Are Hospitals in Danger of Financial Unsustainability? One Industry Expert Offers Insights

March 12, 2019
Rob Lazerow, a senior leader at The Advisory Board Company, shares his perspectives on the challenges and opportunities facing health system executives in a moment of transformative change in U.S. healthcare

Rob Lazerow, managing director, research and insights, at The Advisory Board Company, a Washington, D.C.-based consulting and advisement organization that since late 2017 has been a part of the Eden Prairie, Minn.-based Optum (itself a component of UnitedHealthcare), has spent 13 years at The Advisory Board Company helping hospital and health system senior leaders to prepare for the evolving future of U.S. healthcare.

As the U.S. healthcare industry shifts from a volume-based payment system to a value-based one, the pressures on hospital and health system senior executives continue to intensify and accelerate. Healthcare Innovation Editor-in-Chief Mark Hagland spoke this week with Lazerow, to obtain his perspectives on the challenges and opportunities in this moment in U.S. healthcare. In this first of two articles, Lazerow shares his perspectives on the road towards innovation. Below are excerpts from that interview.

What are you seeing right now, as you survey the industry, at a broad level? There are numerous important trends developing right now.

Yes, that’s correct; we’re seeing the convergence of a number of forces happening at the same time, some interrelated. On the one hand, you have elements of the payer community getting more assertive, more active. There are a lot of folks in the health policy world who assumed on election night in 2016 that payment reform would take a back seat or be over. I literally saw tweets in my Twitter feed saying, “Well, ACOs are over now.” So there was this assumption that it would be over, but that hasn’t been the case. In fact, we’ve actually seen the overhaul of the Medicare ACO [accountable care organization] program, and we’re hearing rumors about new mandatory bundles coming out; so the push to change federal healthcare policy is not diminishing; if anything, it’s been intensifying under this administration.

CMS Administrator Seema Verma has become increasingly vehement in her declarations that the healthcare delivery system has to change, and change fast, right? After all, federal healthcare policy officials are looking at our healthcare system going over a cost cliff, per the projections by the Medicare actuaries.

Yes, that’s right. As a student of healthcare policy, it’s interesting for me to watch this Republican administration grapple with, on the one hand, wanting more of a free market-driven healthcare system, with greater consumer choice, and other free-market elements; but at the same time wanting to control costs. The fact that we’re looking at an annual nationwide healthcare expenditure of $6 trillion within seven years, is daunting. So, how do we bend the cost curve, and make the Medicare program’s economics sustainable? We’ve an interesting change in philosophy [at the Department of Health and Human Services and the Centers for Medicare and Medicaid Services] in the past two years. The Obama administration was in many respects trying to encourage cooperation, through things like voluntary bundles. And in the first generation of Medicare ACOs, you had the Pioneer Program, focused on organizations that had already had experience with risk. And then the MSSP [the Medicare Shared Savings Program]—which was essentially embedded in the ACA [Affordable Care Act]. And the early ACO program was very welcoming to providers; the goal was to get providers to try ACO work; the idea was to give population health time to build up, as it allowed for a six-year path into risk.

And one-quarter of all Medicare ACOs were in downside risk in 2018; but it wasn’t as fast as the Trump administration wanted, so you have this overhaul now towards faster, more risk. And there’s been this interesting analysis around low-revenue versus high-revenue ACOs; I think of them as physician-led versus hospital-led ACOs, and the expectations are higher for hospitals. So they [HHS and CMS officials] are saying, we’re willing to have fewer ACOs, to have the “sprinters” be able to go faster.

It’s fascinating how Seema Verma and the other senior federal healthcare policy officials are insisting on a quicker transition to two-sided risk. Are they doing the smart thing there, or might it backfire and cause many of, if not most of, the ACOs participating in the MSSP, to drop out of the program?

We don’t know yet; but it shows a change of philosophy from the previous administration’s perspective that it’s better to have fewer ACOs that are performing at a higher level, rather than more ACOs performing at a lower level. At the same time, we’re seeing large employers saying,  we need to move faster, too. We’re starting to see new models emerging, such as Henry Ford Health System and GM. Henry Ford Health System only treats something like 20 percent of GM’s population, but sees an opportunity to treat them. Henry Ford has a health plan. This model doesn’t go through a health plan; it’s a direct contract, and I believe that Blue Cross Blue Shield of Michigan is the third-party administrator for it. It’s an interesting mix. And who’s the pace car for change? In the last year, we’ve seen the private sector taking over the pace car for change. Part of it is a shift in priorities form the Obama to the Trump administration. But also, now you have Amazon/Berkshire Hathaway/JP Morgan Chase initiative. I think right now the private sector is taking the lead. The Trump administration is looking to see what’s working well in the private sector, and is looking to incorporate that into public programs, and not always wanting to be the pointy end of the spear.

The thing I’m always looking at is CMMI [the federal Center for Medicare and Medicaid Innovation], because they don’t need congressional approval or formal demo; and then can scale them up. And the way we got Track 3 of MSSP was because of the work that had been done in the Pioneer Program, which had then been deemed successful by CMMI. For 2018, it was definitely the private sector that was [on the leading edge around ACO design and development].

And the third convergence is what’s happening with provider economics. Moody’s Data found that the median hospital operating margin for 2017 had hit an all-time low of 1.6 percent, down from about 3.5 from 2017. So, margins are plummeting; and because we don’t have the 2018 data yet, I can’t tell whether they’ve bottomed out or are still in freefall. And I think there are pushes and pulls to value. I don’t think wide-scale providers are lured to risk through the prospect of better economics. Still, CMMI says, don’t compare your opportunity to now but to the future. And one of the reasons hospital economics are eroding so significantly is that their revenue growth is really slowing down. Moody’s outlook for 2019 expects the trend will continue of costs outpacing revenues; and part of that is payer mix. There’s a case-mix shift taking place, as Medicare beneficiaries use more medical as opposed to hospital care. So there’s this push. If I‘m a hospital system leader, the economics of maintaining a fee-for-service model become so tenuous—so I think that push will be much more motivating than the pull, or the allure, or value.

They’re seeing the sand on the beach eroding, right?

Yes, and at a certain point, they say, gee, I’d rather change my economic model from becoming more and more ruthless in trying to achieve cost savings under fee-for-service, to shifting into value-based payment. So I think that many hospital and health system executives are a reaching that tipping point [around the possibility of shifting into value-based payment arrangements]. I think that leaders need to make the market work for themselves by offering a compelling value proposition and a product that works well. If you look at why there aren’t more risk arrangements, first, they’re administratively difficult; and providers don’t always have a great track record. As they show success in downside risk, and in managing their own populations—in many communities, hospitals are already the largest employers already.

The landscape is changing too fast now to do well if you’re a conservative-thinking administrator, then correct?

I think a lot of them view themselves as the stewards of a critical resource in their community. And that conservatism comes out of wanting to make sure that that resource is always there. That’s not to say that hospitals aren’t investing in innovation; but what becomes really challenging for them is to disrupt the core of their business, rather than innovating around partnerships or access, where it’s less of a threat to their business model. Also, lower-threat innovation or disruption can deliver value to consumers. Virtual care, telemedicine, enrolling patients in portals, are all areas of development being pursued.

Physician group leaders are proving to be the most innovative patient care organizations in some markets, outstripping innovations on the part of hospital organizations, in some instances. How do you see that dynamic playing out, going forward?

I agree that we’re seeing some very innovative and sophisticated organized medical groups leading population health management innovation in many markets. Part of it is economics: they’re not thinking about things like fixed cost, admissions, or hospital volume. So one trend we’ve seen is the hospital-less integrated delivery network. Historically, you built an integrated delivery network with the hospital as a foundation. Yet within the past year, some of the most innovative transactions have involved health plans and physician groups, minus the hospital. And for some hospital executives, that feels threatening, that there’s this empowered physician group that can steer business. They’re the new wholesale buyer—either the health plan or the physician group with population health incentives. And they’re now a purchaser of downstream services. And while that might be threatening, it also absolutely provides an opportunity for value.

So we’re absolutely advising hospital executives to move forward to prove their value in those situations. In that context, an assumption had emerged a few years ago that widespread hospital employment of physicians would be the overriding trend. But we’re seeing a lot of strong physician groups—maybe they have an equity partner or have their own health plan or are a longstanding successful group—standing on their own. We’ve also been telling hospital leaders, you know you need to create a value proposition—you have to do a better job of convincing these wholesale purchasers of downstream services that you’re offering value.

With regard to hospitals getting into risk—what are the critical success factors in taking on downside or two-sided risk?

Our research around successful population health—once you’ve passed through the buildup phase of building the network and infrastructure and technology—the actual population health enterprise—there’s an immediate piece of, how do we support the providers? There’s the hot-spotting involved in identifying the patients whose healthcare is driving the bulk of spending in healthcare, and finding a better solution for them; seeing a patient with comorbidities and chronic conditions cycling in and out of the hospital, isn’t good for anyone—the patient, the healthcare delivery system, the payers. So we’re seeing new care management models emerging. We’re also seeing organizations looking more at rising-risk patients. How do we find them and identify them and address their situations now? And one of the things that’s important for organizations is not just focusing on performance in the current year, but down the road, showing that we’re in this for a while.

In part two of the interview, Rob Lazerow will address a number of subjects, including revenue cycle management, and healthcare IT strategy for the journey into value-based payment.

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