Accountable care organizations and bundled payments

Integrated healthcare isn't a monolithic model. Variations are sprouting up, with many new models falling under the general framework of "accountable care." Within an accountable care organization is a group of healthcare providers who deliver coordinated care and whose payment is tied to achieving specific quality-care metrics while also demonstrating cost savings.

Such arrangements generally include some type of gain-sharing incentive model, and often will feature bundled payments contracts. In a traditional FFS model, a joint replacement might call for individual claims and payments related to a host of services (and providers), ranging from primary physician and specialty physician care, to outpatient and inpatient hospital care, long-term acute hospital care, inpatient rehabilitation care, skilled nursing care and potentially others. In the bundled payments model, however, payments can all be grouped into single acute care or post-acute care episodes, providing new opportunities for cost reduction and effective outcomes.

Through the Centers for Medicare & Medicaid Services (CMS), the federal government has been a key driver of both accountable care organizations and bundled payments. The Affordable Care Act created multiple programs enabling the CMS to allow providers to participate in such contractual arrangements, most notably the Medicare Shared Savings UC program. In this program, hospitals with more than 5,000 Medicare beneficiaries can enter into an agreement with the CMS and annually receive incentive payments if they can demonstrate they are reducing the overall total cost of care for those patients. The CMS has approved more than 250 accountable care organizations for participation in the Medicare Shared Savings Program.

Such government activity has spawned similar programs in the private insurance market. New contractual arrangements between large integrated healthcare systems and commercial insurers enable the former to start delivering accountable care and receiving outcomes-based incentive payments, in addition to traditional claims payments. But they must first demonstrate success in meeting quality metrics around such standards as number of readmissions.

Along with introducing accountable care and bundled payments, integrated healthcare is responsible for greater collaboration between payers and providers. In fact, marketplace developments have included payers buying providers and, conversely, providers starting health plans. In addition, narrow networks and data collaboration are bringing payers and providers close together with the shared goal of decreasing costs and improving outcomes.

Financial impact

Executives at healthcare providers are painfully aware that, despite the fact that their revenues have typically been rising, the cost of providing healthcare services has continued to soar, resulting in pressure on their margins. With the advent of integrated healthcare, providers seem to have acknowledged the unsustainability of FFS and have shown a willingness to accept lower revenues if cost-cutting through outcomes-based payment can help produce healthier margins. However, these changes also bring more risk for the provider as they will be burdened with:

•   The task of reducing costs to achieve higher margins

•   The uncertainty of patient outcomes that affect revenues

•   Reduced Medicare/Medicaid reimbursement rates and new penalties

•   The increased consumer payment responsibility and potential for corresponding bad debt

Likewise, payers will share some of this risk as they try to achieve savings and better outcomes. Consumers too will be faced with more decision-making risk as they will now have more opportunity to hold the line on their out-of-pocket costs.

Ramifications for business operations

For financial managers at payers and providers, it's important not to overlook how these new care delivery and contracting models will impact business operations and transaction flows.

Payers and providers alike need to be sorting through this aspect of integrated healthcare and anticipate that it will introduce new variability into a process that is built around FFS today.

As just one example of how things will change under integrated healthcare, consider an arrangement in which a large integrated healthcare system receives a bundled payment for a joint replacement. Typically, there will be third-party providers who played a role in the surgery. While they may be affiliated with the healthcare system, they may not be part of it. As a result of the lump-sum payment, that specialty provider will need to be reimbursed by the healthcare system rather than the patient's health plan.

It's a simple example but one with major implications. Ultimately, many large integrated healthcare providers will themselves have to act like payers, with specialty physicians looking to them for payment rather than seeking a claim reimbursement from a health plan. In the future, as new models take hold, a specialty care physician like an anesthesiologist may have to work with the integrated healthcare system, or the coordinated care network, depending on the model, to determine their share of the bundled payment and how they will be reimbursed.

Initial considerations

Once these integrated healthcare models gain traction, there will be a domino effect when it comes to implications for back-office operations. Thus, payers and providers need to determine what will trigger non-FFS payments that are part of the outcomes-based payment movement, such as an incentive payment, a risk-sharing payment or any kind of quality outcome retrospective reimbursement. They will also need to determine who will manage these payments, how they will be calculated, and who will be doing the calculations.

Retooling back-office support

Before implementing any of these new models where providers will need to be demonstrating cost savings and quality outcomes to earn incentive payments, providers and payers need to consider how the back-end work associated with integrated healthcare will get done. Unfortunately, few organizations today are executing these business-office functions in significant volume and, until new solutions are developed, this work will be manual, inefficient and burdensome from an administrative perspective. The sooner that providers and payers can dive into these issues, the sooner they will be able to work with their partners, such as IT systems providers, banks and other vendors, to gain an understanding of how these new healthcare delivery models will change the back-end business office function and how the services they use today will need to evolve.

It is important to avoid implementing these new care models and contract arrangements before the proper platform to accommodate the payments is in place. If outcomes-based payments ramp up quickly, and the industry doesn't develop back-office support and systems to efficiently manage these new payment flows, integrated healthcare won't achieve its goals. While it may drive down the cost of delivering care, it could simultaneously drive up administrative costs.

¹ The Trillion Dollar Prize: Using outcomes-based payment to address the US healthcare financing crisis, McKinsey & Company, February 2013.

² The Trillion Dollar Prize, McKinsey & Company.

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