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.

8 replies »

  1. 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 expensive staff, highly regulated, etc.

    How will the CEO and CFO react to the headline: 10% of Medicare revenues at-risk by 2017?

    The CFO will interpret this as “Because of our high fixed cost structure, we have very little ability to flex expenses downward. If we lose $1 of revenue, that’s almost equivalent to $1 off my bottom line (net income). If 10% of Medicare revenues are at-risk, that’s a potential loss of $25 M – more than 100% of our current net income. These at-risk penalties must get our full attention. We must develop a business model that will achieve necessary quality improvements. We gotta change, maybe not today but well before 2017.”

    …and all this is in play BEFORE the major elements of the ACA and Medicare ACOs kicks in. Most of your points go to suggesting that ACOs and accountable care won’t take root. While I disagree, my argument isn’t dependent on this. While rapid growth of accountable care would increase the pace of disrupting hospital fee-for-service business models, they are terminal (as in ‘going to die’) in any event. No one except providers has any belief left that fee-for-service is a good idea.

    Where we agree:
    * Current Medicare ACO models are a bad financial deal for hospitals. Reality is that hospitals have the biggest cost-reduction bullseye target on their back.
    * Access is a critical problem. You see it as THE central problem, I see it as one problem.

    We do read some industry events differently:
    * Health plan business models. You suggest they are cautious about ACOs. I read it as their business models also are on a burning platform — see #1 at http://bit.ly/RFfFT3
    * Potential for rapid growth of ACOs. You suggest DeMarco’s forecast is laughable. I listen seriously when he says HHS has 490 more ACO applications in the pipeline. This should be public knowledge within a few weeks. Let’s wait and see.

  2. 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 not shifting risk to hospitals. DeMarco’s forecast is laughable.

    The ACO continues to be a consultant driven phenomenon- lots of “vision” and lots of consulting opportunities.

    Including things like Hospital Compare and MU as if it was “risk” is rubbish- “fee for check-the-box” is different from risk. Readmissions penalties, as I read the law, only affect the 15% of hospitals with the worst readmission performance, not the rest of the industry.

    Where is the burning platform? It isn’t cost growth. Hospital admissions are falling, imaging volume (hospitals’ most profitable service) growing in low single digits or not at all. Hospital costs grew at about 5% per annum in 2010, and don’t see any surge in the past two years.

    As I’ve discussed in recent postings on this site, the real burning platform remains access and the family cash flow problem that started this recession in the first place. If you add up people with no coverage at all, people without any savings and coverage with high deductibles, and Medicaid beneficiaries (who are seeing serious and escalating access issues), that’s HALF of the US population that basically cannot use our health system without massive public subsidy. The SCOTUS decision badly damaged ACA, by placing as many as 10 million potential Medicaid beneficiaries outside of coverage if their states opt out.

  3. 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 lots of room for innovation at the margins, i.e., direct practice networks as qualified health plan in the exchange machinery (see comment in: https://thehealthcareblog.com/blog/2012/09/08/dropping-out/ ) .

    Let’s face it. our whack-a-mole $2.7 trillion ‘cottage industry’ is performing exactly as incentivized, with many pigs at the trough in tow, routinely extracting vs. adding value.

    Until we drill a little bit further into the lazy and simplistic ‘my revenues are your expenses’ diversion, we’ll not make progress.

    Circa 1990s in DFW, I wrote into a full risk contract with Prudential (prior to Aetna/USHC acquisition) a ‘JOC’ operations committee as the functional interface between the hospital system (THR) and payor. We began to define the co-mingled and common interests including care process re-engineering with actuarial and even marketing considerations. Once the Aetna/US Healthcare took hold little interest was shown to better appreciate the true nature of the relationship and the promise of the JOC was shelved.

  4. 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 rapidly. Most of the surveys on hospital resistance to accountable care are at least a few months old; the Commonwealth data is from 2011. History might show that the SCOTUS decision affirming the ACA was the turning point in shifting away from the old fee-for-service system toward accountable care payment and delivery systems.

  5. 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 see.

    Nice post (as usual).


  6. 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 expensive, and a large amount of it could be avoided altogether if physician care were more proactive and systematic.
    That’s where the energy needs to go.

  7. 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.

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

  8. 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.