01 October 2012

In the past three years, hospital and health system CEOs have become increasingly focused on closing business deals with physician practices and other providers searching for new opportunities.

With health systems, practitioners, and payers under significant pressure to reduce costs and improve quality, all parties are exploring new partnerships that have the potential to create value by improving quality, eliminating inefficiencies, and aligning shared incentives. Independent community hospitals also may feel enticed to enter into these partnerships.

Following the U.S. Supreme Court’s recent ruling upholding the Affordable Care Act (ACA), hospitals and health systems that wait too long to develop new relationships with physician groups and insurers will miss opportunities to enhance their strategic positioning. Few leading organizations are likely to stand still in this uncertain time.

There is some risk that the patients’ perspective will be lost in the flurry of activity. Leaders should ensure that their growth strategies are ultimately focused on improving patient care. With new payment models aimed at rewarding quality and outcomes over volume, providers and payers have an unprecedented opportunity to align around the interests of patients.

Four Partnership Options

From the healthcare finance executive’s perspective, deciding which partnership approach is most attractive is not clear-cut because each market is unique. The value proposition should be apparent to all parties. Choosing a partner, deciding on the best partnership model, and prioritizing market opportunities all should occur in conjunction.

Many hospitals and health systems are expanding their services so they function more as integrated networks that provide a broad array of offerings, including a mix of outpatient and postacute services. Providers that operate as networks can capture revenue from a diverse group of patients by adding patients who need less intensive care and are more likely to pay their share of costs. This approach is essential in an environment that is focused on cost containment and preventive care. Hospital finance executives should be looking for this type of expansion whenever possible.

As hospitals and health systems look to the future, several strategic options are worth exploring.

Offer a health plan. Providers may want to consider offering their own health plan if they can incorporate a large enough patient base to spread the risk and if they have the financial resources to support this strategy. Under the fee-for-service model, physicians and hospitals had incentives to admit greater numbers of patients to the hospital. New payment models are experimenting with economically sustainable ways of keeping patients out of the hospital. Offering a health plan will help health systems align their interests with partnering physicians and enable hospitals to reduce costs, which should help offset the anticipated declines in hospital utilization.

Forge an insurer partnership. Health systems with less risk tolerance or fewer financial reserves can forge agreements with insurers that give covered patients an incentive to seek treatment in the system’s hospitals or outpatient facilities. Providers face a trade-off. For the opportunity of becoming the hospital or facility of choice for subscribers of the insurance plan, they should accept the negotiated rates the insurer agrees to pay.

Kaleida Health of Buffalo and Blue Cross Blue Shield of Western New York recently announced plans to form a physician-led network that includes multiple inpatient, outpatient, and postacute providers whose value proposition includes improved care coordination. This type of partnership is likely to grow in popularity, although it requires a great deal of trust between all parties and clear articulation of mutual objectives.

Create an accountable care strategy. Several organizations have created accountable care organizations (ACOs) to serve Medicare and commercial patients. Under the terms of these organizations, providers and physicians agree to meet certain quality and outcome standards when caring for a group of patients. If the partners achieve a savings greater than a certain percentage compared with what would have been spent for the same patients in a fee-for-service model, the insurance company rewards them with a share of the savings.

Many insurers are joining with providers to set up commercial, non-Medicare ACOs. One such ACO, AdvocateCare, was created last year in an alliance between Blue Cross Blue Shield of Illinois and Advocate Health Care of Chicago. After six months of delivering care to 750,000 members, results suggest some success—at least when it comes to utilization. In the first six months of 2011, hospital admissions were down 10.6 percent and emergency department visits were down 5.4 percent compared with the same period in 2010.

Carve out an insurance product to offer. Hospitals and health systems can negotiate with insurers to offer specific services tailored to certain groups of patients whose care would be managed for a negotiated fee. In the past, these carve outs were used by insurers to manage behavioral health and substance abuse services. In today’s environment, some providers may want to think bigger by setting up comprehensive programs for chronic care patients with diabetes or heart disease. This approach may appeal to insurers that want to eliminate a layer of contracted care managers who come between them and hospitals and skim some of their revenue.

Partnership Considerations

As hospital finance executives weigh their options and make choices about the types of alliances and partnerships they want to form, they should carefully assess several key factors related to their position as well as the position of other players in their market.

Market expansion opportunities. The potential partners available to hospitals and health systems largely depend on local market dynamics, including respective market shares and the types of populations served. Hospital finance executives should seek partnerships with payers and physician groups that will lead to incremental growth opportunities and have complementary strengths.

Resources. For partnerships to flourish, each organization should be committed to success and devote sufficient staff and resources to leverage the full value of the collaboration.

Risk sharing. An effective partnership requires sharing information and financial risk. Deeper integration holds the promise of greater potential cost savings and patient care management, but it also increases the level of risk in the partnership.

Capture of created value. It is one thing to create patient value through improved clinical outcomes and reduced costs. It is quite another to capture that created value and share it among all partners. Hospitals and health systems forging relationships with insurers should ensure the risks they assume are commensurate with the financial benefits when they meet their agreed-upon targets. Providers should not enter into a relationship that leaves them overly vulnerable to downside risks and provides little upside benefit.

Market response. Organizations seeking a partnership have to anticipate the likely responses from the community and competitors left out of an arrangement. In highly consolidated markets, collaboration between two large players risks raising accusations of anticompetitive behavior. It is rare for legal action to be taken, but if it occurs, it can be a distraction from achieving cost savings and improving patient care coordination.

Prepare to Act Quickly

Market forces and federal and state policies will likely continue pushing provider organizations to make deals and forge alliances with health insurers and physicians as they strive to make cost containment efforts viable for their bottom lines. In this environment of rapid change, hospital finance executives should be nimble and prepared to act quickly and decisively as they consider new partnerships with insurers and physicians or they will risk erosion of their positions along with their bottom lines.

Originally published in hfm.

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