1 The Changing Healthcare Industry: Crossing the Shaky Bridge September 10 th, 2015 Jeff Sommer...

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The Changing Healthcare Industry:Crossing the Shaky Bridge

September 10th, 2015

Jeff SommerDirector

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• In the past 36 months, the healthcare field has experienced considerable changes with an increased number of rural-urban affiliations, physicians transitioning to hospital employment models, flattening volumes, CEO turnover, etc.

• Federal healthcare reform passed in March 2010 with sweeping changes to healthcare systems, payment models, and insurance benefits/programs

• Many of the more substantive changes will be implemented over the next two years

• State Medicaid programs are moving toward managed care models or reduced fee for service payments to balance State budgets

• Commercial insurers are steering patients to lower cost options

• Thus, providers face new financial uncertainty and challenges and will be required to adapt to the changing market

The Healthcare Environment Has Changed!

INTRODUCTION

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Growth of High Deductible Plans

MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

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Underinsurance Rates Among Adults Who Were Insured All Year by Source of Coverage at the Time of Survey

Source: http://www.commonwealthfund.org/publications/issue-briefs/2015/may/problem-of-underinsurance


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Reduced Readmission Rates


CMS: 2,610 PPS hospitals to receive penalties in 2015Source: Centers for Medicare and Medicaid Services, Offices of Enterprise Management

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Trend of Lower Inpatient Use

Inpatient Days per 1,000 Persons, 1991 – 2011

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11400

600

800

1,000

883.9

600.374890882947

Inpa

tient

Day

s pe

r Tho

usan

d

Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2011, for community hospitals. US Census Bureau: National and State Population Estimates, July 1, 2011. Link: http://www.census.gov/popest/data/state/totals/2011/index.html.

Compound Adjusted Annual Rate Decline of 2%


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• Declining Patient Volumes

Market Overview – Results


Source: Kaiser State Health Facts, kff.org

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013130

135

140

145

150

155

160

165

170

West Virginia Hospital Admissions per 1000 Population

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SGR Fix – Rate Changes Summary

Time frame Rate Increase

2016 – 2019 0.5%

2020 – 2025 0%. Adjustments made based on physician’s choice to participate in 2 track program of MIPS or APM program• APM 5% bonus (2020 – 2024; fee increase of

0.75%/yr.)• MIPS -4 to +9%

2026+ • 0.75% for physicians participating in MIPS (Merit-Based Incentive Payment System) or an APM (Alternative Payment Model) program

• 0.25% for all other physicians

Sources: Health Affairs, Modern Healthcare, Congressional Budget Office


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SGR Fix – Implications (Source: H&HN Daily 4/6/2015) • Accelerating the replacement of Medicare¹s fee-for-service payments to

physicians with risk-based alternatives• Implication: Hospital participation in patient-centered medical homes, bundled

payment and accountable care organizations as partners with their physicians is a business imperative. If a hospital is not active in these pursuits, nonemployed physicians might find business partners with capital, expertise and infrastructure elsewhere.

• Increasing Medicare payments to physicians by 0.5 percent per year through 2019 is hardly enough to offset medical inflation, regulatory compliance requirements in the Affordable Care Act, IT costs for meaningful use and ICD-10 implementation.• These additional operating costs will require hospitals to develop more

sophisticated ways to manage the medical practices they own and support independent practices with whom affiliation is necessary. That might mean deferring capital from other projects to invest in better systems and personnel to assist these practices.


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Service Area

• Coverage Expansion• By 1/1/14, expand Medicaid to all non-Medicare eligible individuals under age 65

with incomes up to 133% FPL based on modified AGI • Currently, Medicaid covers only 45% of poor (≤ 100% FPL)• 16 million new Medicaid beneficiaries; mostly “traditional” patients• FMAP for newly eligible: 100% in 2014-16; 95% in 2017; 94% in 2018; 93% in

2019; 90% in 2020+ • Establishment of State-based Health Insurance Exchanges• Subsidies for Health Insurance Coverage• Individual and Employer Mandate

• Provider Implications• Insurance coverage will be extended to 32 million additional Americans by 2019

• Expansion of Medicaid is major vehicle for extending coverage• May release pent-up demand and strain system capacity• Traditionally underserved areas and populations will have increased provider

competition • Have insurance, will travel!

Market Overview – Healthcare Reform


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Service Area

• Results (Source: Gallup August 10, 2015 Survey)



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Service Area

• Medicare and Medicaid Payment Policies• Medicare Update Factor Reductions

• Annual updates will be reduced to reflect projected gains in productivity • Medicare and Medicaid Disproportionate Share Hospital (DSH) Payment Reductions • Medicare Hospital Wage Index• Independent Payment Advisory Board (IPAB)

• Charged with figuring out how to reduce Medicare spending to targets with goal of $13B savings between 2014 and 2020

• Summary Impact



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Service Area

• Medicare and Medicaid Delivery System Reforms• Expansion of Medicare and Medicaid Quality Reporting Programs • Medicare and Medicaid Healthcare-Acquired Conditions (HAC) Payment Policy

• By Oct. 2014, the 25% of hospitals with the highest HAC rates will get a 1% overall payment penalty

• Medicare Readmission Payment Policy• Hospitals with above expected risk-adjusted readmission rates will get reduced

Medicare payments • Value based purchasing

• Medicare will reduce DRG payments to create a pool of funds to pay for the VBPP• 1% reduction in FFY 2013, Grows to 2% by FFY 2017

• Bundled Payment Initiative• Accountable Care Organizations

• Each ACO assigned at least 5,000 Medicare beneficiaries• Providers continue to receive usual fee-for-service payments• Compare expected and actual spend for specified time period• If meet specified quality performance standards AND reduce costs, ACO receives

portion of savings



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Service Area

• Medicare and Medicaid Delivery System Reforms (continued)• Medicare Accountable Care Organizations (continued)

• 154 ACOs effective August, 2012• 287 ACOs effective January, 2013• 391 ACOs effective January, 2014• 426 ACOs effective January 2015

• More than 70% of the U.S. population now live in localities served by ACOs and almost 44 percent live in areas served by two or more

• 5.6 million Medicare beneficiaries, or about 16% of total Medicare fee-for-service beneficiaries, now in Medicare ACOs

• These organizations also provide care to 35 million non-Medicare patients, about 6 % more than last year


http://www.kaiserhealthnews.org/stories/2011/january/13/aco-accountable-care-organization-faq.aspxhttp://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/sharedsavingsprogram/News.html


Source: Oliver Wyman, ACO Update: A Slower Pace of Growth in 2014, via healthcare-executive-insight.advanceweb.com

http://www.kaiserhealthnews.org/stories/2011/january/13/aco-accountable-care-organization-faq.aspx

http://www.oliverwyman.com/insights/publications/2015/apr/aco-update--a-slower-pace-of-growth.html#.VUe6CflVhBc

15MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

ACO Growth 2010-2013


ACO Growth 2010-2013


ACO Growth – 2015 and beyond

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ACOs – New Regulations


• ACO Investment Model (AIM) – October 15, 2014• Goal: help rural providers offset the cost of operating a MSSP ACO• Benefits:

• New MSSP candidates receive upfront fixed payment ($250K) and variable payment based on attributed beneficiary ($36/beneficiary), and monthly variable payment based on attributed beneficiary ($8)

• Upfront payments will be recovered out of shared savings• Pre-payments act as forgivable loan if applicant remains in MSSP for 3

years and meets eligibility and performance requirements• Eligibility

• Accepted into MSSP• Less than 10K lives• No hospital unless CAH or rural hospital > 100 beds• Competitive grant with positive points for providers willing to take

downside risk

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ACOs – New Regulations


• Next Generation ACO Model – March 10, 2015• Goal: Test ACO capacity to take on near-complete financial risk in

combination with a stable, predictable benchmark and payment mechanism

• Design/Benefits• Prospectively-set benchmark that incorporates historical and regional

costs• Future trend to incorporate regional trend, patient acuity, and

quality/efficiency discount• Payment options including normal FFS payment, normal FFS plus

monthly infrastructure payment, population based payment; and capitation

• Choice of one of two risk sharing arrangements that determine portion of savings or losses that accrue to the ACO

• Minimum of 10K attributed beneficiaries or 7.5K if deemed rural

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Rural ACO Improvement Act Proposed Legislation – May 25, 2015


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ACOs – New Regulations – June 4, 2015

• More time under shared savings• Added Track 3: 75% savings on risk sharing plans• New methods to identify which patients are included• Refines policies for resetting ACO benchmarks

• Announces CMS’ intent to propose further improvements to benchmarking

MARKET OVERVIEW

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ACO Investment Model Improvements – June 25, 2015

• Payments• Upfront fixed payment• Upfront variable payment based on assigned beneficiaries• Monthly payment based on number of assigned beneficiaries

• Improvements• Opens eligibility for ACOs in both 2015 and 2016• Removes cap of 10,000 Medicare beneficiaries

MARKET OVERVIEW

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Fee-For-Service Financial ModelAssumptions

• Utilization• Inpatient and Outpatient

• Impact of ACA• Impact of Blue Cross steerage initiatives

• Revenue• Third party price increases• Cost based Medicare revenue• DSH payments (Zeroed out in 2014)• Bad debt % of patient service revenue (75% reduction in 2014)

• Impact of ACA• Meaningful use incentive payments• Other operating revenue• Non-operating gains and

• Expenses• Salaries, wages and benefits• Productivity• Supplies and other


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Age Normalized Use Rate Comparisons – Discharges/1,000


Current use rates based on Truven Healthcare Analytics population and discharge estimates by Dartmouth Hospital Service Area (HSA).2021 use rates based on Milliman Governance Institute Presentation (2/2012).

Ranson WVBerkeley Springs WVUS TotalMartinsburg WVRomney WVPetersburg WVGassaway WVKingwood WVMorgantown WVMarlinton WVGrafton WVBuckhannon WVFairmont WVGrantsville WVRonceverte WVSistersville WVClarksburg WVRipley WVHurricane WVElkins WVPhilippi WVSpencer WVHinton WVPoint Pleasant WVWeston WVSummersville WVNew Martinsville WVWV TotalParkersburg WVWeirton WVMontgomery WVSouth Charleston W..Huntington WVOak Hill WVPrinceton WVCharleston WVGlen Dale WVWheeling WVRichwood WVWebster Springs WVBluefield WVBeckley WVMan WVLogan WVWilliamson WV

0

50

100

150

200

250

Normalized Discharges/1,000

159.0

121.1

118

96

70

42

93

61

2021 Minimally Managed Market (High 118/Low 96)2021 U.S. Average (High 93/Low 61)

2021 Highly Managed Market (High 70/Low 42)

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Fee-For-Service Financial Model – Results

When operating income becomes negative in 2016, cash reserves start to decline

$(18)

$(16)

$(14)

$(12)

$(10)

$(8)

$(6)

$(4)

$(2)

$-

$2

$4

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Mill

ions

Operating income (Consolidated)

• Operational improvement and shared service economies of scale are insufficient to combat

declining utilization

• Can’t cut your way to sustainability


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Service Area

• Medicare and Medicaid Delivery System Reforms (continued)

• Provider Implications• Hospitals are taking the lead in forming Accountable Care Organizations

with physician groups that will share in Medicare savings• Value based purchasing program will shift payments from low performing

hospitals to high performing hospitals• Acute care hospitals with higher than expected risk-adjusted readmission

rates and HAC will receive reduced Medicare payments for every discharge

• Physician payments will be modified based on performance against quality and cost indicators

• There are significant opportunities for demonstration project funding



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Sources: Kaiser Commission on Medicaid and the Uninsured (Medicaid Expansion)The North Carolina Rural Health Research Program (Closures)

Closed Hospitals Since the Beginning of 2010


Closure Year CAH PPS MDH SCH

Re-based SCH DSH

Grand Total

2010 2 1 32011 2 2 1 52012 2 5 2 92013 6 5 3 1 152014 7 2 5 1 1 162015 3 4 1 1 9Grand Total 20 20 11 3 2 1 57

Medicare Payment Type

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How Do Real and Projected Spending Compare?

Chart source: The New York TimesData source: CBO


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• Factors that will have a significant impact on rural hospitals over the next 5-10 years • Difficulty with recruitment of providers and aging of current medical staff

• Struggle to pay market rates• Increasing competition from other hospitals and physician providers for

limited revenue opportunities• Small hospital governance members without sophisticated understanding of

small hospital strategies, finances, and operations• Consumer perception that “bigger is better”• Severe limitations on access to capital for necessary investments in

infrastructure and provider recruitment• Facilities historically built around IP model of care

• Increased burden of remaining current on onslaught of regulatory changes• Regulatory Friction / Overload

• Payment systems transitioning from volume based to value based• Increased emphasis of quality as payment and market differentiator• Reduced payments that are “Real this time”

• 3rd party steerage (surgery, lab, and Imaging), RAC audits

Challenges Affecting Rural Hospitals


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• Definitions• Patient Value

• Accountable Care:• A mechanism for providers to monetize the value derived from

increasing quality and reducing costs• Accountable care includes many models including bundled

payments, value-based payment program, provider self-insured health plans, Medicare defined ACO, capitated provider sponsored healthcare, etc.

• Different “this time”• Providers monetize value• New information systems to manage costs and quality• Agreed upon evidence-based protocols • Going back is not an option

Quality

Cost

Patient

Value

Future Hospital Financial Value Equation


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• ACO Relationship to Small and Rural Hospitals

• Revenue stream of future tied to Primary Care Physicians (PCP) and their patients

• Small and rural hospitals bring value / negotiating power to affiliation relationships as generally PCP based• Smaller community hospitals and rural hospitals have value through

alignment with revenue drivers (PCPs) rather than cost drivers but must position themselves for new market:• Alignment with PCPs in local service area• Develop a position of strength by becoming highly efficient• Demonstrate high quality through monitoring and actively pursuing

quality goals



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• Economics

• As payment systems transition away from volume based payment, the current economic model of increasing volume to reduce unit costs and generate profit is no longer relevant • New economic models based on patient value must be developed by

hospitals but not before the payment systems have converted• Economic Model: FFS Rev and Exp VS. Budget Based Payment Rev and Exp

Loss Zone

Service Volumes

Dollars

Cost

Revenue

Profit Zone



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Source: Forbes July 7, 2015

Primary Care Compensation


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• Value in Rural Hospitals

• Lower Per Beneficiary Costs

• Revenue centers of the future

• PCP based delivery system

• CAH cost-based reimbursement

• Incremental volume drives down unit costs

• Once commitment to community Emergency Room, system incentives to drive low acuity volume to CAH

• MedPAC Confusion – Limited Incentives to manage costs???



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The Challenge: Crossing the Shaky Bridge

2012 201520142013 2016

Fee for Service

Payment System

Population Based

Payment System


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• Shaky Bridge• Concern of task force members is that transitioning of the delivery system

functions must coincide with transitioning payment system of rural hospitals, without adequate reserves, will be a financial risk• “Stepping onto the shaky bridge” analogy

• Necessary for hospitals to survive the gap between pay-for-volume and pay-for-performance• Delivery system has to remain aligned with current payment system while

seeking to implement programs / processes that will allow flexibility to new payment system• Delivery system must be ready to jump when new payment systems

roll out

The Challenge


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Finance Function Form

Macro-economic Payment System• Government Payers

• Changing from F-F-S to PBPS

• Private Payers• Follow Government

payers• Steerage to lower cost

providers

Provider Imperatives• F-F-S

• Management of price, utilization, and costs

• PBPS• Management of care

for defined population • Providers assume

insurance risk

Provider organization• Evolution from

• Independent organizations competing with each other for market share based on volume to

• Aligned organizations competing with other aligned organizations for covered lives based on quality and value

The Premise

Network and care management organization• New competencies

required• Network development• Care management• Risk contracting• Risk management


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Implementation Framework – What Is It?• A strategic framework for assisting organizations transition from a payment system

dominated by the FFS payment model to one dominated by population based payment models• Delivery system side addresses strategic imperatives for providers• Provider side addresses strategies for providers to influence the evolution of the

payment system in their market• Requires creation of an integrating vehicle so that providers can contract for

covered lives, create value through active care management and monetize the creation of that value

• Strategic imperatives drive the initiatives that must be designed and timely implemented to successfully make the transition• Each initiative is developed in phases that correspond to the evolution of the

payment models• Work on each initiative needs to begin now so they will be ready to implement

when required


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Implementation Framework – What Is It?


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Delivery System Strategy

• Delivery system must respond to at a similar pace to changing payment models in

order to maintain financial viability

• Getting too far ahead or lagging behind will be hazardous to their health


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Payment System Strategy

• Providers have opportunities to “shorten” and “stabilize” the shaky bridge by:

• Working with payers to create transitional payment models

• Initiating development with payers of full-capitation payment models

MARKET OVERVIEW TRANSITION STRATEGIESFRAMEWORK

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Population Health Strategies


• A narrow rural/urban provider network focused on patient value

• Aggregates multiple rural/CAH populations for critical mass

• Restricted to payers willing to commit to population health and payment

• On CCO’s terms

• NOT for existing fee-for-service or cost contracts

• Legal entity with corporate powers

• Governance structure for setting strategy, policy, accountability

• Actively secures and manages risk/reward-based payer contracts

• Supports PCP-focused quality & care coordination across the network

• Retains local hospital independence, but with contractual accountability

• Houses care management infrastructure

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• For decades, rural hospitals have dealt with many challenges including low volumes, declining populations, difficulties with provider recruitment, limited capital constraining necessary investments, etc. • The current environment driven by healthcare reform and market realities now

offers a new set of challenges. Many rural healthcare providers have not yet considered either the magnitude of the changes or the required strategies to appropriately address the changes

• Core set of new challenges represents the Triple Aim being played on in the market• Locally delivered healthcare (including rural and small community hospitals) has high

value in the emerging delivery system• “Shaky Bridge” crossing will required planned, proactive approach

• Finance will lead function and form• Maintain alignment between delivery system models and payment systems

building flexibility into the delivery system model for the changing payment system

Conclusions/Recommendations

CONCLUSIONS / RECOMMENDATIONS

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• Important strategies for providers to consider include:• Increase leadership awareness of new environment realities• Improve operational efficiency of provider organizations• Adapt effective quality measurement and improvement systems as a strategic

priority• Align/partner with medical staff members contractually, functionally, and through

governance where appropriate• Seek interdependent relationships with developing regional systems

Conclusions/Recommendations (continued)

CONCLUSIONS / RECOMMENDATIONS

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Jeffrey Sommer [email protected] Sewall Street, Suite 102

Portland, Maine 04102(207) 221-8255

www.stroudwater.com

4646

About Stroudwater

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About Stroudwater

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Stroudwater Services

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Regional and Local Experience

• Recent experience with hospital clients in the Southeastern United States

• Personal experience serving hospital clients in West Virginia

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