Hang On

A special issue to get you through the downturn and to forecast what the healthcare industry will be on the other side. Get ready for the failure of the HIT stimulus dream, episode of care contracting, the end of easy credit, and a public plan.

Talk of change in healthcare is dirt cheap these days. So many views of what the future in healthcare may hold come out in a single day, only to vanish before sunset.

The industry is finally and deservedly finding itself under intense societal scrutiny, but it's hard to hear any wisdom through the shouting.

The natural defense is to sit back and wait for change to happen and react. This is healthcare—where risky bets get you buried, after all. Sit back, take care, save money, and wait it out.

But what if you shouldn't? What if the biggest change of all is that healthcare is "fundamentally" changing. Do the old rules about consolidation still matter? What if a public health plan is more than a political bargaining chip but the biggest game changer since Medicaid? Is your strategic and financial planning fast enough? If the marching order was "grow" in 2005-2007, "manage" in 2008-2009, are you ready for "risk" in 2010?

Finance in the Instant Decade

With the effects of the recession stretching well into the next decade, hospitals will need to reassess capital allocation and spending priorities.

Joe Fifer, vice president of hospital finance at Spectrum Health in Grand Rapids, MI, is pretty certain he's got the right systems in place to make strategic decisions on a dime. He's going to have to be. Between the capital markets disaster and the flood of uncertainty created around healthcare reform, he's operating in a business climate that has become downright hostile for hospital and health system finance teams trying to develop five- and 10-year forecasts, let alone quarterly plans.

Fifer says the $2.8 billion integrated delivery system that includes seven hospitals, a medical group, and an HMO, is operating very much in contingency mode these days.

He, along with many of his colleagues, doesn't see this easing up anytime soon. One problem they face is figuring out how to make capital allocation decisions in an environment that looks different now than it did just six months ago. "The challenge for CFOs is, how do you make this multi-year forecasting process relevant on a daily basis?" questions Fifer.

"At Spectrum, we are making fewer annual capital decisions," he says, noting that in the past, typically before the start of the fiscal year leaders would have allocated roughly 80% of their capital for the year. This year, maybe $15 million out of approximately $58 million will be spent on projects out the gate, says Fifer.

Being nimble enough to make strategic decisions daily and hold onto cash longer may be the best approach as healthcare rides out this recessionary period, but imagine this scenario playing out over the next 10 years. It could. Some finance experts think we've seen interest rates fall about as low as they are going to go and that we are entering a time of increasingly higher rates reminiscent of the Jimmy Carter era. If that happens, borrowing will seize up, especially for the lower-rated organizations. The past year has taught that the industry is changing how chief executives do everything from setting budgets to accessing capital.

Thomas Dolan, PhD, FACHE, president and CEO of the American College of Healthcare Executives in Chicago, agrees that chief executives will need to be much more flexible and carry a short-term plan in their back pockets in the future. "You have to be prepared to make immediate changes in your direction given governmental or economic changes," says Dolan. It means doing contingency planning like Spectrum and a much more careful monitoring of operations. "Given the current economic environment, if something starts to go south, you have to pounce on it immediately or it can become a real drain on the organization," he says, especially when it comes to dealing with accounts receivable, bad debt, and the uninsured.

Fifer predicts capital allocation decisions are going to get even tougher if certain aspects of healthcare reform come to fruition. "If you believe that bundled payment or episode of care reimbursement models are in the future, man, we have a long way to go in terms of making adequate investments in information technology," says Fifer.

"Add that to the current environment where we already have huge demands for more clinical technology and more facilities, and I think it will be fascinating to see capital allocation decisions into the future."

At the same time, chief executives will have to become creative once again in accessing capital. "Everybody realizes that everything counts now and you can't become over-reliant on any one funding source, whether it is for operations or capital construction," says Dolan. For instance, he says, in the past some organizations relied too heavily on stock market returns to supplement operating income or they ignored other sources for capital construction, such as philanthropy. "Hospitals will go back to the community much more now than in the past to ask for financial support for capital construction," he adds.

Not only that, but Fifer, for one, believes hospitals will have to move to an environment that is less dependent on an annual budget. He says Spectrum is creating a budget process more representative of the manufacturing world and basing it on set standards for expenses per unit of service. For example, he says, hours per patient day on a nursing unit is considered a unit of service. "We would like to be able to use that to ramp up and down our resources as those units of service change, not unlike what a manufacturing company does." But, he acknowledges, certain areas still have to be worked out. "So many things we do are not tied to a direct product we are manufacturing or delivering."

However, Fifer says, setting a static annual budget doesn't make sense anymore. "If we do just an annual budget, we are making decisions in February and March that are going to last for the next 15 months," he says, noting that Spectrum's fiscal year ends June 30.

For all the fear of the future, Dolan says some of these changes being imposed on organizations today are positive. "I remember the button that said: ‘Everything is important.' Well, we are in that era right now around the financing of our operations," says Dolan. For example, he says, there is a lot more emphasis currently on supply chain management. "Now we realize that is an important source of savings."

Todd Nelson, technical director, senior financial executive at the Healthcare Financial Management Association in Chicago and former CFO of Grinnell (IA) Regional Medical Center, agrees that going through such a time of unprecedented difficulties will leave its stamp on how executive teams approach financial planning.

"Quite frankly, I think we have moved from hospital emergency preparedness from a disaster perspective to financial emergency preparedness," Nelson says, noting that this is forcing organizations to collaborate much more broadly from within. "It isn't that we haven't done it before, but we are seeing everybody do it and what is key is people are receptive to that change and collaboration."

—Michelle Ponte

Complex Contracts

Payment reform does not mean a return to the IDS model.

When policymakers talk about the potential of healthcare payment reform, the examples that they use to back up their arguments usually involve citing the quality outcomes and low cost of one or a few of the nation's remaining integrated delivery systems. Such systems are vertically integrated and own not only hospitals and health plans, but also a variety of ancillary healthcare components like clinics, rehab centers, and nursing homes, for example. Such entities are tailor-made for taking responsibility for a continuum of patient care and control enough of the components to take responsibility for a "bundled" payment that covers a patient's overall health.

But these real-world examples are far from the dominant model in healthcare today. So if payment reform means bundled payments are meant to serve to reduce cost and waste, few healthcare entities are currently well-equipped to deal with such a system. That said, strategies to deal with comparative effectiveness research and bundled payments are likely to be key to the well-being of hospitals and large physician practices. As a result, the design of complicated contracts with other providers as well as strategies to determine the most effective treatment protocols will likely be the order of the day as healthcare reform takes shape.

Many hospitals have already ramped up their efforts to employ their own physicians, a hallmark of an integrated delivery system, and indeed, many might be better positioned to compete in a bundled system with an IDS model. But even dominant, high-margin systems probably don't have enough dry powder financially to build or buy the health plan element even if they wanted to. At the same time, ancillary healthcare services businesses are fair game, says Kathleen Henchey, a principal at Noblis Health Innovation, Falls Church, VA. As for health plan acquisitions or organic growth in that arena, "few of the clients we're working with are interested at all in doing that currently," she says.

Instead, they'll have to design complicated contractual structures that will ensure the hospital doesn't get stuck "eating" the cost of a patient's rehospitalization if, in fact, it's the fault of the rehab provider, for example.

Trevor Fetter, president and CEO of Dallas-based Tenet Healthcare Corp., is still just in the hospital business—the few exceptions being its owned freestanding imaging and surgery centers. "In our markets, I would seek a strategy where we would try to contract with preferred providers in each one of those disciplines where we would be assured quality and coordination would be good and would fit in a price with the bundled payment," he says.

But without further clarity from the government on how bundled payments might be administered, he's reluctant to go any further at this point. As ideas go, he says, "forcing greater degrees of coordination between the various participants in healthcare is a good one."
Under bundling, Tenet would presumably get a bigger payment for the continuum of care, but would be ultimately responsible for more of the course of treatment.

However, antitrust issues for such alliances are yet to be worked out.

"Say you're a patient, and the next step is you need a sub-acute hospital or nursing home. Today, we would work with you and your family to discharge you to a place that might be more convenient for family members, for example. So what happens when we tell you we're discharging you to a different one because we own it or because we cut a good deal with them and we have this bundled payment? That's probably a great economic outcome and probably a good care outcome, but you as the patient might say, 'It's completely contrary to everything I've seen before, and my doctor tells me where to go, not you.'"

Still, Fetter is spending much of his team's strategic planning on a part of healthcare reform he thinks might take on greater importance: comparative effectiveness.

"By virtue of having invested hundreds of millions in programs and technologies to improve clinical quality, I'm glad we did that and started five years ago because we are well-positioned now," he says. "If the government is going to pay a different amount based on performance on core measures or not contract with hospitals that do poorly on them, I would say fine, we're performing well, we'll take that on."

St. Louis-based Ascension Health, the nation's largest Catholic nonprofit health system, is trying to prepare for some sort of bundled payment scheme. "There is value in the bundling of payment," says Robert Henkel, president of healthcare operations and COO of the hospital system, which includes 67 general acute care hospitals, two long-term acute care hospitals, three rehabilitation and four psychiatric hospitals.

"There will need to continue to be a movement away from payment that is piecemeal to payment built on episodes of care." At the same time, he says contractual relationships are the future for most hospitals and health systems, not a return to an IDS model. "I don't think that's realistic. You can't re-create regionally located integrated delivery systems across the entire country and you shouldn't just throw away the good operating entities that have grown up since," he says. "There will need to be a thoughtful approach to contractual relationships that puts the patient at the center of things."

In some markets, Ascension Health is well-positioned, he says, in that the local hospitals already have relationships with providers of ancillary services that the hospital system would build on or link to more tightly via care contracts.

"I don't believe for a moment that it would be our intention to build every element of the continuum of care to serve in all our communities," he says. "In some, we already have them, and others, there are strong providers that we won't duplicate."

—Philip Betbeze

The Art of Compromise

Health plans' strategy to offer reforms could limit the impact of a government-sponsored plan.

Private health insurers won't like hearing it, but a public plan is going to be part of the future of healthcare delivery.

What that public option will look, however, is less clear. The smartest well-connected minds in healthcare and public policy are not sure, but that hasn't stopped both sides on the issue from predicting the eventual impact.

Private insurers say a public insurance option would lead to their demise as the public plan's lower administration costs, overhead, and physician reimbursement would create a scenario that would kill the employer-based healthcare system. But those who support the public plan say the option will simply create competition that would lower healthcare costs and improve quality and access.

The truth, of course, is somewhere in the middle, but that's not stopping private insurance supporters from voicing their concerns.

"It's one of the those things where some physicians will think the grass is greener, but once they get on the other side, they'll realize it's brown," says Ian Duncan, FSA, FIA, FCIA, MAAA, president and founder of Solucia Consulting in Farmington, CT.

Federal policymakers have myriad benefit design options. They could open the public plan to all Americans or limit the plan to the unemployed, self-employed, and those employed by small businesses; they could create a bare bones plan, a basic plan with a preventive focus, or one that is similar to a private plan but with lower premiums because of lower overhead; they could pay physicians and hospitals at current Medicare rates; they could mirror private insurer payment levels; or they could pay somewhere in between.

The most likely scenario is that the feds will open with a compromise public plan to a limited population, such as small business employees, the self-insured, and the uninsured. Smaller businesses are struggling with spiraling healthcare costs and often must decide between offering health benefits or laying off employees.

This smaller plan could find support—or at least muted acceptance—from multiple stakeholders. Private plans would still lose business, and doctors and hospitals would face lower reimbursements, but it could serve as a compromise in a major healthcare reform package.

The Lewin Group, a healthcare policy research and management consulting firm owned by Ingenix, which is a wholly owned subsidiary of UnitedHealth Group, in its April report, The Cost and Coverage Impacts of Public Plan: Alternative Design Options, predicted nearly 43 million people would enroll in the public plan if it is opened to only small employers, individuals, and the self-employed. The report added that 32 million Americans would flee private plans under this scenario.

That is a far cry from the 119 million The Lewin Group predicted would leave private insurers if the public plan is open to all Americans.

Regarding payment, the public plan would likely reimburse higher than Medicare levels, which pay hospitals about 30% less than private insurers and physicians about 20% less.

Instead, the federal government would pay somewhere nearer what is seen in better Medicare and private plans.

John Waltko, vice president of regulatory and financial reporting at Quorum Health Resources in Brentwood, TN, predicts that any public plan will lead to a "squeeze out" of the private insurance market, with small employers ending coverage and Americans dropping their employer-based coverage. He worries about how an insurance market with only a public plan, Medicare, and Medicaid would affect hospital reimbursements. Waltko worries that over time the federal government would cut hospital reimbursements, especially during difficult economic times.

Waltko says he supports healthcare reform, but all parts of the industry must sacrifice—not only hospitals and doctors. "The issue gets down to: How do we get coverage extended? How do we finance it? And who pays for it? I think hospitals are willing to accept some reduced payments from governmental programs in order to achieve coverage for the uninsured," he says. "The reduced payments, however, cannot be a promise of some payment amount in some future period of some uncertain amount.

Reimbursements from a public plan must be fair and equitable to hospitals and physicians and need to occur concurrently with reimbursement reductions from current governmental programs," he says.

Financial impact

In its analysis, The Lewin Group considered the impact of a public plan payment at a midpoint between Medicare and private payers and found that hospitals would benefit financially from this option because not having to provide uncompensated care would more than offset the lower payment levels. Physicians, on the other hand, would lose 0.5% in total revenue because of the lower payments.

Robert Zirkelbach, director of strategic communications at America's Health Insurance Plans in Washington, DC, warns that if the feds paid at a lower rate, the healthcare system would simply shift costs from those underpayments to consumers and employers.

"A government healthcare plan could exacerbate the cost shift and could potentially bankrupt hospitals in the country," he says.

What policymakers decide for the public plan's payment level will play an important role in whether physicians support the idea.

Kevin Pho, MD, a primary care physician based in Nashua, NH, says he hopes that doctors will have the option of deciding whether to accept public plan patients and that physicians who already accept Medicare beneficiaries won't be forced into the public plan, which Pho says could create an equivalent of a single-payer system.
"In a world where medicine is becoming more like a business, you simply can't lose money like that and stay in business," says Pho.

One of the leading proponents of the public option, Jacob Hacker, PhD, professor of political science at Yale University in New Haven, CT, has written extensively about his public plan proposal. He suggests moving Medicaid and state Children's Health Insurance Plan beneficiaries into the public plan, which would have a higher reimbursement rate. That should please physicians who accept patients with Medicaid, which has woeful reimbursement rates.

Hacker says a public plan should build on the Medicare model, but lawmakers should increase primary care payments and implement a bundled payment system. "A good public plan could be very helpful to providers and not just a threat as some perceive it," says Hacker.

Though private insurers think a public plan would destroy their industry, Hacker says private plans should focus instead on more immediate threats. "If you look at private insurers, their biggest threat right now is not the government. It's the economy and the decline of employment-based health insurance. Millions of subscribers are just disappearing from the rolls every year. I see little prospect they will come back," says Hacker.

—Les Masterson

Widening Gap

The stimulus effort will fail to achieve its goal of broader utilization of HIT, instead creating greater disparity.

The $19 billion in stimulus funds for health information technology included in the American Recovery and Reinvestment Act of 2009 has the potential to close the gap between digital and paper-based healthcare organizations. Yet rural healthcare providers are being left behind.

The Office of the National Coordinator for Health Information Technology started off on the right track with both a policy and a standards committee, says Alan Morgan, chief executive officer of the National Rural Health Association. "Then it just went horribly awry," he says. "Providers with the most need are not even mentioned in terms of target."

Out of 20 members on the ONCHIT policy committee, there is no rural representation, and there is only one rural expert on the 23-member standards committee. "It is not rocket science," says Morgan, adding that it is "outrageous" that out of 43 people only one rural expert was included. "You have a tremendous amount of potential and a narrow time frame, but all of the indications so far show a lack of interest in rural."

Short-term pain

Most experts—including Morgan—are still hopeful that the stimulus funds will have their intended effect and narrow the gap between larger healthcare systems and community and rural hospitals. Smaller institutions may even have some distinct advantages. For example, they can get all of their medical staff in one room and have a conversation, says J. Marc Overhage, MD, PhD, president and CEO of the Indiana Health Information Exchange and director of medical informatics and research scientist at Regenstrief Institute Inc.

David Whiles, director of information systems at 210-staffed-bed Midland (TX) Memorial Hospital, agrees. "We are a standalone hospital district and are on the smaller side of the scale and that was our challenge," he says. "We were not in a position of strength and aren't today making hundreds of millions of dollars to invest in IT."
Midland Memorial was able to implement Medsphere's OpenVista EHR system at a cost of $7 million, in part because OpenVista requires no upfront costs for the technology. Midland Memorial has been paperless now for two years.

There is a catch-22 with stimulus funding, says Keith Mueller, PhD, director of the RUPRI Center for Rural Health Policy Analysis in Omaha, NE. The government hopes to incentivize providers to adopt HIT, but providers can't get the money unless they have already started implementing the technology.

The government's financial incentive is probably enough to convince providers who would have adopted HIT in three to five years to start adopting now, Mueller says, but it's not enough to bring those most reluctant providers. "You have to put a huge pile of cash on the table to get someone to dramatically change behavior," he says. "A modest amount can get someone who was thinking about it to do it."

Most providers are probably hoping to be deemed meaningful users prior to getting dinged by penalties rather than in time for reimbursement, says Overhage. "A lot of people will be in jeopardy of being penalized, because this is hard stuff to do." The healthcare industry should keep its eye on the ultimate goal of the legislation, which according to many industry experts is to reduce costs and improve efficiency, safety, and quality of care, not simply to put technology in place. Providers have to be committed to fulfilling the intent and not just the letter of the law, says Overhage.

Long-term gain

The stimulus package has the potential to improve quality of care by giving providers access to patient data at the right time and place with health information exchanges. It can also help drive efficiency by eliminating duplicative diagnostic or lab tests and offering providers access to decision support software.

But there is a real concern that the money will not be used in the most effective way. "We don't have the cookbook yet," says Overhage, adding that there are going to be thousands of hospitals and doctors trying to do the right thing quickly and still secure their share of the funds. "I don't know if we are as good at spending the government's money as effectively as our own money," he says.

The Health Information Technology for Economic and Clinical Health Act can be incredibly daunting—especially if you are a small isolated facility, says Mueller.

The Congressional Budget Office estimates that only 50% of the nation's nearly 1,300 critical-access hospitals will reach the "meaningful user" designation by 2019—four years after providers start incurring penalties. Roughly 2,000 of the nation's 5,700 hospitals are rural community hospitals and approximately 25% of the nation's population lives in rural areas. That is why it is critical for regional and state organizations to help engage rural community providers and close the gaps for things like statewide health information exchanges, says Mueller. "If we target the funds, state by state, with that kind of priority in mind, we should actually close the gap rather than widen it."

Publicly supported technical assistance centers should be targeted at the providers that are cash poor and unable to buy consultants, as well. Rural hospitals and clinics do not have extensive IT departments; they are going to need high levels of technical assistance. Yet rural healthcare was not mentioned as a target group and critical access hospitals and rural health clinics were not mentioned specifically in the request for proposal for HIT regional extension centers, says Morgan. "This is not an oversight; this is a path forward without rural."