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Transform Care May 31, 2016

Path to Value: A Financial FAQ for Health System CFOs

Partner, Health and Life Sciences, Oliver Wyman
Key Takeaway
#Healthcare systems can influence patient spend thru better access, panel growth, continuity of care

According to a recent survey by the American College of Healthcare Executives, health system executives rank financial challenges as the top issue confronting today’s health systems. And among financial challenges, the transition from volume- to value-based reimbursement is the leading concern. Most systems recognize the inevitability of value-based reimbursement, but struggle with understanding the transition and the investments that it requires. As a result, many are moving very cautiously into value-based reimbursements and “transformation.” But that is a short-term play with little long-term gain, says Bryce Bach, a principal in Oliver Wyman’s Health & Life Sciences practice. Here, Bach answers some of the most frequently asked – and most concerning – financial questions that come up during the shift to value:

Q: Won’t juggling cost cutting and the shift to value at the same time overwhelm our organization?

A: Many systems have already clipped the low-hanging fruit in cost reduction, meaning achieving the next wave of cost-structure improvement requires embedding lean operations throughout the organization. That requires a substantial amount of management focus, and so does the shift to value. Some CFOs worry that tackling cost cutting and the transition to value at the same time will overwhelm the organization.

The reality is that most organizations have no choice but to pursue ambitious programs around both lean operations and value transformation. The key to success is recognizing that the two are interlinked, and organizations must bring an integrated message and transformation agenda to the front lines.

That agenda needs to meter the level of change in any given unit to avoid overextending, and that will lead some areas to push harder on lean, while others push harder on value. For example, in many provider organizations, the facilities side should apply more early effort to lean-driven cost cutting and revenue generation, while the ambulatory side will apply more emphasis on driving longitudinal value for consumers.

Whatever balance an organization strikes, each program should be carried out with clear connections to the other to ensure harmonization and to avoid momentum-killing rework.

Q: I don’t want to be too conservative in shifting my contracts to fee-for-value, but isn’t going “all-in” a pretty reckless approach?

A: No organization should go all-in on risk adoption without first proving its capabilities to manage population risk. At the same time, it is very difficult to generate positive ROI on population health management investments by only dipping a toe in the risk waters via shared savings contracts, as many systems are doing.

The key is not entering risk contracts with abandon, but with intention. Becoming a value-based organization has potential for higher overall financial success and sustainability for many, but a robust plan is needed to minimize financial risk in the transition period. Move the clinical model too far ahead of risk adoption, and the system will not be sufficiently rewarded for the value it creates – most of which comes from cannibalizing its own volumes. Move the risk contracts too far ahead of the clinical model, and the system will be writing checks back to payers. Health systems can only move confidently into risk if they have a clear plan that stages the clinical transformation in tandem with the contracting models.

The key is not entering risk contracts with abandon, but with intention. A robust plan is needed to minimize financial risk in the transition period.

Q: How can we afford to take a hit on FFS revenue stream while we ramp up FFV?

A: While it’s true that population health clinical models reduce facility utilization per capita, we are seeing systems capitalize on both FFS and FFV growth opportunities to paint a path to aggregate market-share gains. Many systems underappreciate the magnitude of patient spend that they can influence through better access, panel growth, and continuity of care. Redesigning primary care teams, tightly coordinating with specialists, and integrating virtual care and convenience care, for example, all create incredible value and capacity that allow systems to reach more people and provide better care for them.

This again highlights the need for a well-articulated enterprise agenda. Many systems will face high upfront investment costs to transform to value, but there are strategies to partially or fully fund those investments in-year.

Q: Won’t transitioning to value hurt our bond rating?

A: CFOs have to take a long-term view on this one. Many systems are already facing negative financial outlooks, putting their rating at risk and creating understandable hesitancy to invest. The reality, however, is these systems’ ability to fund a transformation is deteriorating over time. If you believe you need to move to value, then you need to start building momentum earlier, when you can influence how it rolls out in your market rather than having it imposed upon you.

The upside is that bond rating agencies are increasingly appreciating the population health movement and appear more forgiving of systems that are making value-based investments. Organizations that are coming to bond rating discussions with robust stories around value transformation seem to be faring better than years past.

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