Making Oil and Water Work: keys to physician alignment

Fee for service medicine is headed the way of the Dodo bird. Extinction.  Regardless of what model will take its place we can be certain that it will be based on incentives for lowering cost and increasing quality.  These goals can only be reached with the committed support of physicians and the open cooperation of hospitals and related agencies, such as home care.  Intellectually this is easy to understand, realistically it is difficult to accomplish.  Hospitals and physicians need to move past the issues that have divided them and create a new environment where each can benefit from these new incentives.


Some History


In the Time Before, the distant past, life was good.  Hospitals were paid based on the cost of care and physicians on their charges.  Then things changed.  Hospitals were paid on fixed amounts tied to days or diagnoses and physicians on national or regional fee schedules, regardless of what they charged.  Hospitals needed to control costs and physicians needed to do more to maintain income expectations.  These goals were often at odds.


Physicians looked at hospitals as the bank that could make up their revenue deficits through call pay, directorships, and some creative cost supports.  Unfortunately the government took a dim view of some of these arrangements.  Hospitals began to think of their physicians as having unrealistic expectations.  The relationship showed the strain of divergent expectations.  Physicians and hospitals were left to struggle with their challenges alone and collaboration was rare.  Hospitals responded by aggressively increasing the number of employed physicians, thinking this was an easy way to control behavior, and they were surprised when losses per physician approached or exceeded $200,000 per year. Physicians saw employment as way to achieve attractive incomes with minimal risk.  Again, these were not compatible goals. Then things changed again.


Today’s Challenges


We, as an economy, can no longer support the cost of the care that we demand.  Medicare and Medicaid are not sustainable at current levels and employers cannot shift additional insurance costs to employees.  Attempts at cost control, such as preauthorization and utilization review, have failed because of the difficulty in second guessing care decisions.  This meant that the providers of care needed to have more incentives to control what is delivered.  While this could be called rationing the politically expedient term is value.  This also meant that the quality of care needed to be monitored and best-practices needed to be adopted.


Success under this new value paradigm demands that hospitals and physicians create a meaningful and progressive dialogue.  This culture change is a huge challenge.  This dialogue, and the resulting actions, is called alignment.  It matters not if physicians are employed or private.  The goal of alignment is to leverage the knowledge and skills of the physicians to streamline the care process and to monitor and improve the quality of that process.  The hospital contribution typically is the capital needed to improve the data environment, fund the collaborative dialogue, and work with payers to create meaningful financial incentives.


Matching Alignment Models To Markets


Not every organization needs to be, or should be, part of an Accountable Care Organization.  Understanding what care model is right for the marketplace is key to developing a realistic, and financially rewarding, approach to managing patients and assuring quality.  Moving from volume to value is not a single step process. Deciding to pursue population management does not mean that the necessary resources are in place or that the medical community has the knowledge needed to achieve success.  A phased approach, while less dramatic, may offer a better chance of achieving the goal.


            Step 1-Educate


Hospital leadership is typically more aware of the need for value-based care models and the financial foundations for adopting them.  Physicians are busy in their volume world with only limited exposure to the new initiatives.  Taking the time to provide the background related to the move to value and the various care models (case pricing, gain share, population management, etc.) is key to having physicians engaged as partners in the value process.


Step 2- Evaluate


Physician readiness, data availability, service area demographics, and financial resources are keys to developing a viable care model.  Developing an inventory of foundational elements is critical to future success.  Issues such as service line dominance, DRG cost concerns, availability of ancillary services, and current outcomes compared to best practices are also key data points.


Step 3- Identify


Picking the right value model is a critical decision.  Smaller hospitals or those with modest regional populations might target cost and quality management of certain service lines or DRGs.  Hospitals in a more competitive market might adopt gain share or co-management models to create dominant service lines.  Major medical centers or integrated delivery systems could explore the more complex models such as case pricing or population management.  Payer incentives should also be considered.  There might be support for medical homes or rewards for improving HCAP scores, reducing readmissions, or other more focused opportunities that could be pursued.


Step 4- Implement


The single most important goal in the development of any value model is success.  Consideration should be given to establishing a modest first step so that the reinforcement that results from achieving that goal can serve as the foundation for more aggressive steps to follow.  Finding the thought leaders in the physician community is a critical first step to establishing a meaningful and focused dialogue.  Understand that these leaders may not be part of the current formal governance structure.


The Challenge


The organizations that are leading the way in developing care management models have had decades of experience in creating the culture of physician/hospital collaboration.  Creating a similar culture will take more time and more effort than many expect.  The worst possible outcome is abandoning the process.  Hospital leadership and physicians (employed or community) need to be committed to the process, regardless of how difficult.  Reliving past wrongs must be avoided.


While fee for service may be destined to join the Dodo physicians and hospitals have the opportunity to avoid the same fate and, together, create a care model that achieves quality outcomes at a cost that can be sustained.  It’s time to get started.


What's Ahead for Healthcare?

Many people within the industry are focused on the potential outcomes of the political battle related to the Affordable Care Act. While it remains unclear what upcoming elections might change, if anything, the underlying reality is that the way healthcare is delivered and funded will be different in the years to come regardless of the fate of the reform law. Hospital and physician leaders should focus on the knowns, rather than the unknowns, and begin to position themselves for the future.


What are the key changes that we can anticipate and what should we do to prepare?


Volume to Value


It is entirely likely that you have heard this phrase more times than you would like, but it represents a fundamental shift in how care is reimbursed. The reason for this shift is the need to reduce total spending, both government and commercial, for care but, at the same time, ensure quality of the care doesn't suffer. Essentially we need to eliminate duplicative and unnecessary services and monitor what remains. If the total dollars available are reduced who will feel the most pain? Hospitals. CMS reports that, in 2012, total healthcare expenditures were $2.8 trillion and hospital care represented more than 30 percent of that. As the most expensive component of the industry hospital care also represents the most lucrative target for savings.


Site of Service


This is really a component of the volume to value shift but the importance justifies a separate discussion. Commercial carriers are already directing patients away from hospital-based services and toward freestanding diagnostic facilities. The Medicare Policy Advisory Commission (MedPAC) has recommended the elimination of the differential cost incentives paid to hospitals for hospital-based services such as high-end imaging, infusion, and other services. The ability for hospitals to gain more revenue than is available to physicians and others who provide similar care is part of the justification for employed physician salaries, especially in cardiology, oncology, and orthopedics. If the revenue for related ancillary services declines what happens to physician compensation?


Revenue Growth


The days of negotiating for better reimbursement from insurance plans are clearly over. The best that can be expected is that reductions will be avoided. Revenue growth will come from incentives tied to outcomes, patient satisfaction, and cost reductions. The do-more / make-more mentality will need to change. Regardless of how quickly this shift occurs in various markets is somewhat irrelevant. Providers should aggressively look at the cost of the services they provide, identify ways to redesign the care process and reduce costs, and aggressively adopt best practices and outcomes monitoring as preparation.


Physician Alignment


Simple phrase; difficult process. Physicians are key to bending the cost curve and improving care outcomes. Without active and progressive physician leadership prospering in a value environment is a dream. The difficult question is how to engage physicians in the process and assure that, once they are engaged, that their efforts are quickly translated to care redesign. Hospitals need to reduce costs, move patients through the process more efficiently, and assure that care is delivered in the appropriate settings. Expecting that physicians will suddenly change practice patterns that have proved successful for decades because it will benefit the hospital is naïve. Physicians need to be compensated for their time and efforts and the success of the outcome needs to be shared. Creating this model is complex and, if not crafted carefully, can result in legal and regulatory issues.


In a value-based care world, payments will be tied to episodes of care. This means that those dollars will need to be divided among all that participate in that care. Payers won't dictate who gets what so those difficult negotiations need to occur before the sift takes place.


There is no future scenario that doesn't require a close hospital-physician partnership. The time and dollars invested in beginning this journey to collaboration is perhaps the best investment opportunity.




It is highly likely that not everyone will survive the shift in care and payment models. If the reimbursement field is leveled between hospitals and their competitors, who will be able to create the most attractive margin? If hospitals continue to expand their employed physicians and control referrals what happens to independent providers, even if they are low cost? If patients are responsible for a significant portion of their care cost will they become informed shoppers much as they are in the retail environment and seek out the best deals? If satisfaction and quality metrics are readily available to payers and patients will they avoid those providers with lower scores? These are critical questions that should be addressed before spending time on potentially distracting projects.


Once the shift to value occurs in a market it is too late to begin to plan on how to respond. More aggressive competitors will already have plans in place and will have begun to benefit financially. This does not mean that everyone needs to plan on building an accountable care organization (ACO). This is one of those things that could easily go away. CMS is continually introducing care models in an attempt to see what works and what doesn't. Don't focus on the vehicle, focus on the destination.


Physicians and hospitals both need to begin to prepare for the future. They don't need to wait on each other, but discussing and planning jointly is an excellent first step. Taking the time to gather data, educate colleagues, and identify points of strength and weakness will pay dividends as change continues.


Why can't you reduce losses from physician practices? Culture

For nearly 20 years we have been helping health systems improve the financial performance of their employed physician practices.  Sometimes the results of the effort are dramatic and, at times, not so much.  What makes the difference? Culture.


Changing the culture of an organization is much like turning a tanker.  The process takes great effort and is slow but the goal is reached.  Physician networks lose money because the business model is flawed.  Unless that model is changed the results will remain the same.  One CEO, faced with losses that exceeded $9 million per year set a goal of a $3 million improvement.  Presented with an opportunity to build the bottom line by more than $6 million he decided to do nothing because the “barn wasn’t burning” yet.  Another client with an $85 million annual loss was hesitant to close unproductive practices and streamline the administrative structure.  The end result was a $10 million improvement but it could have been dramatically higher.


All physician networks have a strategic value.  Often that strategy requires that a subsidy be provided but many practices exist because the community needs the resource and these should operate at or near break-even.  Losses are tied to a small list of causes: 1) staffing, 2) inefficient practice size, 3) revenue cycle, and 4) physician compensation.  Unless you are willing to address all of these in a committed fashion your performance improvement will be modest at best, even if your barn IS burning.


Want to learn more about our approach to performance improvement? Contact Greg Mertz, Managing Director, at


Is there really value in value-based care?

Last month we explored things that needed to be addressed before you went down the pathway to value. This post suggests that there is also an economic consideration. 

Regardless of what it is called; accountable care, population health, shared savings, the goal of value-based care is to lower the total spend on care while maintaining or improving quality.  Typically there is a financial incentive for providers to meet that economic goal.  The basic question however is tied to that economic incentive.  If the upside potential enough to overcome the investment needed to successfully manage care?


Studies have shown that nearly 50% of the cost of care is driven by 5% of the population.  This is true even in commercially insured populations.  This means that, in a population of 10,000, the savings derived from better management of 500 people will need to generate an incentive payment large enough to help offset the needed investment.  Do you know the current level of spending on this group?  Do you have a firm idea of the achievable goal through better patient management?  Is your share of that cost reduction going to help pay for the enhanced data systems, care management staff and the potential loss of productivity as staff and providers struggle with a new approach to care?  Maybe not.


On a smaller scale Patient Centered Medical Homes (PCMH), while clearly enhancing the management of chronic patients, may not generate real dollar savings for years while the cost of care coordination may exceed any patient management fees available.  Filling gaps in care will ultimately lead to better health for the diabetic or hypertensive patient but over what time?


 Perhaps there are quicker “wins” that might be more attractive.  Reducing the cost of joint replacements, or cardiac care, or other resource-intensive procedures can help widen the margin on that care.  Could this be an early focus?


We suggest that having a short term goal, in addition to a more global strategy, makes financial sense.  We are all entering a new era of care models and we need to learn the rules before we become adept at the game.

As always, if you would like to learn more about our experience in this area or to discuss your situation please email Greg Mertz, Managing Director, at

Does Population Health Make Sense (for you)?

The interest around accountable care and population health management continues to grow and an increasing number of hospital and physician organizations are investing significant financial resources in developing the underlying capabilities.  But does that investment really make sense?

Many questions should be answered before updating data systems, aligning physicians, and pursing Medicare or commercial opportunities.  Let’s consider a few:

·         Is the proposed population to be managed large enough and the potential savings significant enough to cover your costs?  The bulk of “savings’ are tied to about 5% of the target population.  This means in a 5,000 member group about 250 folks need to avoid costs to a level that meet or exceed your expenses.

·         Are your physicians philosophically aligned with you in believing that the undertaking is worth the efforts and that the rewards are attainable?

·         Are the data available from you proposed partner at a level of detail that will allow you to target that 5%?

·         Are their alternative approaches to “VALUE”, such as gain sharing, medical homes, or case pricing that have a better chance of success?  Should you start small and grow as you learn to manage care?

Every market is different and the path ahead is far harder and more expensive than you might think.  Early experience in the ACO environment is not a compelling argument for diving into the water without careful thought; unless you simply view the exercise as a learning experience.

Want to talk about what we have seen work (and not work)? Email Greg Mertz, Managing Director, at and let him share our experiences.


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