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Investments in new IT tools are helping hospitals steer clear of the margin cliff

Health Care Current | February 5, 2019

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies, and provides updates and insights on policy, regulatory, and legislative changes.

My Take

Investments in new IT tools are helping hospitals steer clear of the margin cliff

By Steve Burrill, vice chairman, US health care leader, Deloitte LLP

Over just the past few months, I have noticed that hospitals and health systems are making bigger investments in virtual health and relationship tools that connect clinicians to patients, clinicians to other clinicians, and clinicians to virtual information that allows them to improve patient care. As traditional fee-for-service (FFS) gives way to payment models that reward value over volume, hospitals are also investing in new technologies that can manage tremendous amounts of data, produce detailed analytics, manage population health, and help coordinate patient care.

The transition to value-based payment models is only going to accelerate, and hospitals that don’t have the right technology could find themselves struggling to catch up. Consider this: On January 1, hospitals began seeing payment adjustments for the first performance year under the Medicare Access and CHIP Reauthorization Act (MACRA). Last month, Blue Cross Blue Shield of North Carolina said it had inked value-based payment agreements with five of the state’s seven largest health systems (see the January 22, 2019 Health Care Current). Growth in value-based contracts—combined with an aging US population and shrinking reimbursement from government payers—could push hospitals and health systems toward a margin cliff if they don’t keep pace with technology.

Many hospitals are making bigger and bolder IT investments

Between 2012 and 2016, hospitals that received some payments tied to quality and value were more likely to invest in new technology compared to hospitals that relied largely, or entirely, on FFS payments, according to Beyond the EHR—a new report from the Deloitte Center for Health Solutions. The report examines data from 4,500 US hospitals gathered between 2012 and 2016 (the most current data available).

Quite a bit has changed since 2016. Just two years ago, FFS made up virtually all revenue generated by hospitals. Even among pioneering hospitals, value-based contracts and other alternative payment models rarely made up more than 10 percent of revenue. Today, most of our health-system clients see at least 20 percent of their revenue from risk-based or shared-risk contracts. For some health systems, these contracts now account for more than half of overall revenue.

A few years ago—as value-based payment models were beginning to take root—hospitals that had risk-based contracts were more likely than others to invest in new types of technology, according to our research. With MACRA’s Merit-Based Incentive Payment Systems (MIPS) and Alternative Payment Models (APMs) now in place, many hospitals and health systems are taking bigger and bolder steps in the adoption of new IT systems that go beyond electronic health records (EHRs).

Hospitals have also been investing in digital tools that use artificial intelligence (AI) and cognitive analytics to quickly sift through massive amounts of EHR data to identify patients who might be at risk for various health conditions. A health system, for example, could use this information to identify people who might be at risk for developing Type 2 diabetes or congestive heart failure. Early intervention and preventive care could help keep a medical event from occurring. As hospitals take on more financial risk, revenue will be generated by all patients and members, no matter how often they walk through the doors. However, members who get hurt or sick more than expected, on the other hand, will erode margins that come from per-member-per-month payments.

Physicians, patients are warming up to virtual health care

Virtual interactions with patients rose from 56 percent of total interactions in 2015 to 59 percent in 2017.1 We are likely to see that percentage increase this year now that Medicare—as of January 1—began paying for virtual doctor visits to determine if an in-person visit is needed.

Virtual health can reduce clinical costs and improve members’ experiences by keeping them healthy and out of the hospital—and both patients and physicians are interested in it. The Deloitte 2018 Surveys of US Health Care Consumers and Physicians have found that both stakeholder groups agree on the benefits of virtual care. Consumers point to convenience and access (64 percent) as important benefits. The top three benefits from physicians’ perspectives are improved patient access to care (66 percent), improved patient satisfaction (52 percent), and staying connected with patients and their caregivers (45 percent).

Virtual tools extend beyond telehealth and include email, texting, and video chat applications. While the technology that drives virtual care has been available for several years, adoption is just beginning to ramp up—driven largely by Medicare’s changing payment models. By focusing on return on investment and value of investment, organizations can develop a comprehensive vision, define goals, prioritize and sequence virtual care investments, and decide how to measure success. Consider these examples:

  • Mercy Virtual Care Center, a three-year-old, 125,000 square-foot hospital outside of St. Louis, has four floors bustling with 850 nurses, doctors, technicians, and other personnel. What it doesn’t have is patients…at least not inside the facility. All of Mercy’s patients are seen virtually by specialists and other clinicians who meet with their patients electronically through remote real-time video appointments. Patients might be at home or in a more traditional hospital.
  • An East Coast health system with more than 50 hospitals has an app that allows its patients to have virtual consults with their clinicians. The interface mirrors technology like video calls, which many consumers already know. This has allowed the health care system to shift high-touch, in-person care toward more emergent conditions.
  • DeloitteASSIST is a digital assistant that is being used by some hospitals in Australia (we are awaiting approval for use in the US). Existing nurse-call systems can’t distinguish between a patient who has fallen and a patient who can’t figure out how to work the television remote. The digital assistant responds to patient voice commands and uses AI and cognitive software to triage requests. Patients receive immediate responses to their requests, confirming they have been heard—and that someone is on their way.

As FFS revenue recedes further, hospital leaders could find it more challenging to pay for new technology. Once the industry reaches a tipping point, revenue based on outcomes and risk could exponentially increase, leaving even fewer resources for new investments. For hospitals and health system leaders that haven’t yet made investments in virtual health and tools that can help digitally connect to patients and to each other, now is the time.

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1 Healthcare IT News, How AI command centers are helping hospitals harness analytics and manage operations, May 2018


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In the News

Proposed HHS rule would remove safe-harbor protections for drug rebates

The US Department of Health and Human Services (HHS) has proposed eliminating safe-harbor protections for the rebates drug manufacturers pay to pharmacy benefit managers (PBMs), Medicare Part D plans, and Medicaid managed care organizations, effective January 1, 2020. The proposed rule, which was issued January 31, is part of the administration’s larger strategy to reduce drug costs, as laid out in its Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (see the January 8, 2019 My Take).

The proposal includes three changes that would impact rebates used in Medicare and Medicaid:

  • Removing safe-harbor protections by changing the definition of “discount” to explicitly exclude the price reductions drug manufacturers give to PBMs, Part D plans, and Medicaid managed care plans.
  • Adding safe-harbor protections for the price reductions drug manufacturers offer consumers at the point of sale.
  • Adding safe-harbor protections for arrangements between PBMs and drug manufacturers, wherein they provide services such as utilization management, medical education, and medication monitoring.

Notably, the rule would keep in place safe-harbor protections for rebates paid under arrangements with other stakeholders such as wholesalers, hospitals, physicians, and pharmacies. Through the proposed rule, the administration seeks to make drug prices more transparent. As discussed in The future of drug rebates: Are they to be or not to be?, pharmaceutical manufacturers establish list prices for their products with an understanding that discounts and rebates will lower the prices employers and government programs actually pay. Health plans and PBMs typically consider rebates as they design their formularies (the preferred drug lists used by health plans). In 2017, rebates and discounts offered by brand-name drug manufacturers reduced list prices by an average of 44 percent, as reported in the blog.

On the same day, the Pharmaceutical Care Management Association (PCMA), the organization representing the PBM industry, issued a statement opposing the proposed rule. PCMA says that eliminating rebates in Part D would have caused 2018 premiums to increase by 52 percent—and noted that Part D rebates yielded $34.9 billion in premium savings for enrollees from 2014 to 2018.


Higher-than-expected claims, state and federal rules led to higher premiums during first years of exchanges

Higher-than-expected medical claims—coupled with new state and federal requirements—affected insurance premiums, health plan participation, and enrollment during the early years of the public insurance exchanges, according to a new report from the Government Accountability Office (GAO). Public insurance exchanges, which were established by the Affordable Care Act (ACA), began selling 2014 health coverage on October 1, 2013. Health plans that participated between 2014 and 2016 said a lack of historical data about the new enrollees made it difficult to create accurate actuarial assumptions.

The report notes that several other factors also contributed to the higher-than-expected claims costs:

  • Special enrollment periods: Some health plans said that the rules around life events (e.g., loss of health coverage, change in address, or getting married or divorced) allowed too many people to enroll in health coverage outside of the defined open-enrollment period. In 2017, HHS took steps to minimize abuse of the special enrollment periods.
  • Transitional health plans: HHS permitted some plans that existed prior to 2014 to be sold after the exchanges became operational. These plans did not have to comply with the ACA’s coverage mandates, and therefore tended to be less expensive. Moreover, some health plans said that these types of plans were most attractive to healthier people, which made risk pools worse for some exchange plans.
  • Sicker enrollees: People who enrolled in exchange plans had higher rates of several diseases (e.g., diabetes, depression, Hepatitis C, and end-stage renal disease) than the overall individual market population had prior to the ACA.
  • High use of services: Outpatient and inpatient services were in higher demand than many health plans predicted.

(Source: GAO, Claims Costs and Federal and State Policies Drove Issuer Participation, Premiums, and Plan Design, January 2019)

New app tells Medicare beneficiaries ‘what’s covered’

CMS has launched a new application that allows Medicare Part A and Part B beneficiaries to see whether Medicare covers certain medical services and items. The “What’s covered” app is part of CMS’s eMedicare initiative to modernize the Medicare program for beneficiaries (see the October 9, 2018 Health Care Current). CMS says it regularly receives questions about the services covered under Medicare, and the new app could help eliminate some of those questions by allowing beneficiaries, caregivers, and others to access coverage information through their mobile devices. The information available on the app mirrors the most commonly accessed content from the website.

CMS encourages flexibility, targets opioid use, in Medicare payment proposals

On January 30, CMS released Part II of the proposed 2020 Advance Notice for Medicare Advantage (MA) rates and payment policies for Part D plans.

CMS expands upon changes made for 2019—the first year health plans are permitted to provide supplemental benefits for specific populations. In 2020 and beyond, MA plans will have even greater flexibility to provide chronically ill beneficiaries with tailored services, such as home-delivered meals and nonmedical transport. The CHRONIC Care Act of 2018 called for this expansion by loosening the rules to include non-health-related benefits. The 2020 Advance Notice also proposes to update the payment methodologies used for MA and Part D plans, including removing several measures from the Star Ratings program. This is in addition to the changes proposed to the risk-adjustment program made in Part I of the Advance Notice, which was released on December 20, 2018 (see the January 8, 2019 Health Care Current). CMS also noted that premiums for MA and Part D plans are at a three-year low.

CMS also issued a Draft Call Letter containing recommendations to address the national opioid crisis. In the letter, CMS proposes encouraging MA plans to offer targeted benefits and cost-sharing reductions to patients who have chronic pain or are undergoing treatment for addiction. The agency also proposes encouraging Part D plans to reduce cost-sharing for opioid-reversal agents. According to CMS, the agency’s policies targeting overutilization have helped reduce the percentage of Part D beneficiaries using opioids, from 36.3 percent in 2010 to 31.3 percent in 2017.

(Source: CMS, CMS proposes Medicare Advantage and Part D payment and policy updates to maximize competition and coverage, January 30, 2019)

Blues plans spent $25 billion on elective knee, hip surgeries in 2017

Elective orthopedic surgeries made up nearly half (47 percent) of all orthopedic spending among Blue Cross and Blue Shield plan members in 2017, according to a Blue Cross Blue Shield Association (BCBSA) report released on January 23. Blues plans spent more than $54 billion to treat all orthopedic pain conditions (including pain in the muscles, bones, and joints) in 2017. The $25 billion spent on surgeries that year is up 44 percent from 2010. The report, which analyzed medical claims data from 2010 to 2017, found that knee-replacement surgeries increased by 17 percent, and hip replacements increased by 33 percent, during the time period. BCBSA’s report also noted changes in costs for these surgeries, including:

  • From 2010 to 2017, the average price of knee-replacement surgery grew by 6 percent, and the average price of hip replacements increased by 5 percent.
  • The average price for an inpatient knee-replacement surgery is $30,249, compared to $19,002 for outpatient surgery.
  • The average price for inpatient hip-replacement surgery is $30,685, compared to $22,078 for outpatient surgery.
  • In 2017, 11 percent of all knee surgeries and 8 percent of hip surgeries were performed in outpatient facilities.

(Source: BCBSA, Planned knee and hip replacement surgeries are on the rise in the U.S., January 23, 2019)

Senate and House committees hold hearings on drug prices

The Senate Finance and House Oversight and Reform Committees held hearings on January 29 to investigate the high costs for prescription drugs—and discuss methods to discourage drugmakers from setting high prices. As noted in a recent My Take, addressing pricing, spending, and costs for prescription drugs is expected to be a priority for the 116th Congress.

Both hearings included witnesses whose children rationed insulin because of its high cost. During the Senate Finance Committee hearing, Senator Chuck Grassley (R-Iowa), who serves as committee chair, called for greater transparency from drug manufacturers and endorsed the administration’s efforts to require manufacturers to publicly share their prices (see the October 23, 2018 Health Care Current). Grassley specifically singled out the rising costs associated with insulin. Three drug-pricing experts discussed the practice of paying physicians a 6 percent markup over a drug’s average sales price (ASP) in the Medicare Part B program. According to the experts, this could encourage physicians to prescribe higher-cost drugs.

During the hearing in the House, Oversight and Reform Committee Chairman Elijah Cummings (D-Md.) announced plans to investigate drug pricing. He told the committee he had sent detailed requests for information to 12 drug manufacturers. Cummings is also supporting a package of bills that would allow Medicare to negotiate prices, increase competition from generics, and allow consumers to import drugs from Canada (see the January 29, 2019 Health Care Current). The leader of an economic think tank urged lawmakers to reduce the costs of drug approvals for biosimilars, which are the generic variants of biologic drugs. He also recommended implementing a fast-track approval process for drugs that do not have competition and allowing pharmacies to substitute biosimilar drugs for brand-name biologics. Additionally, the director of a hospital’s financial division suggested that drug manufacturers should have to justify price increases.

Breaking Boundaries

Chatbots might need some adjustments to win the hearts and minds of health care consumers

Chatbots used in health care are not meeting consumer expectations, according to a new report from UserTesting. Chatbots are computer programs that simulate conversation with humans, typically through websites. Organizations that rely on chatbots to engage consumers and simplify their website experience might want to check with users to see if they trust the chatbot feature—and determine if the technology can handle their complex queries.

The report is based on data from 500 consumers who evaluated chatbots—from several different platforms—on their ease of use, speed, credibility, aesthetics, and ability to delight. Participants were asked to pretend to have symptoms related to a common cold or food poisoning. They then used the apps to ask basic questions and have their symptoms diagnosed. Results showed that consumers didn't completely trust the diagnoses or basic advice offered by chatbots. Consumers were also concerned about their privacy.

The study also determined that the chatbots didn’t meet consumer expectations for handling complex conditions. When users tried to diagnose food poisoning, they found the chatbot experience became less intuitive and more overwhelming. Overall, the study found that consumers are open to using health care chatbots—73 percent of participants said the chatbots are helpful. But the researchers concluded that consumers won’t fully embrace chatbots until certain features are improved.

A Deloitte report offers these tips for organizations that are considering chatbots:

  • Have a clearly articulated value proposition: Chatbots can provide basic customer support, highlight and drive sales opportunities, support human interactions by providing detailed facts, or streamline internal processes. Organizations should understand and articulate the goals they want their chatbots to achieve.
  • Focus on specific products and services: Organizations should consider initially limiting their chatbots to one product or service. The chatbot should be engaged when the conversation turns to its specialty. Organizations can then refine and expand the chatbot’s knowledge base by feeding it more relevant information over time.
  • Ensure all relevant data is available: A chatbot needs to have all the relevant information about the products or services it is supporting. Organizations should be sure the chatbot has been exposed to internal process flows, specific customer-journey maps, and the deep knowledge that is required to answer questions and generate responses.
  • Learn and adapt: Organizations should use the data obtained from chatbot-centric interactions to further refine the chatbots themselves. They should also have processes in place to harness these learnings to improve chatbots’ products and services.

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