Your customers are playing it. You should too.
Hospitals and medical practices were introduced to risk-based contracting decades ago, with the advent of health insurance. In 1982, Medicare raised the bar for hospitals by introducing prospective payment in the form of DRGs, or diagnosis-related groups. Since then, the stakes have kept rising. Today, Medicare, Medicaid and private insurers are pushing ahead with value-based contracts, putting pressure on providers to offer high-quality care cost-effectively. As providers assume more risk, they need their suppliers to help.
Todd Nelson, FHFMA, MBA, director of partner relationships and chief partnership executive with the Healthcare Financial Management Association, addressed the impact of value-based contracting on healthcare providers and their suppliers at the 2021 IMDA/HIRA annual conference in September. Repertoire followed up by asking Nelson about risk and what it means for healthcare providers and suppliers. Nelson served as vice president and CFO of a rural Midwest hospital for 15 years prior to joining HFMA.
Repertoire: It seems that hospitals were forced to assume risk when the feds introduced DRGs in 1982. Would you agree? Why or why not?
Todd Nelson: Hospitals did assume some risk when DRGs were introduced, but they quickly learned the levers to pull to mitigate that risk. Those levers were mostly financial (controlling labor and supply cost, length of stay, etc.) and they were able to recover some through various payment mechanisms for higher cost/LOS [length-of-stay] cases. Additionally, not everything was included in the DRG, so hospitals could make it up in other volume (i.e., fee-based) revenue sources.
Rep: Haven’t hospitals and health systems managed risk since they began contracting with insurance companies? If so, what’s different today?
Nelson: This difference is really managing the clinical risk of caring for a population. When working with an insurance company, the risk is negotiating a payment rate that is too low. The insurance company is taking the risk for greater volumes of patients or procedures. In the new models of value-based payment, the hospital is taking the risk for the clinical side of things as well as cost. It’s an entirely different set of skills, actuarially – more like those of an insurance company.
Rep: How successful are hospitals and health systems in terms of managing risk today? What mistakes have they made? And where have they achieved success?
Nelson: As noted previously, hospitals and health systems have been managing various types of risk for decades. The key here is that the stakes are much higher when managing all the financial and clinical risk on behalf of the patients they serve. Additionally, payment incentives are not always aligned. For example, the financial incentive for the hospital may be to reduce the number of visits by keeping the patient healthy and out of the hospital, but the physician may still be paid on a fee-for-service model, which encourages more visits.
Rep: Do you believe there are limits to how much of a health system’s revenues can come from risk-based contracts? If so, what are those limits?
Nelson: I am not sure there is a hard and fast rule, or amount of revenue that can come from risk-based contracts. Although organizations must have a good base of financial reserves to meet their payment obligations – and those are higher the more risk contracts they take on – it really depends on each individual organization as to what they can handle.
Rep: Do hospitals and health systems evaluate medical technology differently today than they did, say, 10 or 15 years ago, because of risk-based contracting? If so, how? And why?
Nelson: Hospitals and health systems are continuing to evolve their evaluation approach over time as the demand for resources continues. As organizations accept risk and value-based agreements, the evaluation process considers more than just the “price at the pump.” It takes into account other factors such as resource reduction down the line, lower length of stay, length of recovery, medication or supply cost changes, and impact on clinician time/satisfaction.
Rep: How should distributors and manufacturers of new technologies adjust their sales and marketing strategies accordingly?
Nelson: Don’t get me wrong: Initial cost is still important, and that is the easier story for the sales rep to tell. A more difficult strategy is telling the story of how your technology impacts the other intangibles (e.g., satisfaction, outcomes, community or environmental impact), all of which are becoming more prevalent in providers’ decision-making process. Even though those areas are more difficult to measure and explain, they should be included in their sales/marketing strategies – as they get to the overall value proposition of the technology.
Rep: Any other messages for dealers about their role in working with health systems as they operate in a risk-based environment?
Nelson: I think the best advice I can give is to listen to your customers and understand their pain points and the problems they are trying to solve on behalf of their patients and communities they serve. If you can understand those, you can find ways to work with them to help improve the overall health of the community – a true win for everyone.