Framing the Issue

  • Performance data give Medicare and other payers the ability to measure the value of health services.
  • Value-based competition will thoroughly disrupt health care markets and will favor innovative players.
  • Providers will need to reconsider what business lines they do well and what businesses they need to get out of.
  • Focusing on efficiently meeting the needs of groups of patients with similar needs will help providers to add value and remain competitive.
  • The pace and scope of change will vary by community and by provider.

It was an ambitious decision even for an organization as big and robust as Intermountain Healthcare: to lower its target for patient care revenue by $700 million. But to get ahead of the shift from fee-for-service to value-based care, Intermountain leaders decided that this was exactly what was needed to control its own destiny.

Rationing or withholding care beneficial to patients was a nonstarter. Instead, Intermountain leveraged its pioneering work in clinical process improvement and advanced IT to transform itself. Using a global budgeting approach that could serve as a model for health systems across the country, Intermountain revamped operations throughout its Salt Lake City-based system, which includes 22 hospitals, a health insurance subsidiary and about 1,400 employed physicians at more than 185 clinics serving most of Utah and southern Idaho.

The result: Intermountain is on track this year to meet that $700 million target — 12 percent below its previous income trend.

The timing may be right. The Centers for Medicare & Medicaid Services has set a goal to steer 90 percent of Medicare payments through value-based programs by 2018, and commercial payers are interested in similar approaches. “The payers are seeing there is a new value proposition,” says Joe Mott, Intermountain’s vice president for population health and health care transformation. “They can partner with us in new ways that can bring value to the community and their customers.”

Intermountain’s global budget approach is well ahead of the curve, says Bruce Henderson, managing director and health care strategy practice leader with Chicago-based consultants Navigant Healthcare. “There aren’t many organizations that have the experience, the level of integration across the continuum and the analytics to support what Intermountain is doing. Many people aspire to it, but are not ready to go that far that fast.”

Intermountain used a number of techniques to redefine value. “Hot-spotting” — identifying high-risk patients through medical data and helping them to stay out of the hospital — helped, Mott says. So did medical home primary care, multispecialty clinics for complex patients and integrating behavioral health into primary care. Helping patients to manage diabetes and high blood pressure better by integrating pharmacy, nutrition and lifestyle coaching into primary care visits generated some of the biggest savings.

“One of the challenges of this work is it comes from a hundred places,” Mott says. “You have to change processes on so many fronts.”

Mott credits Intermountain’s leadership for committing to a global value-enhancement strategy, despite the huge short-term revenue hit. “The board and the senior management team are very serious about our obligation as a nonprofit. We feel that kind of commitment to the community is driven by our mission: helping people live the healthiest lives possible,” he says.

Eyes wide open

Intermountain’s decision was not taken lightly, Mott says. Rather, it was a strategic choice informed by careful research and planning.

“We modeled the goal of reducing patient revenues by $700 million all the way through our financial statement, our operating statements, how we would have to manage volume and expenses and how it would flow through to our balance sheet,” Mott says.

Intermountain’s cost accounting system, one of the field’s most advanced, played a critical role. “If you manage away $1 million in emergency department revenue, you’d better be managing your staffing and supplies in the ED,” Mott says.

Intermountain also pays its operating units in each locality it serves through a global budget, leaving it to hospitals, physicians and other providers to make the best use of the money to meet patient needs. System leaders believe global payments are better aligned with the goal of reducing overall costs and even avoiding bundled payments, except in the markets where CMS mandates them as part of the Comprehensive Care for Joint Replacement pilot program.

Still, managing the entire system to maximize efficiency isn’t a financial imperative right now when the majority of revenues are still straight fee-for-service. But Intermountain sees going all in on maximizing value as a strategic investment.

The organization’s chief operating officer, Laura Kaiser, outlined some of the advantages of immediate action in an article published in the Harvard Business Review in October. Written with Thomas Lee, M.D., chief medical officer at patient-experience company Press Ganey, the article highlights some advantages to being ahead of the curve: increasing sustainability by attracting new customers as value-based purchasing takes hold; gaining experience in managing risk; building relationships with partner providers, government and social services to coordinate complex services; and avoiding the alternative to action — lower-quality, higher-priced care.

Of course, with the fee-for-service model still the norm in most places, not every organization has the wherewithal to make such a dramatic move toward value. More typically, health systems are taking a slower path, developing clinically integrated networks to coordinate care for discrete clinical conditions, such as joint replacement, heart failure, depression and diabetes.

These generate incremental — but real — value gains and help to build the infrastructure to go further. “By defining care processes and committing to assessment and improvement, as organizations, they are able to create predictable results,” Navigant’s Henderson says. “These integrated organizations enable entering into risk-bearing bundled arrangements that are value-based rather than fee-for-service-based.”

Global budgeting and full capitation are not even possible for many hospitals, says Joanna Kim, the American Hospital Association’s vice president for payment policy. “Quality vs. cost depends to an extent on volume. Some may not be able to move payment to quality-based capitation, because they don’t have the volume to average costs. … There will likely be different models depending on community needs.”

Knowing costs

In an April 2015 New England Journal of Medicine perspective article with Harvard Business School’s Michael E. Porter, Press Ganey’s Lee argues that before reliable quality and cost data were available, health care quality was assumed. Systems didn’t have to do extensive market research or create products that differentiated them in the market. As long as systems were big, patients would come, which made operational effectiveness the key to financial success.

Now, however, greater transparency on price and quality is creating pressure to improve everywhere, says Michael Rowan, who oversees operations at 102 hospitals in 19 states as chief operating officer of Englewood, Colo.-based Catholic Health Initiatives. And scale aids improvement through variation analysis. “We are narrowing variation around best practices identified throughout our system to improve quality and minimize cost,” Rowan says. Scale also enables the system to take capitation and develop insurance products that lower costs and improve quality.

Increased price and quality transparency differentiates provider performance, Lee says, and creates market pressure to lower prices and reward quality. As a result, systems may have a tough time retaining business lines in which they do not have a clear cost and/or quality edge and face tough decisions about what services to provide where and to whom — and where to close services. “It means we have to find out what patients need and what we can do well, and focus on those things that can be done well,” he says.

For complex and highly specialized services such as oncology, cardiac surgery, transplantation and neurosurgery, competition will increasingly move to the regional and even national level, says Zack Cooper, assistant professor of health policy and of economics at Yale University. “Some employers are beginning to realize they can get their employees higher-quality care at a lower price if they are willing to pay for them to travel. Two thousand or three thousand dollars for travel is dwarfed by the extension of life and the savings to be had.”

Responding to competition starts with adopting a data-driven strategy to deliver value. To clarify strategic direction, Porter and Lee formulated six questions every health care leader should explore. “It is hugely important in any business to have a clear idea of what you are trying to do,” Lee says.

Starting points

Value-based strategy also will reshape the way systems are organized and operate, moving them away from so-called vertical departments and toward horizontal networks that are organized around patient groups with similar needs, Lee believes. “You can rarely create value at the typical levels of organization, the hospital level, the physician group, where patients are heterogeneous. You can’t tell who is in there, so there’s nothing to compare the data with,” Lee says. “But if you get down to patients with Parkinson’s, then you have something you can evaluate in terms of outcomes, and organize teams to deliver services more efficiently.”

Empowering teams dedicated to specific patient groups to systematically innovate will improve outcomes and lower costs, Lee adds. It also will combat clinician burnout. In vertical organizations, people pass through so quickly that clinicians have little chance to build relationships. “But if you have a team focused on a group of patients, you get to know them, and that sustains you.”

But while transparency and competition can be a great general prescription for delivering health care value, obstacles lie in the way. For one, assessing value requires reliable outcome measures, but these are difficult to formulate, says the AHA’s Kim. CMS has only a few outcome measures, and some are not well-developed. For example, holding hospitals responsible for all Medicare costs that a patient incurs for 90 days after discharge may be too inclusive because many of those charges may not be related to the hospital stay.

Quality and outcome measures capture about 75 percent of what primary care physicians do, but much less for specialists, says Patrick Herson, M.D., president of Fairview Medical Group, which employs 480 full-time-equivalent clinicians serving Fairview Health Services at six hospitals and dozens of clinics in Minneapolis and the surrounding areas. “Specialties are eight to 10 years behind primary care. We are working to close that gap, and we are waiting for specialty societies to come up with agreeable measures.”

It’s a process that can, and should, take time, Kim says. “The gold standard of quality measurement is outcomes measures, so you want appropriate, well-done measures. It’s important not to rush them, so they can become robust.”

In the meantime, existing measures should be used to improve patient care, says Herson. “We recognize that not all the quality measures are perfect, but they are good enough to benefit patients.”

As for Intermountain’s plan to reduce patient revenue by $700 million, Mott says, “We were able to show that if we manage in a disciplined way using current budgeting and financial tools, we can manage to this mission and maintain our financial health.”

Howard Larkin is a contributing writer to H&HN.