2018 outlook: Many hospitals and health systems will be straddling two canoes | Deloitte US has been added to your bookmarks.
2018 outlook: Many hospitals and health systems will be straddling two canoes
Health Care Current | November 14, 2017
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.
2018 outlook: Many hospitals and health systems will be straddling two canoes
By Steve Burrill, Vice Chairman, US Health Care Providers Leader, Deloitte LLP
As we paddle into 2018, many hospitals and health systems are rowing upstream – with a bit of choppy water ahead – straddling two canoes. The smaller canoe is value-based care, and many CEOs are trying to find stable footing. The other shoe remains firmly planted in the larger fee-for-service (FFS) or volume canoe.
In a recent survey conducted by the Deloitte Center for Health Solutions, hospital and health system CEOs told us they are concerned about operating under these two completely different financial models. In the long run, hospitals that have put more of their business in risk-based contracts earlier might fare better than those where it makes up a small percentage of revenue.
We’ve been talking about the shift to value-based care for the past several years now. Although the transition away from FFS is taking place, adoption is occurring more slowly than many hospital and health system CEOs anticipated. Almost 30 percent of all health care payments in the US are tied to alternative payment models, according to an October 30 report from the Health Care Payment Learning & Action Network – a public-private partnership launched by the US Department of Health and Human Services.
I’m not aware of any hospitals that have a majority of their payments coming from value-based contracts. However, I expect adoption will increase in 2018 now that the US Centers for Medicare and Medicaid Service (CMS) has issued final regulations for the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). Initiatives from CMS’s Center for Medicare and Medicaid Innovation, state Medicaid programs and, to some extent, private-sector health plans, could encourage further acceleration.
Along with strategically moving their business model from volume to value, I see four other challenges that hospitals, health systems, and physicians could face as we enter 2018.
Challenge 1. Sustaining positive margins in an uncertain and evolving environment
Sustaining positive margins might be one of the biggest issues for hospital and health system CEOs as we head into the New Year. Here’s why:
- Changes to the 340B Program: Recent changes to the 340B Program could result in a steep reduction in pharmaceutical margins for hospitals that participate in the program.
- Lower inpatient revenue: Inpatient revenue has fallen 18 percentage points since 1994, which will likely push some health systems to consider additional revenue streams. Although operating margins increased in 2010 after the Affordable Care Act (ACA) due to increased insurance coverage – and as the economy emerged from a difficult recession – they began to level off beginning in 2012. I expect the actual cost of delivering care will continue to increase faster than inflation, but revenue increases won’t keep up.
- More value-based contracts: As health systems take on more at-risk contracts with health plans and government payers, they become financially responsible for the health of their members. For many hospital leaders, it will be critical to understand the populations included in their risk-based contracts. The people who make up a community won’t necessarily reflect the population included in a contract. Members in a contract might be sicker and higher users of resources compared to the broader community. While health plans seem to understand this, some health systems aren’t there yet.
How can hospitals make up these higher costs given that revenue is likely to be relatively flat in the year ahead? Hospitals that are strictly in the FFS business might be able to boost margins by bringing in more cases – a tried and true approach, but not one that works with value-based care.
New approaches, such as using predictive analytics and artificial intelligence to improve the supply chain, or robots and cognitive automation to enhance finance and revenue cycle processes, have the potential to bend the cost curve and improve revenue next year and in the years to come. These emerging technologies, which are outlined in our recent paper, could help hospitals truly innovate their operations in the face of mounting financial pressures.
Additionally, to help offset potential losses, hospital leaders might want to consider alternative revenue streams, such as urgent care centers or joint ventures with health plans or other health systems, to counter declining revenue from in-patient services.
Challenge 2. Boosting use of electronic health records
The vast majority of hospitals and health systems are using electronic health records (EHRs) in some capacity, but I see many levels of implementation. Some hospitals continue to use EHRs that are several generations old and are little more than data repositories that are not interactive. More sophisticated hospitals are beginning to rely on EHRs to improve care. An EHR, for example, might trigger a warning to a physician who prescribes a drug that could cause an adverse reaction with another medication. The next step is to figure out how to extract data from the EHRs and use it to improve care quality through the use of data analytics, predictive analytics, and better care coordination.
Using big data to create better care plans and higher quality for patients is what hospitals and health systems should work to refine. In the year ahead, hospital leaders should get EHRs into the hands of every clinician. They also should work to make EHRs more interoperable – across systems as well as system to system.
Challenge 3. Improving efficiencies through virtual care including telehealth
Telehealth is another technology poised to reshape care delivery in 2018. Office visits conducted through a smart phone or tablet are becoming more prevalent as risk-based contracts encourage hospitals and health systems to build a holistic view of the patient, and consider new sites of care including the home. Still, one of the biggest barriers for the adoption of telehealth is the lack of payment for visits. In a volume-based world, clinicians generally do not get paid for virtual visits.
As health systems take part in more value-based contracts (and get paid a per-member per-month fee), the health system has a financial incentive to be efficient and effective. If telehealth can make clinicians more effective, hospitals are going to use it. However, executives at hospitals that generate most of their revenue from volume have little reason to adopt telehealth. These executives want patients to come in for their visits. As we enter 2018, hospital leaders should take a closer look at virtual health and telehealth as this technology becomes more widely adopted – and expected by consumers.
Challenge 4. Winning the hearts and minds of patients and families
The most successful hospitals in 2018 might be those that focus more attention on the member experience. Historically, this has not been the top priority for hospitals. But, we are seeing a shift. Consider this: According to Deloitte research, good patient experience is associated with higher hospital profitability. Hospitals with the highest patient-reported experience scores, for example, reported an average net margin of 4.7 percent. Hospitals with “low” ratings, by contrast, reported an average net margin on 1.8 percent.
Hospitals and health systems should help members manage chronic diseases, and keep patients out of the hospital through the use of preventive medicine and wellness programs. This might include connecting to their patients digitally and monitoring them at home. For patients who make on-site visits, hospitals and physician offices should create environments where patients feel comfortable. It also has to be easy for them to schedule appointments, and easy to get in to see a clinician. Patients also want to understand their bills, and even find a parking spot when they visit. To win the hearts and minds of their customers, patients should be greeted and thanked for their business. They want a sense of belonging.
As we paddle into the unknown waters of 2018, many hospitals will enter into new risk-based contracts, or will expand existing ones. Some hospitals will remain seated in the FFS canoe despite mounting pressure to change. Executives who are aware of potential hazards ahead, and have a map to help navigate around them, may be better positioned for a successful journey.
In the news
CMS announces shift in Medicaid program objectives and waiver process
During a November 7 speech to state Medicaid directors, Seema Verma, the CMS Administrator, announced updated objectives for Medicaid, including new guidelines for 1115 and 1915 waivers, and state plan amendments (SPAs). The updated objectives largely mirror the goals that she, and former Secretary of Health and Human Services (HHS) Tom Price, outlined in a letter to states earlier this year (see the March 21, 2017 Health Care Current).
The Center for Medicaid and CHIP Services (CMCS) – the organization within CMS responsible for overseeing the Medicaid Program – published two bulletins outlining changes to the Medicaid waiver and State Plan Amendment (SPA) processes.
The Section 1115 Demonstration Waivers Bulletin says that CMS will:
- Work with states to develop an individual approval process timeline and modify the special terms and conditions – which serve as a legally binding agreement between the state and CMS – to allow maximum flexibility
- Develop an expedited approval pathway for waivers that it determines to be substantially similar to those previously approved in other states
- Approve waiver extensions of up to ten years (previously limited to five years) for certain waivers that it considers to be routine and non-complex
- Provide states with a transparency review checklist
- Provide guidance to states regarding waiver budget-neutrality rules and related terms and conditions
The State Plan Amendment and Section 1915 Waivers Bulletin says that CMS will:
- Hold introductory calls with states within 15 days of receipt of a SPA or 1915 waiver application
- Use a “toolkit” that includes pre-printed SPA and waiver templates, application checklists, and policy guidance to reduce the volume of incomplete applications the agency receives from states
- Send all states a comprehensive list of their pending SPA and waiver applications along with any outstanding requests for additional information (RAI)
- Disapprove a pending SPA if the state does not respond to outstanding RAI by February 2018
- Expand the use of the Medicaid and CHIP Program’s web-based application submission portal to additional types of SPAs
House E&C Committee discusses how to improve MACRA and alternative payment models
In a House Energy and Commerce Committee hearing last Wednesday, representatives from physician groups said many doctors are having difficulty transitioning to alternative payment models (APMs) under the Medicare Access and CHIP Reauthorization Act (MACRA).
While large health systems can provide technical assistance for physicians, small and rural practices, and underserved hospitals often cannot, the witnesses explained. Physicians who lack technical support risk not being able to succeed (e.g., by receiving incentives from CMS) in the shift toward value-based care.
Representatives of the Physician-Focused Payment Model Technical Advisory Committee (PTAC) – an 11-member committee established by Congress as part of MACRA in 2015 – indicated that there needs to be better communication between PTAC and CMS/HHS.
In its 2018 final rule, issued November 2, CMS said it expects between 185,000 and 250,000 physicians will participate in advanced APMs under MACRA (see the November 7, 2017 Health Care Current).
House approves bill to fund CHIP for five years
On November 3, the US House of Representatives passed a bill that would extend funding for the Children’s Health Insurance Program (CHIP) for five years. Federal funding for the program officially expired September 30 (see the October 3, 2017 Health Care Current).
The bill passed along party lines, with Democrats opposing the bill because it would allocate funds from the Prevention and Public Health Fund to fund CHIP’s reauthorization. The bill would also increase Medicare premiums for beneficiaries who earn more than $500,000 a year.
The Senate has its own bipartisan version of the bill, which does not include budget offsets, but has not yet passed the full Senate. The Senate still needs to approve the House version of the bill, but Democrats say they will oppose it because of its funding sources (see the October 31, 2017 Health Care Current).
CMS expands diabetes program nationally
CMS says it will expand its Medicare Diabetes Prevention Program (MDPP) nationwide beginning on April 1, 2018.
By teaching long-term dietary, physical activity, and weight control strategies in a group setting, MDPP helps people who have prediabetes avoid developing type 2 diabetes (see the August 29, 2017 Health Care Current). CMS estimates that Medicare spent $42 billion on prescription drugs, hospital services, and physician visits for beneficiaries with preventable diabetes in 2016. For every successful participant in the program, CMS could save more than $2,000.
Clinicians and providers participating in the program receive higher payments with beneficiary weight loss and attendance at education sessions.
- Providers receive a $160 bonus for every patient who achieves the program’s 5 percent weight-loss benchmark.
- Providers receive a $195 payment for patients who do not meet the weight loss benchmark, but attend every session.
- Providers whose patients do not meet the minimum standards for weight loss or attendance receive lower payments.
CMS has received some criticism for not covering virtual versions of the program, which could be more accessible for some patients. However, the agency says it might include them in the future if a reliable virtual program becomes available.
Related: Diabetes is a complicated, costly, chronic disease. Many organizations are piloting strategies and programs to better understand diabetes prevention and how to improve care for patients with the disease. Deloitte research identified three common themes in improved diabetes care: Clinical innovation, patient engagement, and financial incentive alignment.
GAO says CMS should do more to track opioid abuse in Medicare
The criteria CMS uses to help track Medicare beneficiaries at risk of opioid addiction are insufficient, according to a new report from the Government Accountability Office (GAO).
CMS flags beneficiaries at risk of opioid abuse if they receive high doses of opioids or receive medications from four or more providers or pharmacies. CMS can “lock in” a beneficiary to only one prescriber and one pharmacy. The GAO report said that CMS could strengthen its opioid abuse prevention efforts if it:
- Gathered more information on the numbers of individuals who might be at risk for opioid addiction
- Required the National Benefit Integrity Medicare Drug Integrity Contractor (the contractor that works to prevent and track fraud, waste, and abuse in Medicare Parts C and D) to track providers who prescribe high volumes of opioids
- Mandated Part D plans to report on the actions they are taking with high-opioid prescribers
The GAO report said that strengthening these criteria will help CMS achieve its goals of reducing risk of harm from opioid use through its Opioid Misuse Strategy. HHS agreed with the first two recommendations, but not with the third recommendation, citing existing reporting requirements.
CBO estimates repealing individual mandate will save $338 billion
Assuming no changes to existing law, the Congressional Budget Office (CBO) estimates that the federal budget deficit would decrease by $338 billion between 2018 and 2027 if Congress repeals the ACA’s individual mandate. CBO attributes these savings to reduced spending on premium subsidies – four million fewer people would have health insurance by 2019, and 13 million fewer by 2027.
The CBO, along with the Joint Committee on Taxation (JCT), released the report in response to a request from Representative Kevin Brady (R-Texas), chairman of the House Committee on Ways and Means.
CBO also said another effect of repealing the mandate would be higher premiums. The agency estimates that premiums for non-group plans would rise by roughly 10 percent each year during the next ten years due to the decrease in enrollment.
If lawmakers were to eliminate only the penalty, as opposed to the entire mandate, the effects on the budget and premiums would yield “very similar” results, the agency said.
The agencies are now revising their analytical methods, so these estimates might change in the future. CBO released the report because Congress might add a repeal of the individual mandate to the tax reform legislation.
(Source: “Repealing the Individual Health Insurance Mandate: An Updated Estimate,” Congressional Budget Office, November 2017)
Maine voters approve Medicaid expansion
On November 7, fifty-nine percent of Maine voters approved a ballot measure to expand the Medicaid program as called for by the ACA. Question 2 on the ballot asked whether to expand Medicaid to individual adults with income at or below 138 percent of the federal poverty level, as 31 other states have already done.
Maine Governor Paul LePage (R) advocated against the expansion and previously vetoed five expansion bills that had been approved by the legislature. He said that he will not implement the expansion until the state legislature outlines a clear funding mechanism. The initiative legally takes effect 45 days after the legislature next convenes, which is in early January. After that, the state administration has 90 days to submit the federal paperwork to implement the expansion. Maine is the first state to expand Medicaid by referendum.
More than half of hospitals receive bonuses under CMS value program
In 2018, fifty-seven percent of all eligible hospitals will receive bonuses under CMS’s value-based purchasing program, up from 55 percent in 2017.
The value-based purchasing program rewards acute-care hospitals with bonus incentive payments if they reach certain clinical, safety, patient- and caregiver-centered experience, or efficiency goals. The program is budget neutral, and the bonuses are funded by reducing payments to each diagnosis-related group (DRG). High-performing hospitals receive bonuses.
Some critics have questioned the program’s effectiveness, and whether the percentage bonus is sufficient to give hospitals the incentive to improve quality.
The mobile eye clinic in your smartphone
Refractive errors (e.g., far and near sight, and astigmatism) are the most common causes of vision impairment around the world, and are the second most common causes of blindness. These conditions can be prevented early with glasses, but in developing countries, eye tests and specialists might not be accessible for many people. An app from a company called Peek Vision is helping non-specialists – including teachers and health workers – test people’s sight, and determine if further investigation is needed, using a smartphone.
While many people in developing countries do not have access to specialized health care, many people own mobile phones. The International Telecommunications Union estimated there were 7.3 billion mobile phone subscriptions worldwide in 2016 – up from in 2.2 billion in 2005. Moreover, of the people who owned a mobile phone in 2016, an estimated 5.8 billion lived in the developing world, compared to just 1.2 billion in 2005. This means, for example, that more Africans have access to mobile phones than piped water.
The technology behind the Peek Acuity app seems fairly simple. A capital letter E, which changes in orientation and size, is shown on the phone’s screen. The patient points in the direction that the letter is facing and the tester records the response by swiping a finger across the phone’s screen. If the patient can’t tell which direction the letter is facing, the tester shakes the phone. The app then calculates a vision score, provides a snapshot of how the patient sees the world, and determines if the patient needs a referral.
To date, more than 100,000 children in Kenya have been screened through the app. Most of the screenings take place in schools. About 5 percent of those screened have been found to have serious visual impairment and have been referred to treatment. Community volunteers are going door-to-door to screen older people. This means specialists are able to focus on serious problems in hospitals rather than on screenings. Peek is also being used in India and Botswana, with trials in Ethiopia and Tanzania.
Another company, Eyenetra, is revolutionizing eye care in rural India, where some patients have to travel several hours to sometimes hard-to-reach clinics. Similar to Peek, the company focuses on training lay people to provide screenings and basic eye exams in their villages. The company uses a cloud-based technology platform, combined with a smartphone and a handheld auto-refractor device, which measures sphere, cylinder, axis, and pupillary distance through a series of game-like interactions in a virtual-reality environment.
Related: While these startups are serving patients in developing countries who don’t have access to care, the companies are also looking to the US market, and are creating solutions for people who might have access to eye specialists but are looking for more convenient options. A startup called Blink recently launched a service in New York City that allows people to pay $75 to get a routine eye exam in their home or office. The company sends a technician to the customer with a set of smartphone-compatible tools similar to the ones described above. The customer gets screened, and the results are sent to a certified optometrist. A prescription, if needed, is emailed to the patient. The company intends to expand beyond New York City soon.