Reimbursement as an Experimental Science

The fog of healthcare reform has left healthcare leaders confused regarding the future of third party reimbursement; governmental and commercial. The guessing game is in full swing:
  • Fee-for-service?
  • Capitation?
  • Bundled payments?
  • Episode-of-care-payments?
  • Other?

The smart money should be on “all of the above”. My take is reimbursement to providers will be an “experimental science” for the foreseeable future. It is unlikely that the payer markets will flip a switch and convert largely from a fee-for-service world to a neat, clean and understandable new world of health services pricing and payments.

The less integrated community health systems are scrambling. There seems to be a return to the behaviors of the late 1980’ and early 90’s; the “PHO” era. Independent physicians and community hospitals are quickly forming enterprises to “accept financial risk”. The Pioneer ACO experiment is underway. By all accounts, some are making progress. Others have already dropped out.

The more integrated health systems with years of experience under their belts seem comparatively unconcerned; “accountable care organization? We’ve been that for decades. We can contract for, accept and manage payments in any form. It is more important that we get paid, and less how we’re paid”.

Structural design of provider systems will need to accommodate reimbursements in multiple forms. It follows then that the more integrated health systems should be best positioned to convert various forms of “risk payments” to profitable financial performance as a result of the characteristics of the integrated health system design; especially the ability to control or sufficiently influence the totality of the required operating expense and capital structures including clinical models, provider productivity and related compensation.

The more integrated health systems typically place “accept financial risk from payers” high on the list of market tactics. Why? Because they know many of their competitors can’t.

Accepting contracted financial risk is only step 1. Organizations must internalize the competencies to manage that risk to sufficient profitability.

This brings us to the last and perhaps most counter-intuitive point. The market cycle we’re in now may be the most profitable for the more integrated health systems ready and able to accept and manage financial risk. Why? It is highly likely that the health insurance premium inflation curve (governmental and commercial) will remain on a less steep, but positive slope going forward.

Consequently, financial risk transfer inflation curves for providers are likely to remain positive as well, but at a lesser slope grade. The provider systems that are able to reduce total costs of care, while maintaining quality will benefit from a widening differential between realized reimbursement rates and total costs of care through the cycle (however long it lasts).

So, health systems prepared to pursue financial risk contracting as a principal strategy and are also prepared to reduce total costs of care at a rate that exceeds downward pressures on volumes and costs will benefit disproportionately to those who are unable to function this way; at least for a while.  
Daniel Zismer, Ph.D.2013