Alternate Payment Models: Why The Healthcare Industry Will Never Look The Same by Walter Colsman, Columbia Threadneedle Investments
- The Center for Medicare Services has launched several pilot projects that explore alternative payment models with the goal of reducing healthcare cost while improving quality.
- CMS is already moving towards requiring bundled payments for certain procedures. These programs will move from pilots and voluntary programs to mandatory payment schemes in the future.
- Hospitals, doctor groups, and post-acute care providers are scrambling to position themselves for this new world, and investors must be aware that there will be clear winners and losers.
The Center for Medicare Services or CMS is the government agency responsible regulating Medicare. CMS makes coverage decisions, establishes rates and oversees reimbursement. Historically, CMS payments have been strictly transaction-based, meaning every doctor encounter, procedure and test would generate a code and a payment. The Affordable Care Act gave CMS the authority to explore and implement alternate payment models through innovation initiatives with the goal of reducing cost while improving quality. While there is little impact on the healthcare systems today, the payment landscape is changing quickly, creating investment opportunities and risk.
Since the ACA was enacted, CMS has launched several pilot projects that explore alternate frameworks for paying for healthcare. The intent is to replace the sole incentive to boost volume. These projects range from penalties for hospitals that rank poorly on certain quality metrics to bundled payment initiatives that hold providers accountable for an entire episode of care.
Despite skepticism whether these projects would ever get out of the lab, in January CMS laid out a “Payment Taxonomy Framework” in which goals for alternative payments were established. CMS plans to link most payments to quality fairly quickly, and this largely entails penalties for poor quality outcomes. CMS has set the ambitious goal of having 50% of all Medicare payments coming from bundled care type of arrangements by 2018. Bundled care involves CMS paying a flat rate for an entire episode of care, from diagnostics to recovery. The various providers inside that bundle must decide what to spend money on to manage the patient, with any savings shared between CMS and the providers. Products and services which lower cost and improve outcomes will win while others will fall by the wayside.
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There has been much investor fear about drug pricing, and cutting drug prices makes for a much better political sound bite than a wonky payment model comment. The reality stands that while legislation could always be enacted, CMS is precluded from direct price negotiations with pharma. Rather, this administration is focused squarely on attacking waste in the system. Drug utilization will be affected as parts of these initiatives, but with better outcomes in mind, not necessarily to lower drug spend. For example, ensuring a patient takes prescribed medication post-discharge could increase drug utilization while lowering overall healthcare costs. In another case, a more expensive drug may be used over a cheaper alternative if it can save money elsewhere.
With 2018 not far off, will CMS get there? CMS is already moving towards requiring bundled payments for orthopedic and cardiac procedures, with a particular focus on post-acute care cost and quality. CMS has also tackled disease management by laying out bundled oncology and piloting end stage renal disease management bundling. These programs will move from pilots and voluntary programs to mandatory payment schemes in the future.
Hospitals, doctor groups, and post-acute care providers are scrambling to position themselves for this new world. At a minimum, providers are trying to lower costs and improve quality in order to survive. They are trying to gather data and build the analytic capabilities needed to succeed, with the more ambitious planning to lead in population management as a “convener.” They are trying to position themselves by making acquisitions or forming partnerships. They are lobbying in Washington in an attempt to tilt a rising tide of regulation in their favor.
Will the new system succeed? This is not the first time the system has moved in this direction, and the prior attempts failed for at least three reasons. First, many providers lost money, and if they did not go bankrupt sought a bailout while pointing out access issues. Others managed to cherry-pick profitable patients, while industry lobbying efforts succeeded. Second, patients revolted against decisions they deemed against their best interests in favor of costs. Doctor incentives were mixed and complicated by the rising threat of litigation. Third, the data and technology was lacking to make it all work, while the coordination of care was too complex.
Many of these elements persist today. Even technology, where a great deal of investment has been made, challenges success given the staggering complexities. Undoubtedly, there will be pushback and delays. However, much has changed since the 1970s. In particular, patients are much more consumers today, and doctors are now more aware of costs as well as benefits. Structurally, physicians are frequently employed or part of large groups, and organizations have much greater span and scale. There is enough data to show that it is often possible to lower cost AND improve quality. A lot of waste is out there. In episodes of care that are easily defined and where the benefits significant, change is likely to stick.
Regardless, providers are preparing for this new system, and investors must be aware. There will be clear winners and losers. Consider:
- Some service lines will become more valuable than others, with both intermediation and disintermediation potential. Mergers and acquisitions will only increase as providers seek to have the optimized “bundle.” Watch the post-acute space for the first impact, including skilled nursing facilities, rehab facilities, and long-term acute care hospitals. Hospitals will increasingly try to leverage their footprint into lower-cost outpatient settings such as ambulatory surgical centers.
- Entire new service models will arise ranging from telemedicine to disease management services. These can deliver care in a lower cost setting and/or prevent a patient from getting sicker and generating more costs.
- Devices, drugs and capital equipment will increasingly have to prove their economic and quality efficacy, with innovation that reduces cost even more important than before. A medical device that sells for a premium but reduces infection rates? Maybe. A higher cost radiation oncology machine when the existing machines in the area are not fully utilized? Maybe not.
- Device companies will look to wrap services around their products and may take a portion of their price at risk. A company with a device and bundled services that can demonstrably save money may just beat out a “low-cost” competitor.
- Technology will promise analytical, management and monitoring capabilities be it software and big data or smart monitoring devices. Silicon Valley has already entered the game and may disrupt existing players.
- Even insurance models will change as commercial plans look to leverage the Medicare framework, and hospitals and doctor groups may create their own insurance companies within their practice.
How much traction CMS ultimately achieves remains to be seen, but one thing is clear: the industry will never look the same.