Framing the Issue:

Population-based accountable care arrangements reward innovators who can cut costs and improve outcomes.

The rewards mostly flow from revenues previously budgeted for hospital services — often funding services that directly reduce inpatient volume.

Optimizing operational effectiveness and efficiency, and better integrating hospital and other services are prerequisites to delivering value-based care.

Population health management also exposes hospitals to new risks, including defining and tracking populations and patient compliance.

Successfully negotiating the transition to value-based care requires careful assessment and management of local market conditions and population risks.

If you haven’t already met someone like Mike Pykosz, chief executive officer of Chicago-based Oak Street Health, chances are you will soon.

After graduating from Harvard Law and a stint at the Boston Consulting Group, Pykosz returned to his native Chicago last year as a health care entrepreneur. Backed by a group of investors “excited about the model,” he opened four primary care clinics exclusively serving Medicare and Medicare-Medicaid dual-eligible patients mostly from underserved, low-income communities — with plans for more.

The clinic model Oak Street’s well-informed backers find so attractive meets social service as well as medical needs. Patients are served by a team including a geriatric-trained primary care physician, a nurse and a medical assistant, with support from care coordinators. Panels are limited to 500 patients, or 750 with the addition of a physician’s assistant or nurse practitioner — about one-quarter the typical primary care size. This allows half-hour visits as well as quick and comprehensive follow-ups to ensure that chronically ill patients comply with care plans and are seen within 48 hours of a hospital visit. And, Oak Street’s physicians earn more than average for their specialties.

Oak Street also provides transportation for patients to clinics and other services, and each clinic hosts a community gathering place where patients can come for frequent special programs or just to pass the time. Clinics include on-site dental and pharmacy services, which patient surveys found are common care gaps — all without charging deductibles or co-payments.

How is this possible? Shared savings.

In its first nine months, Oak Street significantly reduced hospital admissions and emergency department use, cutting costs for its population by more than 10 percent below projections. This nets bonuses that more than cover the extra services. “The biggest levers to improve performance are primary care and social services,” Pykosz says. “If you do both, you can save a lot.”

Traditional fee for service simply wouldn’t produce enough income to pay for it all. For that matter, a low-risk patient population with less total savings potential also might not support the model, Pykosz says. “We looked at the risks and opportunities for reducing costs and improving health in this population and built a doctor’s office around it.”

It remains to be seen whether Oak Street Health continues to clear its financial hurdles as it rapidly scales up. But as Pykosz sees it, there’s plenty of opportunity to improve on the cost and performance of the current system. “As long as we are the best, we will be OK. And our performance is very much above average now.”

Lead or get out of the way

That entrepreneurs are betting on comprehensive primary care for high-risk Medicare patients demonstrates the disruptive potential of population health-based risk-contracting. The potentially huge rewards created by shared savings, bundled payments and capitation are sure to entice competition for the traditional physician-hospital delivery model.

And since the rewards mostly come from funds previously budgeted for hospital services, it’s critical for health systems to recapture a share, even if it won’t make them whole. “The truth about health care is that no matter what happens, we are going to spend less money on it,” says Bruce Muma, M.D., chief medical officer of the 1,200 member Henry Ford Physician Network, part of the five-hospital Henry Ford Health System based in Detroit. Doing more with less is not optional, he adds.

So the question for hospitals is not whether to participate. It is how, when, where, with which partners and for which target populations they can do so — without going under.

Many systems are developing capabilities to address new risks presented by population-based accountable care. These include reorganizing, integrating and streamlining clinical services; aggregating and tracking risk pools; and building patient outreach and counseling services. Many find that these capabilities help them fulfill their community service mission, including better serving uninsured and underinsured patients.

“Our hospitals are in many different places in terms of where they are on the spectrum of taking risk and how they are engaging in population health,” says Ashley Thompson, director of policy at the American Hospital Association. “As part of the Triple Aim, we are committed to improving population health.”

Bulking up carefully

For Juan Serrano, senior vice president of payer strategy and operations for Englewood, Colo.-based Catholic Health Initiatives, the issues around population health management are complex, but the solution, at least generally, is clear. “All the answers lead in the direction of being the best we can be in serving the needs of our community and serving our fair share of the community,” he says.

That means aggressively developing population-based services, even if it means temporarily taking a loss, Serrano says. For example, CHI, which operates 93 hospitals in 18 states, accepts risk for more than 200,000 lives through Medicare shared savings programs — despite rules that make it hard to keep patients within its network, or even know all the patients for which it is responsible.

The AHA anticipates changes in federal shared savings programs that will clarify attribution and simplify quality reporting, Thomson says. However, it’s not clear if these and any changes to the formula for sharing savings will be enough to keep most hospitals in once the upside-only option expires.

Regardless, Serrano believes participating provides valuable experience that will pay off as CHI expands its Medicare Advantage plans, which currently enroll 17,000. It’s simpler to predict and manage risks in Advantage plans because enrollees join voluntarily and accept incentives to stay in-network.

CHI also will expand its commercial plans, which now include 70,000 members, some at full risk and others in self-funded programs. In addition, about 12–15 percent of CHI’s commercial contracts include some kind of value-based purchasing component, but that’s rising fast, Serrano adds.

“It is anyone’s guess how much of our revenue will be at risk five years from now, but it will be more than it is today,” Serrano says. “To be paid for value, we have to be adept at creating and maintaining value — that is a requirement. We don’t believe we have the choice but to invest in population health programs.”

Indeed, CHI is restructuring itself around the task. At the system level, it has added technical resources that include actuarial analysis, underwriting and health plan management on the insurance side, and clinical network development and care coordination on the provider side, with IT support for it all. The system also provides financial backing, including a $1 billion investment in health plans serving the Little Rock, Ark., and Louisville, Ky., markets. The goal is three-pronged: own and operate health plans partner with payer health plans, and provide managed health services directly to employers, Serrano says.

That’s not to say CHI enters risk-bearing arrangements blindly. To the contrary; the system launched this strategic initiative by systematically assessing its capabilities and opportunities in each market.

Insurance products and services for both commercial and Medicare patients were examined along with the cost of care relative to national and regional norms. From this, the financial potential for specific risk products was projected, as well as the potential for improving care quality and access. “In some markets the total cost represents an opportunity we can work toward reducing outright,” Serrano says, “but more important is rationalizing health care consumption, which makes it more affordable in the community.”

Markets also were assessed in terms of readiness for risk-contracting. Those already served by HMOs, PPOs and Medicare Advantage plans, or by narrow provider networks, are good candidates for value-based contracting, Serrano says. Building capacity quickly makes sense under these conditions. But where employers have little experience or interest in risk contracts, a slower approach may be better. Willingness of commercial insurers to partner in shared risk products also influences how quickly and with which products CHI moves forward.

CHI also examined its own readiness. The system is building clinically integrated networks in each of its markets and adding technology, informatics and care coordination capabilities, as well as developing provider reimbursement and legal structures that support risk sharing. Physicians from key specialties are brought in to help identify specific population health needs and structure programs to meet them. This helps to improve care efficiency and shift caregiver culture toward managing populations, Serrano says.

Consumer preferences also are examined. “We conduct sensitivity analysis to find out how aggressively we can transform our culture from a patient perspective without undermining the economic stability of the system,” Serrano says. For example, moving to restrictive networks before patients accept them can undermine loyalty.

The program already has delivered some notable successes. In Des Moines, a shared savings partnership with the Blues improved compliance with national standards for blood pressure, diabetes and cholesterol control, from about 50 to 85 percent by adopting a medical home model, says Stephen Moore, M.D., CHI’s CMO. Health plans acquired in Washington state and Arkansas have expanded operations into Kentucky, Nebraska, Ohio and Tennessee. Products include commercial plans, third-party administration services and Medicare Advantage and supplemental plans. Services offered directly to employers include wellness education, preventive screenings, personal health coaching, disease-management support and on-site health services.

“We have to trust that putting the value proposition in the marketplace will result in a favorable economic response from employees and consumers,” Serrano says.

Pinpointing different populations

Identifying and tracking patient populations are crucial for managing risk. It’s also a challenge, both technically and economically.

Consider Fairview Health Services, which includes seven hospitals and about 3,350 physicians in Minneapolis and surrounding areas. Located in one of the most active managed care markets in the nation, Fairview launched its population health program five years ago. It participates in the Pioneer ACO program, has risk-sharing contracts with all local commercial payers and has developed network products to appeal to targeted consumer segments.

Extensive as the offerings are, they still mostly focus on about 5 percent of the population — those with high-cost conditions, including chronic obstructive pulmonary disease and congestive heart failure. The potential savings from aggressively managing these patients justifies the expense of frequent checkups, monitoring equipment, calls from care managers and even home care visits, says Dan Anderson, chief operating officer and president of community hospitals.

Another 20 percent or so are at elevated risk for future problems, but identifying and engaging them is less immediately rewarding. “Our next challenge in preparing for alternative models of capitation or global payment is extending them to a less-complex population,” Anderson says. “The impact on total costs is less for an individual, but the size of the population in less critical categories is quite large.” Better automated tracking of care received inside and outside the network as well as expanded care networks are needed to effectively manage these patients.

This is where many global risk arrangements fall down, particularly taking risk for the total cost of care for a large population — with potentially catastrophic consequences for providers, says Lynn Carroll, senior vice president of provider economics for PaySpan, which automates and coordinates payments among providers, patients, payers, health plans and financial institutions across a wide variety of reimbursement models.

Risks in relatively small populations with known high-cost conditions treatable through well-defined protocols can be controlled because they are identifiable and the value of specific interventions is clear, Carroll explains. But as the population expands and unknown conditions multiply, that value relationship breaks down. “We are a long way from universally being able to assess fee-for-value across every concatenation of patient need and service provided.”

Real-time tracking of patient encounters is the only way to keep up, but that’s not easy, Carroll points out. “There are plenty of horror stories of providers that take risk and then six or nine months later they get a reconciliation report and they owe a couple of hundred thousand dollars, and it’s too late to do anything about it,” he says. Needless to say, this dampens enthusiasm for risk-contracting.

Since tracking claims and costs historically has been a payer rather than provider function, it may make sense to partner with a payer for those services, Carroll says. Better yet, contract fee for service with bonuses for recommended preventive care. “It’s not about ACOs, shared savings or fee for service, it is about achieving the most value for what you are paying. As long as there is a quality component that is measurable and makes sense, we are going in the right direction,” Carroll says.

Indeed, risk-contracting can deliver value only if providers understand — and are able to meaningfully address — exactly the risks they’re taking, he adds.

Rationalizing operations

As value-based purchasing squeezes hospital revenues, optimizing operational efficiency and effectiveness will be essential not just to maintain margins. With hospitals viewed as cost centers, they’ll need to show evidence that a certain level of spending is necessary to maintain quality — and deliver value — to keep payer rates reasonable.

“If you reduce fees without understanding the cost structure, you make cuts based on what you’re paying rather than what is needed to do the job,” says Henry Ford’s Muma. “It becomes a downward spiral, a race to the bottom.”

Understanding costs mostly comes down to good old-fashioned cost accounting — something hospitals historically haven’t done well. “It involves getting out a stopwatch and figuring out how many nurse hours, how many pharmacy hours, how many tech hours it takes to do a hip replacement — figuring out what is needed and what is not,” Muma says. “It involves figuring out actual supply costs and joint prosthesis costs. That is where the learning needs to be, and it needs to be more broadly applied across all hospital services.” Henry Ford is participating with 24 other organizations in a bundled joint replacement initiative through the Institute for Healthcare Improvement aimed in part at developing such standards.

And just as hospital responsibility for care now extends beyond the hospital walls, so must operational analysis, says Andrew Ziskind, M.D., managing director, clinical solutions, at Huron Consulting Group. Employing physicians gives systems much greater ability to coordinate care across a much broader continuum. But it’s also new territory for systems that previously focused on inpatient care. Many need help connecting care processes so readmissions are reduced and care is delivered in the lowest-cost appropriate setting. In what has become a health mantra, the goal is providing the right care to the right patient in the right setting at the right time.

This often requires rethinking the delivery system. “We focus heavily on optimizing assets,” Ziskind says. “Do you have redundant services? Too many beds? The right mix of primary care and specialty physicians? The right clinical programs? With efficient operations and infrastructure you are well-positioned from a delivery and cost structure perspective to build the core competencies to successfully manage population health and the risk that goes with it.”

But truly managing population health goes further, says Rob Schreiner, M.D., also a Huron managing director. “It’s one thing to construct coordinated care that consumes fewer dollars than uncoordinated care. It’s even better to have some kind of upstream intervention that avoids acute episodes altogether.”

This is done by analyzing records to identify patients at risk for specific illnesses and intervening early. For example, out of 100,000 patients, a handful might be obese adults with a history of diverticulitis not requiring surgery, putting them at significant risk of severe diverticulitis. Reaching out to these patients with diet and lifestyle support could head off a repeat episode requiring colostomy, Schreiner says. “That can be replicated for heart attack, asthma, obstructive lung disease and a multitude of conditions if you have the right analytics, reporting and outreach.”

Still, systems must avoid financially crippling themselves as they transition to population health. “The tipping point comes when you move beyond your initial self-insured or small-risk contract, Ziskind says. “When it gets to the point where you truly shift the way care is delivered, we often see dramatic decreases in inpatient volume.”

Managing mission risk

While population health discussions mostly focus on making it pay for insured patients, many systems also find it useful for managing another risk — caring for underserved, uninsured and underinsured community members.

“As we plan to take more risk in the Medicare and commercial markets, we want to tap that expertise to give our most vulnerable populations care that mirrors what is available to populations that can afford better coverage and access,” CHI’s Moore says. He estimates system cost for charity care and self-pay shortfalls run $500 million to $600 million annually.

In a study of high-utilizing uninsured patients in Louisville, CHI found that most were impoverished, with multiple chronic illnesses requiring active management; many were homeless or itinerant; and most had a comorbid psychiatric diagnosis. The patients were identified primarily from the system’s own medical records and about 500 accounted for nearly a quarter of the system’s uncompensated care in the region.

CHI developed a program that included regular primary care focusing on managing chronic conditions. Other services included transportation to clinics and providing telephones for those who didn’t have them. All were offered services, and about 80 percent enrolled, Moore says.

At nine months, the enrolled group saw a 30 percent reduction in emergency department use and a 50 percent reduction in inpatient use. More important, both physical and mental health status improved markedly, Moore reports. If expanded systemwide, the program could cut uncompensated care 10–15 percent while providing better service. A similar approach might reduce Medicaid losses, he adds.

Heartland Regional Medical Center in St. Joseph, Mo., sees a population health approach as essential to maximize the benefit of its free clinic, in operation for more than 100 years, says Linda Bahrke, R.N., who administers Heartland’s community health improvement program and the system’s ACO. The uninsured population in the area is still large, in part because Missouri declined to expand Medicaid under the Affordable Care Act.

The clinic has added care managers to help patients with chronic conditions. It also intercepts and steers low-acuity patients who seek care at the ED to other venues, and helps them to connect with primary care and clinic providers. But managing or even finding uninsured patients is challenging because many move often or are homeless. “It’s hard to get your arms around this population,” Bahrke says.

The ACA mandate that nonprofit hospitals do annual community needs assessments is helping many to identify and respond to local needs, Thompson adds. “It has been extremely valuable to members to address voids in local health services. We hear a lot about dental and mental health needs. Hospitals can fill the void themselves or contract with others in the community to fill the need. It’s amazing.”

Howard Larkin is an H&HN contributing writer. 

The co-pay conundrum

Another challenge for organizations taking population-based risks is conflicting patient incentives, notably high-deductible health plans. Out-of-pocket costs not only increase self-pay balances and bad debt, they also discourage patients from seeking the regular care that is the cornerstone of population health management, says Kris Kurtz, controller at Metro Health, a 208-bed osteopathic teaching hospital with 204 employed and independent physicians affiliated through a physician-hospital organization in Wyoming, Mich.

National data suggest the problem is growing, says Ann Garnier, chief operating officer for CarePayment, an Oswego, Ore.-based finance firm that partners with providers to fund patient out-of-pocket charges. As of 2012, 41 percent of U.S. residents reported carrying or having trouble paying medical debt, up from 31 percent in 2005, according to surveys by the Commonwealth Fund. Over the same period, those reporting deductibles of $1,000 or more rose to 25 percent from 10 percent. That contributed to a 12 percent rise in uncompensated care reported by hospitals to $46 billion in 2012, according to the latest available data from the American Hospital Association.

Even modest deductibles and co-payments financially strain patients, particularly when they recur, as with chronic conditions. According to a 2014 study of medical debt by the Kaiser Family Foundation, the average 2013 single-coverage deductible of $1,135 was nearly double the average liquid assets of households earning up to 100–250 percent of the poverty level. Add typical co-payments and coinsurance, and the total for a major medical case exceeds the $2,740 average cash on hand for households up to 400 percent of poverty. Over two years, it even comes close to depleting the $12,000 in average liquid assets of households above 400 percent of poverty.

Given that family deductibles for Bronze plans on insurance exchanges, which are chosen by about 20 percent of buyers, average more than $10,000, and for Silver plans, chosen by about 60 percent, average more than $6,000, providers everywhere likely will see patient balances explode, Garnier says. Many already have.

At Metro Health, uncollected patient balances rose from about $500,000 monthly in late 2013 to $800,000 in the first quarter this year, driven mostly by higher deductibles and co-payments, Kurtz says. “Self-insured balances did not change; the upward trend is on the underinsured side.”

More insidious, out-of-pocket costs create disincentives to seek regular preventive and maintenance care. While cost sharing is supposed to prompt more prudent health care buying, it instead drives many patients to avoid treatment altogether until their conditions are too serious to ignore. In a recent Gallup poll, nearly one-third said they put off care because of cost last year.

That undercuts providers’ ability to reduce costs by providing continuing care. “If you have most people choosing high-deductible plans, it creates risk for an ACO, which is tied to patient outcomes,” Garnier says.

Metro Health has taken several steps to manage high deductibles, including beefing up its charity care and outreach programs, such as free screening for vascular disease. The system also publishes average prices paid for services on its website and offers zero percent financing through CarePayment, Kurtz says. He credits the program, which is co-branded with the system and integrated into its patient intake processes, with keeping total bad debt stable despite rising patient account balances. Typically, such a plan can double self-pay collections over internal collection efforts, Garnier says.

Kurtz also thinks it gives Metro Health a competitive edge as out-of-pocket costs loom larger in patients’ decision-making. “People in this community like to pay their bills, and this gives them an opportunity to do it in an affordable way.”

Patient financial counseling also may help hospitals to reduce self-pay risks. “Consumers need to make fundamental changes in spending habits to budget in health care,” says Garnier. “They haven’t been used to being asked for money up front. It’s a sea change and it will take a few years to adjust to the new world, but it has to become more retail.”

Counseling should extend to choosing plans that make care more accessible, Garnier adds. “Patients need to know the difference among a Bronze, Silver and Gold plan. They need to know they are getting good providers, good quality and how much it will cost, and how to pay for it. We need to support patients as consumers.”

Prevalence of high-deductible plans also may create opportunities for systems to offer their own plans with patient incentives more aligned to population health management, says Juan Serrano, senior vice president of payer strategy and operations for Englewood, Colo.-based Catholic Health Initiatives.

A related risk is if patients reject the narrow networks required to make it work, much as they did restrictive managed care models in the 1990s. But, Serrano notes, consumers now have data on how well networks deliver both clinical care and patient satisfaction.

The movement to health exchanges also gives the choice of networks to consumers rather than employers. People are more likely to commit to a network they freely choose based on reliable quality and cost data. — Howard Larkin




Executive Corner

Risk-contracting factors to consider

Market opportunity

Revenue vs. cost trends — Do historical and projected revenues exceed costs for a given population cohort?

Opportunity for lowering c