The Business Case for Population Health Management

Introduction

As payments for health care transition from fee-for-service to value-based payments, health care providers have been described as operating “in two canoes.” In the fee-for-service canoe, providers have incentives to provide more frequent and more expensive services. At the same time, in the value based payment canoe, providers have incentives to reduce inappropriate and unhelpful utilization of healthcare. At first glance, traveling in these two canoes at the same time may seem perilous. Both the clinical infrastructure and the clinical culture required for success at these different goals are likely to be very different.

This “two canoes” mixed-payment system also carries important implications for health care providers and the health care system nationally. First, risk contracts force providers to actively weigh volume and income aspirations with broader societal benefits and the need to achieve a sustainable cost growth rate nationally. Second, these contracts attempt to transfer the pursuit of important societal goals to health care provider organizations. Unfortunately, there is no payment system that can perfectly align what patients need with what contracts reimburse. Population health management represents an attempt to encourage provider organizations to pursue financial margin in ways that address critical societal goals include care coordination and reducing preventable rises in the overall cost of healthcare.

We believe that the business case to develop culture, business practice, and infrastructure for value-based care is strong for several reasons. First, in some ways, value-based care can improve margins in fee-for-service contracts even while it also reduces costs for local populations. For example, encouraging shared-decision making with patients about joint arthroplasty could reduce unwarranted expenditures in a local population while also creating more operating room capacity for external referrals. This type of shift would both improve a hospital’s performance in contracts that involve shared financial risk but also potentially improve hospital margin in fee-for-service business. Importantly, it could improve the quality of care for both populations, particularly if hospital capacity is already constrained.

Similarly, improving care coordination and transitions to outpatient care for patients with percutaneous coronary intervention (PCI)¹ can reduce the cost of care for patients receiving routine PCI by reducing hospital readmissions. At the same time, these avoided readmissions can lead to more inpatient bed availability to allow the development of advanced techniques such as transcatheter valve replacement that attract patients from outside the local region.

These clinical examples represent straightforward ways to succeed in a “mixed-payer” environment, where population health programs coexist with programs meant to generate external referrals. In principle, decisions could be more difficult when these tradeoffs are more stark, for example in program development. Complex care management programs² are unlikely to improve margin in fee-for-service. Furthermore, changes in public policy may cause uncertainty about the pace and form of transitions in payment policy.³

With these more difficult decisions about organizational priorities, however, we believe that while the pace and form of a transition to value-based payment are uncertain, the end result is much clearer. Simply put, the persistent rise in the cost of health care in America is unsustainable. Furthermore, public pressure is likely to demand a health care system that produces better clinical outcomes.

Health care costs and the US economy – implications for long-term provider strategy

In 2016, health care accounted for 17.9% of the total gross domestic product (GDP) of the United States, an amount equivalent to $10,348 per person.⁴ In 1960, health care accounted for only 5.0% of GDP.⁵ Over that time period, therefore, the proportion of health care costs within the overall economy has more than tripled. This proportion differs markedly from the proportion in other countries. For example, health care accounts for 9.6% of the GDP in Australia, 10.3% in Canada, and 11.9% in Sweden.⁶

While the outlier status of the United States is clear in terms of proportion of the overall economy spent on health care, the contributing factors to that outlier status on other aspects of the economy is less clear. Conceptually, high health care costs could decrease the profitability of businesses that pay for employees’ insurance and even encourage them to employ fewer people, raising unemployment, or decrease wages. Another concern is that increased costs borne by states could cause direct reductions in spending on other public priorities, such as education, housing, or public security. Although these concerns are conceptually valid, little rigorous evidence exists to demonstrate that higher health care costs have a deleterious effect on other aspects of the economy.⁷

Despite the lack of rigorous evidence, anecdotal evidence cited in the popular media commonly attribute economic problems to health care costs.⁷ Furthermore, to the extent that individual patients bear the direct burden of health care costs, there is an association between substantial household financial burden and illness. For example, 1 in 4 low-income families in which one member has atherosclerotic cardiovascular disease experiences out of pocket medical expenses that exceed 20% of the household budget.⁸ For these reasons, public pressure for providers to reduce the cost of care seems likely to persist.

Generally, the high aggregate spending on health care are related to both higher costs and higher utilization of health care, in addition to population growth and aging.⁹ In addition, changes in disease prevalence and incidence appear to be reducing the overall cost of care.⁹ Some excess costs seem to be related to a greater intensity of delivery of services. For example, among the OECD countries, the United States ranks 6^th of 11 in the incidence of myocardial infarction (192 per 100,000 population per year).⁶ However, the highest number of coronary artery bypass surgeries are performed (79 per 100,000 population per year) and the second-highest number of percutaneous coronary intervention are performed (248 per 100,000 population per year) in the United States.⁶ For coronary disease in the United States, the intensity of procedures and surgery exceed the population-adjusted incidence of disease.

The greater contributor to excess spending, however, appears to be high wages and prices rather than high intensity of services. For example, specialist physicians make 5.3 times the average wage and generalist physicians make 3.6 times the average wage in the United States, ratios higher than any other OECD country.⁶ Pharmaceutical spending is about double the average in these other countries.⁶

Establishing a coherent provider organizational strategy in the setting of changing policy priorities may seem difficult. Different public priorities and approaches may shift incentives in the short and even medium term. However, in the broad setting of American health economics and policy, any long term organizational strategy seems much clearer. Given the high costs and mediocre outcomes of health care, long-term pressure and incentives to reduce costs are likely to persist and even accelerate.

In principle, American health care costs could be brought closer to the costs of other countries with either reduction in prices or reduction in utilization. Reduction in prices has conceptual problems, including reduction in the incentives to invest in research and development (pharmaceutical) and reduction in the incentives for talented individuals to pursue careers in health care (wages). Given the volatility of margins of health care provider organizations, reductions in prices could produce disruptive immediate effects in health care delivery and access.

In the setting of these drawbacks of reducing prices, provider organizations choosing to respond to the long-term rise in health care costs could shift infrastructure and patterns of care to engage in reductions in utilization through population health management. Reduction in utilization of effective services could reduce costs, but would violate the basic mission of health care providers and provider organizations to improve health. A long-term shift to population health management is the clearest and surest business response to these long-term structural challenges in American medicine. Although the short-term policies may shift, the long-term structural incentives to provide high-value health care will not.

Existing business pressures on health care providers

Responding to these long-term incentives to shift towards value-oriented care will be difficult, because of the existing financial pressures on provider organizations. We believe that decreased financial pressure on hospitals and doctors related to expansion of insurance during implementation of the Affordable Care Act (ACA) may allow more flexibility to invest in value-oriented infrastructure and programs. Furthermore, the introduction of new programs and contracts, including accountable care organizations, offer the opportunity for funds that could support infrastructure and programs that could improve value over time.

In states that expanded Medicaid programs under the ACA, hospitals had increased Medicaid revenue, decreased uncompensated care costs, and improvement in profit margins.¹⁰ Furthermore, the proportion of U.S. hospitals with negative operating and total margins have been steadily decreasing since 2000.¹¹ In 2016, the aggregate total hospital margin for community hospitals was 7.8%, higher than 4.2% in 2001.¹¹ Although hospital margins vary based on type of hospital and region¹², these results suggest that hospitals may have more financial bandwidth currently than in the past to invest in expensive infrastructure and programs than they did in previous years. In addition, features of evolving payment models, including shared savings in ACOs, may provide additional revenue to support this type of work. We believe that upfront availability of funds is critical for a transition to value-based care, because both clinical culture and infrastructure will likely take many years to develop before improvements in quality and coordination cause reductions in the growth of cost of care.

Reputational and mission-driven advantages to providers of value-oriented care

Public attention is focused on the high costs and mediocre quality of care currently delivered. As such, even without full risk incentives for all patients, programs that improve value may improve the public perception of providers and health systems. In fact, leaders of health plans and health systems cite the value of their care delivered by or coordinated by their organizations.^13,14 These type of public statements underscore the degree to which values has become part of provider reputation, even before any transition to full risk-oriented contracting. “Persisting with an outdated model ultimately may lead to unacceptably high financial and public-relations costs, as payers shift their business to higher-value competitors whose approaches to care are perceived as more responsible and sustainable.”¹⁵

Furthermore, as mission-driven organizations, hospitals, physician groups, and other providers may find that addressing the unsustainable rises in the cost of care are part of their mission to serve local communities. Health care provider organizations can function as a public trust, with community service as core elements of their missions. At the Massachusetts General Hospital, improving “the health and well-being of the diverse communities we serve” is part of the mission statement.¹⁶ At UCLA Health System, community engagement is a core part of the institutional mission.¹⁷ Many health care providers and other employees of provider organizations have chosen careers in health care because of an interest in serving communities. Inefficient and ineffective health care delivery affect not only the health of communities but also the financial welfare of communities, through costs imposed on local governments, businesses, and directly to patients. In that context, even before stronger financial incentives emerge, population health management may serve the community service mission of provider organizations.

Financial advantages to providers of value-oriented care

In addition to preparing for more financial risk, substantial financial advantages already exist for providers to pursue value in care delivery. In 2005, CMS selected 6 organizations for a 3-year demonstration project intended to incentivize better coordination of care.¹⁸ This Care Management for High Cost Beneficiaries (CMHCB) demonstration tested the hypothesis that better coordination of care could improve health outcomes and reduce costs for Medicare patients with complex medical needs.¹⁸ From this early experience, larger programs have emerged within Medicare. In particular, the Affordable Care Act of 2010 introduced Medicare accountable care organizations, and 32 providers were selected as the original Pioneer ACOs in 2011.¹⁹ Assessment on financial performance began on January 1,2012 and the program was concluded at the end of 2016, with 9 ACOs still participating.¹⁹

ACOs have become more numerous and covered more patients over time. In 2018, more than 1000 ACOs representing nearly 1500 ACO contracts exist throughout the United States.²⁰ They include both private insurance companies as well as Medicare and Medicaid. In this context, now about 40 million Americans are covered by an insurance plan attributable to an accountable care organization.²⁰

In addition, other changes in payment policy continue to shift business incentives for provider organizations. Previously, the Balanced Budget Act of 1997 established the sustainable growth rate (SGR). The SGR was a method that would restrict the total growth in the cost of health care for Medicare beneficiaries to total growth in the overall U.S. economy, as well as other factors including the number of fee-for-service Medicare beneficiaries, and changes in expenditures due to changes in laws and regulations. Health care inflation rising faster than overall inflation had the effect of repeated recommendations of cuts in physicians’ fees. Only once, however, did those actual recommendations result in a cut, in 2002.²¹ Instead, repeated threats of cuts caused planning difficulties among individual doctors and provider organizations. The SGR effectively preserved a fee-for-service backbone to Medicare payment policy, while costs continued to rise and long-term accounting for Medicare did not reflect the “doc fixes” that Congress would commonly pass to avoid SGR recommendations from coming into effect.

The SGR was repealed by the 2015 Medicare Access and CHIP Reauthorization Act (MACRA). In addition to repealing the SGR, MACRA shifted this backbone of Medicare payment to a value-oriented system. In effect, MACRA replaced a method that called for repeated cuts in physicians’ fees but retained the underlying fee-for-service system with a value-based system. In that sense, the replacement of SGR with MACRA conceptually demonstrates the business incentives for providers. Given the long-term structural issues with health care costs and the American economy, there is an inevitable tradeoff: rate reductions or a shift to value-oriented payment.

In addition to crystalizing that conceptual tradeoff, MACRA also brought to health care providers more incentives to invest in value-oriented care. Consistent with the modest early success of ACOs is the concept that infrastructure investments and clinical culture will take years to effectively transform. As such, the long term prospect of increasing value-based contractual arrangements and providers holding more risk should motivate value based case. But ACOs have already grown nationally, covering nearly 40 million patients. Furthermore, with the implementation of MACRA, the underlying structure of Medicare payment already incentivizes value-oriented care. As such, the future is not the only good business case for providers to transition. In fact, at this point, strong incentives to deliver high quality care already exist.

Summary

At first glance, business incentives for health care organizations appear complex as payment systems transition from fee-for-service to value-oriented payment. By improving the efficiency of health care through population health management, organizations can effectively pursue seemingly discrepant business incentives. At the same time, investing in new infrastructure for quality and value can help organizations both pursue their missions to improve health as well as address the important national priority of high health care costs.

Key points:

• As payments for health care transition from fee-for-service to value-based payments, health care providers have been described as operating “in two canoes.” In the fee-for-service canoe, providers have incentives to provide more frequent and more expensive services. At the same time, in the value based payment canoe, providers have incentives to reduce inappropriate and unhelpful utilization of healthcare.

• We believe that the business case to develop culture, business practice, and infrastructure for value-based care is strong for several reasons.

• These clinical examples represent straightforward ways to succeed in a “mixed-payer” environment, where population health programs coexist with programs meant to generate external referrals.

Synopsis.

American healthcare is shifting from a fixed-cost, fee-for-service payment model to “value-based” payment, in which providers including both physicians and hospitals increasingly face incentives to both reduce the total cost of care and meet specific quality benchmarks. Leaders of organizations that pay for healthcare, including Medicare, state Medicaid programs, private insurance companies, and employers have catalyzed this shift in response to substantial increases in health care costs as well as generally mediocre health outcomes compared to other countries. Here, we make the case that although the pace and details of such payment reforms are uncertain, these underlying structural economic challenges make a transition to some sort of value-based care inevitable. Furthermore, the infrastructure and programs for value-based care will take years to develop. As such, providers have strong incentives to change organizational culture and structure in ways that prepare for value-based care. In this way, both doctors and hospitals can also contribute to solutions to a critical national challenge in improving value for American patients.