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Wednesday, October 26, 2011

Love is all you need? Well, not quite: common elements and success factors of Alternative Delivery and Payment Models

by Torsten Bernewitz

Yesterday I summarized some of the take-aways of the AHIP Shared Responsibility Summit in Washington ( The conference showcased innovative two-way (provider-payer) partnerships, and even three-way alliances (provider-payer-employer), all built on the spirit of shared objectives, collaboration, and trust.
While “love was all around us”, the examples that were presented also pointed to the critical factors to make these relationships work and a win-win for all stakeholders, and highlighted the challenges that must to be addressed. I briefly mentioned these common elements and success factors yesterday; here are some more detailed observations:
  1. Alternative models must focus on network performance, not on a particular provider group. Experiences with alternative delivery and payment models that engaged only one stakeholder group, for example primary care, have shown disappointing results. With hindsight, this is perhaps not so surprising. If we engage only one stakeholder group in an alternative model, the only real options are a) to drive down unit costs and b) to hope that favorable outcomes will translate into long-term savings. However, driving down unit costs is not a sustainable strategy, and payer-provider goals are misaligned anyway on this dimension - a likely recipe for failure. Better outcomes at the stakeholder level will likely come at short-term cost increases, or, like squeezing a balloon, will lead to cost shifting through patient selection. The two most important drivers of quality and costs are when and where to refer, and to leverage this dimensions, payers must engage the overall system.
  2. New approaches need to accommodate the fee-for-service model, at least a little while longer. There is widespread agreement that the currently predominant fee-for-service model creates incentives for overuse, and consequently the alternative models aim to replace it with pay-for-performance and global payment approaches. However, from a pragmatic perspective, fully replacing fee-for-service will not be feasible in the near-term. First of all, CMS is forced by its statute to continue with fee-for-service. Secondly, on state level there are frequently significant regulatory barriers that would need to be overcome to move to bundles payment models on a broader basis. This is the case in many states, and the constraints vary across states. So if fee-for-service remains a fact of life in the foreseeable time, alternative models need to find workarounds. An approach that seems to work reasonably well is to create a “shadow capitation budget” (with all the bells and whistles of risk adjustment, trending, inflation adjustment etc.), still pay fee-for-service, but then calculate savings vs. the “shadow budget” and share any such savings with providers. Provided these incentives are significant enough, this appears to be very attractive to provider organizations.
  3. Success can be achieved through the right focus and targeting. Across health plans, about 20% of the members generate 80% of the costs. Similar relationships exist across diseases, and most other areas of healthcare. The Pareto principle offers the opportunity to focus on the right areas for interventions to improve processes, outcomes and costs. It is no secret that healthcare costs increase exponentially across the wellness spectrum from healthy, to at risk, high risk, early symptoms and active disease stages. To manage costs, we need to identify and engage individuals before they move to the next higher cost cohort. This requires a holistic view and engagement of plan members, not just the “patient” subgroup.
  4. Data sharing is a critical element to drive change and measure performance. A key feature of all alternative delivery and payment models is the pooling of data and analytics from payer and provider sources to create joint dashboards to identify trends, outliers and areas of focus, to establish goals, and to track performance. Many of the metrics on these scorecards provide stakeholders with a new perspective of the healthcare process, showing components that were previously obscured, or not shown together in combination. “You can only manage what you measure, and what is measured, gets done” – this statement can certainly be confirmed in healthcare, where a data driven, scientific approach is a hallmark of the culture.
  5. Upfront payer investment is needed to get things started. All alternative delivery and payment models presented highlighted the need for initial payer investment and support to set the process in motion. Even provider systems that are already well organized, like Geisinger when they entered such an ADPM program, have to make significant changes to the way they work, and in particular the processes and systems managing data and money flows. Payer support can be in the form of supplemental fees – for example Cigna’s Initial Coordination Fee – and/or support though services and personnel. Of course, these incremental costs need to be offset in the mid to long term, and should be part of the considerations when cost savings are shared.
  6. Effective governance is a key enabler for a smooth implementation. The leadership in both the provider and payer organizations needs to support the new model and give permission to get the initiative started – and then “get out of the way” to allow execution. Good governance and project management are key to success. It is important to involve all key stakeholders, however without making the process unwieldy and slow. This takes careful planning how stakeholder interests are represented in the various workstreams. We need to be very clear who is in charge of what. Legal needs to have a prominent place at the table. Alternative models touch on many regulatory issues – data sharing and bundled payments to name but two – and it is important to incorporate the legal perspective early in the process to avoid discovering later that certain model components are infeasible.
  7. We must align goals and rewards between payers and providers, across the network, and between organizations and the individual. One of the flaws of the current fee-for-service model is that it sets the wrong incentives by encouraging overuse. To support working together on improving quality and costs, all stakeholders must share the same priorities and share in the gains in a meaningful way. Without this alignment the initiative will fail, merely shift costs around, or lead to suboptimal trade-offs. The best practice is to set concrete goals and targets (looking at relative performance vs. peers does not resonate well with physicians, but a clinically relevant target does). The financial upside opportunity must be significant to get the attention.
  8. Alternative models require a culture and values of transparency and accountability. And in most cases, this will mean a significant cultural shift. Working together in new ways, and sharing data and information in common dashboards and scorecards, requires getting over some of the attitudes and assumptions that may be informed by past experiences. For example, previously adversarial relationships may prompt us to continue playing our cards close to our vest, or we may still try to catch each other out in the contractual fine print. Openness and sharing is also not well aligned with a culture where risk containment is deeply ingrained. Both partners need to abandon such notions, and this requires strong change management efforts.
  9. Change management is therefore a key success factor. Moving to alternative delivery and payment models is not easy, it takes a long time, and in addition to technical challenges, significant emotional barriers need to be overcome. All payers and providers who have tried the new approaches report they encountered bumps on the road. To make the approach work, physicians need to buy-in and embrace it. Achieving this is at the same time the most important and the most difficult task. The new approach calls for standardization (not a good concept to win physicians), measurement and accountability (physicians are not used to being measured, at least not once they have left medical school), and the incorporation of costs in the evaluation (reminding physicians of their frustrations with managed care in the 90s). In addition, many physicians suffer from “change fatigue” through the many initiatives that are calling for their attention. However, while change can be very hard, it can be successful if we put the right conditions in place. This includes careful planning what and how to communicate, and finding and addressing the right emotional triggers that find positive physician response.

Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at
ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

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