Accountable Care. Winter in this issue. What you need to know about the latest healthcare movement

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1 NAVIGANT PULSE WINTER Winter 2011 A Deep Dive into Accountable Care What you need to know about the latest healthcare movement in this issue The Horn of the ACO Unicorn ACOs and Supply Chain: Brace for Impact Bridging Employed Physician Compensation Plans into a New World of ACOs 2011 Navigant Consulting, Inc.

2 NAVIGANT PULSE WINTER in this issue A letter from DAVE & Alex NAVIGANT NEWS THE HORN OF THE ACO UNICORN John Schmitt takes a close look at patient-centric care as the key to creating successful ACOs. Bridging Employed Physician Compensation Plans into a New World of ACOs Ron Vance explores physician compensation plans as the market moves to ACOs. ACOs and supply chain: brace for impact Caroline Kolman highlights the role of effective supply chain management in value-based ACOs. NAVIGANT as AN expert news source upcoming events

3 NAVIGANT PULSE WINTER A Letter from Dave & Alex Dave Zito Alex Hunter Clients, Colleagues and Friends: Accountable Care Organizations (ACOs) make up only four pages in the 2,000-page healthcare reform law passed by Congress last year. But for many physician practices and hospital systems, accountable care is the most talked-about part of the controversial law because it could transform the way we do business and care for patients. And no matter how the Patient Protection and Affordable Care Act may be modified by the courts or a now-divided Congress, the movement toward accountable care will not abate because it offers the potential to accomplish what physicians and hospital administrators have sought for decades: more integrated, cost-efficient and highquality patient care. Of course, the accountable care movement has its share of skeptics. To some, no matter how glowing the promised benefits, ACOs bring to mind another healthcare acronym HMOs. While we saw some excellent examples of Health Maintenance Organizations in the 1990s such as Kaiser Permanente, the cynics of the world need to be convinced that ACOs won t also fall victim to patient and provider backlash against patient care restrictions and financial limitations. Moreover, even more optimistic providers legitimately worry that the needed investment in electronic medical record systems and other ACO infrastructure could have inordinately long paybacks. Those providers who see accountable care as an essential business strategy for the future will rush to embrace the partnerships between clinicians and hospitals when the Medicare shared savings programs are established next year. Many more will wait and see the results of pioneering partnerships before jumping in. But regardless of how quick or how cautious the pace, we believe the strategies and goals underlying ACOs cannot be ignored as providers adapt to a rapidly changing healthcare arena. We at Navigant are energized with the prospect of sharing our expertise because those strategies and goals are in our sweet spot integration of organizational design, clinical integration and operational management for physician groups and physician-hospital partnerships. Our expertise in these key areas has never been deeper since the combination of Navigant s healthcare team and EthosPartners Healthcare Management Group late last year. Once again, this issue of Pulse devoted to accountable care demonstrates the many ways Navigant can arm you with the vital information needed to navigate through all the changes. John Schmitt s article on The Horn of the ACO Unicorn is aptly titled because it focuses on the most distinctive feature of ACOs: the promise of patientcentered care. Ron Vance examines a true pocketbook CONTINUED ON NEXT PAGE

4 NAVIGANT PULSE WINTER A LETTER FROM DAVE & ALEX issue: how to adapt employed-physician compensation plans as the market moves from fee-for-service to outcome-based reimbursements. Caroline Kolman examines a crucial component of ACOs promise of greater efficiency: supply chain management. In addition, we ll offer a preview of the new authoritative book on ACOs by Marc Bard, M.D. and Mike Nugent, a link to Alex Hunter s tips for transitioning to ACOs, as well as the latest client news and upcoming events on timely industry issues. As always, we welcome your comments. Please visit our website, or contact us by phone or . Best regards, Dave Zito Managing Director Navigant Healthcare Practice Leader (312) Alex Hunter Managing Director Navigant Healthcare Provider Services Leader (770)

5 NAVIGANT PULSE WINTER Navigant News St. Joseph Mercy Completes Michigan Heart Buy In an example of successful physician-hospital alignment, three Navigant Healthcare professionals Kathleen Henchey, Mike Lenahen and Ron Vance provided fair market value compensation assistance in a deal between St. Joseph Mercy Health System and Michigan Heart, PC, a physician-owned cardiovascular practice. The deal calls for St. Joseph Mercy Health System to employ Michigan Heart s 326 employees including 34 cardiologists and 10 nurse practitioners and physician assistants. St. Joseph Mercy Health System is growing a large, integrated network of outpatient services and physicians with a goal toward better coordinating care that is provided in more affordable settings for patients, shares Beth Cafaro, vice president for health networks, St. Joseph Mercy Health System. Rather than wait for health reform to force changes upon us, we are taking proactive steps to ensure future success, before many of the reform act measures go into effect in Navigant Experts Author New Book on Accountable Care Organizations Marc Bard, M.D., chief innovation officer of Navigant s Healthcare practice, and Mike Nugent, director and leader of Navigant s Managed Care Pricing team, are co-authors of a new book titled Accountable Care Organizations: Your Guide to Strategy, Design, and Implementation. The book provides the structural blueprints, management skills and cultural tools necessary to implement a successful ACO. Practical advice is bolstered with real world examples of leading healthcare providers that are pioneers in the rapidly changing world of accountable care. Published by the Health Administration Press, the book will be available in April CLICK FOR MORE INFORMATION America is dealing with a broken healthcare system. It s the perfect storm in the healthcare ecosystem. It s up to us to restructure the system so we can be accountable for the totality of care. Dr. Bard takes a hard look at what it takes to design and implement an effective accountable care organization. David L. Bernd Chief Executive Officer, Sentara Healthcare

6 NAVIGANT PULSE WINTER Navigant Raising Heart Health AwarenesS In honor of National Heart Month, Northwestern Memorial Hospital s Bluhm Cardiovascular Institute launched its consumer education and awareness campaign called Hearts a Bluhm. Navigant sponsored the campaign and participated in the event by having our award-winning corporate illustrator, Craig Frazier, paint a giant acrylic heart. His artwork is featured along with others throughout key high-traffic, Chicago-area locations to help Bluhm Cardiovascular promote heart health. Care Connection Program Earns Award for Healthcare Innovation A Navigant consulting team in the Healthcare Physician Strategy practice worked with Lifetime Health Medical Group (LHMG) over the last two years to develop a unique care management program. The Navigant team designed and developed Care Connection Coordination (C3) - an RN staffed systemic care management unit connecting patients to the most appropriate healthcare resources such as a primary care doctor, physician specialist, case manager, or community health resource. Since the program s inception, LHMG has reduced Medical Service Expense (MSE) costs by approximately $3.6 million over 18 months and improved quality within the hospital. In 2010, the program connected over 2,000 patients with available healthcare resources to reduce unnecessary costs while improving the quality of patient care in the Rochester area. The Rochester Business Journal is recognizing Navigant s work at LHMG with its annual Health Care Achievement Award for Innovation. The Award is given annually in recognition of individuals or organizations that have made a significant impact on the quality of healthcare in the Greater Rochester, NY area. HeartAware TEAM Wins Grant to Reduce Cardiovascular Disease in Rural Communities Scott & White Healthcare, Temple, TX, was recently awarded a $159,000 grant for their use of Navigant s healthaware solution in rural populations. Catherine McNeal, M.D., the primary investigator, applied for the AstraZeneca Healthcare Foundation to establish a new program called A to Z: HeartAware Reaching Rural Population (HARRP). The purpose of the HARRP program is to reduce the incidence of heart attacks, heart failure and stroke in rural, underserved populations. The team will expand and merge existing programs to provide basic cardiovascular disease risk factor screening and treatment through school-based clinics in four underserved, rural communities in central Texas. A multidisciplinary rural advocacy program also will be created within the four communities with teams of students representing the Colleges of Medicine, Nursing and Pharmacy within the Texas A&M Health Science Center System and in partnership with the Texas A&M School of Rural Public Health to identify and reduce barriers to healthcare for disadvantaged families. Congratulations to Navigant consultants John Schmitt, Ph.D., C3 Project Developer, Travis Wood, COO LHMG, and Matt BonDurant, LHMG Analytical Consultant.

7 NAVIGANT PULSE WINTER The Horn of the ACO Unicorn John P. Schmitt, Ph.D. An ACO is like a unicorn. Everyone can describe what one looks like, but no one has seen one. Such was the analogy offered by a speaker at the National Committee for Quality Assurance (NCQA) 2010 National Policy Conference. It s a good analogy. Unicorns do have many familiar characteristics but only one distinctive, unusual and noticeable feature a horn in the center of its forehead. The features of an Accountable Care Organization (ACO) are enumerated in Section 32 of the Medicare Shared Savings Program. Most of the features are variations of organizational models and payment systems quite familiar to healthcare practitioners. However, one section of the new legislation requires ACOs to meet patient-centeredness criteria specified by the Secretary of HHS (Health and Human CONTINUED ON NEXT PAGE

8 NAVIGANT PULSE WINTER Services), such as the use of patient and caregiver assessments This new patient-centric criteria will be the distinctive horn of the ACO unicorn. The new criteria will distinguish ACOs from the more familiar healthcare delivery models of the past. Further, just as the power of the unicorn is found in its horn, the unique power of the ACO will be found in its success in delivering patient-centered care in an inherently accountable fashion. WHAT THE ACO HORN IS NOT Almost every ACO presentation begins with a distinction between ACOs and past healthcare delivery models. The point is frequently made that an ACO is not just a new term for Health Maintenance Organization (HMO), Provider Sponsored Organization (PSO), Independent Practice Association (IPA) or some other similar entity. However, at the end of such presentations, skeptics often emerge contending that the ACO is really nothing new, while others see the ACO as a revolutionary healthcare development. Why the difference? In the end it is largely a matter of geography and experience. For example, many West Coast HMOs launched in the 1970s and earlier have proven more successful in managing medical expenses and measuring quality of care than similar initiatives in the rest of the country. In addition, most practitioners who entered the healthcare field in the last 10 to 15 years are not familiar with earlier delivery models which had ACO-like features. The ACO eligibility criteria cited in the new legislation is familiar in many respects. ACOs must have such traditional features as shared provider governance, multi-provider relationships, membership information, cost and quality measurement ability, case management and risk-sharing. Somewhat newer requirements include shared savings distribution capabilities, electronic prescribing and electronic medical record capabilities. One would think the successful and systemic implementation of these criteria would be sufficient for distinguishing an effective ACO. They are not. A determined conviction of the crafters of the ACO legislation is to avoid the root cause of the marketplace failure of many HMOs in the 1990s. HMO members deserted the organizations in large part because they did not like their inherent care restrictions, financial limitations and provider constraints. In other words, ACO success will not be ensured by organizational effectiveness, technological capabilities or positive financial performance. These will be necessary but not sufficient. The powerful horn of the ACO will be found elsewhere. WHERE THE ACO HORN IS Not many people alive today have seen true patient-centric care. It did exist at one point. Before World War II, most physicians were primary care practitioners. They delivered babies, set fractures, performed amputations, stitched up accidental wounds, treated strokes and dealt with whatever condition came in their office doors or was needed if they were summoned to the patient s home. Depending on the patient s economic condition, they were paid in money, food, blankets, barter of some type or sometimes not at all. A return to those times is not likely what will be proposed by the Secretary of HHS. However, this historic glance back into early healthcare offers a vivid baseline to get a vision of true patient-centric care. At that time, patient-centric care was as natural as a unicorn s horn. How did the patient-centric culture get lost? After the war ended in the 1940s, physician specialties emerged, due in large part to medical training received in the military. Community hospitals proliferated as the post-war population grew. As treatment protocols and specialty referrals became the norm, healthcare became provider-centric. When the social programs of Medicare and Medicaid were passed in the 1960s, the federal government became a healthcare payer. Commercial insurance, which was largely employer provided, caught the new wave of third-party coverage. As payers began to regulate their provider payments, healthcare became payercentric. Somewhere in these changes, even with the best of intentions, patient-centric care was lost. ACO legislators want the Center for Medicare and Medicaid Services (CMS) to lead the way to finding a CONTINUED ON NEXT PAGE

9 NAVIGANT PULSE WINTER patient-centric culture that incorporates the best of today s clinical, technical, financial and legal elements. The ACO legislation hints at what CMS will require of patient-centric ACOs. They will include teams of primary care professionals. These practitioners will use processes to promote evidence-based medicine and patient engagement, report on quality and cost measures, and coordinate care, such as through the use of telehealth, remote patient monitoring, and other such enabling technologies. The results of care received from ACO providers will be assessed by both patients and caregivers. Like Medicare Advantage Star ratings, assessment results will increasingly influence the patient volume and care payments received from CMS. It is reasonable to expect commercial carriers will catch this new wave of federal government initiatives as they have other waves of change in the past. unicorn will be its most prominent, admirable and potent characteristic. Undoubtedly some will hastily point out that the unicorn is a mythical creature that doesn t really exist. Will the successful ACO of the future also remain mythical? At the moment, its fate depends on CMS making the ACO believable and all the healthcare industry stakeholders becoming believers. About the author As Director, Subject Matter Expert (SME) John P. Schmitt plays an integral role in advising healthcare clients on managed care processes and health reform developments. Dr. Schmitt has more than 30 years experience in healthcare consulting, academics and corporation management. Contact John at or (423) THE ACO LANDSCAPE AHEAD Will plentiful herds of ACO unicorns populate local healthcare landscapes in the future? Their birth, survival and proliferation will depend on many events and decisions yet to come. One thing is certain. A new, successful ACO will not be a re-engineered provider organization with a patient-centric mission statement simply grafted onto its traditional structure. CMS Administrator, Dr. Donald Berwrick, has already offered such warnings. In December 2010 he advised attendees at a Commonwealth Club meeting in San Francisco that there will be two camps in response to the changes under the reform law. One will be authentic partners, the other will be cloaks of the status quo. Berwick emphasized that CMS is looking for partners. Future healthy and powerful ACOs will be distinguished by a patient-centric culture that is a natural part of the provider organization. It will be deeply rooted in the very infrastructure of the ACO. Further, the ACO will thrive on being accountable for the quality, cost and overall care of the patients receiving care from it. As a result, patients attributed to the ACO will stay with the ACO not by mandate but by loyalty. Most of all, the successful ACO will be immediately recognized by all by its unmistakable display of patient-centric care. The horn of the ACO

10 NAVIGANT PULSE WINTER Bridging Employed Physician Compensation Plans into a New World of ACOs Ronald L. Vance, JD Throughout the last two years, and for the first time in U.S. history, more physician practices were owned by hospitals than by independent physicians, according to a recent survey conducted by the Medical Group Management Association (MGMA). A previous Pulse article, Getting Ready for the Third Wave of Physician Hospital Integration, provided a range of strategic and tactical recommendations for health systems to better align and manage their new integrated physician partners, including a brief review of the benefits of flexible physician compensation plans to better prepare for bundled, payment-for-performance and related reimbursement reform arrangements. This article explores in more detail health systememployed physician compensation plans as the market moves from predominantly fee-for-service to fixed or outcome-based reimbursements in the new world of Accountable Care Organizations (ACOs). As the CONTINUED ON NEXT PAGE

11 NAVIGANT PULSE WINTER market moves from volume-driven to value-driven compensation, it is imperative that physician pay plans measure, report and incentivize higher levels of qualitative, in lieu of quantitative, performance. Confronting the Resulting Compensation Conundrums Just as hospitals/health systems are ramping up their levels of physician employment, many have been faced with shrinking operating margins to invest in physician-hospital affiliation initiatives. Furthermore, according to MGMA, the reported average level of operations financial support provided by hospitals per employed FTE physician relationship (based upon the performance of the ambulatory practice alone) is $75,728. Despite these financial challenges, the competition to employ physicians is increasing among hospitals that recognize the importance of tighter relationships with their physician partners. Therefore, despite their public pronouncements, too many hospitals and physicians are reluctant to develop and implement physician compensation plans that provide higher levels of incentives for quality, service and/or efficiency that go beyond current pressures for increased levels of productivity that effectively produce more revenues and require lower subsidies. For the same reasons, we continue to observe varying degrees of resistance to measure productivity based on effort generated regardless of the level of actual collections received per patient. In addition, increasingly physicians particularly the newest generation are seeking higher levels of security and are less willing to produce at higher levels for increased compensation, if that higher productivity sacrifices their lifestyle. There is a need to balance these new physicians desires for secure, competitive base salaries with the need for higher levels of productivity that are needed to afford their overall compensation and benefits packages. However, from a compensation design and physician culture development perspective, the longer hospitals place primary emphasis upon individual physician productivity and expectations for physician practices profitability, the more challenging it will be to move to more patient-centric compensation plans that reward for outcomes of care that will be needed for success under bundled payment arrangements within ACOs. There is no easy solution to this range of compensation conundrums for employed physician relationships. However, we recommend deliberate movement toward plans that increasingly include measurement and reward for outcomes that provide actual (or at least perceived) value to patients and payors for physician services. Lessons Learned from Current Market Physician Compensation Planning Both within the current largely fee-for-service compensation and the future shared risks of ACOs, we generally recommend avoiding the more extreme pure base salary and pure individual productivity physician compensation plan designs. Pure base salary plans generally lack sufficient accountability for minimum work standards and do not provide motivation for above minimum-workstandard performance. Pure productivity plans provide significant accountability for actual financial performance for individual physicians, but often fail to promote teamwork or include sufficient motivation for quality, service and other balanced-performance behaviors. The most predominant employed-physician compensation plans that provide better balance today continue to include: Revenue-less-expenses. Production based on Work Relative Value Units (wrvus) as assigned by the Centers for Medicare and Medicaid Services (CMS), plus other incentives. Base salary plus other performance incentives. Many of the revenue-less-expenses plans now further include funding of other quality/service incentives, as well as adjustments to the credited revenue based upon averaged or guaranteed levels of collections to protect the physician participants from poor billing and collections performance by operations groups. These plans are often retained in markets with relatively higher levels of overall physician reimbursement from government and commercial payors. CONTINUED ON NEXT PAGE

12 NAVIGANT PULSE WINTER An increasing number of the employed compensation plans measure physician clinical activities based on CMS assignment of wrvus. In effect, CMS assigns wrvus for physician effort based upon their documented Current Procedural Terminology (CPT) codes. Both the level of assigned wrvus and the CPT codes themselves are modified at least annually by CMS. Although imperfect, the CMS system attempts to credit more wrvus for higher documented levels of complex patient care services. This approach is considered payor neutral because the same level of production credit is provided for patient care services provided to all patients, whether they are indigent or have the highest level of commercial insurance. wrvu-based plans have increasingly been desired by physicians who have concerns about declining reimbursement levels and the collections performance by the operations group supporting the practice. Also increasingly used are base-plus-performance incentive plan designs that include significant accountability to earn base salary levels, and may include incentives for other quality/service and efficiency targets. These plans generally do not include production incentives. They are generally designed by hospitals for employed physicians that do not necessarily control their own volumes and therefore are harder to hold accountable for higher levels of professional collections and/or wrvus. These plans also are used when it is not in the hospital s best interest to incentivize increased utilization of patient care services such as intensivist or hospitalist physician services, where the primary goal is efficient management of care and not extended hospital stays and consultant physician expenses. Below is a summary of the comparative advantages and challenges of these plans. Most Frequently Utilized Integrated Physician Compensation Plan Designs Credited Revenues / Stipends (MINUS) Actual and Allocated Expenses EQUALS EARNED COMPENSATION Highest level of individual accountability for actual financial performance of the practice. Uses actual, not projected, accounting for allocated physician revenues and expenses. Most closely reflects the business model and incentives within a typical private practice. Often promotes individualism and less team culture; internal inequity. Vulnerable to significant/sudden changes in market expenses and reimbursement rates. Enhances physician demands for control over basic operations, revenue allocations, etc. Base Salary (PLUS) Production Incentive (PLUS) Quality/Service Incentive (PLUS) Other Compensation EQUALS EARNED COMPENSATION Comparative Benefits Payment is based upon a nationally recognized payor-neutral production metric that is externally competitive. The compensation benchmarks include market overhead, ancillary services, and allied health provider usage. Provides a potential metric for other non-cpt generating activities. Provides greater internal equity regarding pay rates. Comparative Challenges Requires further expense control to reduce churning (e.g., repeated patient visits, etc. that do not include further opportunities for reimbursement from payors). Shifts significant risk to health system re: affordability of the payment-per-wrvu. Availability to lock-in pay rates are subject to fair market value (FMV) tests. Base Salary (PLUS) Performance Incentives (PLUS) Other Compensation EQUALS EARNED COMPENSATION Provides significant security for annual compensation for hospital-based and/or other subspecialties that have less control over their own production and/or should not be incentivized to increase production. May include minimum work standards to ensure basic accountability and incentives for stretch goals re: patient care productivity, access, quality, service, efficiency, etc. May limit individual accountability and/or reward for production. Effectively caps/limits the total compensation that may be earned annually by the most active and entrepreneurial physicians within such a plan. CONTINUED ON NEXT PAGE

13 NAVIGANT PULSE WINTER Regardless of the compensation plan selected, we have observed and recommended expanded use and definition of Minimum Work Standards (MWS) within the Base Salary or Draw component of the compensation plan design. Aside from minimum clinical production standards, appropriate MWS categories may include documentation (e.g., medical records completion, submission of charges, etc), accessibility (e.g., standards hours, clinical sessions per week, etc.), EMR utilization (e.g., initial adoptions, meaningful use, etc.). Furthermore, we recommend well-defined and communicated consequences for failure to meet the MWS thresholds, including the potential disqualification for other performance incentives. Another lesson learned within the wrvu-based compensation plans is to include additional requirements that the overall practice expenseper-wrvu level remains within a budgeted target to safeguard against over-utilization of the medical practice s resources by a physician who is seeking solely to maximize his/her own payments for wrvu production without regard to the actual affordability of the compensation plan. Failure to meet the budgeted expense-per-wrvu may result in a reduced level of production incentive payments, as well as ineligibility for other quality/service performance payments. Additional Considerations to Bridge the Path to a New ACO World The recommended pace of evolvement to the new hybrid designs must be addressed on a marketby-market assessment. In many markets, we have observed an increasing reluctance to guarantee not only the level of payment rates for clinical productivity (e.g., compensation-per-wrvu, compensation-perprofessional collections, etc.) beyond three years for their employed physicians, but also the basic compensation design itself. Compensation plans for employed physicians in a fully implemented ACO world may radically reduce or eliminate typical productivity incentives and include much higher levels of shared savings, payment-for-performance and other payments based upon efficiency and demonstrated service/quality. Progressive health systems are requiring incremental demonstrations of patientfocused outcomes that will become mandatory in the future. To help bridge a path to the new world, we have set forth below a range of interim considerations for a typical four-component plan design: INTERIM CONSIDERATIONS TO A TYPICAL FOUR-COMPONENT PLAN Compensation Design Component Common Design Approach Next Step ConsiderationS Base Salary Production Incentive Set as a % of total earned compensation (e.g., >= 85%) per clinical productivity. Often includes limited minimum work standards (MWS) re: patient satisfaction, documentation, outcomes, etc. Additional compensation for each $ or wrvu above threshold to earn clinical Base Salary. Specialty-specific pay rates. Earned regardless of achievement of quality/service performance. For Primary Care Physicians, evaluate per expected patient panel size, medical home responsibility. Expanded MWS for protocol adherence, Electronic Medical Records (EMR) usage, expense control, other provider satisfaction, etc. Likely eliminated or capped for increased number of subspecialties. For others, likely reduced or disqualified payments for failure to meet MWS quality/service performance levels. Quality/Service Incentive Other Compensation Typically limited to 5-15% of anticipated total compensation. Frequently set at lower levels of demonstrated performance. Often does not consider team performance for outcomes or efficiency. May include distinct payments for call coverage, supervision of Allied Health Providers (AHPs), Medical Directorships, etc. Evolve to higher levels (>=20%) of anticipated total compensation. Provide payout for higher stretch (well above median) performance. Increased reliance upon team performance re: efficiency/service. Increased consideration of these activities within Base Salary performance standards. Increased use and incentives for efficient use of AHPs. CONTINUED ON NEXT PAGE

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