Hayes' Healthcare Blog

Healthcare Leaders Blog: 5 Steps to Prepare Your Organization for Value-Based Care, Don Michaels, Ph.D.

Posted by Don Michaels, Ph.D. on November 11, 2015 at 9:00 AM

Prepare Your Organization for Value-Based Care

The shift from fee-for-service to value-based care may be moving slowly, but there’s little doubt that the change is inevitable. According to a recent survey by PwC, alternative incentive based payment models like bundles and capitation currently make up a small percentage of payments. The report indicated that at the end of 2014, only 20% of Medicare payments to hospitals are tied to alternative payment methods. On the physician side, more than half of physician revenue is still based on a fee-for-service model.

Clearly change is on the way. How will you prepare your organization for value-based care?

At the beginning of 2015,  the Department of Health and Human Services (HHS) set up a framework that establishes categories based on how providers receive payment.

Category 1: Fee-for-service with no link of payment to quality

Category 2: Fee-for-service with a link of payment to quality

Category 3: Alternative payment models built on fee-for-service architecture

Category 4: Population based payment

According to HHS, value-based purchasing includes payments made in categories two through four. Transitioning from category one to category four means increasing accountability for both quality and total cost of care and placing a greater focus on population health management as opposed to payment for specific services.

HHS has now set a goal to have 30% of Medicare payments in alternative payment models (categories 3 and 4) by 2016 and 50% in those categories by the end of 2018. Overall, HHS wants 85% of Medicare fee-for-service payments to transfer to value-based purchasing categories two through four by 2016, and 90% by 2018. And as we have all seen, where the federal government goes, private payers typically follow.

So the question is no longer “if” value-based payment programs are going to be part of the healthcare landscape, but rather “when.” It is becoming increasingly necessary for providers to start preparing now for the move and that means making some fundamental changes in the way healthcare organizations currently operate.

Here are five steps to ready your organization for this change.

Understand your costs

The first and most important factor for organizations to understand is your cost structure. How much does it cost you to deliver a unit of care? Knowing the parameters of what your costs are is crucial as you begin to negotiate with insurance companies on a payment plan. This knowledge is also crucial as you begin to develop your service lines and determine how payments are going to be apportioned among providers in a value-based program. Getting to your true costs means initiating a detailed, thorough cost accounting program.

If you can’t readily determine your costs for providing various services, you may need to enhance your internal accounting structure on both the clinical and administrative side of the organization. You must take into consideration not only the direct costs of physicians, nurses, and specialists, but also general overhead expense of the business as well. Indirect costs like housekeeping, food, finance, and facility maintenance, which can’t be tied directly to a specific care delivery event, must be amortized across all interactions and built into the cost structure.

Assess payer proposals

Once you determine your costs, you will be better able to discuss payment plans with insurance companies and other payers. They may offer a global fee structure to cover specific services at pre-determined pricing or a risk-based plan where you are responsible to deliver care for a defined population over a certain period of time for a fixed price. Based on step one, you will need to model out your expected costs versus the revenue being offered and calculate the volume of services needed to ensure those costs are covered.

It’s important to evaluate how your operations may need to change to ensure that quality care continues to be delivered while staying within the negotiated price points. For example, is it less expensive to use an external lab than testing internally even though it might not be quite as quick? What is the impact of the tradeoff of a four or eight-hour delay in getting back test results versus the cost savings?

Evaluate care delivery network

Once you have negotiated your value-based contracts, the focus should turn to delivering quality care in a cost effective way. That means creating processes that keep patients healthy and out of the hospital. For example, add a process to ensure patients receive a flu shot to avoid costly hospital stays. You may want to consider proactive initiatives such as offering incentives for a health club membership, or hiring a case manager to contact patients for conformance to an established care plan.

You need to evaluate who is going to be part of your care delivery network going forward. No organization has all the physicians, facilities, and capabilities required to deliver a full continuum of healthcare. For example, your organization may have an adequate number of specialists but not enough primary care doctors. Or you may not have a post-acute skilled rehab facility. When sending out a particular care event, you need to determine which partner is the most cost effective for that particular service. Each clinical intervention should meet the goal of lowering costs while improving the quality of care and ultimately drive patient satisfaction.    

Select appropriate technology

Having the right technology is crucial in producing the information necessary to successfully manage the care process. For many organizations just beginning the journey, these systems are not yet in place. Sifting through the many available IT system options and adopting new technology and the change that comes with it can be challenging.

Evaluate your options from both a financial investment and operational workflow perspective. Match the features and functionality of the potential system to your specific needs and budget parameters. It’s essential to have the appropriate infrastructure, hardware, and software to help successfully manage this new payment landscape.

Obtain support

Preparing for the transition to value-based care is neither easy nor uncomplicated. You need to consider which external resources may be needed to overcome some of the challenges. Whether you need help evaluating your operations or a plan to reduce costs, an experienced partner may be worthwhile. An experienced partner can also help you set up physician, post-acute care, and other networks and assist you with contracting with the payers. Or you may need support with evaluating technology systems and vendors to help identify and acquire the appropriate tools for your organization.

The healthcare environment continues to evolve and the concept of value-based care is imminent. By beginning your preparations now, you can ensure the success of your organization for the future.


Don Michaels, Ph.D., is a faculty member of the School of Public Health at Harvard University where he teaches healthcare IT and Senior VP at Hayes.  He has extensive experience working with all types of healthcare provider organizations in various capacities. A retired partner at one of the Big Four accounting firms, Don believes that “one of our most valuable services is to act as the facilitator for key decision makers as they work through complex processes.”

Topics: Change management, payment models, Fee-for-service, Hayes Thought Leadership Blog Series

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