Dawn Carter, Ascendient
After decades of unabated growth in healthcare costs, payors, consumers and the government alike are finally taking action to eliminate cost-shifting and to force providers to assume more risk. From MACRA and the lower reimbursement rates of Medicare Advantage to the growing use of freestanding sites, hospitals are facing a transformational shift in payment structures with few escape valves.
For those that actively engage these forces, it is certainly possible to thrive. The airline industry is a good example. Consider that while several major airlines declared bankruptcy since 2004, low-cost carriers have generally thrived and remained profitable in the face of rising fuel prices and increased competition. Studies have shown that low-cost carriers can achieve a total cost per unit of service that is 40 percent less than legacy carriers. These airlines have accomplished this through such tactics as standardization, different operating models, a la carte fees, and shifting tasks to passengers. While the airline industry is not identical to healthcare, there are parallels: safety is paramount, governmental regulation is pervasive, fixed costs are proportionally high, and both require a highly specialized workforce.
Like the low-cost airline carriers, we believe these forces will drive providers to fundamentally restructure costs. Here are four important changes that are putting financial pressure on providers:
The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) goes into full effect in 2019 and will move physicians toward a value-based payment system, which is expected to have a fairly immediate impact on hospitals. For example, a report published last year in Health Affairs found that hospital reimbursement from Medicare could decrease by $250 billion over the next 15 years due to MACRA.
Medicare will now base physician payments on utilization, quality and cost. The fundamental driver of these changes will be assigning patients to a primary care physician that will be paid, in part, based on the total cost of the patient’s care by specialists, hospitals and outpatient centers. When making referrals, these physicians will now also have to think about cost—whether to refer a patient to the hospital or a freestanding imaging center for a CT scan—in addition to quality and patient outcomes. For proceduralists, payment will be affected by their cost-per-case, as compared to their peers nationwide.
Insurers are also ratcheting up the pressure on providers. Some are voicing concerns to regulatory bodies that provider consolidations are not reducing costs. Many are pushing patients to utilize lower cost sites of care for things like ER, imaging and procedures.
According to Radiology Business, Anthem Blue Cross and Blue Shield announced its intention last summer to stop paying for outpatient MRI and CT scans performed at hospitals when the patient could have saved money by going to a freestanding imaging facility.
They’re also denying more claims. Many are more closely scrutinizing ER visits and rejecting the claim if they find out the patient could have reasonably gone elsewhere, or if the episode was not an emergency. NPR reported that such programs are designed to reduce the trend in recent years of inappropriate use of emergency rooms. This is not only deterring some patients from obtaining care but also saddles hospitals with more unpaid bills. Data from Change Healthcare found hospitals across the country now lose more than $260 billion per year on denied claims from insurers.
In addition to pushing some patients to freestanding facilities, CMS is also exploring bundled payments for certain episodes of care. The voluntary Bundled Payments for Care Improvement Advanced (BPCI Advanced or the Model) covers 29 inpatient clinical episodes and three outpatient clinical episodes with preliminary price targets and payment tied to performance on quality measures. These bundled services, including hip and knee replacements, have already impacted how providers under that program are delivering care. For example, many providers have dramatically reduced the length of stay at skilled nursing facilities post-joint replacements, or avoided the stay altogether.
According to a TransUnion healthcare analysis, costs for major procedures are on the rise and patients experienced an 11 percent increase in average out-of-pocket costs during 2017. As a result, patients are increasingly cost-conscious, particularly for high-margin services such as imaging and outpatient surgery. Many are looking to freestanding sites for cost savings. Consider that while an MRI may run $2,500 in a hospital, it may cost only $500 in a freestanding center. Patients who are able to afford the $500 will choose the lower cost option when possible, while those who cannot afford any alternative may choose a hospital under the perception that they can avoid payment.
As these financial challenges in healthcare converge, as we have modeled in Healthytown USA, they will increasingly pinch the bottom lines of providers. Providers will have to carefully prepare and think about new cost structures as we move to a comprehensive value-based system in the coming years. Taking a proactive approach by quantifying the impact of these changes based on their market position will allow organizations to embrace these changes as an opportunity to help them improve patient outcomes while improving their own financial health.