As the healthcare industry focuses on the efficiency, cost-effectiveness and quality of healthcare services, new payment models like bundled payments and accountable care organizations are becoming more prevalent.
As Sanjay Saxena, MD, partner at Booz & Company, a management consulting firm, points out, "[The healthcare industry] cannot achieve the kind of outcomes it desires with its current models. The fee-for-service model as currently structured is running an unsustainable course. You'll be hard pressed to find anyone who says that continuing down the road of paying for activity alone is a good thing for the healthcare industry."
For this reason, hospitals need to be proactive and prepared. However, not all hospitals have the necessary capabilities to engage in new models. While ACOs and bundled payments offer financial opportunities, they also represent financial risks that some hospitals are not prepared to manage. While it is important to be proactive, hospitals and health systems need to assess certain factors before they should begin discussions with commercial payors or apply to the Medicare Shared Savings Program. Here are four steps to help hospitals determine their capabilities for new payment models.
1. Evaluate the hospital's financial model. Hospitals that know their financial model will have productive discussions with commercial payors towards new and innovative payment models, says Chris Day, chief business development officer for Aetna Accountable Care Solutions. Those hospitals will be better able to predict their revenue streams as they raise their risk in the payment model and reduce fee-for-service reimbursements. According to Mr. Day, the best way to assess a hospital's financial model for new payments is to consider a few questions: How will changes in payment alter hospital finances? Where does most of the revenue come from currently? How would new patient populations change finances? If need be, could the hospital attract new patients to support financial changes?
2. Assess patient population. Before a hospital considers entering a new payment model with a payor, it needs to evaluate its patient population. Markets can vary on a number of factors, but one of the most pertinent determinants is the patient population in the market. "Successful payment models often deal with more discrete and defined populations," says Dr. Saxena. A hospital needs to answer a few questions: What is its patient population's current health? What is the current cost of care for its patient population? Are there opportunities to manage patient care differently? Is the hospital serving the majority of patients in the market? Where would new patients come from? Different payment models are going to unfold differently in different markets. A hospital that knows its patient market is better prepared to begin new payment models.
3. Determine preparedness for risk. Payment models can vary on the amount of risk a hospital and payor shares, so a hospital needs to know its risk preparedness to choose the right balance of risk and reward. "Many payment models include bonuses for achieving high performance levels and penalties for not achieving other performance levels," says Mr. Day. Hospitals need to be comfortable with the upside as well as the downside possibilities.
The level of organization and integration within a hospital or health system often drives the size of its appetite for risk. "If it is a loosely integrated health system, then the willingness to participate in shared or joint risk is limited. Executives and medical staff could be motivated to participate through a lower risk set up like fee-for-service payments with bonus opportunities, representation on leadership committees to help define new payment models and other non-financial incentives," says Dr. Saxena. "If the hospital is already highly integrated with a high level of coordination between physicians and hospital components, then it may want to explore bundled, episodic or global payments."
4. Prepare data capabilities. Since new payment models encourage population management, the extent a hospital can prepare, assess and utilize data sets to increase its population management capabilities sets the tone for its success in new payment models.
According to Mr. Day, certain questions need to be addressed in order to prepare the right type of data: What data do I need to manage my patient population? How do we get that data? How can we exchange the data in real-time? When these questions are answered, a hospital should work to advance its data capabilities to capture its current healthcare outcomes. That data will give it a base on which to determine its preparedness for new payment models.
The healthcare industry is changing, and the hospitals and health systems that want to remain viable options for healthcare services should assess their capability for new payment models. Preparing for new payment models can help hospitals avoid risks down the road, while offering them a method to lower costs and improve patient outcomes.
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As Sanjay Saxena, MD, partner at Booz & Company, a management consulting firm, points out, "[The healthcare industry] cannot achieve the kind of outcomes it desires with its current models. The fee-for-service model as currently structured is running an unsustainable course. You'll be hard pressed to find anyone who says that continuing down the road of paying for activity alone is a good thing for the healthcare industry."
For this reason, hospitals need to be proactive and prepared. However, not all hospitals have the necessary capabilities to engage in new models. While ACOs and bundled payments offer financial opportunities, they also represent financial risks that some hospitals are not prepared to manage. While it is important to be proactive, hospitals and health systems need to assess certain factors before they should begin discussions with commercial payors or apply to the Medicare Shared Savings Program. Here are four steps to help hospitals determine their capabilities for new payment models.
1. Evaluate the hospital's financial model. Hospitals that know their financial model will have productive discussions with commercial payors towards new and innovative payment models, says Chris Day, chief business development officer for Aetna Accountable Care Solutions. Those hospitals will be better able to predict their revenue streams as they raise their risk in the payment model and reduce fee-for-service reimbursements. According to Mr. Day, the best way to assess a hospital's financial model for new payments is to consider a few questions: How will changes in payment alter hospital finances? Where does most of the revenue come from currently? How would new patient populations change finances? If need be, could the hospital attract new patients to support financial changes?
2. Assess patient population. Before a hospital considers entering a new payment model with a payor, it needs to evaluate its patient population. Markets can vary on a number of factors, but one of the most pertinent determinants is the patient population in the market. "Successful payment models often deal with more discrete and defined populations," says Dr. Saxena. A hospital needs to answer a few questions: What is its patient population's current health? What is the current cost of care for its patient population? Are there opportunities to manage patient care differently? Is the hospital serving the majority of patients in the market? Where would new patients come from? Different payment models are going to unfold differently in different markets. A hospital that knows its patient market is better prepared to begin new payment models.
3. Determine preparedness for risk. Payment models can vary on the amount of risk a hospital and payor shares, so a hospital needs to know its risk preparedness to choose the right balance of risk and reward. "Many payment models include bonuses for achieving high performance levels and penalties for not achieving other performance levels," says Mr. Day. Hospitals need to be comfortable with the upside as well as the downside possibilities.
The level of organization and integration within a hospital or health system often drives the size of its appetite for risk. "If it is a loosely integrated health system, then the willingness to participate in shared or joint risk is limited. Executives and medical staff could be motivated to participate through a lower risk set up like fee-for-service payments with bonus opportunities, representation on leadership committees to help define new payment models and other non-financial incentives," says Dr. Saxena. "If the hospital is already highly integrated with a high level of coordination between physicians and hospital components, then it may want to explore bundled, episodic or global payments."
4. Prepare data capabilities. Since new payment models encourage population management, the extent a hospital can prepare, assess and utilize data sets to increase its population management capabilities sets the tone for its success in new payment models.
According to Mr. Day, certain questions need to be addressed in order to prepare the right type of data: What data do I need to manage my patient population? How do we get that data? How can we exchange the data in real-time? When these questions are answered, a hospital should work to advance its data capabilities to capture its current healthcare outcomes. That data will give it a base on which to determine its preparedness for new payment models.
The healthcare industry is changing, and the hospitals and health systems that want to remain viable options for healthcare services should assess their capability for new payment models. Preparing for new payment models can help hospitals avoid risks down the road, while offering them a method to lower costs and improve patient outcomes.
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