• Health care experts agree that delivery must become value-based rather than volume-based.
  • This transformation will occur through a combination of higher quality, increased efficiency and lower costs.
  • Attaining this transformation will require close coordination among providers, payers and health plans.

Even as media attention continues to focus on the unfolding of the Affordable Care Act, there are certain objectives that health systems must pursue under any circumstances. Perhaps the most crucial objective of our era, and one that has moved to the forefront of public discussion, is the effort to transform health care delivery to a system that is based on value rather than volume. Value is the quotient that drives reimbursement in most other industries, so why not health care? The Centers for Medicare & Medicaid

Services have stated that transitioning to a value-based payment system will make health care safer and prevent injuries and unnecessary readmissions to hospitals, which increase overall health care costs. CMS officials say such a transformation will result in savings of $55 billion over five years for Medicare alone.

This transformation — which points toward the formation of accountable care organizations — represents an enormous change from decades of volume-based reimbursement. It is no easy task, but it is one that health systems around the country are beginning to undertake. The task requires the utilization of evidence-based medicine at every level of care, the sharing of information among health care stakeholders, and heightened communication with patients and their families to ensure continuity of care.

Health systems must analyze the cost of care, pricing strategies and new ways to work with physicians. Sophisticated information systems are an essential element.

One of the most crucial requirements is an alignment of goals among entities that previously have sometimes been at odds: providers, payers and health plans. In a value-based environment, no stakeholder will achieve success unless all stakeholders achieve success.

Yet, while the task is far from easy, the transformation is under way.

"Hospitals and health systems are working hard to improve quality and efficiency and demonstrate value to patients and the communities they serve," says Neil Jesuele, the AHA's executive vice president of leadership and business develoment and president of Health Forum. "We are seeing greater integration within and across provider organizations that will lead to better coordination of services and resource utilization."

What needs to be done?

Michael Rowan, executive vice president and chief operating officer of Catholic Health Initiatives in Englewood, Colo., says value-based health care requires a new set of financial incentives.

"The incentives of the old model are to do as much as possible," Rowan says. "The more you do, the more you get paid. Under the value proposition, it's important to be able to show value. And value comes not by process, but by outcome. You should be paid for delivering an outcome of wellness. Your incentive is to intervene in ways that are highly efficient and effective, to bring them to that state of wellness."

Looking at it from an ROI standpoint, improved quality leads to fewer complications, which results in lower costs. Defining and calculating cost savings to complete an ROI calculation is doable, but it will take some practice. It's not something that many organizations are doing on a regular basis.

At the same time, attention must be focused on the nonfinancial return that results from the value-based transformation, particularly improved patient care.

Cost of care, culture of care

Virtually every health system around the country is engaged in a cost-reduction initiative. Most are seeking to reduce costs by 20 to 30 percent over several years, industry analysts say.

Some of those organizations are crunching the same kind of data they have gone over for many years. This includes an evaluation of FTEs and an in-depth look at supply costs, among other things. "The reality, though, is you can't get 20 or 30 or 40 percent of costs out without really redesigning the care processes," says Joseph Fifer, president and CEO of the Healthcare Financial Management Association. "And some of that will point toward increased quality."

Other more innovative organizations are investing in process improvement and value engineering, through such means as Lean, Toyota-style or Six Sigma production systems.

Ultimately, attaining value-based health care requires a cultural change in the health system, says Terry O'Rourke, M.D., executive vice president and chief clinical officer of Trinity Health, Livonia, Mich. "That's not something that can be done by just sending out a memo. It's challenging, working with people to change the care delivery process."

Collaboration in California

In Sacramento, a health system has aligned its vision with a health plan and a physicians' group to provide value-based health care to members of CalPERS, the California Public Employees' Retirement System.

Dignity Health, formerly known as Catholic Healthcare West, formed California's first ACO with Blue Shield of California and Hill Physicians Medical Group.

Michael Blaszyk, chief financial officer of Dignity Health, says the health system understood years ago that the amount of the gross domestic product consumed by health care in our national economy was unacceptable, and that Dignity needed to be part of the solution.

The health system and Blue Shield began having conversations with Cal-PERS about the rising health care costs and the growing obligations owed to current employees and retirees.

Then the health system, Blue Shield and Hill Physicians began discussing how they could meet the objectives of CalPERS collectively.

To do that, Blaszyk says, the health system, the health plan and the physicians' group would have to "set aside those things that would normally be incentives to each of the organizations separately, to come together for a common good, and to test a theory we had: by bringing an insurer and a large physician group together with a health system, that we could bring down the rate of admissions, that we could bring down costs, and we could provide higher levels of quality to this population."

Bringing the parties together was difficult, says Rosaleen Derington, chief medical services officer for Hill Physicians.

"After many months of negotiating the financial structure, we then put governance structures in place," she recalls. "That's when the struggles began. The closer we got to where the actual work happens, the more difficult the processes were. We were changing years and years of culture and, in some cases, years and years of animosity between organizations. We then started to be very transparent with data, and that's somewhat intimidating."

The ACO was launched in 2009. "The results, I think, are pretty clear and compelling," Blaszyk says. "We were able to reduce readmissions from 5.4 percent in 2009 to 4.3 percent in 2010, and to 4.1 percent in 2011. "

Derington says targeting readmission rates included bedside coaching of patients and family members; making sure patients saw their primary care physicians soon after discharge; and calling patients after they went home to make sure they understood their medication regimens.

The impact made itself apparent on the cost side of the ledger. "If you compare the cost with the remaining Cal-PERS population, the cost trend was 3.9 percent [annually], 8.8 percent for all CalPERS members," Blaszyk says.

Movement in Michigan

Trinity Health's O'Rourke says the move toward value-based health care represents objectives he has wanted to achieve throughout his entire career.

All those objectives revolve around taking better care of patients. "That means a number of things," he says. "It means having access. It means having coordination of care. It means being compensated for the right thing."

O'Rourke emphasizes that good care also constitutes cost-effective care. As an example, he points to a sepsis initiative in which Trinity has been involved for two years. Trinity brought together key practitioners from all of its hospitals and worked with outside consultants.The health system has developed protocols for sepsis, and those protocols are embedded into Trinity's electronic health record system.

The program has helped Trinity to lower the mortality rate for sepsis patients from 15.8 percent two years ago to 13 percent in its most recent fiscal year, which ended July 1, 2012.

O'Rourke is proud of those results. "That reduction in mortality correlated in our saving some 406 lives in that period. That's more than one person a day who walks out of our hospitals alive who wouldn't have the year before."

The sepsis initiative also has resulted in cost savings to Trinity that total $16.6 million.

In another example, Trinity has employed electronic health records and bar code technology to prevent medication errors. "We have reduced our medication error rates by 34 percent," O'Rourke says. "According to national data, each medication error costs around $8,700. On a scale where we deliver millions of medications a year, reducing that by 34 percent not only improves the quality of care, but has great financial benefits as well."

The significance of the transformation is not lost on O'Roarke. Health system leaders shoulder a big responsibility to see that the transformation succeeds. "It weighs heavily on us as leaders to get it right this time," he says.

The Investor Perspective

Hospitals and health systems will need to demonstrate the value of their transformation initiatives to the investment community. "Capital market participants will be monitoring the evolution of value-based health care, its implementation and timing in the industry," says Fred Hessler, managing director of Citigroup. "They will be particularly focused on the transition from fee-for-service payment arrangements to value-based payments."

Julius A. Karash is a freelance writer and editor in Kansas City. Mo.

Merging Texas Health Systems Target Greater Value

The move toward value-based health care is being cited as part of the thinking behind the planned merger of two Texas health systems: Baylor Health Care System and Scott & White Healthcare.

In a joint news release issued Dec. 14, 2012, the two health systems stated that "in this new era," health systems must be prepared for declining reimbursement, high levels of information management, greater demand for primary care services and population health management.

Joel Allison, president and CEO of Dallas-based Baylor Health Care, says this type of thinking is not new to his organization. "At Baylor we have always been focused on quality. As we saw the continued emphasis on and the opportunity to move to value-based purchasing, we put even more emphasis on our commitment to safe, high-quality care."

On Jan. 1, Baylor Quality Alliance, an accountable care organization, was launched. Areas of focus include patient access to care, clinical integration, electronic health record connectivity, population case management and care coordination for the highest-acuity patients.

"We also have within the Baylor Quality Alliance programs that align incentives for quality and savings with Cigna, Aetna, BlueCross BlueShield of Texas and Humana," Allison says. "We have two direct employer contracts that are built around quality scores and shared savings targets."

Allison says the proposed merger with Scott & White, which the parties hope to complete by June 30, will augment the value quotient. "We both are aligned on doing population health management, and we want to geographically expand that to be able to manage more populations in the right setting. This gives us an opportunity to improve quality, create better access to care and gain efficiencies."

Reducing back pain and treatment costs in Seattle

In 2000, Virginia Mason Medical Center in Seattle adopted the Toyota Production System as part of a heightened focus on quality, affordability and access.

Four years later, Starbucks and other large Seattle-area employers, along with their health plan officials, asked Virginia Mason to help them reduce health care costs.

"As we talked with them about affordability, one of the issues was that health plan data suggested that Virginia Mason was more costly than other providers," says Robert Mecklenburg, M.D., medical director of the Center for Health Care Solutions at Virginia Mason.

The discussion led to a marketplace collaborative in which employers leverage their purchasing power to bring out the best in providers and health plans.

"We started out by showing, in the case of back pain, a huge amount of waste in the system," Mecklenburg says. "It showed great care embedded in a whole lot of inefficiency. So when we began working with Starbucks to redesign back pain care, 90 percent of the waits and delays and non-value-added care disappeared. We were left with a much more efficient model."

As a result, time lost from work due to back pain decreased by 50 percent, physical therapy visits decreased by 50 percent and patient satisfaction increased to nearly 100 percent.

"This not only saved money for employers, but saved money for us, because we were producing back pain care at a much lower cost," Mecklenburg says. "Our margin went up 50 percent in that spine clinic. We did much better financially. We had greatly increased capacity and a much lower cost of production."

Virginia Mason has achieved the same kinds of results in Portland, Ore., Mecklenburg notes.