referral base. Likewise, health systems were concerned about public perception and market share.
Advocate was a leader in recognizing that it would need a better value proposition than its competition to maintain market share. Development of a CIN made perfect sense under these circumstances. (More recently, the Federal Trade Commission in November 2018 made statements supporting the closer integration of hospitals and physicians if the combination results in controlled costs and improved care.)
An integrated network requires that providers willingly submit their quality and utilization data and that they respond to organized efforts to improve both. A network should use care management to improve patient outcomes and decrease the total cost of care, and partner with facilities that provide care in the most cost-effective settings.
Both physicians and hospitals in a competitive environment benefit from legally sanctioned steerage of patients to in-network providers. Providers are rewarded directly (with a portion of shared savings, as established in the health plan contract) and indirectly (through in-network steerage). Providers may even choose to accept a lower payment rate in exchange for the increased volume that comes from being a part of the network. Patients benefit from higher-quality, more cost-effective care, based on the standards that providers must agree to as part of the CIN.
High Value Pressure, Low Competition
The upper-left quadrant in the grid represents hospitals in markets with limited nearby competition but with health plans and self-insured employers that increasingly demand value from providers. Low competition creates a challenge for the development of integrated networks in this market because there may be a shortage of specialists and because providers may not see a threat of losing their patient base to a narrow network. This type of market dynamic puts the emphasis on cost containment.
Hospitals and health systems in this quadrant can improve their positions via both traditional and new approaches to cost reduction and quality improvement. Traditional methods include basic operational “blocking and tackling”—examining labor and non-labor cost management and searching out revenue cycle and supply chain efficiencies. Newer approaches include physician engagement and clinical variation reduction.
Low Value Pressure, High Competition
In this type of market, health plans are less interested in promoting value-based products, but there is much competition between providers. This dynamic is driven in large part by the socioeconomic environment.
Locales such as Silicon Valley and New York City are populated with prosperous businesses that use generous benefits to attract top talent from around the world. Hospitals have negotiated excellent fee-for-service rates with the health plans in this market because they are “must-have” network providers for the local businesses. These businesses have not been interested in restricting their employees to narrow networks. They want their top talent to be able to access any provider they wish, particularly those that practice in convenient and well-regarded facilities.
This is a wonderful type of market for providers. Fee-for-service PPO payment prevails. At the same time, other providers want to crowd into the area to get a piece of the action, meaning competition is high. Providers and facilities fiercely protect their patient base and referral sources.
The primary strategy in this market is to be perceived as the best. Patients demand high-quality care and top-notch service. Price is not the primary driver of business. Providers must compete by being convenient and providing the best possible consumer experience, including by using telehealth technology. Providers benefit from developing mechanisms to hand patients off to each other seamlessly.
The Common Denominators
Despite key differences, several things are common to all markets. MACRA will require improvements in quality and cost control for Medicare beneficiaries, and the number of people who are 65 and older will continue to grow as a share of the population during the next 20 years.
According to a census of U.S. hospitals, the payer mix at most facilities is more than 50 percent Medicare. Likewise, for many physicians, more than half of their patients are enrolled in Medicare, meaning MACRA can significantly affect their payment.
Hospitals can help physicians who are engaged in MACRA—and thereby gain their allegiance—by participating in advanced alternative payment models. Physicians can help hospitals control length of stay, readmissions, and other variable costs of care that affect Medicare DRG payments and Medicaid payments. In all communities there is at least some incentive for hospitals and physicians to find ways to affiliate.
Conditions are always changing, so the best strategy for today may not be ideal for tomorrow. The employer base may undergo significant changes. A new hospital may be built across town. An integrated delivery system may create a narrow network in coordination with a health plan, and suddenly thousands of patients have incentive to change providers seemingly overnight. Health plans may continue to shift to products that reward some element of cost-effectiveness. A new insurance product may appear at any time.
In other words, providers should constantly reassess their situations and decide whether a change of strategy is in order.
John Malone is principal for Lumina Health Partners.