COMMENTARY:

Providers will face pres­sure to deal with daunt­ing fi­nan­cial re­stric­tions

Modern Healthcare - - NEWS - Richard Clarke

When the elec­tion is over, ex­pect more fi­nan­cial stress

The new year has just started, but in­side the Belt­way, all eyes are on the pres­i­den­tial and con­gres­sional elec­tions that will take place in Novem­ber—and the re­newed fis­cal pol­icy de­bate that awaits us once the elec­tions are over.

Soon af­ter the elec­tions, bar­ring an act of Congress, the Bush-era tax cuts will ex­pire. Many ex­perts be­lieve the national debt will once again ap­proach the con­gres­sion­ally es­tab­lished le­gal limit, and the se­ques­tra­tion spend­ing cuts that were man­dated by the Bud­get Con­trol Act of 2011 will take ef­fect.

The num­ber im­printed on our col­lec­tive con­science is $1.2 tril­lion—the amount that the con­gres­sional deficit-re­duc­tion su­per­com­mit­tee was tasked with chop­ping. But most economists agree the real tar­get is about $4 tril­lion to $5 tril­lion from the fed­eral bud­get deficit. (The dif­fer­ence is par­tially at­trib­ut­able to the cost of a per­ma­nent cor­rec­tion to the flawed Medi­care physi­cian pay­ment for­mula, as well as any additional fis­cal stim­u­lus.) That’s sub­stan­tially more than the su­per­com­mit­tee could be­gin to tackle last fall.

Most likely, deficit re­duc­tion will be achieved pri­mar­ily through spend­ing cuts. Re­gard­less of the out­come of the Novem­ber elec­tions, any new deficit re­duc­tion pro­posal that is po­lit­i­cally vi­able will con­tain a high ra­tio of spend­ing cuts to tax in­creases. Af­ter the su­per­com­mit­tee ad­mit­ted de­feat, there were calls by some to re­vive the bi­par­ti­san plan re­leased (though not en­dorsed) by the Simp­son-bowles com­mis­sion in De­cem­ber 2010. That plan cen­tered on spend­ing cuts that would ex­ceed tax hikes by a ra­tio of 3 to 1. Go­ing into 2013, the po­lit­i­cal environment could ne­ces­si­tate an even steeper ra­tio.

This points to fur­ther spend­ing cuts, in the neigh­bor­hood of sev­eral tril­lion dol­lars, that would be divvied up among de­fense, dis­cre­tionary spend­ing and en­ti­tle­ments— three ways, but not nec­es­sar­ily three equal ways. In Novem­ber, De­fense Sec­re­tary Leon Panetta told Congress that mil­i­tary cuts in the se­ques­tra­tion would force the Pen­tagon to cut back ship and con­struc­tion projects, fur­lough civil­ian work­ers, and leave the mil­i­tary with the small­est force since 1940. And se­ques­tra­tion-level cuts in do­mes­tic non­de­fense dis­cre­tionary spend­ing would drop this cat­e­gory of ex­pen­di­tures far lower, as a por­tion of gross do­mes­tic prod­uct, than it was dur­ing the Rea­gan, Clin­ton or Bush years, ac­cord­ing to the Eco­nomic Pol­icy In­sti­tute. As a re­sult, en­ti­tle­ments—so­cial Se­cu­rity, Medi­care and Med­i­caid—are likely to bear the brunt of the cuts, and the ma­jor­ity of the en­ti­tle­ment cuts will be borne by health­care providers.

That means providers can an­tic­i­pate com­bined Medi­care and Med­i­caid cuts as high as $400 bil­lion to $600 bil­lion, rem­i­nis­cent of the deep cuts in the Bal­anced Bud­get Act of 1997. The cuts will be made us­ing blunt in­stru­ments, such as rate cuts to Medi­care and Med­i­caid, and value-based in­stru­ments that seek to fur­ther re­align in­cen­tives to bet­ter man­age care and re­duce avoid­able uti­liza­tion, such as ac­count­able care or­ga­ni­za­tions, med­i­cal homes and bun­dled pay­ments. How­ever, these val­ue­based in­stru­ments are still new and largely un­proven. While the jury is still out on whether these pro­grams re­duce spend­ing over­all, re­sults from pi­lots and demon­stra­tions have shown that they can im­prove qual­ity and re­duce acute-care uti­liza­tion.

One thing is clear: Providers need to start plan­ning for the value-based health­care sys­tem that is evolv­ing from the vol­ume-based sys­tem of the past. You can start by ad­dress­ing five key im­pli­ca­tions of a lower-pay­ment, lower-vol­ume environment:

Move from man­ag­ing op­er­at­ing costs to re­design­ing your or­ga­ni­za­tion’s over­all cost struc­ture. Your ef­forts should in­clude re­ex­am­in­ing the ser­vices you of­fer, re-en­gi­neer­ing how re­main­ing ser­vices are de­liv­ered and re­duc­ing over­all ad­min­is­tra­tive costs.

Con­sider your mar­ket po­si­tion in re­la­tion to eco­nomic and clin­i­cal in­te­gra­tion. Hor­i­zon­tal in­te­gra­tion can gain economies of scale to drive down cost and im­prove ac­cess to fi­nan­cial and hu­man cap­i­tal. Ver­ti­cal in­te­gra­tion with physi­cians and post-acute providers is needed to cre­ate the in­fra­struc­ture for man­ag­ing care across the con­tin­uum. De­ter­min­ing your or­ga­ni­za­tion’s role within your mar­ket re­lated to in­te­gra­tion is key.

Rec­og­nize that all providers will be held re­spon­si­ble for cost and qual­ity out­comes. All providers will need to work with pay­ers to sep­a­rate risks that are within providers’ con­trol from in­sur­ance risks, in­vest in clin­i­cal and fi­nan­cial sup­port and cre­ate a cul­ture that sup­ports re-en­gi­neer­ing of care de­liv­ery.

Pre­pare for a pay­ment sys­tem that links a sig­nif­i­cant and grow­ing por­tion of provider pay­ment to qual­ity. De­spite con­tin­ued chal­lenges in defin­ing and mea­sur­ing qual­ity— and the in­evitable grow­ing pains of qual­ity-linked pay­ment method­olo­gies—the trend is un­mis­tak­able.

Be ready to pro­vide in­creased trans­parency of both cost and qual­ity data. Pur­chasers will re­quire providers to jus­tify their pric­ing based on the qual­ity of out­comes. Also, as pa­tients start pay­ing a greater share of the cost of in­sur­ance pre­mi­ums and health­care ser­vices, they will use avail­able data to act more like tra­di­tional con­sumers.

It will take time to achieve the gains nec­es­sary to en­sure an or­ga­ni­za­tion’s fi­nan­cial sus­tain­abil­ity. Providers would be wise to re­dou­ble their ef­forts given the additional pay­ment re­duc­tions on the hori­zon.

Providers need to start plan­ning

for the value-based sys­tem evolv­ing from the vol­ume-based

sys­tem of the past.

Richard Clarke is pres­i­dent and CEO of the Health­care Fi­nan­cial Man­age­ment As­so­ci­a­tion, Westchester, Ill.

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