Health System Renaissance:
The Impact of Reform on the
AMC Business Model
© 2011 UHC. All rights reserved.
© 2011 UHC. All rights reserved.
2
What’s On The Horizon
• Beginning in April 2012, launches accountable care
organizations (ACOs) as part of the Medicare Shared Savings
program
• Beginning in October 2012, implements a budget-neutral
hospital value-based purchasing (VBP) program to withhold
payments unless quality scores exceed benchmarks
• Also in October 2012, establishes hospital readmission policy
to reduce payments for “excess” readmissions
• Beginning in January 2013, establishes bundled payment pilots
to include inpatient, physician, and post-acute care services
• Beginning in October 2014, reduces hospital payments if rate
of hospital-acquired conditions exceeds threshold
© 2011 UHC. All rights reserved.
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ACOs 101
• Not a new idea…organized delivery systems have existed for
years (IDNs, IPAs, PHOs, etc.)
• Per CMS, ACOs are defined as “groups of doctors, hospitals,
and other health care providers, who come together voluntarily
to give coordinated high quality care to the Medicare patients
they serve”
• Goal is to generate savings by reducing costs, unnecessary
care, duplicative services and medical errors
• Savings to Medicare = revenue reduction for providers
• Managing utilization, meeting quality targets, reducing direct
costs and minimizing ACO’s administrative expenses will be
necessary for providers to share in savings
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ACOs: Risky Business
•
Shared savings concept includes bilateral risk option
•
Risk-free corridor too narrow for all but largest ACOs
– At 5,000 lives threshold, unwarranted bonuses and unearned
penalties more likely than not
– 20% of ACOs with 10,000 attributed lives would incur penalties
averaging $1.5 million in any year during which they had no impact
on population costs whatsoever
– After 3 years, the worst 20% of ACOs with 25,000 attributed lives
would absorb penalties averaging $3.2 million despite having no
impact on population costs
– After 3 years, the worst 10% of ACOs with 50,000 attributed lives
would see penalties averaging $5.2 million if they had no impact on
population costs
•
To virtually eliminate the probability of an undeserved penalty, an ACO
needs 100,000 attributed lives
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CMS Incentives More Stick Than Carrot
Value-Based Purchasing
• AMCs less likely to fall into bottom quartile of nation in core measures…also
less likely to be among top quartile, but best performing AMCs are
• One in three AMCs in bottom quartile for patient satisfaction – fewer than
10% make top quartile – two-thirds of AMCs below national median
• Up to 2% of Medicare revenue at risk for underperformers
Readmissions
• Neither superior nor poor performance systemic in readmissions…not
uncommon for both extremes to coexist within an AMC
• Up to 3% of Medicare revenue at risk for hospitals with higher than
expected readmissions
Hospital-acquired conditions
• HACs shift from high revenue outliers to financial risk – worst performers
will lose 1% of total Medicare revenue
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How Much Is At Risk?
Annual Medicare revenue1 forfeited by AMCs who fail to meet
quality and performance targets
AMCs with typical
Medicare volume
AMCs with large
Medicare volume
VBP
(up to 2%)
$1.7 million
$3.5 million
Readmissions
(up to 3%)
$2.6 million
$5.3 million
HACs (1%)
$0.8 million
$1.8 million
Total (6%)
$5.1 million
$10.6 million
Beginning in FY2013, AMCs not meeting national quality benchmarks may see
Medicare revenue decline by $5-10 million
1
Excludes IME, DSH, and outlier payments
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The AMC Business Model –
Core Vs. Commodity
Inpatient and Outpatient Net Income by Patient Percentiles
Top 5%
$205 million
Core
Bottom 5%
<$154 million>
Commodity
Top 25%
$263 million
Middle 50%
$900,000
Bottom 25%
<$207 million>
Source: UHC Midwestern Member, January 2010 – December 2010
© 2011 UHC. All rights reserved.
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Payment Reform Has Commodities In
Cross Hairs
Percentage of total Medicare spending on episodes
14.0%
Ischemic Heart Disease
CHF
Hypertension
4.3%
4.0%
CVA
3.6%
COPD
3.4%
Diabetes
3.2%
Joint Degeneration - Knee, Lower Leg
3.1%
Joint Degeneration - Back
3.0%
Chronic Renal Failure
2.8%
AMC Core Cases
0.01 - 0.5%
Bundled pricing focused on 20 commodity episodes addresses 60% of CMS
spending…over 100 times the amount spent on AMC core business
Source: MedPac, June 2010 Data Book
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Health Reform: Short Term
Imperatives
Payment reform creates two short-term imperatives…
→ Reduce costs to restore margins as unit prices fall
→ Grow core to maintain ability to subsidize commodities
…long-term inflation lag may require “game changers”
– Health system scale to dilute AMC fixed costs and
rationalize commodities/diversify margins
– Episode management to re-engineer care processes,
extend cost reduction beneath existing floors
© 2011 UHC. All rights reserved.
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High Total Costs… Variable Costs Crucial
Under Bundled Payments or ACO Strategy
Adjusted cost/discharge1
• Total cost/discharge (adj.) 16%
above UHC median
• Labor cost/discharge (adj.) 12%
above UHC median
• Adjusted total cost/discharge
increased only 2% from 2010
to 2011
UHC rank in
2011
57/73
54/73
1 Total
expense/discharge adjusted by CMI and wage index
Labor expense/discharge adjusted by CMI and wage index
Source: UHC Operational Data Base (Reporting periods for the 12 months ending September of the stated year)
© 2011 UHC. All rights reserved.
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Core Growth Levers
• Core diagnoses – 70% of insured patients with these diagnoses are
consistently in financial core
Less prevalent cancers (brain,
head/neck, GI, liver, pancreas,
myeloma, leukemia)
Cerebrovascular conditions
(intracranial/subarachnoid
hemorrhages)
Acute kidney failure
Digestive diseases (chronic liver
disease, colitis, enteritis)
Endocarditis (valves)
Trauma
• Complex care – 40% of cases with charges ≥ 3x AMC’s average are
in financial core
• Patients with severity of illness levels 3 or 4 are nearly 3 times as
likely to be in core vs. patients in SOI levels 1 or 2
• Transfer cases twice as likely as non-transfers to be in core
• Patients from ≥ 50 miles away are twice as likely to be in financial
core as patients from ≤ 10 miles away
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How We Compare
Percent of Inpatient Admissions
(Urban AMCs)
Source: UHC Clinical Data Base, January 2010 – December 2010
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Reducing Readmissions Creates
Room At The Inn
Beds consistently filled by related readmissions
Median = 26 beds
University HospitalUMDNJ
(5.7% of capacity)
AMCs
Related readmissions consume 4% to 8% of the typical AMC’s
inpatient capacity…median = 5.5%
Source: UHC Clinical Data Base Q3 2010 – Q2 2011
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Readmits Look More Like Commodity
Business
Operating margin per discharge
Source: UHC Clinical Data Base; UHC Financial Data Base
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May Still Be Work To Do To Succeed
Under VBP
VBP snapshot as of October 2009 – September 2010
95%
52%
44%
36%
29%
24%
32%
23%
7%
UHC Members
24%
23%
4%
National Hospital
Compare
• Core Measures and HCAHPS
focus in year 1…outcome and
efficiency measures to be added
in future years
• Select opportunities for
improvement in Core Measures
• Like other AMCs, efforts should
continue to improve patient
experience
• UMDNJ ranks at UHC median but
trails national median at last
snapshot
• A portion of VBP funding may be
at risk
Highest observed
75th percentile
Median
UMDNJ
25th percentile
Source: UHC Clinical Data Base; Hospital Compare
Lowest observed
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Overall, Strong Coding And Documentation…
Select Opportunities for Improvement
 Above UHC median in 9 of 15 service lines for capturing any
comorbidities/complications
• 2 service lines in the lowest UHC quartile merit attention: cardiac
surgery (relatively low patient volume) and trauma
 9 of 15 service lines near or above UHC median in capturing
major comorbidities/complications
• 3 service lines in the lowest UHC quartile, each with relatively low
patient volumes, merit attention: medical oncology, surgical oncology
and urology
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Performance Recap
• Reducing costs increasingly important as any new fixed costs
come on line and reimbursement methodologies change
• Some core growth opportunity, particularly in region outside
50 miles and transfer cases
• Continuous attention on Core Measures and HCAHPS
necessary to ensure forward progress – reduces risk for VBP
penalty
• Performance in mortality continuing to improve – strong
coding/documentation recognize severity
© 2011 UHC. All rights reserved.
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Health Reform: Game Changers
Payment reform creates two short-term imperatives…
→ Reduce costs to restore margins as unit prices fall
→ Grow core to maintain ability to subsidize commodities
…long-term inflation lag may require “game changers”
– Health system scale to dilute AMC fixed costs and
rationalize commodities/diversify margins
– Episode management to re-engineer care processes,
extend cost reduction beneath existing floors
© 2011 UHC. All rights reserved.
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Next Stop: Health Systems
UHC member survey:
“We are (or will be) part of a multi-hospital system”
60% are part of
systems today
Today
88% of AMCs in systems today are the dominant component of their
systems…of members expecting to be in systems 5 years from now, 91%
say they will be the dominant component
© 2011 UHC. All rights reserved.
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Moving Commodities Creates Scale
• AMC helps community build/strengthen complementary clinical
programs, lower acuity cases migrate to community hospital
partners
• Relocated commodities fill vacant community capacity –
contribution margin falls to bottom line
• Higher commodity margins due to lower variable costs in
community
• Vacated AMC capacity backfills with higher acuity, higher margin
cases if access open and actively managed
• Overall increase in volume dilutes fixed costs if AMC part of system
Diverting commodity business to a community hospital partner creates capacity
at AMC that fills with marginally better business…relocated commodities
profitable at lower community costs
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Systems, Not Networks, This Time
Around
• 1990s “integrated delivery networks” formed to aggregate
size, develop bargaining clout with insurers – efficiency and
genuine care coordination largely unmet promises
• Payment reforms will hammer down price and narrow
loopholes for profiting from waste
• Health systems must do what networks didn’t
– Evolve central nervous system
– Standardize care processes efficiently
– Rationalize distribution of services
– Align physicians and hospitals
– Create sustainable incentives/compensation
© 2011 UHC. All rights reserved.
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A Measured View Of ACOs
• Health system development intuitively suggests readiness for
population risk…a careful examination of random claims fluctuation
urges caution
• Small ACOs (5,000 lives) look a lot like roulette – roughly equal
chance of random gain or loss
• Moderately-sized ACOs (10,000 to 25,000 lives) face annual risk of
$2 million to $6 million unwarranted penalty
• Health system development addresses market consolidation
without assuming population risk
• AMCs will always depend on broader referral bases than own ACOs
can ever provide
• Until reliably capable of reducing population cost, AMCs should
defer risk-sharing or limit participation to a level comfortable
absorbing unearned financial penalties should they occur
© 2011 UHC. All rights reserved.
23
Health Reform: Game Changers
Payment reform creates two short-term imperatives…
→ Reduce costs to restore margins as unit prices fall
→ Grow core to maintain ability to subsidize commodities
…long-term inflation lag may require “game changers”
– Health system scale to dilute AMC fixed costs and
rationalize commodities/diversify margins
– Episode management to re-engineer care processes,
extend cost reduction beneath existing floors
© 2011 UHC. All rights reserved.
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Bundled Pricing Inverts Profitability
Average revenue and cost per knee replacement
(Inpatient and Outpatient Hospital and Physician)
Traditional fee-for-service
Bundled pricing
Bundled pricing reallocates revenue away from adverse outcomes toward
“typical” cases…fundamentally changes profitability of complications
Note: Assumes bundled price reflects weighted average (complicated and uncomplicated) based on median complication rates
Source: UHC Clinical Data Base; UHC-AAMC Faculty Practice Solutions Center
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Things To Keep In Mind Under
Bundled Payments
• Wide cost variation among AMC’s own cases – top decile 2 to
3 times AMC’s median
• Community will cherry pick low cost cases, turf high cost
outliers to AMC
• Avoid “one size” pricing – segment cases by cost
• No way to avoid revenue reduction – CMS has to save money
• Mitigating losses will require case management – reducing
variation in supply/Rx cost, eliminating avoidable
complications
• Shared savings outside bundles (e.g., related readmissions)
can restore revenue
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Meeting The Unmet Promise
 Balance economic value with ideology – “why” is as important
as “whether” to build/expand a system
 Optimize use of capacity – until core growth exhausted, move
commodity business to community partners
 Embrace the national imperative for higher efficiency and value
 Leverage innate AMC advantages to realize clinical integration
 Experiment with care coordination to drive episode costs below
currently practical floors
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© 2011 UHC. All rights reserved.
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