Like much in health reform, the transition from volume-based to value-based reimbursement is coming early in Massachusetts. "Our reforms successfully expanded insurance to nearly everyone, which makes us a model," says Mark M. Fulco, senior vice president of strategy and marketing for Sisters of Providence Health System in Springfield. "Some would call us a laboratory and some would call us a crash-test dummy, but we have been forced to think about this sooner."

The Massachusetts Blues were among the first to introduce quality-based reimbursement for providers on a large scale. Now the state is looking at insurance rate setting and global payments for episodes of care to bring down costs that are among the highest in the nation.

Inevitable as the transition appears, it's not happening overnight. Fulco notes that 95 percent of Medicare enrollees are in fee-for-service in western Massachusetts. Still, the system's flagship Mercy Hospital set out three years ago to develop a "micro-accountable care organization" for a Medicare Advantage plan based on a medical home model.

Early results are good. With about 6,000 members enrolled, 2009 costs were nearly 13 percent below those for fee-for-service Medicare, with much of the savings coming from a nearly 50 percent reduction in inpatient days. While its pilot differs from the proposed ACO regulations — notably by including incentives for patients to stay in network — Mercy is confident enough in its newly developed medical management skills to join the upcoming Medicare Shared Savings program. "We will probably operate the plans side by side as long as we are allowed to," Fulco says.

However, scaling up a delivery system designed for value-based reimbursement is difficult — and can be risky financially if you do it before the new incentives are in place. Move to accountable care too soon and you leave volume-based money on the table. Move too late and you risk losing the market to better-prepared competitors. "How do you keep standing with your feet in two boats, one tied to the dock and the other pulling away? How far and how fast do you go?" Fulco asks.

"The timing is tricky, and will depend on local market conditions," says Bill Woodson, senior vice president for Sg2, a health care intelligence and information services company headquartered in Skokie, Ill. "The approach Medicare tried to take [with ACOs] doesn't look very workable. So what you want to look at is how quickly the commercial payers want to move." Markets with extremely high costs likely will be targeted by payers first, though payers may find less leverage in regions dominated by a single-provider system.Woodson recommends targeting a small population, as Mercy has done, and experimenting to master care coordination and quality improvement. "Be slightly ahead of the incentives and kick off a handful of initiatives to help learn — maybe one clinical condition and one medical group."

Also be aware that the change will take time and leaders will be challenged to articulate clear organizational goals in what will be a tumultuous period of payment policy change, says Thomas Dolan, president of the American College of Healthcare Executives. He believes the long-term gains may be worth taking some losses on fee-for-service today. "You can't wait for a government mandate. People don't change behavior overnight. You have to start the effort today knowing it will take time, but also knowing where you want to end up. The sooner you can make the transition, the better off you are. If you can afford to take the loss, you need to do it."

The Right Model for the Market

Getting the model right in each of its 20 markets is central to Trinity Health's accountable care strategy, says Joseph R. Swedish, president and CEO of the Novi, Mich., system. "When we talk about ‘accountable care,' we are careful not to put the word ‘organization' in there. We will not repeat the mistake of trying to create a one-size-fits-all model," which Swedish believes helped kill some previous integration efforts.

Rather, Trinity is focusing on developing the fundamentals required to support accountable care in every market, Swedish says. These include clinical integration of hospital and physician care; advanced IT capabilities including electronic medical records, disease registry, e-prescribing and patient and physician portals; and robust leadership and governance to ensure each organization is positioned for change, integration and high performance.

Trinity also is assessing the readiness of each market for accountable care. The fastest moving is southeastern Michigan, where it's participating in a Centers for Medicare and Medicaid Services' Multi-Payer Advanced Primary Care Practice demonstration project that includes 17 commercial and government payers, including Medicaid managed care and fee for service, and Medicare. The system has 250 employed physician practices recognized as patient-centered medical homes and relationships with another 1,000 or so in independent practices aligned with it. Physicians will receive a per-member-per-month fee of about $7.76 to $9.96 for managing patients according to medical home concepts.

Swedish expects accountable care also will develop rapidly in Columbus, Ohio, where a Mount Carmel hospital, also part of Trinity Health, runs a large Medicare Advantage program and has long experience managing risk and coordinating care and provider payments.

"On the other extreme, many rural markets will not be able to take this kind of transformative, population-health management approach until it becomes clear what kind of engagement mechanics with physician and payers are appropriate for them," Swedish says. "They won't be taking risk any time soon."

However, some rural markets are ready for accountable care. In fact, Christopher E. Press, president of 150-bed Blanchard Valley Hospital in Findlay, Ohio, considers it an advantage that there are a limited number of providers and no competing hospitals in his county of 70,000 residents. The system encompasses long-term care, home care and a critical access hospital. "Everyone sits down and shares the data, and it helps everyone," he says.

That includes local businesses. "The private sector is out in front here," says Press, who considers Blanchard's ability to contain costs a strategic asset for employers. "We have to offer a great value proposition. If it gets too expensive for health, it doesn't help them or us and then they move jobs out of here."

Already Blanchard Valley has a pilot medical home program and enrolls its own employees, as well as those from another business, Press says. About 40 physicians participate.

"Like many hospitals we are self-insured. If we reduce our own benefit costs, we have preserved valuable resources," he says. The plan includes a tobacco surcharge. Physicians are paid on a per-member-per-month basis to provide medical home services.

"The early returns are favorable," Press says. "We have folks with chronic diseases and we make sure they get their A1C or lipids or whatever they need to manage themselves. We have a terrific diabetologist-endocrinologist; our diabetic patients are much more carefully monitored. It is hard to come up with data that it is a durable improvement, but pretty much everyone understands that it makes sense to pay more for these benefits because it saves money in the long run."

Still, fee for service remains about 99 percent of the market and Press is concerned that the transition could cost the system. "How do you insulate yourself from losses on this? Carefully. The reason we take the approaches we are taking is we believe in the end the system will shift to pay for value, not activity. If that is what you believe, you have to begin to get experience in how it works."

If anything, rural hospitals have an even greater need to improve efficiency because they generally have a poorer payer mix, says Ray Montgomery, president and CEO of White County Medical Center, which currently staffs about 250 of its 438 licensed beds in two facilities in Searcy, Ark. "Hospitals are giving up $155 billion in Medicare. We will get some of that back through Medicaid expansions and insurance exchanges, but the fact of the matter is we see a shrinkage of our margin," says Montgomery, who also is the American Hospital Association board liaison to the small or rural hospitals constituency section.

While the cost of developing an accountable care infrastructure strains many small and rural facilities, Montgomery also sees his tightly knit rural community as a potential advantage. "In an urban market you have more physicians, whereas, in rural and smaller markets it is potentially a little easier to work more collaboratively and bring the physicians under some kind of umbrella." White County is investigating a physician-hospital organization or alliance with physicians. "We are positioning ourselves to be able to collaborate and protect the compensation base, and prepare physicians for bundling and reductions in reimbursement, and to incentivize them to reduce costs. We are still in a development phase, but think we will have it in place by 2014."

Leading Culture Change

Such diversity of approaches reflects a wise skepticism about the future details of accountable care as well as a healthy respect for the market, notes Maulik Joshi, president of the Health Research & Educational Trust and senior vice president of research at the AHA. But this uncertainty also may make it tough to develop a concrete plan for organizational change — or leading a culture change that supports it.

One thing is certain, however. "Value-based purchasing will be based on objective measures of quality and efficiency," Joshi says. Therefore, he recommends concentrating on the fundamentals of improving quality and efficiency while experimenting with various physician alignment models.

Stephanie McCutcheon, a consultant in Pasadena, Md., who has held several senior executive positions at hospital systems, recommends targeting specific system characteristics and involving employees early. At one system with which she worked recently, that was done by developing a value-based employee benefit plan. The goals included reducing an 11 percent annual cost increase rate to zero by improving enrollees' participation in prevention and primary care. They include comprehensive health risk assessments and creating goals for employees with chronic health conditions. Services are to be delivered by a primary care team including coach-concierges and disease management specialists. The plan is to extend the same kind of services to external employee groups, Medicare and Medicaid over the next two years.

McCutcheon believes that involving employees from the outset helps change the climate in the system, which is a first step to changing the embedded culture. "The message is: ‘Yes, we are going to change and take some risk, and we are likely to succeed.' " Once the population inside believes, it can change the way the organization relates to the outside. However, she cautions, "You have to make sure the numbers work as you make the transition."

Press stresses talking. "At a moment of change, you are going to have people who are not aware, people who are aware but skeptical, and people at different points in their careers. Some will be able to leave, but for some this will define their careers, and they need information to make the change."

System leaders also need to respond when staff or physicians request changes to meet the vision, notes Joel Shalowitz, M.D., professor of health enterprise management at Northwestern University's Kellogg School of Management. When someone comes to the CEO and says, ‘It's not getting done,' it is the CEO's job to say, ‘Get it done.' I've studied organizations with that type of leadership engagement, and it filters down all the way to the lowest levels of the organization."

Shalowitz also suggests that joint ventures between physicians and hospitals may be a better option than outright employment, especially in places that have no history of coordinated care. "I'm a great believer in people exercising their core competencies — hospital administrators should run hospitals and doctors should run group practices."

Joshi suggests that kind of leadership will help systems get control of their destiny. "There is no trigger or tipping point," he says. "If you are focused on efficiency and quality and coordination and alignment, you are going to create your own tipping point. You need to work with the market and payers to make it happen."

Howard Larkin is a contributing editor at H&HN.