The Patient Protection and Affordable Care Act may spur an explosion of innovation in the delivery of health care—from accountable care organizations to bundled payment models and beyond. But efficient, forward-looking organizations started this revolution well before Washington got involved. Now they are forging ahead before most of the law takes effect.

The hospital field is reengineering care systems, experimenting with new payment models, and the savviest organizations are embracing clinical integration. This innovation is being done with patients and the quality of care uppermost in mind. But financial pressures to change lend urgency. The combination of shrinking volumes, a deteriorating payer mix, declining margins, reduced access to capital and significant new capital needs makes transforming care a matter of long-term survival.

Organizations are responding by embracing quality- and safety-improvement strategies, says Rich Umbdenstock, president and CEO of the American Hospital Association. Many were jolted into action by the recession and the reality that Medicare and Medicaid reimbursements are heading lower.

Now they're following the pioneering efforts that successfully linked quality to financial improvement. "The increasing connection being drawn between lowered cost and raised quality has done a lot to encourage hospitals," Umbdenstock says.

Financial stakeholders also are nudging them on. Mark Eustis, president and CEO of Minneapolis-based Fairview Health Services, says conversations with the investor community clearly reflect "a sense that organizations need to create a new business model."

The new approach may incorporate a number of fledgling care delivery and payment models that all have the potential to improve outcomes and reduce costs:

  • Infrastructure development, such as electronic health records and increased data analytic capacity, to better coordinate care and improve value
  • New integrated care delivery strategies, which include community-based services, and electronic data to provide insights about how best to target care improvements for high-risk, high-cost groups of patients
  • Payment methods that encourage high-value care across the entire care continuum and ensure that investments in infrastructure and quality improvements are sustainable

Many of these efforts remain in the early stages and are being implemented in piecemeal fashion, according to the Engelberg Center for Health Care Reform at the Brookings Institution, Washington, D.C. But those with sufficient financial strength and investment backing to pursue the reforms have shown signs they can enhance their operations while keeping costs down.

Health care organizations finally have learned that a big part of the battle lies in reducing the costs of care, according to Brent James, M.D., executive director of Intermountain Healthcare's Institute for Health Care Delivery Research in Salt Lake City. "Health care businesses are going to rise or fall on their ability to find and eliminate the current waste in the system," he says. "Manufacturing figured it out 30 years ago. Now we're figuring out that it applies to health care, too." He acknowledges, however, that it's a struggle to overcome the shortfall in revenues that delivering more efficient care often entails. "You do it through contracting with your commercial payers," he says. "And then you right-size your system over time."

Until now, efforts have focused on pulling costs out of the supply chain and improving productivity. But that has not been enough. Organizations now must rethink how the delivery system is organized as a way to reshape the cost structure, says Mark Grube, managing director at health care consulting firm Kaufman Hall in Northfield, Ill. "There's only so far you can go with aggressive cost management," he says.

Structural Changes

Many hospital systems are focusing on structural changes. Momentum is growing in particular behind the establishment of accountable care organizations. Under the ACO model, groups of physicians, hospitals and other providers collaborate to earn shared-savings bonuses from payers for meeting quality improvement targets and demonstrating reductions in overall spending growth for targeted groups of patients.

Investors have valid concerns about whether organizations will weaken their financial positions by making acquisitions and sinking money into still-evolving models, says Richard Clarke, president and CEO of the Healthcare Financial Management Association. That's what happened in the 1990s, Clarke notes, when hospitals snapped up physician practices and ended up losing lots of money. There's no guarantee this integration will fare smoothly, either. However, support for a new attempt is building.

One key determinant to whether the new models succeed financially lies with physicians and their relationship with hospitals—increasingly in integrated rather than voluntary arrangements. And the nation's largest physician organization says strong backing for the efforts is essential to make them work. "New models of patient care, including ACOs, are one important way to best meet the goals of optimized, coordinated patient care and also help curb health care costs," says Cecil B. Wilson, M.D., president of the American Medical Association. "For these new models to be successful, physicians in all practice types and sizes must be allowed to lead and participate."

Hospitals and physician groups alike are showing renewed interest in formalizing their relationships. But one mistake health care organizations and investors frequently make is getting caught up in a focus on short-term revenue improvement, according to J.R. Thomas, president and CEO of MedSynergies Inc., an Irving, Texas-based company that provides consulting services on physician-alignment strategies. The strategies that succeed this time, he says, will be those focused on long-term results. "Health care is a long-term industry—one year doesn't matter."

New Payment Models

An essential part of efforts to transform care is payment reform aimed at linking quality and cost incentives. Bundled payment models that seek to reduce spending on an episode of care have yielded promising results. But the new models still face practical obstacles and must be evaluated and refined, as the Engelberg Center noted in a report this year. The Health Care Incentives Improvement Institute is doing its best to accelerate the shift from paying for volume to paying for value. Despite providers' growing acceptance of the need for a new model, efforts are moving relatively slowly. The institute expects to have 10 pilot projects on its Prometheus payment model active by the end of 2011, up from three at the beginning of the year.

Investors who understand the need for patience could see efforts pay off. Provider organizations that adopt value-based payment should be able to achieve higher net margins over the long term, says François de Brantes, the Engelberg Center's executive director. "In the transformation from fee-for-service to value-based payments, there is a legitimate concern that margins might slip," he says. "However, the margin opportunity on episode care is much higher if you manage it well."

Geisinger Health System, Danville, Pa., long has been in the forefront of efforts to improve quality of care. One of the earliest health systems to adopt electronic health records and to become clinically integrated, the physician-led system is out front again with such innovations as its ProvenCare bundled payment system and an advanced medical home for chronic disease care called ProvenHealth Navigator. ProvenCare has trimmed hospital costs by 5 percent while reducing average length of stay and 30-day readmission rates for patients of coronary artery-bypass graft surgery.

Under ProvenCare, launched in 2006, a flat fee is charged for elective heart-bypass surgery that includes 90 days of follow-up treatment. Geisinger does not charge for any additional costs if there are complications. Its medical home model, meanwhile, has enabled it to cut projected spending for chronically ill Medicare patients by 7 percent.

Geisinger continues experimenting with payment models, benefiting from the fact it has its own health plan and insures about 30 percent of its patients. President and CEO Glenn Steele, M.D., ultimately hopes to link a series of regional insurers and integrated systems together to create a new national brand to seek the business of large, multistate employers.

Steele says it remains a challenge to find the proper balance between fee-for-service and whatever replaces it—shared savings or bundled payments or some new form of capitation. Eliminating cost and creating value is a top underlying priority, he says. "Regardless of how quickly we go to another form of payment, most providers understand that taking a value proposition approach to health care delivery and financing will help us no matter how much fee-for-service is retained."

Optimizing Services

Some innovative systems also have been taking a harder look at how and where they distribute their services. Under this approach, organizations focus on higher-value service lines and on business units that are critical to the marketplace. It's an approach that Kaufman Hall says can get them lean and mean financially in a way that incremental cost cuts cannot.

That can mean eliminating cardiac surgery at hospitals where volume is light, or establishing a stroke care network at select sites to avoid duplication of services, or decentralizing hubs and building hub-and-spoke networks instead. Walter Morrissey, M.D., the vice president in charge of the distribution planning effort at Kaufman Hall, says it's called optimizing your service footprint and amounts to rationalization, for sound financial reasons. "It's about having the right services and the right facilities in the right locations," he says.

It's too soon to gauge the exact financial benefits of optimization, Morrissey says, since those efforts have been going on only for one or two years. But the strategy can help organizations avoid millions of dollars in overbuilding and clearly brings substantial savings overall, he says.


Information technology is one area in which most health care organizations cannot afford to cut back if they are to improve quality, efficiency and transparency. IT sophistication is critical to achieving full clinical integration.

Investors may be worried justifiably about the huge cost of building integrated systems. But analysts say investments made carefully and drawing on the experiences of early adapters should pay off in the long run. The Engelberg Center notes that care delivery models are enhanced greatly when they are supported by a robust health IT infrastructure.

Intermountain Healthcare, Salt Lake City, provides a good case in point. Clinical quality improvement has been a key business strategy since 1996. The organization estimates it has eliminated at least $150 million through structural changes.

Technology investments have been a key underpinning to its progress. Advanced computerized systems en­abled it to reengineer its care around findings that certain clinical conditions are over-treated, adding significant cost and increased risk to patients. With resulting protocol changes, Intermountain has reduced sharply the number of preterm deliveries, premature babies on ventilators, adverse drug events, deaths from pneumonia and coronary-bypass surgery, and readmissions for heart failure and pneumonia.

Now it is taking its pioneering work in health care IT a step further with a rigorous effort to analyze and improve bedside care. At the heart of the initiative is an innovative new computerized system that provides doctors with real-time clinical data and faster access to research, at the patient's side. Developed with GE Healthcare and the Mayo Clinic, it's the third electronic health records system Intermountain has developed from scratch. James sees investments in advanced clinical IT systems as essential to deliver, as he puts it, all the right care but only the right care. "It turns out," he says, "that care delivery is innately an information science."

Shared Savings

Already a national leader in clinical integration, Advocate Health Care, Oak Brook, Ill., launched an innovative program this year in collaboration with Blue Cross Blue Shield of Illinois. Under AdvocateCare, hospital and physician reimbursement is tied to meeting performance standards for Blue Cross-covered patients.

Beyond better patient safety and outcomes, a key goal of the shared-savings contract is to reduce health cost increases to the level of the Consumer Price Index within three years. "It's a new paradigm because we're collaborating together to focus on value," says Lee Sacks, M.D., Advocate's chief medical officer. "It builds on our history of focusing on outcomes and efficiency and creates a much better alignment with Blue Cross, so we are incented to do the right thing."

Advocate also touts results from its Advocate Physician Partners joint venture between 3,600 independent doctors and eight Advocate hospitals—an ACO-like clinical integration program. The collaborative's financial incentive system links hospitals and physicians to improve care coordination and drive savings. It includes an annual report card and bonus payments and also punishes under-performance through loss of incentive payments, enrollment in corrective action programs, and, ultimately, removal from the network.

Among the financial benefits, the use of generic medications has increased 20 percent since 2005 and saved about $15 million a year. Primarily, though, Sacks says the intent of the partnership is to improve quality, outcomes and safety, which it has done. Improving quality, he says, is good for business and generally reduces costs over time.

Collaboration with Employers

Bellin Health System, Green Bay, Wis., is a prime example of how a small, community-based system can have a large financial impact through innovation. The organization is collaborating with area employers to decrease costs by improving employees' health and expanding its FastCare brand of retail clinics to a dozen states. Bellin began working with employers after reducing health care costs for its own staff by 33 percent from a wellness program it introduced nearly a decade ago with a health coach and free preventive services. It saved an estimated $10 million the first five years.

Bellin staff educated other workforces and in some cases offered incentives to steer them to its lower-cost clinics. CEO George Kerwin says all parties benefit: employees are healthier, employers see health costs reduced, and Bellin shifts care to less expensive levels when appropriate, saving more resources for primary care.

As part of the effort, the system launched its FastCare clinics five years ago and operates five in area grocery and discount retail stores. Counting another 50 around the country in partnership with other systems, it's the largest health system-based retail clinic brand in the United States.

About 43 percent of local clinic visits are after hours, which Bellin says saves an average of $424 per visit over emergency department care. Diverting 125,000 patients from ED visits so far has resulted in an estimated $53 million in decreased health care costs. The competitive benefits are another plus: the system estimates it gets 20 patients a day from referrals, many of them belonging to Bellin's competitors.

Expanded Patient Access

Carolinas HealthCare System has thrived through steady regional growth, roughly doubling its operating revenues ($6.3 billion in 2010), affiliated hospitals (33) and employed physicians (1,712) in five years. The system, based in Charlotte, N.C., says its success is derived largely from a strategy to deliver care closer to the customer, quadrupling the number of outpatient care sites to more than 600.

Its focus on increasing the number of sites and ways people can access its services has made it more effective in delivering community-based care while keeping it financially strong. These destination centers include physician practices, freestanding emergency departments, nursing homes, hospices, home care agencies, and ambulatory surgery, imaging and rehabilitation centers. "We're a health care company and not a hospital company," explains Joe Piemont, president and chief operating officer.

Carolinas also is collaborating more with other providers, joining forces to improve clinical care of strokes, cancer and other diseases, and reduce costs. For example, it signed a management contract with the smaller MedWest care group that quickly resulted in $15 million in savings through best-care practices and economies of scale. "There are a number of ways to affiliate and consolidate in addition to mergers and acquisitions," Piemont says.

Dave Carpenter is a freelance writer based in Chicago.

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