Payment Reform:

From Principles to Action

Randy Fuller
Director, Thought Leadership
April 22, 2010 Healthcare Financial Management Association
Growing Uninsured Population

2
Exponential Growth in Expenditures

3
 Looming Medicare Insolvency
Medicare Cost and Non-Interest Income by Source as a Percentage of GDP

Source: A Summary of the 2009 Annual Reports. Social Security and Medicare Boards of Trustees. http://www.ssa.gov/OACT/TRSUM/index.html

4
 Premium Costs Put Coverage Out of
Reach For Many
Growth In Healthcare Insurance Costs Are Now Making Affordability Difficult for
Individuals and Small Businesses

Cumulative Changes in Health Insurance Premiums, Inflation, and

Workers Earnings, 1999-2008

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits,

2000-2008. Bureau of Labor Statistics, Consumer Price Index, U.S. City
Average of Annual Inflation (April to April), 2000-2008; Bureau of Labor
Statistics, Seasonally Adjusted Data from the Current Employment
Statistics Survey, 2000-2008 (April to April).
 Cost Impact: Raising Cost Structure of
American Industry
..performance of the U.S. health care system have put Americas
companies and workers at a significant competitive disadvantage
in the global marketplace. Business Roundtable
March 2009

Business Roundtable: New Study Shows Health Care Costs Put U.S. Workers at Significant Disadvantage Compared with Global
Competitors, March 2009
Cost Impact: Changing the Quality of
Care
Cost to Quality Comparisons
Lower Value

Source: OECD Health Data 2009, OECD (http://www.oecd.org/health/healthdata).

8
Provider Business Models Under
Pressure
 The External View
Capital and equity markets essential to
healthcare provider operations and expansion
Estimated $400 billion in tax exempt bonds
outstanding,
funds capital equipment, facilities and working capital
$94 billion capital in publicly traded healthcare
companies
Debt and equity supported by cash flow of current
business models
GM and Chrysler bankruptcies involved only $52
billion in debt and $1.9 billion in equity
 The External View
Rating agencies closely examining quality, efficiency and
management ability to plan and manage as keys to future
success

An important component of Moodys credit assessment is the

effectiveness and credibility of governance and management.
Management teams build credibility with investors and market
participants with good disclosure practices and greater transparency
concerning board interaction with management, competitive
strategies, market challenges and opportunities.
Moodys Not-for-Profit Hospitals: Greater Disclosure and Transparency Will Likely Build Market
Confidence During Credit Crisis, May 2009

Hospitals that publicly provide coherent information on quality, cost

and patient satisfaction and use this information to create a
competitive advantage will likely gain market share over time and be
a contributing factor to a stronger bond rating.
Moodys Not-for-Profit Hospitals: Greater Disclosure and Transparency Will Likely Build Market
Confidence During Credit Crisis, May 2009
 Simple Cost Cutting Wont Be Enough
Lower US Hospital Admissions Higher Cost Per Bed Day
and Shorter Stays Offset by Partly Driven by Higher
Higher Costs Per Bed Day Low Hospital Surgical Procedure Volume
Occupancy Drives
10% Fewer Drugs Higher Fixed Costs per US Spends Above-Expected
Consumed in US Than in Bed Day on Medical Devices, Especially
OECD Peer Countries Implantable Cardiac and
High Staffing Ratios and Orthopedic Devices
Drug Prices in US are Salaries Drive Above-
50% Higher for Expected Nursing Costs in US
Comparable Products, Hospitals
Average Price Gap is US conducts more diagnostics
Nearly 120% Due to per capita than other OECD
Usage Patterns countries and reimburses
more favorably

Care redesign across multiple stakeholders will be required to achieve

access, quality and cost goals.
Source: McKinsey Global Institute, Accounting for the cost of US Healthcare: A New
Look at Why Americans spend more December 2008
Know That the Platform Is Burning
The effects of the recession
will inevitably ease and the
course of reform will ebb and
flow, but health care remains
on a burning platform

Holding onto the status quo is

not an option
HFMA Five Reform Principles
Quality reward quality, evidence-based care
Alignment align incentives among
stakeholders
Fairness/Sustainability recognize
appropriate costs for quality care
Simplification make processes simple,
standard, and transparent
Societal Benefit make benefits provided
explicit, and compensate for accordingly
The five reform principles support the
nations health goals.
 From Volume to Value
HFMAs 3rd Annual Thought Leadership Retreat Currently an estimated 4% - 5%
By 2015 the percentage of provider payments that will of total patient revenues are at
be at risk based on performance (including risk based on quality outcomes
outcomes) will be: enough to wipe out margins
1. Significant (> 25%) 61% Financial leaders expect
2. Moderate (10 to 24%) revenues at risk to reach
3. Small (< 10%) 10% - 24% by 2015
4. None or very Quality and efficiency
insignificant 29%
performance will likely become
a competitive advantage with
10%
payers and consumers
0%
Growing transparency on cost
and quality
1 2 3 4
 Stakeholder Concerns
Coming to agreement on outcome/quality
measures
Cost and speed of transitioning to new system
Fostering a sense of urgency to change
Revenue shifts from one group of stakeholders
to another
Defining and apportioning of societal benefits
Behavioral changes in how consumers and
providers view and practice health care
 Build Key Competencies to
Prepare for Payment Reform
Build strong physician integration

Develop ability to manage risk

Build capability of costing and pricing new bundles of services

Demonstrate finance expertise in quality and process

improvement
Build Strong Physician Integration
 Weve Tried Integration Before..
Success is likely to lie in addressing and finding solutions in the
following areas:

Clinical Leadership / Champion

Compensation / Incentives
Market awareness
Goal Setting
Data Sharing
Engagement / Cultural Blending
Technology
Process Improvement
Develop Risk Management Abilities
 Develop Risk Management Abilities
Assess the organizations exposure to the multitude of
risks inherent in healthcare reform
Payment risk will payers continue to pay for portfolio of services?
Execution risk can the provider deliver care of high quality and efficiency?
Market risk will breadth of reform disrupt flow of patients to the organization?

Develop comprehensive and realistic views on the

organizations strengths and weaknesses
Match the strengths and weaknesses against the risk
exposure and develop strategies to mitigate the risks
 Develop Pricing Capabilities
Move toward flexible pricing capabilities

Gain an understanding of service costs

Learn to reassemble costs in flexible packages that

represent payment bundles or episodes

Be prepared to price services based on outcomes

Work toward tracking costs and utilization patterns

across care settings and through longer periods
 Demonstrate finance expertise in quality
and process improvement
Exercise leadership in developing dual goals of
increasing quality and reducing cost in process
improvement
Help shape portfolio of projects aimed at raising quality and reducing cost
Leverage finance strengths to aid in process
improvement and realize dark green dollar savings
Systematic approach to analysis
Longitudinal view
Focus on dependability of data
Sophistication in auditing
Foster working relationship between finance and
quality staff through cross training
 Concepts Being Tested
HFMA identified nearly 75 public and private
demonstration projects across US
Range from simple P4P bonuses to bundling to
payment
Address specific health issues such as diabetes,
preventive care, cancer, cardiac conditions, asthma,
hypertension, pediatrics, orthopedics and
obstetrics/gynecology
A survey of providers involved in projects finds
little in the way of major change
Physician / Hospital integration most common
adaptation
Global Capitation Requires Provider Change

Source: Global Capitation From Sharp Rees-Stealys Perspective, March 10, 2010
Mount Auburn Hospital Success Story:
Collaborating with Physicians and Payers
Goal: Empower primary care physicians to take the lead in
providing high-quality, efficient careand share the financial
rewards

Strategy: Negotiated five-year alternative quality contract with

Blues plan in which primary care physicians receive and
distribute the total per-patient revenue from the insurer

Results: As the end of the first contract year approaches, CEO

expects a win-win-wingood for hospital, physicians, and
patients
 Mount Auburn Hospital Success Story:
Collaborating with Physicians and Payers
 Spectrum Health Success Story:
Managing Clinical and Financial Risks
Goal: Achieve a clinical/financial win/win through quality
improvement initiatives that have a positive effect on the
bottom line

Strategy:
Use dashboards with clinical and cost metrics for the
majority of high-volume surgical procedures and medical
conditions
Take a collaborative approach to negotiating pay-for-
performance contracts with payers
 Spectrum Health Success Story:
Managing Clinical and Financial Risks
Results:
Actively driving down complication and mortality rates in high-
volume conditions and procedures
$23 million per year in revenue tied to pay-for-performance
contracts with two managed care payers
More than a dozen five-star quality ratings from HealthGrades
System is well positioned for the changing payment landscape

New goal: Reduce readmissions by 30%

 Spectrum Health Success Story:
Managing Clinical and Financial Risks
Reductions in readmissions are We hope to offset some of the
indicative of better quality, which is
what we are all about. But this is going
revenue reduction with a more
to cost us money because we currently efficient model of care and
get paid for these admissions, or at through higher quality and
least the vast majority of them. reduced complications.

Joseph J. Fifer, FHFMA, CPA

Vice President, Finance,
Spectrum Health Hospital Group
John Byrnes, MD
Senior Vice President for System Quality
Spectrum Health Hospital Group
 HealthPartners Success Story:
Making a Commitment to Quality
Goal: Improve outcomes for patients with diabetes

Strategy:
Use evidence-based guidelines to develop quality improvement
programs for diabetes care
Provide financial bonuses to physicians based on The D5, or
the number of patients receiving optimal care for diabetes
 HealthPartners Success Story:
Making a Commitment to Quality
 HealthPartners Success Story:
Making a Commitment to Quality
Results:
The number of patients who received
optimal diabetes care increased 129%
over four years
Improved diabetes care prevented
115 heart attacks
925 cases of eye disease
155 amputations
HealthPartners Health Plan is saving $15
million per year on diabetes-related costs
Everyone is clear about what
the rules of the game are,
what the yardstick for success
looks like, and what care
optimally people should get.
We still have quite a ways to
go. But we are gaining
momentum.
Andrea Walsh, Executive Vice
President, HealthPartners