Many hospitals are experiencing increasing workflow challenges due to high inflation rates. As a result, government and commercial payers are responding in unique ways.
On this episode of Value-Based Care Insights, host Daniel J. Marino discusses economic challenges in health care, particularly hospitals and physicians. We’re joined by commercial insurance and government reimbursement expert, Cliff Frank.
Key points include:
Hospitals and other health care facilities are facing a number of challenges, and inflation is a key component to internal issues. It’s essential that providers have an understanding on how to navigate an ever-changing infrastructure.
Risk contracting has been a common issue for hospitals as payers are making money on empty hospitals and slower ORs. This obviously increases the need for better contracts between payers and providers.
The ACO module has changed drastically, impacting how care is coordinated for Medicare patients.
Daniel J. Marino
Managing Partner, Lumina Health Partners
Lumina Health Partners
Daniel J. Marino: Welcome to Value Based Care Insights. I'm your host, Daniel J. Marino. In today's show we're going to spend some time talking about payers and their evolving products and what we're seeing in the industry now is they're having conversations with hospitals, physicians, and providers. It's an interesting environment that we're dealing with now. As many hospitals are experiencing challenges with costs, in particular high inflation that's occurring. I was talking to one of my clients, a CFO, and their labor costs are up over, over 8%. It's just amazing. In health care, if costs go up, we can't just pass on those costs to consumers by raising our prices; reimbursement for the most part is fixed. This does create a real economic challenge to hospitals, to physicians, it’s important those in health care have a clear understanding on how to navigate these challenges.
Daniel J. Marino: The challenges with margins on hospitals are increasing. Many hospitals are continuing to lose quite a bit of money. We're seeing the government and commercial payers beginning to respond, but they're responding in interesting ways. They're responding by adding new products, having different types of negotiations with providers. We’re beginning to see and continuing to see a shift of risk occurring back to providers, creating this unique dynamic on reimbursement and really setting expectations around changing the care delivery model. Well, I am pleased today to have a colleague of mine. Who's been on the show before and is extremely knowledgeable in the commercial insurance industry with the government reimbursement industry. He has negotiated numerous contracts for providers across the country, Cliff Frank, glad to have you on the show.
Cliff Frank: Glad to be here. Thank you.
Daniel J. Marino: Cliff, as you think about what's occurring with some of the contract negotiations between payers and providers, you know, it's not easier, I think it’s getting tougher, right?
Cliff Frank: Absolutely
Daniel J. Marino: A lot of the providers are just not coming up with good contracts with payers. When you look at some of the quarterly reports that the insurance providers and carriers are reporting, they're actually doing financially well. It's creating this challenging communication gap between the providers and the carriers, all of which are really creating a major challenge for us as patients, right? What are you seeing? What are some of the things that you're hearing as you're having these conversations?
Cliff Frank: I think it creates a new view for risk contracting, risk contracts in this kind of environment are actually a countercyclical investment that providers can make. What's happening now is the payers are making bank on empty hospitals, slower ORs.
Daniel J. Marino: Less procedure utilization that previously happened.
Cliff Frank: That's right. Meanwhile, the hospitals are suffering a triple whammy of higher costs for supplies, higher labor costs and lower patient volumes and it doesn’t work.
Daniel J. Marino: No it doesn't. Some of the conversations that I'm having right now with payers, I'm not seeing payers increasing their fee for service rates. I'm seeing them keeping the rates the same. In some cases, they're crying poor, where they're saying, Hey, we want to reduce your rates by two or 3%, but oh, by the way, if you want to make it up, we're happy to create some type of a risk model in your contract so you can earn it. Right. Are you seeing the same thing?
Cliff Frank: Payers are happy. It's still more in the pay for performance with a little bit of upside with a little bit of downside. It's not yet the full ACO reach, full-delegated risk, but you know, where Medicare goes, the payers eventually follow.
Daniel J. Marino: So let's talk about that for a second. ACO reach is a fairly new product. It’s a new offering that the government has put out, for those that aren't quite sure what it is. The reach model is kind of the new generation of ACO. ACO reach stands for realization, equity, access, community health model, an interesting acronym for the evolving ACO model that's out there. How is that , and what the government is doing with the ACO reach model, translating into either higher reimbursement for providers. What are the commercial payers doing to either replicate that or follow the government's lead? Any ideas?
Cliff Frank: Well, the first thing that ACO reach is doing is helping physicians organize themselves. One of the tenants of the ACO reach model, as opposed to direct contracting, was the government really wants the doctors to be in the driver's seat. 75% of the board has to be physicians.
Daniel J. Marino: Right.
Cliff Frank: Independent physicians, hospital employed or private equity, MD type organizations, they're all getting involved with this, but in a different way; that is at the local level accountable to each other. That network that they build, the infrastructure that they invest in, and the government is helping with that investment by providing some advanced funds, which they did not do under regular ACO. The care coordination infrastructure the government is helping pay for. This whole local contracting entity, ACO reach, is available to payers and also available for direct contracting to employers.
Daniel J. Marino: That's interesting.
Cliff Frank: Our whole new table is being set here.
Daniel J. Marino: You're absolutely right. So when, when we're talking about this and you think about the benefits of the ACO reach model, it does a couple of things, right? It's allowing providers to get some additional resources to help reduce their costs, right? To be able to provide support to more local providers, if there is independence in your market, there's a way to help subsidize and maybe support some of that cost all in the name of performance and quality and outcomes. I also see it as a mechanism in the event that this integrated network, your ACO performs, you have an opportunity to earn some nice money off of this.
Cliff Frank: Yes. It's really designed to be a Medicare advantage lookalike without the constraints of Medicare advantage. This thing is either a camel or it's just a disaster waiting to happen. There'll probably be some of both.
Daniel J. Marino: It's probably going to be in the middle somewhere. Right.
Cliff Frank: Well, you'll have across a full spectrum, but they're going to be ACO reach models that end up in the ditch really fast.
Daniel J. Marino: Oh, there are. I mean, you saw that early on it's happened all the way along. I could remember going way back with the first ACO.
Cliff Frank: The next gens.
Daniel J. Marino: Exactly.
Cliff Frank: Pioneers.
Daniel J. Marino: I mean, there were quite a few failures, but there were a lot of successes too. And those that were successful were really successful, and they did well. So how are the commercial carriers responding to this?
Cliff Frank: There's a fundamental problem that the carriers have. What Medicare is doing is it's helping provider networks wrestle with this problem. And that is, HMOs are not selling, PPOs are selling.
Daniel J. Marino: Especially in the MA space. Although, a lot of the five star plans are HMOs. You know, it's restricted to a community. It's hard to advance that beyond it because of the restrictions around the HMO model.
Cliff Frank: Well you know there's the PRI primary care referral authorization requirement and all the rest of it for that product to grow, increasing the potential of the industry moving to Medicare PPO, which allows for direct access to specialists. It's still supportive of a primary care relationship, but frankl, it's pretty loose. So now what you have in the Medicare advantage market is this kind of PPO situation where suddenly, the providers are invited to take risk. Well, that's been an alien concept for a long time, until ACO reach comes along and does the same thing because Medicare is a PPO. It just happens to have everybody in it. There is no Medicare limitation. There is a seduction involved to have that really strong primary care relationship. But if you wake up with a sore back and you want to go to the orthopod to bypass your primary care, there's no benefit hassle. There's no benefit penalty. There's nothing to prevent that from happening, whereas in a Medicare HMO, that could be restricted. There is a lot more leakage in these ACO networks. You have to manage leakage and increase keepage in either the ACO reach model or any of the Medicare or commercial capita at risk arrangements. Managing who the patients see and how they get there really becomes important. It all depends on the framework of a really good primary care relationship with the patient. Because if the patient has a good relationship, they'll be more connected. If they have no relationship and it's simply a transaction, then they're going to bounce around like a pinball in the health care system.
Daniel J. Marino: You're absolutely right. If you're just joining us, just turning in I'm Daniel J. Marino, you're listening to Value Based Care Insights. I'm talking today with Cliff Frank, and we're having a fascinating discussion on the evolving insurance products and what we see happening both from the Medicare perspective with ACO reach and then also from the commercials. So Cliff, are you seeing standard fee for service PPO products now introducing risk into that type of an arrangement without having it a value based care type of structured contract? On the flip side, are you still seeing both of those being primarily driven from value based care?
Cliff Frank: Following the Medicare ACO model, what happened? What happens now is that there’s not a direct capitation from the plan, sending a check to a provider network, which then reconstructs the downstream payment stream. That's not happening, but what is happening is say here's a population that includes HMO, PPO, ACA plans, lefthanded people on Tuesdays, and, and some outta state. And that's all in your risk bucket. But if you beat that total medical expense, and that's the way things usually now are hooked up with a total medical expense model, you beat back on a risk adjusted basis, you get 50 or 60 or 70% of the savings,
Daniel J. Marino: It is tied to some level of performance. There is a value based component to it. You have to be able to aggregate the cost.
Cliff Frank: Medicare has made it okay to have that gate swing both ways. In Medicare, first it was track C, D, and E where you had 1%, 2%, 4% at risk and 4% on a hundred million where you got 7,000 members suddenly at 12,000 a piece. That's a hundred million spent, and that's a lot of money. And
Daniel J. Marino: So you absolutely lose.
Cliff Frank: You could lose 4%. Most providers don't have that kind of money laying around. Well, now the carriers are kind of adopting those kinds of models. They’ll go down maybe up 20%, down 10%, which is enough to get your attention. The whole thing is they want to get your attention because there's variation in unit price, although there is, but not that much. And frankly, with transparency, we can see that and that's going to get squeezed out what there is, is variation in clinical proclivity.
Cliff Frank: Some doctors see a pulse as an indicator to do something and you have others who are much more conservative and worse. They may both be in the same tax ID, right? They're both part of the same group practice. Well, it's really important to have the doctors and primary care doctors incentivized to send to the conservative doctor and not to the cowboy.
Daniel J. Marino: With these new models, you have to focus on reducing the variation that's occurring between the providers, right? And as you begin to reduce that variation, you're reducing the cost differential that's occurring, and based on what the performance thresholds are, that's where you're able to make some of your money. It’s truly is creating that efficiencies in the name of taking costs out
Cliff Frank: And improving quality.
Daniel J. Marino: Absolutely. Yes, absolutely. When you think about that, gosh, for many health care, for ACOs, for hospitals and so forth, in order for that to work, they've gotta invest in their infrastructure, right? You're talking about investing in care managers, you're talking about going through some initiatives to some clinical variation, redic initiatives, reduction initiatives. So you're taking costs out, you're preparing, you're helping the physicians become successful. I'm hearing that hospitals are struggling with that. They don't have the money to invest in it. So how are they going to be successful in these products?
Cliff Frank: Well, they also don't have the guts.
Daniel J. Marino: You have to be able to. That's where it starts. You have to say “Hey, we're doing this and we're here. Everybody needs to be on board.”
Cliff Frank: We're attacking ourselves. If our big admitters are also the outliers, that's a big problem. So making that transition, you know, the old two canoes, with one foot in each, is really, really hard. That's where some of these other intermediary organizations may step in and do that right. Either for the hospital or to the hospital.
Daniel J. Marino: Well that's where it starts. You have to have the directive, you have to have that mission or the vision to say, here's how we're going to do things differently. But, you know, I guess to a certain extent, that will only take you so far. If you don't have the financial resources to invest in providing that delivery model differently than how you're doing it today, you're not going to be successful. Regardless of what you say, are you hearing commercial carriers? Are you seeing commercial carriers willing to invest or provide some resources back to the ACOs or to the hospitals that allow them to collaborate on these types of innovative structures?
Cliff Frank: The payers will generally cough up some care management fees and 3 to 10 per member, per month range. The problem is that even when they save #5 million the ACO or the CN, saves $10 million. Where'd that savings come from? Generally it comes out of the hospital.
Cliff Frank: In terms of utilization reduction, how much does a hospital get back? Maybe $2 million, two and a half million dollars? Does that compensate them for the loss of the revenue? No way. What has to happen is a combination of successful performance, but then there's got to be leakage reduction to backfill the revenue. So the hospital doesn't die from doing well on these value based deals.
Daniel J. Marino: You are absolutely right. So it has to be a two-pronged approach. And I think this is where to a certain extent, some of the CFOs, some of the hospital leaders are, are struggling between having to take costs out of this system and becoming more efficient, you have to figure out how you expand your geographic reach. How you begin to pull the patients back into the system, if they're leaking out. And frankly, if you're in a restricted market where you're capturing 80 to 90% of the market, you've gotta figure out how you can partner with somebody else to expand that opportunity to grow your patient population without having those things done. And I agree with you, I think it's a real uphill battle for some of the hospitals.
Cliff Frank: I think the strategies are completely different rural versus urban and even mid urban. The two hospital towns that have 200,000 to 300,000 people. That's way different than the 12 hospital market like Tampa, where the most penetration you're going to have is about 30%. So you got 70% leakage. Well, there's a hell of an opportunity there. Whereas if you've got 80, or 90 percent. It's not really going to grow.
Daniel J. Marino: No, it's not going to grow. I think those strategies, although I think the principles are the same, the strategies have to be different, but I also feel like, as we're thinking about the payers in that market, we also have to figure out from a provider standpoint, what's driving some of the economic discussions and the economic successes for your institution. I really believe that payers are going to continue to put pressure on hospitals to accept less reimbursement; and hospitals just can't do it. And if anything, they need more reimbursement because they have to be able to cover the inflationary costs that are inherent in their organization. So as they're thinking about redesigning their strategic economic approach, they have to focus on how they create greater expansion, how they can collaborate, and how they can bring down their costs. But I think they also become creative in some of their negotiations with their payers. So you can be able to receive some level of resourcing that covers these costs and really drive some mutual success.
Cliff Frank: I think it's going to take all of that plus an examination. Maybe among our five hospitals in the market, everyone doesn't need a heart program. Everyone doesn't need OB. Everyone doesn't need behavioral health”, and you try to do that clinical integration that we said we would do that we didn't do.That’s clinical rationalization, right? So much of that has not taken place because it was just too hard. Well, now if we're going to go bankrupt, guess what?
Daniel J. Marino: Well that's a good point too. A lot of the conversations I'm having with hospitals, it's really around, “Hey, what are you doing well? Where do you want to put your resources?” You can't provide everything to everybody. And it's unfortunate, but the economic environment just doesn't doesn't allow for that. But it also then helps to position the hospitals for success. They can focus a lot of their outcomes, their cost management on those particular clinical service areas that they do really, really well. It's almost a differentiator.
Cliff Frank: Well, it is. And in fact, it may be cheaper or more effective for you to buy that other service like dialysis from your competitor rather than to provide it yourself, particularly if you're in a risk based deal where everything's a cost, nothing's a profit.
Daniel J. Marino: That's absolutely true. Well, Cliff, this has been fantastic. You know, as always, I enjoy the conversation. You bring certainly a wealth of knowledge and new perspectives in terms of where the payer industry, the reimbursement, is all going. Any final thoughts or insights you'd love to share with our audience?
Cliff Frank: I just think that we're headed for two more years of violent combat in the arena because payers greed is unending because their stockholders are significant and providers are not exempt from any of that either. They suffered the same disease, right? So we're all just fighting over the same pie and it ain't getting bigger.
Daniel J. Marino: It's not getting any bigger and it’s getting harder. We have to figure out how we continue to connect the dots, that line is getting harder and harder to draw well.
Cliff Frank: Like a tapeworm.
Daniel J. Marino: It is like a tapeworm. You're absolutely right. Well, my friend, I want to thank you for joining today. This has been a great conversation. Always love to have you again, thank you for, for a lot of your insights. I also want to thank our audience for listening today until the next insight I am Daniel J. Marino bringing you 30 minutes of value to your day.
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About Value-Based Care Insights Podcast
Value-Based Care Insights is a podcast that explores how to optimize the performance of programs to meet the demands of an increasingly value-based care payment environment. Hosted by Daniel J. Marino, the VBCI podcast highlights recognized experts in the field and within Lumina Health Partners.