Commercializing the Fee-For-Value Investment – Part I: Why it matters

As the market shifts to value-based reimbursement models, physicians and hospitals are expected to manage more financial and clinical risk. This requires significant investments in new capabilities – all while reimbursement is deteriorating from both the private and public sectors.

In particular, providers need to invest in population health management solutions, analytical and technology infrastructure and network management capabilities to ensure their long-term viability in the market. These solutions are capital-intensive investments with estimates varying widely, deCynthia Kilroypending on the source. The American Hospital Association estimates start-up costs for an accountable care organization (ACO) to be $5.3 million, with ongoing costs of $6.3 million for a 200-bed hospital with 80 primary care physicians and 150 specialists.(i)  The Institute for Health Technology Transformation (iHT2) estimates the initial investment for a 200-physician practice to range from $1 million to $11.7 million. The initial investment for a 200-bed hospital could be anywhere from $7.5 million to $11.3 million.(ii)

As providers make investments to transition to the new fee-for-value business models, they need to develop strategies to commercialize their investments, with two goals in mind:

1)    Increase market share to create economies of scale.
2)    Ensure long-term viability and profitability of the organization.

By increasing their market share, providers can reduce the per member per month (PMPM) investment and ongoing costs of managing the population.

Recent experience in the marketplace suggests physicians and hospitals invest in fee-for-value capabilities with the near-term goal of managing a specific single population. But providers need to be thinking about developing a long-term strategic plan to target additional public and private populations and/or channels. An August 2012 study by The Commonwealth Fund showed that 56% of hospitals participating or planning to participate in an ACO were working with a commercial payer or a self-insured employer.(iii)  The same study showed that 32% of hospitals are participating or  planning to apply for the Centers for Medicare & Medicaid Services’ Pioneer ACO program.

The long-term strategic plan should include an understanding of the current marketplace dynamics, including provider competition, health plan landscape, demographic makeup and impact from federal health reforms. Once provider organizations understand their local-market trends, they need to define an approach to moving different populations to risk-based contracts, including the following strategies:

  • Health plan partnerships and public applications
  • Direct contracting to self-funded employers
  • Private and public exchanges
  • Management Service Organization (MSO) outsource service

I’ll dig more deeply into these strategies in my next post.

i AHA and McManis Consulting. (2011, April). The Work Ahead: Activities and Costs to Develop and Accountable Care Organization.
ii  Institute for Health (iHT2); Institute for Health Technology Transformation. Accountable Care Organizations: 10 Things You Need to Know About Accountable Care
iii The Commonwealth Fund. (August 2012). Hospitals on the Path to Accountable Care: Highlights from a 2011 National Survey of Hospital Readiness to Participate in an Accountable Care Organization

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