How to prepare your hospital for risk

Trustees of nonprofit health care organizations appreciate that revenue from fee-for-service reimbursement has been the basis for keeping their institutions financially sustainable over many years. Such revenue has provided capital to start new programs, build facilities, recruit physicians and maintain bond ratings.

Volume acts like a flywheel, adding financial momentum to a nonprofit organization’s mission, including uncompensated care and community benefits (e.g., free flu shots), and, for academic medical centers, support for teaching and research that so often are at the heart of trustees’ pride in their organization. There is a growing awareness, however, that reimbursing medical services under FFS may encourage sometimes unnecessary utilization and may have contributed to substantial, annual increases in the cost of health care.

When reimbursement changes from FFS to a regime involving risk, budgetary uncertainty shifts from the insurer (private or governmental) to the nonprofit health care organization. A risk contract often uses population health management approaches that reward all steps in patient care that create value — efficient, high-quality care and decreased unnecessary utilization.

For organizations dependent on FFS reimbursement for decades, creating value and decreasing utilization could create substantial financial exposure both because accepting risk may mean accepting losses if the budget is overspent and because maintaining large overhead expenses in the face of decreasing use is costly. Organizations have much more experience at growing volume than at managing risk. Simply put, accepting risk raises considerable anxiety because of unfamiliarity and financial uncertainty.

Complex choices

FFS is a powerful force that can become embedded in and drive an organization’s culture. For leaders, FFS reimbursement may have created a culture that defines metrics (volume), status (specialties that contribute to the surplus) and rewards (incentives for volume growth) and may therefore have become a major priority for strategy (e.g., investing in one specialty or service rather than another).

For physicians, FFS may sometimes encourage autonomous, siloed decision-making that maximizes what is well-reimbursed. For example, an unnecessary emergency department visit or an orthopedist using the most expensive hip implant adds costs to those who pay for care, but it may not affect the salary of a colleague and might even add to the organization's positive margin.

Trustees may become immersed in the FFS culture. Every board meeting reviews FFS metrics such as the volume of admissions, outpatient visits and ancillary services and their impact on the annual operating margin.

Many hospitals function with a burden of debt, a vulnerable credit rating and a minimal operating margin. It is understandable that trustees may have little enthusiasm for accepting more risk and investing in population health’s operating infrastructure (care coordinators, information technology systems and so forth) when success in population health management could reduce FFS revenue. Further, the revenue from volume is predictable and usually arrives within two months of service, while settlements of risk contracts often are delayed and need to be estimated for a future fiscal year.

Although focusing on FFS currently fulfills the trustee’s fiduciary responsibilities, an approach that maximizes utilization is increasingly difficult to justify as consistent with a nonprofit hospital’s mission and values or the community’s best interests. (For more on defining a broader view of fiduciary duties, see Joshua D. Margolis' “Professionalism, Fiduciary Duty, and Health-related Business Leadership” in the Journal of the American Medical Association, May 12, 2015.)

Encouraging volume results in unnecessary utilization, raises health care expenditures and has a draining effect on overall spending on social services. It is not hard to trace the consequences of rising health care costs on progressively lower budgets for education, housing or even public health. Unbridled FFS erodes other critical social supports for a community, the very people trustees are meant to serve, represent and protect.

Board leadership

Given the current dependence on FFS, it would be irresponsible for trustees to abandon it too quickly and accept dangerous levels of risk. However, there are steps board members can take to prepare for and encourage a shift to accepting risk and thereby better balance their obligation to the organization and to the broader community they represent.

Trustees should consider the cultural implications of moving from FFS to risk. FFS may have encouraged each silo of care to become autonomous and have little or no financial stake in the next component of care. However, PHM is based on a financial interdependency between all clinicians caring for the patient with a common goal of maximizing value. This interdependency has the potential to drive collaboration, such as when developing protocols and reducing clinical variation. But a risk budget can also generate a contentious struggle between physicians and hospitals if, for example, they try to maximize their share of the overall budget without regard for the other.

Trustees should routinely be aware of national trends in federal and commercial risk contracting and PHM findings so that they can put their own institution’s strategy in the context of evolving contracts and population health quality metrics. Trustees should also review how the CEO and management team are rewarded. Are the rewards largely for growth in volume or do they include lowering the cost of care, the “total medical expense,” PHM quality metrics and taking steps related to risk contracting?

There are a number of questions boards need to address as they move forward:

• Should the metrics reported at board meetings include not only volume and growth but also metrics for coordination of care, readmission rates, implementation of advance directives, avoidable admissions and bed days, medication adherence, unnecessary utilization of the emergency department, and other PHM indicators?
• Should trustees consider expanding and subsidizing services that are not part of FFS strategic volume growth (for example, mental health services, palliative care or “hospital at home”) to enable emergency department patients to seek more-appropriate sites of care?
• Should trustees encourage a higher level of investment in technologies such as tele-visits, electronic health records, home monitoring and predictive analytics that are directed to PHM?
• If they are part of a system, should trustees evaluate whether health care services are in the “right place at the right time” or whether FFS financial considerations are defining patterns of utilization?

There are a number of other considerations for a health care organization moving toward a risk-acceptance model.

If the organization self-insures its employees' health benefits, the trustees should consider encouraging risk contracting and PHM to gain experience for this population. Trustees should also look at a strategic plan of investment that supports risk contracts (such as primary care redesign, hiring care managers, embedding mental health services in primary care settings and setting up appropriate information systems) and review metrics related to implementation and performance of this plan.

Whenever possible, the board should prioritize efforts where those reimbursing care have created common ground between FFS and PHM — for example, in reducing readmissions. Trustees should review the contracting process to assess the opportunities to incentivize better quality and encourage insurers to negotiate on a PHM rather than an FFS basis.

For many high-risk, resource-intensive patients, community-based social services are critical in reducing use of the emergency department and hospital. The board should ask what collaborations are being developed with local groups to provide the needed social support.

As trustees wrestle with these decisions, they will probably see the value of PHM, but their enthusiasm could be dampened by major barriers: upfront investments, the financial consequences of lower volume, willingness to accept financial risk and a potentially resistant culture. All those who pay for care, including government and insurers as well as employers, can facilitate a prudent and viable path that encourages trustees to replace the incentives and culture of fee for service with the values of population health management.

Author’s note: The author wishes to acknowledge Drs. Tim Ferris, Donald Berwick, Tom Lee and David Blumenthal for their very helpful suggestions on drafts of this essay, and Drs. Cheagh Milford and Catherine DeAngelis for their valuable comments on its final version.

Michael Jellinek, M.D. (Michael.Jellinek@Lahey.org), is executive vice president and CEO of the Community Network at Lahey Health in Burlington, Mass.