HEALTHCARE: THE NEW NORMAL
Tuesday, January 05, 2016
Healthcare is a business, yet it typically trails most business-related trends by several decades. For instance, while most other businesses began the transformation to electronic record-keeping in the late 1980s and 1990s, the movement in healthcare has primarily happened over the past five years. Considering that healthcare is a life-critical system as opposed to a mission-critical business, any change must be approached with caution. However, occasionally government regulations and the political arena force rapid change and evolution in the business model. Taking the example of electronic health records (EHRs), it was the combination of government incentives (to adopt) built into the 2009 American Recovery & Reinvestment Act (ARRA) that finally provided the impetus for providers to make the jump to EHRs.
Healthcare providers must stay on top of these regulations and understand the trends in healthcare in order to remain financially solvent. One of the major game changers for healthcare providers came in the form of the 2010 Patient Protection and Affordable Care Act (ACA), which is sometimes referred to as Obamacare.
In many ways, the ACA creates a new normal in healthcare through a mix of regulations, incentives, penalties, and other mechanisms that will solidify certain trends in the industry. The primary funder for health services is the Department of Health and Human Services, which is the same entity that is regulating this “new normal” in healthcare. Thus, beyond merely staying in business, a thorough understanding of the evolving healthcare landscape will serve providers well as they seek grant funding to make up for decreased reimbursement and increased risk sharing.
Emerging trends in healthcare more broadly are also having an impact on federal grant funding.
The trend toward thinning margins is not a new development with the ACA. Hospitals and healthcare providers have been dealing with the mantra that they have to do more with less since the explosion of managed care and capitation payment plans.
When it comes to Medicaid patients, often times the reimbursement schedule is determined by state governments (with little or no input from providers of consideration of actual service costs), offering as little as $30 for a primary care visit to a private physician in New York State, for example. On average, commercial insurers would reimburse the same type of visit at $100.
Healthcare costs continue to accelerate, easily outpacing general inflation. At the same time, regulatory pressures are driving reimbursement rates downward. One of the less talked about long-term consequences of the new health insurance exchange marketplaces that are now operation is their effect on provider margins. The marketplace will exert intense pressure on commercial payors to drive down their plan prices in response to increased competition. By-and-large, insurers are for-profit conglomerates that answer to shareholders who will not stand for decreased profit margins. These insurers are going to pass that loss on to providers as they negotiate future reimbursement contracts.
Expect to see thin margins become even thinner over the next several years, requiring providers to be creative and innovate in order to survive.
Likewise, as the subsequent demand from providers to take advantage of grant funding to fill these funding gaps increases it is innovation and creativity that will separate those that are successful from those that struggle or fail.
On one hand you have a provider that requests a grant to overcome an operating deficit related to decreased reimbursement for provided services. Such a request pales in comparison to a provider that is proposing an innovative telehealth solution that decreases overhead and provider travel time (loss time) to deal with the lower reimbursement levels. A funder will be much more likely to fund the one-time upfront costs (and some ongoing maintenance) of a telehealth project rather than providing a blank check to cover operating deficits that a provider is experiencing.
These regulatory and environmental pressures will also manifest themselves in the form of continued provider consolidation in the healthcare sector. One of the easiest ways for providers to deal with thinning margins is to engage in mergers and acquisitions.
As much as the general public hates to hear it, healthcare providers compete for patients. Unlike traditional businesses, the patients are not true consumers in the sense that they pay for 100% of the cost of their services and make choices accordingly. Thus, such competition results in duplication of administrative structures, services, and technology while failing to provide a corollary decrease in price, or cost of healthcare services. In order to decrease these inefficiencies and ensure they capture a larger share of the patients in their catchment area, providers must look to consolidate to survive. In addition, provider consolidation and networking increases their group purchasing power when it comes to negotiating favorable reimbursement rates with commercial insurers and purchasing supplies and large capital equipment.
Thus, there are many benefits to provider consolidation in terms of remaining financially viable. The good news is that providers that are willing to go down that path—whether through formal consolidation or creating large informal healthcare networks—are putting themselves in position to capitalize on grant funding.
Cooperation and partnerships amongst providers has always been a selling point to funders when it comes to securing grants In many cases, the formation of an informal or formal provider network is a prerequisite to meet to eligibility requirements of the grant program. In fact, the Health Resources and Services Administration (HRSA) currently has an open solicitation for the Rural Health Network Development (RHND) Grant Program. The program provides up to $900,000 over three years to rural health networks (formal arrangements with network board and bylaws), which can be used to connect network participants, purchase technology, or implement a variety of network activities.
In the interest of reducing healthcare costs, there is a concerted effort amongst government and commercial payors to incentivize the provision of care in ambulatory and home-based environments and penalize institutionalized care. There is no question that the bulk of health-care costs are driven by costly inpatient stays in acute care hospitals and skilled nursing facilities. With that in mind, the ACA dished out billions in funding for demonstration projects (e.g. Money Follows the Person) that incentivized states to transform their Medicaid long-term care reimbursement mechanisms to move patients out of nursing homes and into community-based settings. Likewise, the Center for Medicare and Medicaid Services (CMS) was appropriated billions of dollars through the ACA to test and evaluate new delivery and payment models in the healthcare system. Many of these new delivery mechanisms involve innovative projects that allow for the provision of care in ambulatory and home-based settings.
Providers do not have much leverage in combating this particular trend, because the implications go beyond the cost savings of ambulatory over inpatient settings. The truth is that hospitals and nursing homes, while being equipped to deal with the most complex patients and healthcare problems, are also hotbeds for nasty antibiotic-resistant bacteria and other infectious diseases. Thus, providing care in alternative settings quickly also improves health outcomes in the form of a decrease in hospital acquired infections.
When it comes to grants, this regulatory shift is mirrored in the priorities of funders. Many federal funders will not even consider projects that are exclusive to inpatient settings. They are much more interested in funding projects that address wellness, prevention, and chronic disease management in ambulatory settings. This includes the movement towards mobile health (mHealth) and the involvement of smart phones, tablets, and other technology is assisting patients with managing their care by adhering to treatment plans and increasing informal communication between providers and patients.
There is still some potential to find funding for inpatient initiatives, but at the very least providers must be able to connect it to transitions in care settings (primarily ambulatory/home-based).
No discussion of the “new normal” in healthcare can be complete without addressing the movement away from traditional fee-for-service reimbursement mechanisms. The days are numbered whereby providers are reimbursed for every patient encounter, test conducted, and procedure performed.
As with ambulatory services CMS is investing billions in alternative payment methodologies. Some of the common arrangements being tested through grant programs and demonstration projects include accountable care organizations (ACOs), shared provider-payor savings and bundled payments. Though the details of each of these respective payment models could be discussed ad nauseam, at the end of the day they all are being explored because they shift responsibility and risk from payors to providers.
Under shared savings arrangements, any cost efficiencies are split between providers and payors. With ACOs, a network of providers receives an overarching fee per enrollee by the payor and assumes all risk if the costs of a particular patient’s care exceeds reimbursement. With bundled payments, services are grouped together (e.g. pre-surgical appointment, tests, surgery, and post-surgical follow-up) and a single payment is made to providers regardless of the number of encounters, test, procedures, or hospital inpatient days actually racked up by the patient.
In addition to shifting risk, the ACA and associated regulations are taking transparency in healthcare to the next level. Healthcare providers are being forced to track all financial and health outcomes data as well as make it available to the public. Medicare has already begun penalizing for poor performance through its Hospitals Readmissions Reduction Program. Essentially, CMS has put the onus on providers to prevent hosptial readmissions by assessing a penalty when patients are readmitted to a hospital within 30 days of a previous discharge. In many ways, this type of penalty should be viewed as the start of pay-for-performance.
Obviously, medical professionals do not believe it is fair for them to assume the majority of financial risk in treating patients when so much of health outcomes are contingent on lifestyle choices and other factors outside of their control. However, the emergence of pay-for-performance may be inevitable, and the pressure payors are currently exerting on providers may grow dramtically as patients catch on to this new dawn of transparency.
With the growth of high deductible health plans and efforts of payors to shift financial responsibility for care to patients, the latter group is considering costs and provider quality metrics more than ever when making treatment decisions. As this data becomes even more readily available at the patient’s fingertips, this trend will undoubtedly continue. Soon, both patients and payors will be demanding more accountability from providers, making pay-for-performance a logical next step.
When it comes to providers assuming risk and pay-for-performance, the impact on grant funding is already evident. Many hospitals are desperately seeking out grant funding to assist them with the Medicare readmission penalties.
The issue is that while providers can provide adequate explanations as to why readmissions are not their fault, this is not a need that can easily be sold to funders. In that respect, it comes down to how providers are framing their problems and needs to funders. Rather than trying to offset penalties, a hospital can implement a quality control program that aims to reduce hosptial readmissions. By reducing readmissions, such a project will be improving healthcare quality while reducing costs. A project that is presented in these terms is something that both federal and foundation grantmakers would find compelling.
When it comes to federal funding , one would be wise to always consider the design and implementation of new payment models when requesting funds for innovations in service delivery. In this case, it comes down to knowing the trend and funder’s priorities (e.g. new payment models, provider risk, transparency) as well as how to frame your request (e.g. avoiding penalties versus improving quality and reducing costs through decreased hosptial readmissions).
With so many trends and new regulations to consider, it can be tough for providers to navigate the “new normal” in healthcare, particularly when it comes to their grantseeking efforts. As the primary grant funder in the sector, one must consider the priorities of the Department of Health and Human Services and the trends they are forcing through regulations and reimbursement policies. Knowing these priorities and trends is crucial to a provider in determining which projects may be fundable through grants and how to frame their needs. When you are attempting to read between the lines as it relates to various grant programs, the 3-part aim established by CMS’s Innovation Center should provide the guiding principles: Better health (status), better healthcare (delivery), and reduced costs.