Payer mix doesn't blend with hospital revenue models

November 02, 2011
By Trevor Bromley

This report originally appeared in the October 2011 issue of DOTmed Business News

Health systems have become focused on, if not preoccupied with the possible shifts in the payer mix as a result of the Patient Protection and Affordable Care Act. As a result, they’re investing significant amounts into the development of population-based reimbursement and bundled payments, and on the development of medical homes and accountable care organizations.

Experts suggest that additional economic dynamics such as a shift in health plan enrollment will create pressure to take additional costs out of their system. Providers, however, will be ill-prepared to deal with the magnitude of the changes for lack of expertise and organizational cultural factors.

In “Changing Economics in an Era of Healthcare Reform,” which appeared in a recent edition of the Journal of Healthcare Management, author Nathan Kaufman, managing director of Kaufman Strategic Advisors, LLC, predicted that a significant shift in health plan enrollment will take place over the next five years. This shift will see more people becoming members of government-sponsored plans, and fewer covered by private and highly profitable health plans. The differential is approximately nine million, according to CMS estimates.

Kaufman suggests that these profitable patients will be lost to government-sponsored plans with non-negotiable provider rates such as Medicare, Medicaid, and exchanges. While there will be a financial benefit to providers from government-funded insurance, over time, there will be a net loss since Medicare and Medicaid are not expected to keep up with historical and projected hospital cost inflation. In response, providers will need to become better at revamping their costs structures by a daunting 10 to 15 percent.

Other pressures that will impact providers include an increase in bad debt as patients pay a greater share of their health care costs; lower revenues as a result of lower utilization of health services as higher deductible employer-sponsored health plans discourage patient visits; and a political climate that could reduce or block proposed private insurer premium increases. This could result in the reduction or freezing of reimbursement levels from private insurers to providers much like what was proposed in Massachusetts when, in 2010, the state’s Department of Insurance rejected rate increases.

ACOs and cost control
Many health systems are investing large sums of capital in the development of accountable care organizations to take advantage of the financial rewards of quality improvement and cost reduction. Will this be a panacea for the pressures that the coming payer mix will create? Can this be banked on? Kaufman questions whether the sheer cost of forming and operating ACOs will significantly exceed the payback and wonders whether it might actually make the cost issues in most health systems even worse.

Many agree with Kaufman and believe that health systems don’t have enough evidence that the payments from shared savings coming from ACO plans will even offset the infrastructure costs, let alone address the magnitude of the financial pressure the health plan shift will create. Perhaps even more significant are other fundamental ACO arrangements that introduce serious risks, including a lack of control over patient behavior. In a conversation with DOTmed News, Kaufman put it very bluntly, saying, “What we’ve learned from capitation and other risk arrangements is that when you have no control over patients and they have unlimited choice, then you’re going to lose every time.”

Perhaps the most problematic aspect of ACOs is that costs savings will be achieved through some level of cannibalism. “ACO arrangements rely on reduced hospitalization, high-end procedures and referrals to specialists,” Kaufman writes in his recent article. “So we’re putting an organization together to reduce our own revenues. ..It’s essentially a legislative experiment with the probability of failure far greater than of success.” To mitigate their own ACO risk, Kaufman quips that those with ACOs had better “hope like hell that their competitors also have ACOs.”

Flat and falling revenues: countering the convergence
As reimbursement and utilization decline, conspiring to flatten and reduce revenues, those health systems who continue to view cost-shifting and fine-tuning ACOs as a viable long term strategy could face mass layoffs and major restructuring. This has already come to pass for some. “But this is not really viable either,” says Kaufman. “You can’t just cut — you need concerted redesign, a new business model.” He points to organizations like Geisinger, Virginia Mason and ThedaCare in Appleton, Wis. These forward-thinking organizations anticipated the reductions and got ahead not by incremental improvements, but with large-scale, creative and intelligent care delivery redesign enabling cost reduction without disabling their organizations. “They give me hope that it can be done. What it will take among many other factors are CEOs and boards with a lot of backbone, as there is a huge amount of resistance to this magnitude of redesign. The good news is that there still time left to hospitals to prepare.”

Trevor Bromley is a freelance health care writer. He can be reached at