COVID-19 has dominated healthcare priorities over the last two years, but the market has not stopped moving. The pandemic will, unfortunately, be part of our lives for the foreseeable future, but we will eventually come out on the other side of it — and it’s crucial to pay attention to the financial trends that will shape the years to come. For Critical Access Hospitals (CAHs) and rural health systems, developing a strategy around these top priorities will become even more important than it was before the pandemic.
The Changing Market
Several factors — including rising healthcare costs, new technological advances, and declining patient volumes in hospitals — are prompting changes within our existing payment system:
- Insurance premiums are increasing. According to the Kaiser Family Foundation, the average cost of family health insurance in 2021 was $22,000, approximately 30% of the average household income ($65,000).
- Advances in technology and telehealth services have led to an acceleration of new market competition. Companies including Amazon, Walmart, Walgreens, CVS, and Google are seeing market opportunities and investing in providing urgent care, primary care, post-acute care, virtual care, and pharmacy services.
- Hospital inpatient and outpatient volumes are declining, and this trend is likely to continue. As we look at future projections, the old equation, Price x Volume = Net Revenue, starts getting more challenging.
- The federal government is maintaining its commitment to transitioning the payment system from fee-for-service to accountable care.
- Many rural/community hospitals will be returning CARES Act funding. Early in the pandemic, many rural hospitals had high cash balances due to CARES Act Funding creating a false sense of security. It’s important for CAHs to understand their baseline cash and project future cash if they do need to return funding.
The Evolution of the Payment System
Our current fee-for-service payment system is essentially payment for sick care. Within that system, individual organizations can manage price, utilization, and costs and compete with each other for market share based on volume.
But as we look at the payment system of the future, a population-based payment system, our objectives are much different. We will receive payment on a per capita basis, and we need to figure out how to care for a defined population within our service area. This requires building strong relationships beyond just the hospital — with medical staff, primary care specialties, upstream hospitals, tertiary centers, post-acute care, etc. that all become part of our care delivery spectrum.
In 2016, CMMI Deputy Director Dr. Rahul Rajkumar developed the idea that there will be an evolution of payment — not a revolution. He defined the categories of payment as we move from volume to value along with these categories:
- Category 1: fee for service, no link to quality and value
- Category 2: fee for service, link to quality and value
- Category 3: APMs built on fee for service architecture
- Category 4: population-based payment
The challenge is making a smooth transition from Category 1 to Category 4 while crossing on a “shaky bridge.” It will take time and courage to make it through this revolution, and we must be prepared for the situation to get worse before it gets better.
Five Initiatives for a Successful Transformation
To transform the fee-for-service system into a population-based payment system, the following three initiatives must be implemented:
- Initiative I: Improving operating efficiencies, patient safety, and quality
Hospitals not operating at efficient levels are currently, or will be, struggling financially. “Efficient” is defined as:
- Appropriate patient volumes
- Meeting needs of their service area
- Revenue cycle practices operating with best practice processes
- Expenses managed aggressively
- Physician practices managed effectively
- Effective organizational design
- Initiative II: Primary care alignment
Revenue streams in the future will likely be tied to primary care physicians, which often comprise a majority of the rural and small hospital healthcare delivery network. Small and rural hospitals, through alignment with PCPs, will have extraordinary value relative to costs. Hospitals should fundamentally align with employed and independent providers to enable interdependence with medical staff and support clinical integration efforts. Interdependent alignment is accomplished through functional, governance, and contractual relationships.
- Initiative III: Rationalize service network
Hospitals should develop a system integration strategy, evaluating a wide range of affiliation options, including network relationships, interdependence models, and full asset ownership models, and establish interdependent relationships among small and rural hospitals. They should identify the number of providers required in the service area based on population and the impact of an integrated regional healthcare system, and conduct focused analysis of procedures leaving the market.
- Initiative IV: Developing a population health foundation
The goal is for infrastructure to manage self-insured lives and maximize fee-for-service (FFS) utilization and quality incentives. Initiatives to do this include,
- PCMH or like structure
- Care management
- Discharge planning across the continuum
- Transitions of care
- Medicare reconciliation
- Post-discharge follow-up calls
- Identifying community resources
- Maintain patient contact for 30 days
- Develop claims analysis capabilities/infrastructure
- Develop evidenced-based protocols
- Initiative V: Begin proactively transitioning payment systems
Transitional payments include
- Fee for service payments that include incentives for quality and utilization control
- Enrolling self-insured employees/dependents in population health efforts to reduce unnecessary utilization and costs
- Fee for service against capitation benchmark with shared savings
- Shared savings model Medicare ACOs
- Shared savings models with other governmental and commercial insurers
Partial capitation and sub-capitation options with shared savings
Rural Health System Financial Imperatives
The “shaky bridge” crossing will require a planned, proactive approach with new strategies.
Important elements that must be addressed include:
- Operating efficiencies, quality, and patient engagement
- Medical staff alignment
- Service area rationalization
- Population health management
- Transitioning payment systems
Immediate priorities include:
- Developing a 12-month cash plan factoring in returned funding
- Meeting with commercial insurers to discuss increasing costs and imperative for higher reimbursement
- Preparing interim cost reports that recognize higher labor/non-labor
- Leveraging goodwill received during the pandemic to recapture lost market share
- Creating new consumer-oriented strategies (i.e., open access in clinics, telehealth)
- Developing aggressive and proactive approaches to maintain/enhance staffing
- Leading political advocacy recognizing rural is disproportionately impacted by staffing shortages
Contact Stroudwater to get expert help developing a strategy around your hospital’s top priorities.