How COVID-19 Illuminates the Path to Value in Healthcare | Align With Funders in Mutually-Beneficial Relationships

This is the fifth post in our series "How COVID-19 Illuminates the Path to Value in Healthcare" authored by?Jordan Miller?and?Dave Friederichs. In our?last post, we examined how moving a portion of a health systems’ fee-for-service revenue to a capitated model would have dramatically improved health system financial durability and resiliency during the height of the COVID pandemic.?If you're just joining us - welcome! There are links to each of the series articles at the bottom of this post.

Key Takeaways

• Payer-provider conflicting incentives and resulting lack of trust creates inefficiencies and unnecessary cost for both, which is ultimately passed to patients and government;
• Deeper alignment of finances, incentives, governance, and operations between providers and payers can eliminate these inefficiencies and produce better financial outcomes for providers, payers, and patients;
• Organizations must learn new competencies to succeed in this type of model, but many existing competencies can be re-purposed to support it.

Why is This Idea Important??

• The current payer-provider transactional relationship model creates an atmosphere of distrust, resulting in a very grinding, administrative-heavy, and costly relationship (estimated by a January 2020 Annals of Internal Medicine-published study at 34% of total healthcare spend) while adding nothing to quality of care and outcomes, and negatively impacting patient and caregiver experience;
• When providers (who are best-positioned to understand patient care needs) participate in premium payments and financial management responsibility, this friction can be removed, creating opportunities for payers and providers to realize additional margin, improve outcomes and experience, and jointly grow market share.
• When payers and providers can drop their guard (at least somewhat), and focus on the areas where they can provide mutual benefit to each other, cost and complexity can be removed, providers can attain greater revenue certainty and payers more cost certainty, and focus more attention on serving patients well and delivering good outcomes, which if done in a fiscally-responsible way will lead to growth, profitability and sustainability for both parties;
• Payer-provider partnerships that do this well have a significant opportunity to grow market share for both in ways that non-integrated approaches cannot replicate.?

What are Payers, Providers, and Patients Looking For?

To open this part of our discussion, we chose to visually depict how the interests of providers, payers, and patients overlap. As you might expect given the level of dysfunction in our healthcare system, their interests don't overlap very much.

The transactional fee-for-service model provides for only one common interest between payers and providers – services that are “needed” to effectively take care of patients.?As reasonable as that sounds, both sides define “needed” very differently because providing a service has polar opposite effects for each.?Payers get a fixed amount of revenue per person, so every dollar paid for services is a dollar lost; they’re incented to approve the minimum necessary amount of services to maintain or return a person to an acceptable health status.??For providers, every dollar received for services is a dollar gained, so they're incented to expand services without restriction – even low-value services.?In this setup, the tension can only be resolved through an increasingly-complex labyrinth of rules that increase workload, reduce margins, and make healthcare more expensive, that benefits only software and outsourcing companies who work to overcome it.

But, payer and providers’ self-centered interests are more similar than they initially appear.?Both want to maximize margin, both emphasize quality of care, and both are incented to grow (members for payers, patients for providers).?If their polar-opposite revenue and expense models could be reconciled, there is significant opportunity to turn their individual interests into mutual interests and work together.??

What Could a Mutually-Beneficial Model Look Like?

Sharing premium revenue with providers in exchange for financial management responsibility brings these polar opposite models together.?It satisfies the core interests of both sides:

• Predictable expenses for payers (by giving providers a capitated payment);
• Predictable revenue for providers (the capitated payment);
• Mutual incentives and local decision-making around wellness & prevention, “needed” care, higher quality and more cost-efficient care, and member/patient experience.

When aligned, all of these should deliver a superior product.?If the payer-provider collaboration is successful, it should follow that they will win market share and grow their mutual member-patient base.?Every MSA is ripe for this type of disruption given the consistent above-inflation growth in healthcare costs over the past two decades, as illustrated below.

How Does This Affect Patients?

As we’ve talked about in our first post, healthcare is a “grudge purchase” – something people need, but don’t want.?As such, our relationship with healthcare tends to be very just-in-time – out of sight, out of mind when not needed; initial avoidance when we think we might need it; and when we accept we do need it, a complete shift in desire to unrestricted access and low or no cost.?That runs contrary to payers’ wellness & prevention-focused model, which requires proactive, health-conscious choices, but plays well into providers’ sickness and care-focused model, which may partially explain why people typically have greater affinity for and trust in their providers than in their payers.?

On the surface, providers’ shift in incentives?would appear to put providers and patients at odds because it restricts access. But patients’ surface desires are predicated on a much more fundamental question – “Do I feel like I’m being taken care of?”.?In our first diagram depicting a transactional payer-provider relationship, patients generally don’t – each provider knows only its individual role, and payers have only a minimal coordination role, leaving the patient to manage their own care.?Patients respond by focusing on maximum flexibility, which manifests as a desire for the lowest cost and unrestricted access to care.?

But patients don't want to manage their own care, and they know they're not qualified. They would prefer - and in most cases, pay for - a trusted advisor. Because they have financial and care responsibility, providers in highly-aligned payer relationships are in the best position to be that trusted advisor.?When providers do this well, patients will be more collaborative and loyal long-term, creating an entirely new layer of value and sustainable margin.

What Provider-Payer Alignment Models Exist?

The above is a high-level representation of the spectrum of healthcare payment models.?Models further to the left are more transactional and fee-for-service based; models further to the right more closely align incentives between providers and payers and lend themselves toward mutually-beneficial relationships.?Each category presents opportunities in all payer types (Traditional Medicare, Medicare Advantage, Commercial, Direct-to-Employer, and Medicaid).?

• With rare exception, all providers today operate in the more transactional models (Fee For Service) that may have some payment adjustments based on quality (Quality Adjustment);
• Though it may not be immediately obvious, virtually all health systems are in a Full Risk model for specific populations, namely, members of their employee health plan and the individuals they serve who depend on charity care. A small, though increasing and variable by region, number have expanded their participation in Full Risk, which is the aligned payer-provider partnerships we've discussed in this article.
• A sizable number of providers participate in Upside & Downside models that are a hybrid of the other categories, where fee-for-service is the foundational payment model, with opportunity for bonuses and penalties based on performance in quality, cost, and patient experience metrics.

While it is the most popular provider-payer alignment approach today, we do not believe Upside & Downside models are viable long-term for payers or providers. To put it simply, it isn't value-based enough, and it isn't fee-for-service enough; purely financially, the revenue upside from value doesn't offset the resulting reduction in fee-for-service revenue. Providers participating in Upside & Downside models with incentives to reduce total cost of care have two options to create that reduction:

• Reduce their service volume or re-allocate volume to lower-cost services. You can imagine how this would sound to a CFO who's invested millions of dollars in facilities, equipment, workforce, and technology - in a heavily fixed-cost industry like healthcare, it sounds very scary. The opportunity to get a portion of that savings as a bonus certainly doesn't offset the reduction and results in less total revenue. In competitive markets, there may be opportunities to make up for the loss by acquiring new patients, but this is hard to predict, and in less-competitive markets, may not be possible.
• Reduce services from providers they don't own. How this is implemented varies based on the assets the provider owns, but as you would expect, there's a focus on high-cost venues such as acute care, ED, and post-acute care. Certainly there are cost reduction opportunities in all care venues, but the "squeeze the other guy" approach likely overlooks more impactful cost reduction opportunities at owned venues, encourages providers to invest in service lines where they may can generate revenue, but may not have the expertise to drive high-quality outcomes; and create sustainability challenges for the facilities being "squeezed".

In contrast to Upside & Downside models, Full-Risk models - by providing an upfront payment that's not tied to services performed - give providers an opportunity to replace, stabilize, and potentially grow top-line revenues while incenting them to manage quality, cost of care, and experience. It's a much more sustainable path, but it does require developing or re-orienting competencies that most providers don't have today.

What Competencies Do Providers Need to Succeed?

There’s a consistent set of competencies organizations will use in all of these categories, but how those competencies are applied changes as providers move from Fee-For-Service and Quality Adjustment into Upside & Downside and Full Risk models.?Key competencies in Fee-For-Service and Quality Adjustment focus on maximizing services volume and fee-for-service revenue flowing to the health system and its providers; those same competencies in Upside & Downside and Full Risk models change focus to matching patients with providers best equipped to provider high-quality, efficient care with an excellent care experience.?In addition to re-focusing existing competencies, providers will need to take on new competencies very similar to those exhibited by payers, including managing total cost of care, expense forecasting, product pricing, benefit design, network adequacy, and care coordination.?We can’t stress enough that if you don’t have competencies in these traditionally payer-focused areas – particularly expense forecasting, product pricing, and benefit design – hire or build those competencies before entering into Full Risk models.

Notably among these, the concept of a network is evolving as new reimbursement models emerge.?

• We tend to think of networks in the vein of today’s payer networks, which are nothing more than a list of providers who have contracted with the payer to provide care.?The term “network” would seem to insinuate interaction and coordination among the members, and guidance toward the right providers for a given condition, but in typical payer networks this is almost never the case.?
• Health systems tend to think of networks as the facilities they own and providers they employ, but this definition is incomplete; it excludes needed services those systems don’t provide, and ignores that providers and facilities outside the system may perform better on cost, quality, and experience.?
• Some health systems have created Clinically-Integrated Networks of owned and affiliated assets that do better at providing adequate access and directing care to higher-performing providers, but greater sophistication to orchestrate care and drive financial and clinical outcomes is needed. In order to deliver care in a provider-payer aligned model, providers will need to expand their definitions of network adequacy, composition, and performance.

What Model(s) Should Health Systems Enter Into?

Clearly we believe that all parties - providers, payers, and patients - will benefit the most from Full Risk models - the aligned payer-provider relationships we've been discussing. Most providers are not ready to leap from Fee-For-Service or Quality Adjustment to Full Risk, which explains why many are in Upside & Downside models. Some have entered into these models with the mindset of intentionally moving to more aligned Full Risk models; others will not proactively move but believe they'll be forced eventually. As with most changes, those that change proactively will do better than those who reactively wait for change to be forced on them.

The programs each organization should enter into depend largely on its services makeup.?

• Primary care-oriented organizations considering Upside & Downside models should look to enter into more population-based programs, such as ACOs, PCMH, CPC+, and Direct-to-Employer primary care arrangements.?If you're ready for Full Risk models, CMS' Primary Care First and Commercial, Direct-to-Employer, Medicare Advantage, and Medicaid primary care capitation arrangements may be of interest;
• Specialty-focused organizations will do better entering into episodic care agreements (commonly known as bundled payments) that apply value-based models to a discrete episode of care. Both Upside & Downside and Full Risk models provide opportunities;
• Being a mix of primary and specialty care, health systems could take either of the previous approaches individually, or a more holistic approach oriented toward global, population-based models (ACOs in Upside & Downside models, Category 3, provider-sponsored health plans, payer -provider joint ventures, global capitation in Full Risk models). Full Risk models most providers participate in by default (employee health plan, charity care population) provide an excellent laboratory for experimentation.

What’s Up Next??

In our next post, we’ll look at the concept of a network, and how the way providers think of a network changes dramatically when they enter into a highly-aligned payer relationship of the kind we've discussed.

All Posts in Our Series

Week 1 | Introduction to the Series

History and Economics

Week 2 | Why Traditional Market Economics Don't Apply to Healthcare

Week 3 | How We Arrived at our Healthcare System...and How History is Repeating

Week 4 | What a Business Model Shift Could Look Like and the Impact

How to Succeed

Week 5 | Align With Funders in Mutually-Beneficial Relationships

Week 6 | Build and Operate a High-Performance Network

Week 7 | Understand and Manage Cost & Quality Performance

Week 8 | Build Brand Equity and Engage Consumers

How to Transition

Week 9 | Changing Behavior Through Incentives and Job Structures

Week 10 | The Enabling Technology You Need