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Are Hospital Business Models on a Burning Platform? Not Yet, But It’s Inevitable.

From reading recent headlines, one might easily get the impression that hospitals are resistant — or at least ambivalent — in their pursuit and adoption of accountable care initiatives.

Are Hospitals Dragging their Feet on Accountable Care?

Commonwealth Fund: “only 13 percent of hospital respondents reported participating in an ACO or planning to participate within a year”

KPMG Survey: “(only) 27 percent of [health system] respondents said current business models were either not very or not at all sustainable over the next five years”

Health Affairs: “Medicare’s New Hospital Value-Based Purchasing Program Is Likely To Have Only A Small Impact On Hospital Payments”

The Bigger Picture

Do hospitals today perceive their current business model on the metaphorical “burning platform” — when the status quo is no longer an alternative?

The answer from the headlines above might suggest “no”, but I believe the correct answer is “not yet, but it’s inevitable”.  Hospitals are feeling the heat, but it’s just not yet hot enough to jump off the platform and abandon existing business models.

Fiscal forces are in play to continue to turn up the temperature to the point where change is inevitable. Modern Healthcare reported:

The AHA estimates that about 10% of Medicare revenue will be at risk in 2017 as a result of:

  • Value-based purchasing
  • Penalties for high rates of readmissions and hospital-acquired conditions
  • Incentives for participation in the inpatient quality-reporting program
  • Incentive payments tied to achieving meaningful-use standards in the use of electronic health-record systems.

None of these initiatives are dependent on the Accountable Care Act (ACA) legislation. The first three of these date back to the Bush administration.

With 10% of your revenues inevitably at risk in the near future, what’s a hospital CFO or CEO to do? While you might believe you can hold out for a year or two, the conclusion is inescapable: We must change.

Yes, I’m frustrated that more hospitals are not yet leading or engaging in accountable care initiatives. But, I’ll be patient. It’s just a matter of time.

Vince Kuraitis, JD, MBA, is a health care consultant and primary author of the e-CareManagement blog, where this post first appeared.

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Gregg MastersJeff GoldsmithVince KuraitisAlan Ritter Recent comment authors
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Vince Kuraitis
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Jeff, fun to spar with you on this. Thanks for engaging. I spent the first 15 years of my career in the hospital world and I understand how hospital CEOs and CFOs think (not suggesting that you don’t – I understand and respect your long standing role in the industry). Let’s consider a simplified example: * Community hospital with $500 M revenue * 4% net margin = $20 M net income * 50% of revenues are Medicare Remember that hospitals are very high fixed cost businesses: open 7x24x365, strict building codes, lots of capital equipment (MRI, CT, ICU), specialized and… Read more »

Vince Kuraitis
Guest

Jeff, Agreed, “accountable care” in almost all forms is a challenging business model for hospitals. My point is that they will be forced to adopt it (i.e, forced off the burning platform), not that they will like it. Gregg, I take the AHA stats as documenting a MINIMUM floor of at-risk revenues by 2017, not a prediction or a ceiling. Knowing how hospital CFOs think, my point is that this 10% minimum floor is sufficient by itself to push hospitals off the burning platform. I find Bill DeMarco’s stats interesting and persuasive. When the momentum shifts, it will likely shift… Read more »

Jeff Goldsmith
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Jeff Goldsmith

Despite the press releases about one-off deals, most private insurers, particularly market-leading Blue Cross plans, are still very cautious about ACO and suspicious that the main provider interest in their markets are from those systems with near monopolies (who want to lock in their current rate structure). The Medicare ACO program “covers” less than 5% of Medicare beneficiaries, and a tiny fraction of it will actually resemble full risk. There is simply no evidence of momentum toward risk-sharing with hospitals in the current payment stream. Medicare Advantage is growing at 10% a year, but most of the hospital contracts are… Read more »

Gregg Masters
Guest

Actually Vince, AHA’s 10% at risk prediction seems far too low. On a recent ‘this week in accountable care ‘ broadcast Bill DeMarco (see: http://www.blogtalkradio.com/acowatch/2012/09/05/this-week-in-accountable-care-with-william-j-demarco) suggests between Medicare Advantage and the roll-up of all ACOs (excluding the private market, ‘off the report-able balance sheet’ ACOs seeded by the likes of Aetna, Humana and UHG, in the commercial space, the total is north of a 50% structural shift by 2014. The usual lack of vision in the institutional c-suites has not changed since the collective misadventures of the 80s when the hospital industry en mass entered the insurance business. We shall… Read more »

Jeff Goldsmith
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Jeff Goldsmith

Accountable care is a bad business deal for hospitals, which is why they are not embracing it. Here’s how it works: hospitals spend millions creating managed care infrastructure, telll your docs they’ll get a lot of new business, then give up 100c dollars on the front end, send in a lot of meaningless data and MAYBE get a few 60c dollars back as your “reward” in two years. It’s a stupid program with a double digit negative ROI. Hospitals need to CUT their costs, not merely shave a few points off the future rate of growth. Hospital care is too… Read more »

Gregg Masters
Guest

Oh Jeff, totally so agree with: ‘Hospitals need to CUT their costs, not merely shave a few points off the future rate of growth’ …with a completely different take on: ‘Accountable care is a bad business deal for hospitals…’ If ever there were a set of ‘out years’ (soft) incentives on why hospitals in collaboration with their medical staff ‘clubs’ or more likely aligned JV entities, need anticipate and re-tool their operations, ie, cut, not manage the rate of cost growth, it’s the ACO in ALL of it’s derivative (including commercial) forms. It is the perfect vision and gestalt, with… Read more »

Alan Ritter
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Alan Ritter

I’m not sure it matters that much for the point of the article, but hospital value-based purchasing and penalties for high readmission rates both come out of the ACA. And the ACA stands for the Affordable Care Act.

Vince Kuraitis
Guest

Alan, I’ll try to be more precise. The history of CMS hospital value based purchasing and readmission reduction programs date back to the Bush administration.

The Congress, under Section 5001(b) of the Deficit Reduction Act of 2005, required the Secretary to develop a plan to implement a value based purchasing program for Medicare payment for subsection (d) hospitals, beginning with FY 2009.
http://www.cms.gov/QualityInitiativesGenInfo/downloads/VBPRoadmap_OEA_1-16_508.pdf
http://op.bna.com/hl.nsf/id/bbrk-8url4c/$File/CRSMedicareReadmission.pdf

The Affordable Care Act (ACA) further extends and codifies these initiatives.