The transition of the US health care payment system from fee-for-service (FFS) to alternative value-based, budget-based, episode or procedure-based (e.g., bundled) and/or population-based payment models (APMs), is forcing health systems simultaneously to manage the operational aspects of this transition (as well as its likely short- and long-term impact on revenue and patient volume) and to reconsider their strategic position, goals and challenges in light of the likely consequences of this transition. Purely volume-based economic models like FFS, and the business objectives and strategic plans derived from such models, must be adjusted to accommodate APMs based on quality, efficiency, cost and/or population health metrics. The result is a transformational challenge for health systems, but also a once-in-a-generation opportunity for those who can figure out how to maintain, or even grow, their margins under the new payment systems.

Reimbursement in most markets is still largely FFS. Moreover, many APMs continue to use FFS as the baseline compensation methodology against which post-billing and collection adjustments are made under some APM contractual arrangements. Accordingly, health systems must have strategies that help them to maintain their margins in the FFS world as well as those that assist them with transitioning successfully to new and evolving APMs in the relevant markets. This will require systems to simultaneously manage for success, or at least control risks, under two fundamentally different payment systems with sometimes conflicting incentives (e.g., FFS rewards increased patient volume in the hospital, and APMs tend to punish such volume increases). This transition is not for the faint of heart, nor is it a choice as APMs grow in markets across the country. Even in markets that are still predominately FFS, the implementation of MACRA, which is discussed below, from 2017 (until 2019 on a reporting basis only) onward will provide significant financial incentives for all physicians participating in Medicare to reduce their patients’ utilization of hospital services.

APM Incentives

The consequences of the shift toward APMs will affect many aspects of health systems. To begin with, strategies must take into account new and significant factors that will impact payment, including financial accountability for: achieving high quality outcomes, avoiding preventable readmissions, achieving cost savings across covered patient populations, achieving cost savings for specific clinical services and improving population health. As noted above, success in achieving APM metrics based on these factors may adversely affect FFS volume, particularly as physician behavior changes in response to APM incentives for both APM and FFS patients. Both as an operational matter and to some extent as an ethical matter, few physicians will be able to, or want to, maintain different practice patterns for their FFS and their APM patients.

No matter which factor is the focus of a strategy, success will generally require the effective and efficient delivery of care across a continuum of care providers. While providers of health care services have long worked together, the new payment models require more than mere coordination. Instead, groups of providers must come together with aligned financial incentives and the close operational and clinical coordination required to achieve particular APM metrics. Such financial and cultural alignment may be difficult to achieve in some circumstances. For example, one of the goals of payment reform is to reduce costly utilization through the provision of services in less costly environments, which often will result in lowered hospital patient volumes and revenues. FFS revenues will help hospitals make this transition, but eventually, all of the providers in the system will have to learn to share APM revenues in a way that is perceived to be fair by the participating providers and determined to meet the essential financial needs of each provider group in the system. This will likely result in some downsizing of hospital capacity in certain markets, which will have implications for current debt structure and staffing. At the same time, systems will have to find resources to fund the growing information technology (IT) and other care management infrastructure needed for success in meeting APM metrics. The need for access to such IT and care management infrastructure is widely expected to drive many of the remaining private practice physicians into employment or other close contractual relationships with health systems. 

Other factors may make unifying providers around a shared vision more possible. With the passage of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) the federal government has provided a powerful incentive for health systems, physicians and other clinicians to work together to achieve success. By forcing physicians into either the merit-based incentive program or approved APMs, MACRA provides hospitals with an incentive to adopt programs that will help physicians achieve success under MACRA and, along the way, help the hospitals achieve higher quality and more efficiency in care delivery. At the same time, some of these incentives will tend to adversely affect hospital patient volumes and revenues when implemented across physicians’ whole patient panels.

As noted above, the shift toward APMs is not uniform either by geography or payment model. Many markets are still predominantly FFS, and a multitude of government and commercial APMs currently exist with MACRA waiting in the wings for all Medicare participating physicians. Accordingly, systems must carefully assess their options to meet currently achievable APM goals while preparing for future and more challenging goals and, simultaneously, legitimately maximizing FFS opportunities for as long as they last. 

Further, existing facilities and service lines need to be reevaluated. As a system experiences shifts away from hospital-based services under APM incentives, then it must consider and plan for the revenue and long-term infrastructure implications of such shifts.  For example, a system must consider how much of the current infrastructure will be needed, and can be financially supported, under the APMs, and what options the system has to right-size under its current debt structure. In addition, hospital-based services which have historically produced higher reimbursement rates than most non-hospital services are beginning to suffer from payor-driven rate reduction in some markets, and more generally under the new CMS site-neutrality rules which strictly limit hospitals’ ability to obtain Medicare rates for off-campus ambulatory services, making hospital-based services less financially advantageous in many circumstances. Accordingly, strategic planning for systems should project for shifts in service locations, taking into account changed capital needs, revenue sources and the need for strategic relationships, or combinations, with other providers.

Achieving quality and cost savings outcomes requires the ability to capture, track and analyze data, and effectively communicate the results across a continuum of providers. While most health care providers have focused their attention on achieving “meaningful use” requirements with respect to health information technology, the demands of the new payment models go well beyond the requirements of meaningful use. In addition, because the data capture can be vastly different for different APMs based on the metrics used to measure performance, IT procurement and development must begin with a fundamental understanding of which metrics will be measured. And because effective use of IT is critical to achieving success under APMs, achieving an appropriate level of IT proficiency for systems as a whole and, especially for their affiliated physicians whose pens still control most health care expenditures, the funding and use of such IT is an important part of the strategic plans designed to respond to the changing payment environment.

Education and Process

Finding the right strategic direction can be difficult. It is easy to understand the need to accommodate a changing reimbursement landscape, but it is difficult to translate this need into a set of concrete strategic goals and implementation steps appropriate for the relevant market and the culture and resources of a particular system. Determining a strategic direction under such circumstances requires first a full understanding of the changing payment environment, making educated judgments about the likely consequences for a system's existing operations, and then developing and implementing a strategy based on such judgments, one sufficiently flexible to allow for changes as the payment environment continues to change. Because the implications of the evolving reimbursement landscape will be far-reaching, this process should involve the system’s key stakeholders, i.e., board members, managers and affiliated physicians.

While the evolving reimbursement landscape presents a challenging environment for health care systems, those that focus their strategic thinking now by taking into account the consequences for the delivery of health care services of this fundamental change in the financing of such services, will have the best opportunity to identify and implement strategic goals that will effectively meet the challenge. In so doing, these systems will be taking advantage of a very unusual opportunity to set a strategic direction in advance of having to deal with the immediate and potentially overwhelming consequences of this evolution in health care reimbursement.