A Scenario Model of the Emerging Reimbursement and Payer Environments

In the last article I introduced the UK Style Healthcare (M4A) quadrant of the scenario model for the US based on emerging reimbursement and payer environments. Another quadrant of this model (see Figure 1), is the Low-Cost Survivors quadrant. This quadrant will likely be driven by potential medical rate setting regulations. This is an environment that is as frightening to the current Medical Industrial Complex (MIC) as the Medicare for All quadrant (UK Style Healthcare) is. This quadrant would also disrupt the current power of the payers, providers, pharmaceutical companies, pharmacy benefit management companies, group purchasing organizations, and diagnostic laboratory companies over the pricing controls they have over the industry at this time. Insights into this quadrant may provide guidance on operating approaches to better control healthcare delivery costs across care modalities while also improving care quality. Major US employers and consumers (especially the self-employed) are likely to continue to drive healthcare reimbursement toward accessibility, affordability, and higher quality.

Figure 1

Success Factors for the Low-Cost Survivors Quadrant

Successful providers in this quadrant will focus on delivering healthcare services under federal payment/budget constraints related to potential medical price setting. To be successful in this quadrant, provider organizations will likely focus on:

Service staffing changes related to clinical skill sets (e.g. using PAs or NPs versus MDs).

• Healthcare organizations have been delivery care using the same mix of clinicians for decades. Some organizations are beginning to re-evaluate how to deliver healthcare with lesser skilled clinicians while maintaining high quality care. Where can physician assistants or nurse practitioners be used in place of physicians? Can nurses be used for care delivery where physician assistants or nurse practitioners are currently used? On a state or national basis, how can clinician licensing be extended to provide care that is more cost effective but still provides efficacy and patient safety? One approach defined by Porter and Lee[1], is called integrated practice units. This approach organizes clinical resources around a consumer’s need to create a full care cycle around a patient’s condition. Integrated practice units for medical services should be evaluated with activity-based costing as a component of determining which clinicians should be used for what processes in these units. Quality outcomes and patient safety must remain hallmarks of re-engineered care delivery services.

Eliminating low volume or expensive services and establishing referral relationships with other providers for these services.

• Healthcare organizations will need to evaluate all their services in relationship to their profitability and community need. Again, activity-based costing should be used to initially review the top ten services of the organization based on volume and revenue to start this process. Which of these services is not needed by the community or is a service where the organization is not competitive with other care providers in the community? In this quadrant it may be feasible for currently competitive organizations to assess what services they can create cross-referral networks for accommodating the community. Perhaps an organization that is week in orthopedic surgery outcomes can refer patients to a high performing organization, which might have lower outcomes for cardiac services that can be referred back to the organization who refers orthopedic patients. An article in the British Journal of Management, “The Coexistence of Competition and Cooperation between Networks: Implications from Two Taiwanese Healthcare Networks”[2], provides insights to how competition between healthcare organizations can turn into cooperation.

Flattening of executive organization levels.

• A key analysis that may help identify organization executive overhead challenges is determining the number of director level or higher titled executives that are associated with managing physicians across service lines. In 2013, this ratio was 10 administrators for every doctor[3]. I believe this ratio may now be three times higher. Another more sensitive matter to consider is executive compensation which is also becoming bloated. A study was published in August of 2018 that identified the increasing gap between hospital executives and physicians was growing[4]. Average compensation for CEOs at 22 major medical centers increased by 93 percent, while orthopedic surgeons saw only a 26 percent increase.

Implement annual zero-based budgeting.

• Zero-based budgeting will be a necessity to effectively manage the dynamics of costs in the low-cost quadrant. Zero-based budgeting aims to put the onus on managers to justify expenses and aims to drive value for an organization by optimizing costs and not just revenue[5]. Zero-based budgeting requires more management overhead to support but is likely to provide higher levels of cost/expense accountability within the organization. A critical success factor in this quadrant.

Strategic plans that focus on establishing population health stability (with SDOH) and virtual digital services to monitor, manage, treat and interact with patients.

• Fee for service care processes must be radically re-engineered to survive the low-cost quadrant driven by capitated reimbursement. Telehealth/virtual health services provide with emerging digital technologies must be adopted and implemented to extend care services over time to the consumer’s home. The focus will no longer be on care provided at the hospital. Emerging social determinants of health (SDoH) data must be incorporated into care and outcome analytics to identify the best modalities of care relevant to the patients’ condition/disease. As discussed previously, integrated care units should be developed to coordinate care delivery across all care environments that interface with the patient. This is also an environment where patient monitoring devices (e.g. FitBit, Apple Watch) should be used to better manage patients with chronic diseases. Patient engagement support with interactive apps that are available to patients on their smart devices (e.g. phones, Alexa, watches) will further improve outcomes and patient satisfaction in this quadrant.

Focus tactical efforts on process improvement with evidence-based medical protocols supported with data analytics.

• Cost variance may be fatal for organizations in this quadrant. One way to control costs while ensuring quality outcomes and patient safety is delivered, is to implement evidence-based medical protocols for patient treatments. Healthcare organizations in most cases have adopted evidence-based medical protocols. The benefits include the ability to maintain consistent and high care quality standards, improved speed for incorporating clinical research findings into practice, and the potential to reduce healthcare costs significantly[6]. Evidence-based care guidelines should be integrated with electronic health record environments to improve clinician support and performance.

Become a high-quality low-cost service center (e.g. where employers such as Walmart send their employees for medical procedures).

• Walmart is testing a new healthcare plan for its employees where payer data is analyzed to determine the low cost/high quality providers for providing care to their employees[7] in their communities. Providers who focus on delivering high quality/low cost services to the community are likely to be included in large employer self-insured healthcare plans. This is an environment where bundled payments for services such as orthopedic surgeries with top outcomes can entice employers to enter into commitments for treating their employees. Large employers may become the life blood of the low-cost survivor quadrant.

Monitoring the Headlines

To identify which scenario quadrant healthcare reimbursement will move toward, it is important to pay attention to the media headlines. The following headlines are a blend of current/real headlines, and what future headlines might look like for the low-cost survivor quadrant. Can you tell which are real headlines?

• California: Proposed Legislation Regulating Health Care Rates for Payors and Providers; April 19, 2018
• Caravan Health, Texas Hospital Association Partner to Launch Statewide ACO, June 2019
• State of Colorado contracts with Mayo Clinic to provide all orthopedic surgeries for employees
• University Health Conglomerate to no longer provide neuro-surgeries
• Memorial Health Mega-system reduces 40 percent of their executive personnel
• Colorado adopts medical rate setting for Medicare and state insurance plan
• Edwards-Elmhurst replaces 19 physicians with nurse practitioners
• UMass Memorial cut executive payroll in half

The real headlines are the first two and the last two items. Media headlines will provide the initial nuances for market direction on reimbursement and payer trends. Pay close attention to headlines issues from commercial insurance companies and providers as these organizations have significant influence over US politicians which could impact the initial incremental modifications seen for determining the quadrant or quadrants the US or regional markets may occupy.

Closing Thoughts on Low-Cost Survivor Quadrant

The low-cost survivor quadrant is driven by capitated payments that will require significant cost reduction strategies to survive. The observation of Medicaid markets across states may provide the most useful insights for surviving in these conditions. A key factor to watch in the Medicaid markets is the adoption of telehealth/virtual health services to deliver care closer to the patients, many of which have challenges with traveling to care providers. The focus on telehealth/virtual health and home services for Medicaid patients will likely drive higher levels of care and medication compliance which should result in lower overall healthcare costs and better healthcare outcomes.

[1] https://hbr.org/2013/10/the-strategy-that-will-fix-health-care

[2] https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-8551.2008.00565.x

[3] https://www.healthline.com/health-news/policy-ten-administrators-for-every-one-us-doctor-092813#1

[4] https://www.healthcarefinancenews.com/news/wage-gap-between-hospital-executives-and-doctors-widening-study-shows

[5] https://www.investopedia.com/terms/z/zbb.asp

[6] http://www.openclinical.org/ebm.html

[7] https://www.modernhealthcare.com/patient-care/walmart-test-new-healthcare-services-workers