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The Fast Lane to Value-Based Care: Better Bundle Up

If there was any question that US Healthcare’s transition from fee-for-service to value-based would continue under the Trump Administration, the US Department of Health and Human Services’ (HHS) report, “Reforming America’s Healthcare System Through Choice and Competition” (The “Report”) should remove any doubt.  With Secretary Alex Azar a signatory, The Report discusses numerous roads that HHS intends to follow to drive “value” forward.  All roads lead to a common philosophical destination: Increase transparency and competition in the US Healthcare system and allow consumers to negotiate costs with providers.  It now behooves providers to determine the internal cost of each service they provide, then constantly work to reduce it - while simultaneously improving and demonstrating quality.  To capitalize on these efforts, medical practices should negotiate a lump sum or “bundled” payment for each episode of care they provide and/or manage.

The Highway to “Choice and Competition:”

1.       Buy Your Own Gas

When Obamacare was first passed, there was a theory that providing basic primary care services at no cost could help reduce overall medical expenses by preventing more expensive care later.  This theory is difficult to test for several complex reasons, such as behavioral health, EMTALA, end-of-life care, risk adjustment and many more.   

Nevertheless, to demonstrate the flaw of including basic primary care services for free under health insurance plans, the Report uses the analogy of automobile insurance: If car insurance came with free gas, would consumers have any incentive to reduce gasoline usage or avoid using overpriced gas?

Caring for a human is far more complex than caring for a car.  The takeaway, however, is that primary care services should be provided for a cost - known upfront – allowing consumers to decide their appropriateness.  Creating a functioning market for these services with consumer choice is a cornerstone of value-based care. Provider groups should learn to set, share, and compete on, price.

2.       Eliminate the Tolls

A second issue cited with routine medical care is that it is, well, routine.  Wellness visits, eye exams, allergy tests and even minor procedures such as colonoscopies should not require overly sophisticated third-party administration.  Consumers should be able to arrange and pay for them without a middle man (insurer) taking a roughly 20% cut.

Due to government regulations, insurance companies have medical loss ratio (MLR) requirements.  Put simply, an 80% MLR means that payors must spend at least 80% of every dollar collected on medical care for their beneficiaries.  This leaves approximately 20% going to the “administrator” of such care (insurer). 

The original intent behind a MLR was to ensure that at least 80% of premiums get spent on care.  Ironically though, if payors are limited to keeping only 20% of premiums, a perverse incentive exists to raise them.  The higher the cost for medical care, the higher the premiums insurers can charge and the more money they make.

Of course, not all medical care is routine.  Insurance companies continue to play an important role in helping to coordinate complex care.  Over time though, more care can be streamlined and treated episodically – diminishing the need for a middle man and eliminating roughly 20% of cost from the system.  Providers should strive to be the direct recipients of these episodic payments, not a downstream one.  

3.       Open the Fast Lane

The Report cites two key areas where government rules and regulations have caused detrimental (if unintended) consequences and recommends change. 

A.      Certificate of Need (CON) Rules

The CON process is one that requires providers to first obtain approval to do anything from building a new facility, acquiring certain medical equipment, or adding certain service lines.  The CON process is intended to protect the integrity of the healthcare system by setting minimum quality standards and regulating supply and demand, so that sufficient care is available when needed.

The Report argues that the CON process has instead become an overly political exercise that protects special interests and prevents meaningful competition.   

The administration appears imminently determined to eliminate CON frameworks across the US.  Despite being a “State” issue, the administration has identified a clever way to break down CONs: Tie section 1332 waivers to their removal. 

By reinterpreting existing language, the Federal Government published guidance on 10/24/18 (click here), which reads, in part:

“…the Departments have determined that the analysis of comprehensiveness and affordability of coverage under a waiver should focus on the nature of coverage that is made available to state residents (access to coverage), rather than on the coverage that residents actually purchase.”

As state CON processes unwind, new market models will emerge.  Quality and price would certainly be included as part of any evaluative criteria.  Providers that can demonstrate high quality at a low cost should be able to expand their services and capitalize on the vast new opportunities that await.

B.      Any Willing Providers (AWP)

AWP laws require health plans to contract with any provider that can, and is willing to, meet the boilerplate terms set forth in a standard agreement. Devised to ensure broad market adequacy, AWP is considered yet another road block to meaningful competition.

If every provider receives the same contract, incentives to demonstrate high quality and low cost are removed.  The Report suggests that eliminating AWP regulations will unleash market forces to create competition in healthcare.  Removing AWP provisions will force providers to demonstrate high quality at low cost – accelerating the transition away from fee-for-service and towards value-based compensation structures. 

4.       Pave the Way, Evenly

The Government is also interested in discontinuing another practice deemed to be anti-competitive: Paying providers and facilities more money merely because they are owned by a hospital. Hospital outpatient department (“HOPD”) reimbursement rules not only give higher reimbursement to hospital-owned facilities, but incent consolidation.  If an outpatient clinic can make three times more money simply by selling to a hospital, it will often do just that.  Consolidation drives up the cost of healthcare, without rewarding those who can best innovate and compete on quality and price. 

Lawsuits are being filed by interest groups that represent hospitals (click here) to try to maintain this protection.  Absent success in these suits, independent medical providers might finally be able to compete against hospitals on a level playing field.  

“Site neutral” payments bring new opportunities and new challenges.  Providers that can prove that they can compete on cost and quality will be the biggest beneficiaries.      

5.        Let Everyone Drive

If protectionist policies give way to open markets that are based on quality and cost, patients and consumers will be equipped with the tools to make their own informed decisions on where to obtain medical care.  

Innovative health benefit plans and programs will be necessary to adapt to the changes coming to healthcare.  As consumers learn to navigate healthcare, providers should learn how to compete to manage their care.  By measuring internal costs and streamlining processes, practices can open themselves up to endless new opportunities. 

To best capitalize on these opportunities, providers should assess their own capabilities and consider expanding into new geographies, new services lines, and new networks, if supported by adequate data.  These networks – from traditional payors to employer based – will increasingly demand to pay a set cost for each episode of care.  Bundle up. 

For more information on bundled payments, visit www.tororisk.com/blog

Brian S Kern, JD, is the Founder of Toro Risk Consulting Group – a highly specialized firm helping medical providers understand how to manage liability and financial risks.   He is also Of Counsel with Frier & Levitt, LLC, a boutique health law firm.