Fee-for-service medicine is headed the way of the dodo bird. We don't know what model will take its place, but we can be certain that it will be based on incentives for lowering cost and improving quality. These goals can be reached only with the committed support of physicians and the open cooperation of hospitals and related agencies such as home care. Intellectually, this is easy to understand but, practically, it is difficult to accomplish. Hospitals and physicians need to move past the issues that have divided them and create a new environment in which each can benefit from these new incentives.

Some History

In the past, hospitals were paid on the cost of care, and physicians were paid according to their charges. Then things changed. Hospitals were paid on fixed amounts tied to days or diagnoses, and physicians were paid according to national or regional fee schedules, regardless of what they charged. Hospitals needed to control costs, and physicians needed to provide more services to maintain their income. These goals were often at odds.

Physicians looked at hospitals as the bank that could make up their revenue deficits through call pay, directorships and some creative cost supports. Unfortunately, the government took a dim view of some of these arrangements. Hospitals began to think of their physicians as having unrealistic expectations. Physicians and hospitals were left to struggle with their challenges independently, and collaboration was rare.

Hospitals responded by aggressively increasing the number of employed physicians, thinking this was an easy way to control behavior, and they were surprised when losses per physician approached or exceeded $200,000 per year. Physicians saw employment as a way to achieve attractive incomes with minimal risk. Again, these were not compatible goals. Then things changed again.

Today's Challenges

Our economy no longer can support the cost of the care we demand. Medicare and Medicaid are not sustainable at current levels, and employers cannot shift any more insurance costs to employees. Attempts at cost control, such as preauthorization and utilization review, have failed because of the difficulty in second-guessing care decisions. This failure means that the providers of care need to have more incentives to control what care is delivered. Providers need to balance less care with appropriate care. The quality of care needs to be monitored, and best practices need to be adopted.

Success under this new value paradigm demands that hospitals and physicians begin a meaningful and progressive dialogue — a huge challenge whether physicians are employed or private. The goal is to use the knowledge and skills of the physicians to streamline the care process and to monitor and improve the quality of that process. The hospital typically provides the capital to improve the data environment, fund the collaborative dialogue and work with payers to create meaningful financial incentives.

Matching Models to Markets

Moving from volume to value is not a one-step process. It's better to take a phased approach in selecting and implementing a care model, whether it's an accountable care organization, population management or another system. Doing so will improve your chances of instituting a realistic and financially rewarding approach to managing patients and ensuring quality.

Step 1: Educate. Hospital leaders are typically more aware than physicians of the need for value-based care models and their financial foundations. Physicians are busy meeting the episodic needs of their patients and have little time for new initiatives. Take the time to explain to physicians the reasons behind the various care models (case pricing, gain share, population management, etc.).

Step 2: Evaluate. To develop a viable care model you'll need: physician readiness, available data, service area demographics, financial resources, an inventory of foundational elements, service line dominance, diagnosis-related group cost concerns, availability of ancillary services and current outcomes compared with best practices.

Step 3: Identify. Pick the right value model. Smaller hospitals, or those with modest regional populations, might target cost and quality management of certain service lines or DRGs. Hospitals in a more competitive market might adopt gain-share or co-management models to create dominant service lines. Major medical centers or integrated delivery systems could explore the more complex models, such as case pricing or population management. Consider payer incentives: You might be able to pursue support for medical homes or rewards for improving Hospital Consumer Assessment of Healthcare Providers and Systems scores or reducing readmissions.

Step 4: Implement. Consider establishing a modest first step; achieving the initial goal will encourage everyone to take on the subsequent, more ambitious steps. Find the thought leaders in the physician community to establish a meaningful and focused dialogue. These leaders may not be part of the current formal governance structure.

The Challenge

The organizations leading the way in developing care management models have had decades of experience creating a culture of physician-hospital collaboration. Creating a similar culture will take more time and more effort than many expect. The worst possible outcome is abandoning the process. Hospital leaders and physicians (whether employed or in the community) need to be committed to the process, regardless of how difficult. Reliving past wrongs must be avoided.

While fee-for-service medicine may be destined to join the dodo, physicians and hospitals have the opportunity to avoid the same fate and, together, create a care model that achieves high-quality outcomes at a cost that can be sustained. It's time to get started.

Gregory Mertz, M.B.A., F.A.C.M.P.E., is the managing director of Physician Strategies Group LLC, Virginia Beach, Va.