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Value-based Healthcare - Value for Whom?

December 29, 2016

Another buzzword in the clinical and financial transformation milieu that is occurring in the healthcare world is the term “value-based” followed by whatever contextual word or phrase you choose to use.  But what kind of value are we hoping to achieve and to whom is it going to accrue?

 

 

The triple aim of healthcare is founded on the basic tenants of business value and they include the following:

  • Lower the overall cost of healthcare

  • Improve the quality of outcomes (product), and

  • Increase the service satisfaction of patients

In this dissertation we are not going to argue the merits of trying to achieve all of these broad goals and that may be the topic of a future blog, but rather the question of who is receiving the value for this transformation that is in progress.

Understanding the value equation will require examining the perspectives of several stakeholders in healthcare:

 

THE CONSUMER

  • Affordability – lower premiums, co-pays and deductibles, free in some cases

  • Outcomes – healthier living through prevention, successful surgical procedures, managed chronic condition, longer life

HEALTHCARE INSTITUTIONS AND PROVIDERS

  • Population size – acquisition of larger populations to serve

  • Contracting risk - smaller risks associated with healthcare payers, third-party providers, self-insured entities and suppliers

  • Business operations - cash flow  and internal rate of return for non-profits

  • Business outcome - stock price or partnership value for for-profits

HEALTHCARE INSURERS

  • Population size – acquisition of larger populations to serve

  • Contracting risk - smaller risks associated with healthcare institutions, providers,  and suppliers

  • Business operations - cash flow  and internal rate of return for non-profits

  • Business outcome - stock price value for for-profits

HEALTHCARE SUPPLIERS

  • Market share – acquisition of more customers

  • Contracting risk – lock in bundled payments, reduce risk in capitated arrangements

  • Business outcome - stock price value for for-profits

THE GOVERNMENT

  • Enrollment – increase enrollment of uninsured and low risk populations to off-set costs of high and rising risk populations

  • Revenue – increase tax revenues to cover increasing costs of regulation and enforcement

  • Financial Regulation – identifying and implementing rules to eliminate fraud, waste and abuse

  • Costs – paying claims based on outcome metrics and measure formulas

Are these perspectives diametrically opposed to one another?  To help answer that question we’ll have to determine if value for one stakeholder devalues another stakeholder’s value proposition.

 

A HYPOTHETICAL SCENARIO:

 

A hospital system with a large physician medical group and other geographically affiliated healthcare providers create a clinically integrated network (CIN) using an accountable care organization (ACO) for their CMS population. 

 

In order to demonstrate the alignment (or lack of alignment) with the triple aim of healthcare value, let’s utilize a key contract metric that is used between providers of healthcare and insurers of healthcare:

 

Medical Loss Ratio goal of CIN/ACO

  • > 85% (in other words, the CIN/ACO want to see only 15 cents, or less of every administrative dollar going towards the cost of providing care to their patients)

Medical Loss Ratio goal of Health Insurers and CMS

  • < or = 80% (in other words, the insurer wants to see 20 cents or more going towards anything within their internal operations other than paying it to a provider organization)

As a point of reference, The Affordable Care Act (ACA) theoretically requires insurers to maintain their costs at 20 cents or less.

 

The CEO of a CIN/ACO would want to ensure that its contracts with the insurers are kept to the MLR target of 80%.  However, an interesting interpretation of ACA allows the insurer to perform certain activities associated with a healthcare provider, ostensibly substituting their services for the provider’s services and allowing their 20% administrative threshold to be increased beyond that number.  Obviously, this creates a potential duplication of services and costs if the insurer can’t convince the provider to utilize their services in the contracting process.  Assuming that the insurer has created a service solution aligned with their internal goals of either internal rate of return or shareholder value, they would have built the solution with economies-of-scale guiding their investment perspective.  They now have an incentive to strong-arm the provider in the contracting negotiation to buy their service solution regardless of whether it designed to fit within the clinical care model of the provider organization.

 

The tension that now exists between the CIN/ACO and the insurer is the question of value.  The provider wants to create value for their patient population by reducing the costs of delivering quality care, while the insurer wants to increase shareholder value by creating greater margins by keeping more of the MLR dollar.  Even if the scenario was a non-profit insurer the result would be the same as they would want to increase their internal rate of return and their cash flow.

 

The timing of the investment in the service solution by the insurer is also key.  The insurance industry is armed with more capital and resources and they started earlier in jump-starting their investment projects.  However, they typically underestimate the clinical component in their solution design and they also assume a one-size-fits-all approach to the delivery of care.

 

This scenario demonstrates one of the most critical and important dilemmas facing the question of value and it is not easily solved because it will be played out in almost every provider-insurer contract interaction across the country.  Even if you take the view that the consumer’s perspective of value trumps all other perspectives, they do not make the operational decisions for each of the stakeholders or the timing of when operational solutions are created and deployed.  They will only see the result and use their value criteria at that time.

 

At the moment it appears that the question of “value for whom?”  is dependent on the perspective of the stakeholder.  This is unfortunate because it creates the incentive for non-collaboration and provides the advantage to the insurers and hospital systems versus physician groups and other providers through weakening their financial position by essentially waiting them out in the contracting process.  One thing is for sure – this is not good for the consumer as it creates a sub-par care delivery system and increasing costs in the form of higher premiums and deductibles.

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