Financially thriving during payment reform with shared savings

When it comes to change, it’s the nature of human beings and the organizations they run to choose the path of familiarity and least resistance. This path can be problematic as we’re required to adapt, innovate and seek new solutions in an evolving world.

At nearly 18 percent of gross domestic product (and rising), U.S. health care expenditures are the highest in the world. Further, according to an annual survey by the American College of Healthcare Executives (ACHE), financial challenges ranked No. 1 on the list of hospital CEOs’ top concerns in 2013, followed closely by healthcare reform implementation—chiefly reducing operating and supply chain costs and hospital-provider-payer alignment.

The challenge of managing costs and staying profitable in health care didn’t arise overnight; it’s an ongoing problem exacerbated by decades of ingrained practices and cultural mindsets. Countless factors also impede the financial viability of hospitals and health systems: declining reimbursement rates, Medicaid cuts, inflation, stagnant wages for providers, rising costs and payment reform.

Amidst this current era of rapid change in health care, hospitals — and orthopedic departments in particular — are a perfect example of maintaining the status quo from an organizational perspective. By using payment and care delivery models and practices that far predate them, health care leaders may inadvertently hinder their organization’s growth, profitability, and future relevancy.

As a result, astute leaders are reassessing options and determining new strategies to financially thrive. Fortunately, many new financial reimbursement solutions have been introduced to address health care’s evolving needs, including shared savings models as one such solution.

The upsides of shared savings

Under the traditional fee-for-service model, physicians have been reimbursed the same amount for each service they provided, regardless of the cost of devices or procedures. This construct leaves little incentive for embracing new approaches to care decisions. It also puts unnecessary burden on payers who, historically, have paid the lion’s share of the patient’s bill. Payers are now passing along a larger share of health care costs to patients in the form of high-deductible plans and increased out-of-pocket expenses. As a result, a growing number of patients are now cost aware; they either can’t pay their bills or must forgo treatment altogether, leaving hospitals with mounting bad debt, sicker patients and poorer outcomes.

Health care reform is quickly moving to a world of value-based reimbursements, pay-for-performance through shared savings, and bundled payment programs.

At its simplest, a shared savings model offers incentives for providers to reduce health care spending for a defined patient population by offering them a percentage of net savings realized as a result of their efforts. Hospitals and providers that meet a set of quality standards and continue to hold costs below spending targets receive bonus payments including a portion of the savings achieved.

These new payment models, while not easy to implement and manage, are worth it; they offer a path to alignment that benefits hospitals, physicians, insurers and even patients.

Perhaps nowhere is the urgent need of reducing supply chain costs more pronounced than in hospitals’ orthopedic departments, where high-priced physicians preference items often account for 30-40 percent of hospital expenditures, and as much as 60 percent of supply chain expenses, according to a June 2013 joint report by the Healthcare Financial Management Association and UHC, an alliance of nonprofit academic medical centers. This is a prime example of where implementing new payment strategies can make a big difference for hospitals that work to reduce costs and improve value-based reimbursement through shared savings and other new payment methods.

Hospitals that introduce shared savings programs see numerous benefits. By bringing payers, providers and hospital decision-makers together for the purposes of selecting therapies and modalities of medicine, these programs also introduce the means for measuring and quantifying the outcomes of those practices. As a result, hospitals reduce supply chain costs, surgeons share in a portion of savings and patients receive the same quality of care at a lower price.

Health care reform is helping payers, providers and patients find common ground, and physician alignment is necessary to meet the subsequent shifting payment and care delivery models. When hospitals move away from the traditional way of doing business and take action to achieve physician alignment within shared savings, they can ultimately provide better care quality and benefit all parties from a financial perspective.

Shared savings