laying the cable making investments that will enhance organizational value

Although fee-for-service payment continues to represent the bulk of revenue for most providers, the transition to valuebased payment and care delivery models is gaining traction.

Over the past year, major health systems, health plans, and the Centers for Medicare & Medicaid Services (CMS) have announced ambitious plans to switch a significant percentage of their business to value-based payment models. But until these plans become reality, it can seem difficult to justify investments in the infrastructure needed to take on these new models.

At the same time, fee-for-service payments are coming under pressure. HFMA estimates that a combination of legislative acts in recent years amounts to $4,60 billion in reductions in Medicare and Medicaid payments to hospitals from 2014 through 2023. Although providers traditionally have balanced such payment reductions with "cost shifts" to other payers, that option is becoming limited as health plans face pressures of their own to keep premiums low for both employer-sponsored insurance and plans offered in the individual market and exchanges. More than 70 percent of senior financial executives responding to a recent HFMA survey indicated that they are unable to offset declining revenues from government payers with increased commercial rates. Reduced payments-particularly from government programs-were cited as the biggest driver of cost-reduction efforts.

In sum, hospitals and health systems face a difficult dilemma today: They must reduce costs to adjust to flattening payment rates while funding investments in technology, clinical services, and innovation that will enable successful engagement in risk-based contracting and population health management.

For hospitals and health systems that are questioning the need to invest in value-based payment and care delivery, the words of one health system executive interviewed as part of recent HFMA research offer a compelling rationale: "Even if you may not see an immediate return on investment, you need to 'lay the cable.' This will enable you to build relationships with payers and employers in your market who are making an early move toward value-based payment, and solidify your organization's ability to seize new opportunities as they emerge."

Building the Infrastructure

The investments needed to pursue risk-based contracting range from healthcare IT to enhancements in patient experience and engagement.

Network development. The size of the clinical network needed will depend in part on the local market and on organizational goals. For example, providers that seek to engage in risk-based contracting with local or regional employers should understand that employees and their families will be dispersed across the market and that employers will be looking for networks big enough to offer most employees convenient access to services.

In many markets, health systems will need to build networks that comprise both owned and independent entities. Resources will be needed to ensure that the clinical network complies with state and federal antitrust laws. Risk-based contracting requires the health system to develop and negotiate both contracts with payers-which should be structured to encourage patients to seek care in-network-and risk-sharing contracts with independent members of the network.

Healthcare IT and data analytics. This investment can be considerable, especially if members of the clinical network are on different vendors' electronic health record systems or on different systems set up by the same vendor. Such circumstances can impede network members' crucial ability to communicate easily and access realtime, actionable data on utilization and quality metrics to manage risk effectively.

Care management and patient experience. A key component of managing risk is ensuring that patients stay away from unnecessarily expensive sites of care (particularly by avoiding unnecessary hospital admissions and emergency department visits). Investments to manage this risk may include care coordinators, patient-centered medical homes, and other care delivery models that ensure patients receive timely care in appropriate settings. Investments also might include a call or concierge center for the network, patient web portals, and mobile apps that allow patients to schedule appointments, contact a clinician, or access their medical records.

Network support staff. As the network seeks new contracting opportunities and manages existing contracts, it will require support staff in areas such as finance and contracting, analytics, communications, and sales and marketing.

Funding the Investment

Organizations that keep cost reduction efforts ahead of declines in payment or utilization can free up resources to invest in the infrastructure for risk-based contracting. This dynamic is at the heart of health systems' efforts to reconfigure their cost structure. In addition, although the ROI of new infrastructure may not be immediate, there are strategies that can mitigate the cost of this investment.

Identify opportunities for cost savings. Most health systems that enter into risk-based contracting will have significant savings opportunities-eliminating redundant testing, for example. It also is important to understand where costs are relatively fixed (e.g., in-network primary care) and more variable (e.g., spending on out-of-network care) and to focus resources on areas where costs can be reduced. Resource allocation decisions also should be guided by potential impact.

Identify opportunities for early ROI. As health systems transition toward taking on more risk, they face a difficult question in knowing how to invest today to ensure financial viability in an environment that could look markedly different in just five years. The solution is to promote a model that seeks some return today on investments being made for a value-based future. For example, improved efficiency of inpatient care can contribute to operating margin on the fee-forservice side, while reducing per-member-permonth costs on the risk-based contracting side.

Affiliate instead of own. As noted earlier, a clinical network of a sufficient size to compete successfully for risk-based contracts often must be composed of both owned and independent entities. But this approach can be a virtue: Although pursuing affiliations will not completely avoid costs (building IT capabilities among network members will still be required, for example), it will avoid the substantial costs of acquiring another facility or physician practice.

Building the Future

An organization's willingness to "lay the cable" for new payment and care delivery models will determine whether it can continue to position itself as a market leader that seizes new opportunities as they emerge. Although the future is never certain and the investments can be significant, a strategy that seeks to bridge current realities and anticipated future needs offers the best opportunity for long-term success. *

READ THE REPORT

To access HFMA's newest Value Project report, Strategies for Reconfiguring Cost Structure, and an accompanying online toolkit, visit hfma.org/ valuereconfiguration.

James H. Landman, JD, PhD, is director, healthcare {inance policy, perspectives and analysis, HFMA ([email protected]).