iProtean—Value-based Contracts

Moving to risk-bearing, performance-based contracts may be outside the current experience of many hospitals.  But given the changes today and on the horizon, providers must reduce their reliance on fee-for-service payment and begin to take on value-based contracts.  “ . . . all hospitals and health systems must prepare for the rapidly approaching transformation. Status quo is no longer an option in any market,” wrote Ken Kaufman and Mark Grube in their recent paper, “Driving the Transition to Value-based Care.”  (This blog continues the information presented from the Kaufman Hall Point of View paper in last week’s blog, “Transitioning to Value-based Care.”)


Mr. Kaufman and Mr. Grube recommend the four steps below to prepare for the change to value-based contracts:


Assess the healthcare environment and the organization’s readiness for value-based contracting.  This assessment includes gaining an understanding of:

  • The local and regional market
  • Organization issues related to infrastructure, risk tolerance, capital and human resource requirements
  • Financial, operational, legal and implementation considerations


Identify the range of value-based options. Options exist in many markets, depending on the payers, providers, costs and sophistication.  In some cases, providers can try value-based contracting under the current fee-for-service model through pay-for-performance and other incentive arrangements.  Hospitals may be able to work with payers to begin incrementally, with upside risk only, moving to full risk as they gain experience and infrastructure.  However, it’s clear that national payers want shared risk arrangements and see these as “the only way to drive results,” Mr. Kaufman and Mr. Grube said in their paper.


Develop a defensible value proposition and bring that proposition to payer(s), employers and the community.  Payers must be convinced that the hospital/system can deliver on lower costs and better outcomes.  The organization’s value proposition offered to payers must show strength in the following areas:

  • The primary care physician network and its geographic and service coverage
  • Infrastructure for data sharing with patients, payers and other providers
  • In many cases, the inclusion of a tertiary/quaternary facility or academic medical center


Mr. Kaufman and Mr. Grube noted that hospitals/systems must reduce costs in a way that helps payers reduce their costs while improving quality and service levels.  “Providers need to be willing to exchange a lower base rate with the opportunity to earn up to and beyond current rates when they meet and exceed quality, service, and efficiency goals,” they wrote, and “long-term winners will likely be those entities that partner with the best primary care physicians, who have a proven record of success in delivering preventive, effective, and efficient care.”  The organization that can show experience and capability in managing populations and costs will be best prepared for negotiating success.


Understand that achieving success in managing risk takes time.  Value-based care and risk contracts will require significant investment, and the new model will take time to show positive financial results.  Organizations should develop and consistently update their best-, expected- and worst-case scenarios while undergoing the transition.  Mr. Kaufman and Mr. Grube noted that organizations “should be prepared to sustain initial losses for three to five years . . .”


During the transition period, one standard of care is mandatory.  “Moving to value is the right thing to do, and while payment is likely to lag care delivery improvements, all patients should benefit from the enhanced quality, outcomes, access, and efficiencies achieved by healthcare organizations.”


We recommend that iProtean subscribers read the full Kaufman Hall Point of View paper, “Driving the Transition to Value-based Care.” (December 2012)  The article is available under the Resources tab in the advanced courses, Transforming Your Organization into an Integrated Delivery System, Value-based Purchasing & Accountable Care Organizations and Financing Considerations for Integrated Delivery Systems.



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iProtean—Transitioning to Value-based Care

Transitioning from volume-based to value-based payment for care won’t happen on a specific date.  Hospitals have long been paid on a volume-based payment model, and will continue to operate in that model while the new value-based payment model comes into play.  Lisa Goldstein noted in a recent iProtean course that “the biggest challenge facing health systems is this transformational journey from volume to value, because it will be a journey; it’s not a marathon; it’s not a sprint; it’s a journey of health systems and hospitals operating in two worlds at the same time.” (Transforming Your Organization into an Integrated Delivery System, iProtean, January 2013)


An approach to addressing the challenges of the new value-based model of care will require hospitals and other providers to shift the delivery of care away from the volume-based model as thoughtfully and as rapidly as possible, said Kenneth Kaufman and Mark Grube in a recent paper, “Driving the Transition to Value-based Care.”


Healthcare boards and management teams have a fiduciary responsibility to ensure effective and efficient care in their communities, while preserving the clinical and financial integrity of their organizations, Kaufman and Grube noted.  “From a mission perspective, value-based care delivery is simply the right thing to do for the patient.” Many progressive hospitals/systems have been pursuing transformational models, even before legislation required it.”  (“Driving the Transition to Value-based Care,” KaufmanHall Point of View, December 2012)


The Kaufman Hall paper suggests four prerequisites for hospitals/systems to effectively transition to the value-based model:


A “value mindset.” To both improve outcomes and reduce costs—necessary components of a value-based model—requires a different mindset, culture, incentive system, and management and reporting structures, the authors said.  As others have noted, value-based care will reduce admissions, revenues and margins (see iProtean blog, January 29, 2013). “Governance and management structures should support the delivery of value, moving away from a site-centric approach to more system-centric models,” . . . reshaping operating and reporting lines and management incentive programs, fostering collaboration between hospitals and physicians for managing the care of patients, and offering incentives to treat patients in lower-cost settings.


Removal of every bit of unnecessary work from the organization . . . not only reducing labor and supply chain costs, but also engaging physicians and staff in “tough conversations” about what constitutes efficient and necessary care.  This requires analyses such as:

  • Identifying and redesigning inefficient care processes
  • Improving patient flow through streamlined and consolidated operations
  • Institutionalizing maximum efficiency
  • Rethinking end-of-life care


A unified, organization wide “persistence of attitude,” . . . especially as evidenced in the way physicians take care of patients in the hospital and in their offices.  Physicians have the most significant impact on organizational costs, quality and overall results.  The authors note that physicians’ goals and objectives must be aligned with those of the hospital.  The hospital must ensure physicians “have the data and resources needed to redesign care and service systems for care effectiveness and efficiency.”


Transforming to a “healthcare model.” Hospitals have been in the business of treating sickness—the traditional disease management model.  To move to a value-based model, the emphasis must shift to health maintenance and management, “a true healthcare model,” the authors said. The focus must shift to health screenings to identify problems early on and proactive management of acute-care patients, those at risk for readmissions, and those with chronic health conditions.  One of the aims of health reform emphasizes population health management; this is enabled when hospitals are aligned or partner with payers to assume risk.  (See iProtean courses Transforming to an Integrated Delivery System and the upcoming Financing Considerations for Integrated Delivery Systems.)


iProtean subscribers: for more information on this topic, please view the new advanced iProtean courses Value-based Purchasing & Accountable Care Organizations, Transforming Your Organization into an Integrated Delivery System and Financing Considerations for Integrated Delivery Systems.  Experts Marian Jennings, Lisa Goldstein, Nate Kaufman, Dan Grauman and Monte Dube examine the challenges of moving to a value-based system of care and suggest effective ways to navigate this transition.  Next week’s blog will summarize Mr. Kaufman’s and Mr. Grube’s thoughts on the approach to entering into value-based contracts.



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iProtean—CMS Proposed Rule Will Reduce Regulations for Hospitals

The Centers for Medicare & Medicaid Services (CMS) continues to take steps to reduce unnecessary and burdensome regulations on hospitals, according to a recent CMS press release.  “Reforms to Medicare regulations identified as unnecessary, obsolete, or excessively burdensome on hospitals and health care providers would save nearly $676 million annually, and $3.4 billion over five years, through a rule proposed today by the Centers for Medicare & Medicaid services (CMS). ” (U.S. Department of Health & Human Services, “Reforms of regulatory requirements to save health care providers $676 million annually,” February 4, 2013.)


This latest proposed rule change follows two earlier rule changes by CMS in May 2012. Many of the current rule’s provisions streamline the standards healthcare providers must meet to participate in Medicare and Medicaid (i.e., Conditions of Participation, or CoP).


Clarification on Governing Boards

An earlier rule in May 2012 amended the CoP regarding governing bodies.  CMS proposed that a hospital’s governing body must include a member or members of the hospital’s medical staff. Because of competing objections to this rule change from the American Hospital Association and the American Medical Association, CMS said it would undertake further review.


The February 2013 rule revisits this and now proposes to remove the requirement for a medical staff member to be on the hospital’s governing body.  Rather, a new requirement is proposed:  a hospital’s governing board must directly consult at least periodically throughout the year with the individual responsible (or his/her designee) for the organized medical staff of the hospital.  For a multi-hospital system with a single governing board, the governing body must directly consult at least periodically throughout the year with the individual responsible (or his/her designee) for the organized medical staff of the hospital of each hospital within its system.


Distinct Medical Staff for Each Hospital

CMS also is proposing to revise the hospital CoPs to require that each hospital have an organized and individual medical staff, distinct to that individual hospital, that operates under bylaws approved by the governing body and that is responsible for the quality of medical care provided to patients by that individual hospital. This implies that a multi-hospital system may not have one integrated medical staff serving more than one hospital.


Other Proposed Rule Changes

Other features of the new proposed rule include:

  • Eliminating the requirement that physicians be onsite once every two weeks at small critical access hospitals, rural health clinics and federally qualified health centers
  • Reducing requirements ambulatory surgery centers must meet to provide radiological services
  • Granting privileges to qualified dietitians to order patient diets under hospital CoPs
  • Allowing trained nuclear medicine technicians in hospitals to prepare radiopharmaceuticals for nuclear medicine without the presence of a supervising physician or pharmacist
  • Eliminating redundant data submission requirements and automatic, three-year review and survey process for transplant center
  • Allowing practitioners who are not on a hospital’s medical staff to order hospital outpatient services for their patients when authorized by the medical staff and allowed by state law


Comments on the proposed rule are due April 8.

(“CMS Says Proposed Rule Aimed At Reducing Regulatory Burdens On Healthcare Providers Will Save $676 Million Annually,” Health Lawyers Weekly, February 08, 2013 Vol. XI Issue 5.)


A note to iProtean subscribers:  a new advanced course, Financing Considerations for Integrated Delivery Systems, will be published in your library this month. Experts in this course, Marian Jennings, Lisa Goldstein, Dan Grauman and Nate Kaufman, examine the key drivers for system ownership or partnership with health plans. They discuss what boards and executives should consider when evaluating owning vs. partnering with a health plan.



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iProtean—New ACO Shows Notable Results

Dignity Health, Blue Shield of California and Hill Physicians Medical Group began working on a proto-type ACO in 2007 in response to pressure from the California Public Employees Retirement System (CalPERS), a large healthcare purchaser, and the resulting ACO seems to be doing very well.


The ACO launched in January 2010, serving 41,000 CalPERS beneficiaries enrolled in a Blue Shield HMO. According to a September 2012 article in Health Affairs, by the end of 2011, the partnership had saved CalPers $37 million, and the three partners had split $13 million through their shared savings contract.


The three partners worked on both quality and cost, setting a capitated global budget and sharing risk. Their objectives included reducing costs by at least $15 million in 2010 and maintaining or improving quality of care. The partnership stipulated that “no cost-control initiative can be launched if it would hurt quality,” said the author of a January 31 HFMA article on the ACO.


The risk-sharing agreement holds the three partners responsible for meeting cost-savings targets, and savings above the targets are then shared among the partners. Cost reduction strategies agreed to by the three partners included:


  • Facilitating the exchange of patient information by integrating IT systems
  • Reducing drug costs through patient education, drug purchasing, and contracting
  • Educating physicians about the importance of affordable health care and using data analysis and interventions to reduce variation in physicians’ clinical quality and resource use
  • Using chronic care management, patient education, palliative care, pain management and home visits to reduce unnecessary healthcare utilization
  • Managing utilization by, for example, defining and implementing evidence-based guidelines that eliminate ineffective and marginal surgical procedures.


Some of the team’s initiatives included a proactive discharge planning process and redesigning patient education to boost effectiveness of self-care instructions after discharge. As a result, the readmission rate decreased by 15% in one year. Inpatient admissions and total hospital days also declined by 15% each.  Costs dropped by $20 million.


The partners credit their progress to their focus on transparency—understanding how each of the three made a profit.  When over the hurdle of sharing financial information, they identified ways to deliver care more efficiently. For example, “reducing hospital use was essential to lowering costs across the ACO—but Dignity Health had to have revenue sources to make up for the lost inpatient days.  So Blue Shield worked to ensure that patients who sought outpatient or emergency care out of network were redirected to Dignity Health facilities. Meanwhile, because the organizations were so different, they could not assume financial risk equally. The CFOs of each organization were tasked with figuring out how to spread risk across the partners based on their ability to influence costs in a particular area.” (HFMA, January 31, 2013)


The success of this ACO required mutual trust, transparency and a distinct cultural change.  The partners began to interact with one another in ways that encouraged cooperation and shared success.  Strategies included:


  • Relinquishing oversight when appropriate and trusting the other partners to perform according to ACO objectives
  • Forgetting the past, adversarial relationships
  • Understanding what each organization contributes to the partnership
  • Assigning employees to the project who understand collaboration and partnership principles
  • Using consultants strategically


(L. Butcher, “A Three-Legged ACO Gets Off to a Running Start,” HFMA, January 31, 2013)


The iProtean advanced course Value-Based Purchasing and Accountable Care Organizations details key components of accountable care organizations. Nathan Kaufman, Kaufman Strategic Advisors, discusses the flexibility of commercial accountable care organizations such as the partnership noted above, and advises how to structure the relationship with other partners to ensure savings are shared in an equitable manner.  He notes, “Success is when you share equally in the savings you generate.” iProtean subscribers will find this new course in their course library.



For a complete list of iProtean courses, click here.


For more information about iProtean, click here.