Besides health reform’s already deep Medicare and Medicaid hospital cuts, the industry is bracing for more with this summer’s deficit reduction negotiations. Meanwhile, half of the newly insured in 2014 will be on Medicaid, which covers only 89 percent of hospital costs. Reform also included Medicare’s value-based purchasing, a carrot-and-stick initiative where hospitals can earn or forfeit 1 percent of their Medicare revenues starting late next year, and 2 percent later this decade, based on each hospital’s ability to improve quality and contain costs.
A seemingly small incentive, it nonetheless has gotten the attention of hospital leaders, as a 2 percent differential from a dominant payer can mean a good or bad year. “We strive to have a 2 percent margin,” says Bluford. Commercial insurers also are likely to follow Medicare’s lead.
The movement from sickness to wellness has sparked hospital activity around so-called accountable care organizations, bundled payments, and patient-centered medical homes, concepts built on care coordination, says Steven Valentine, president of the Camden Group, a Los Angeles-based healthcare consultancy. Hospitals are racing to put in place the pieces to support a move to value, including aligning with physicians and investing in information technology.
But hospitals have no roadmap in adopting a value-based care business model. “There is no transition plan,” notes Susan Davis, president and CEO of St. Vincent’s Medical Center in Bridgeport, Conn. To prepare St. Vincent’s, Davis is cultivating a culture focused on delivering safe and reliable care. The Catholic hospital also is looking to improve care delivery and coordinating patients’ care outside the hospital by better integrating physician and hospital interests and spending $10 million on a hospital electronic medical records (or EMR) system and investing $4 million in getting medical staff technology up to par. Later this year, hospitals can earn millions of Medicare dollars based on their ability to have in place a functioning EMR that can manage, track, and coordinate patient care. “IT is critical to safety of patients and continuum of care,” Davis says.
“Doctors are the key” to value-based care, says Isley. Greenville Hospital System “transitioned to a physician-led system,” putting doctors in governance and leadership positions. GHS also is employing many of the physicians caring for its patients, which is a trend nationally. The system’s 600 employed physicians deliver 85 percent of hospital and outpatient care. Having physician and health system interests financially aligned, says Isley, should give GHS a leg up in its ability to deliver value.
Some hospitals are ahead of others. Sinai Health System in Chicago, for example, began focusing on improving community health 20 years ago. “It’s not just acute care,” says Sinai President and CEO Alan Channing, “it’s housing, education, chronic disease.” Investments and initiatives outside the hospital have helped Sinai become a top hospital nationally, based on federal quality and performance measures. “We’ve been a low-cost provider for a while,” says Channing.
Still, commercial insurers have been slow to take notice of Sinai’s ability to reduce costs and improve health. For every $1 Sinai has invested in reducing asthma-related hospital admissions—largely by improving education in the community—it has prevented $15.57 in costs. Sixty percent of Sinai’s revenues come from Medicaid and only 5 percent from commercial carriers. “The payment mechanisms are still encounter-based,” Channing laments, worrying about “Sinai being able to make that transition while struggling to make payroll.”
Consultant Valentine says value and volume are intertwined. “To demonstrate value, you have to have volume,” he notes. Hospital consolidation will pick up, Valentine says, as providers strive to reduce per-unit costs and make investments to improve quality. One third of executives surveyed by U.S. News and Fidelity expect their hospitals will be absorbed or will absorb another in the next five years. “We believe in reform,” says Isley. “I’m optimistic on it, but there are head winds.”