Masterclass: How Leading Health Systems Are Paid

Posted By The Academy

July 13, 2023

Receive a comprehensive overview of key policies and governing bodies impacting LHS, including those addressing alternate sites of care, health equity and patient protections, public payer trends, and M&A.

Takeaways for Industry Partners on Payment Fundamentals

1. Patient care is the dominant source of revenue for health systems, and fee-for-service is the backbone of the existing reimbursement system for outpatient procedures. Inpatient services are generally paid in a more bundled fashion, based on why patients are admitted to the hospital, also known as the DRG. Understanding the nuances of inpatient and outpatient reimbursement is important, as health system executives feel that industry needs to appreciate the complexity of health system economics to be better partners.

2. Revenue cycle billing and payment depends on accurate documentation and subsequent coding. Health systems may employ hundreds of staff and/or use sophisticated technology to ensure coding accuracy and payment capture. Revenue cycle improvement is critical to health system financial success and a key opportunity for industry. Offer insights into process improvement and technology to improve documentation, coding, billing, denials management, and patient collection for better revenue capture.

3. Provider payment can change annually. CMS, CMMI, and MedPAC all play roles in setting rates for Medicare and Medicaid patients. Policy changes laid out by these agencies around which services are reimbursed and where they can be delivered can also impact how commercial payers reimburse for care. Monitor major payment regulations to be aware of changes that could affect revenue cycle operations and/or negatively impact health system finances.

Takeaways for Industry on Alternative Payment Models

4. The terms alternative payment models, value-based care, risk, and population health are often used interchangeably and sometimes incorrectly. Financial risk, or how much a provider stands to gain or lose from an alternative payment arrangement, is most important for understanding provider incentives and strategy in the world of value-based care. While terms like value-based care, risk, and population health are all used to describe non-Fee for Service payment, it’s necessary to understand the actual amount of revenue tied to downside risk to get an accurate sense of a health system’s financial picture and incentives.

5. CMS drives payment reform across health care. To reduce Medicare costs, CMS has introduced and advocated for provider participation in alternative payment models. Health systems typically apply to participate mid-year and join APMs at the start of the year. Commercial payers may offer similar types of arrangements but haven’t been as successful as Medicare in uptake by health systems. Understand the details of new alternative payment models introduced by CMS and other payers to determine which quality metrics and cost benchmarks health systems will be incentivized to meet.

6. There are many types of alternative payment models with different levels of financial risk and quality goals. The amount of risk a health system takes on will influence whether the organization cares more about volumes or controlling the total cost of care. APMs also vary in scope—some focus on specific procedures, while others focus broadly on populations. Investigate the target health system’s risk portfolio and which types of models it participates in to adjust its value proposition accordingly. Consider asking the following questions to get a better understanding:

a. What are your organization’s goals related to risk-based contracting?

b. How much of your organization’s revenue is tied to downside risk?

c. How many lives do you have under risk-based contracts? What populations are covered (commercial, Medicare, Medicaid)?

Takeaways for Industry on Health System Risk Strategy

7. Many health systems are still relatively early in their journey to risk (i.e., only have upside risk contracts in place and/or covered lives are a small percentage of their patient population). Though many of these systems plan to increase their revenue at risk, their end state is likely a mixed financial model– also referred to as “a foot in two boats.” Be prepared to articulate how you can be a valuable partner to leading health systems in a fee-for-service environment while also positioning as a partner for value-based care growth. Craft a compelling “no regrets” sales pitch that offers ROI in both payment models. For example, solutions that improve access or can reduce input or variable costs to the health system (while not reducing revenue) may be universally appealing.

8. Population health leaders may have very different decision drivers than other leaders in the system. While “reducing total cost of care” will likely resonate among population health leaders as valuable ROI, it may mean reducing revenue to the health system, which is less compelling to finance leaders. Additionally, population health leaders may lack full budget authority and need to include finance leaders for final sign-off. Understand the nuances of various roles involved in population health and consider bringing finance leaders into partnership discussions earlier. Alternatively, consider selling directly to the system’s health plan which may have more budget, purchasing power, and interest in reducing the total cost of care.

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