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The expansion of coverage mandated by the Affordable Care Act and the accompanying changes already occurring in the commercial market are driving a rapidly changing health care system. The change from fee-for-service to value-based reimbursement is well under way, creating an impetus for progressive providers to adapt and quickly focus on how they are preparing for the emerging world of population health management.

Reform Is a Market Issue

Market forces continue to be the primary drivers of change in health care reimbursement. Employers and commercial insurers are still demanding better value and an end to runaway premium costs, and the boundaries between payers and providers are blurring as health systems accept risk-sharing contracts or even going so far as to secure insurance licenses. Clinically integrated networks of physicians are emerging as a requirement of system success, and the pace of consolidations and mergers continues to increase as systems seek partners to build the capabilities needed to manage the cost of care.

Since 2010, commercial health plans have changed their business models to adopt accountable care reforms that form the core of the ACA. To do that, they are developing models of care that drive cooperation among the insurer, physicians and hospitals. A new wave of narrow, tailored or high-performance networks and defined benefit products have emerged in response to employer demands for lower premium increases and better insurance value for employees. The introduction of new products for public and private health insurance exchanges means that consumers will have a greater range of choice in selecting their sources of care. Workers given a defined contribution to use toward health benefits have increasingly signed up for the high-deductible, lower-cost plans. The experience of other industries is that when consumers are offered less expensive or more convenient delivery options that don't comprise quality they will change buying habits quickly. Health care is likely to be no different.

Not only is consumerism alive and well in the market, but the development of more cooperative business partnerships between insurers and their formerly distant provider neighbors has become a national trend. Fee-for-service reimbursement is not dead, but the value-based market is replacing it.

Staying Ahead of the Curve

The emerging population health management marketplace requires providers who are nimble enough to respond to employer demands for improved value and more predictable premiums. At the same time, providers must understand and be prepared to thrive under Medicaid expansion, health insurance exchanges and CMS' multiple initiatives for reform. Within this framework, surviving in the population health market will require well-managed health systems to focus on and develop answers for seven key questions:

1. Have you revised revenue strategy to fit emerging market circumstances? Understanding where patient growth will come from, predicting how patient reimbursements will affect the system, and deciding which strategies to use to respond to them are the top priorities for hospital leaders and trustees. One thing is certain: provider organizations must be prepared to deal with a greater volume of patients at a lower average reimbursement, with private insurance rates on exchanges falling somewhere between Medicare and commercial rates. All provider systems will need to analyze how market changes will reshape the local insurance landscape and how this will disrupt utilization, revenues and operating margins.

2. How ready are you for care management? As basic fee-for-service reimbursement declines, earning revenue through quality and efficiency bonuses, risk-sharing on total costs, or taking on more insurance functions will become critical. This means providers will need to develop new care management skills and function as an organization that can manage the health of a population. Providers will need to determine the size of the population to manage and the amount of risk they need to take on in a market to maintain an appropriate share of the premium dollar. Providers who are unable to build an appropriate network or develop the ability to manage care may face the possibility of becoming a commodity to other networks.

3. Are you prepared to double down on primary care? The lack of a viable primary care base can be the Achilles' heel for organizations in the population health management market. When universal health insurance was implemented in 2006 in Massachusetts, there was an immediate shortage of primary care physicians, which created access and cost control challenges. Providing health benefits to the uninsured through either Medicaid expansion or health insurance exchanges will similarly create more demand for primary care. Both federal and commercial accountable care programs place a heavy emphasis on the assignment of patients to primary care physicians. Given the simultaneous expansion of enrollment in private health plans (approximately 2 million people signed up in October and November) and the increase in Medicaid (some 3.9 million took steps in the same two months to establish eligibility), physician availability to manage and coordinate care for both existing and new patients will be an issue requiring continuing executive and board focus.

4. Do you have a plan for strategic cost repositioning? Most market trends presage slower-growing, riskier revenue streams for providers in the future as the market trends toward population health management. In this environment, most hospitals will need to focus on finding additional savings as well as new revenue sources to maintain their profit margins. Strategic asset repositioning to resize the system for future needs and resources, as well as clinical asset restructuring to cut costs, will be high on the agenda of many providers. This should combine a disciplined, top-down approach to address strategic resource allocation issues, as well as a creative, bottom-up process improvement effort to reposition clinical assets and modify operating processes to reduce costs, all while maintaining or improving quality of care and patient experience.

5. Are you paying attention to prevention and wellness? The ACA emphasizes prevention and workplace wellness. While early program results have shown wellness programs have reduced hospitalization for targeted health conditions, the savings have been balanced out by increases in ambulatory care. Now may be a good time for hospitals and health systems to address this issue. Most health system leaders are well aware that CMS has already established significant penalties for unnecessary Medicare admissions and readmissions and, in 2015, will add similar penalties for hospital-acquired conditions. Many health systems are testing out various value-based payment systems that tie an increasing portion of reimbursement to outcomes. With average reimbursement rates trending downward and capitation on the rise, the management of wellness is likely to become a more important part of the trend toward population health management, regardless of the uncertainty about the impact on costs.

6. Is your infrastructure working to produce results? During the past two years, many providers invested in building the infrastructure to participate in value-based contracting or the Medicare shared savings program. Now it is time to demonstrate how these structural changes can deliver their theoretical promise of better care at lower cost. The investments made by the Pioneer and early ACO applicants to build clinically integrated delivery networks only will be validated if these new entities are able to deliver measurable improvements to care while also reducing costs. Changing incentives under new fee-for-value contracts doesn't necessarily change behavior. Institutional inertia, silos and fragmentation may not dampen experimentation, but they pose huge obstacles to implementation.

7. Do you have the right strategic partners to create value and facilitate growth?
The era of shared savings, accountable care and population health management has created an opportunity for new partnerships among formerly distant neighbors. Providers will increasingly need to adopt a make-versus-buy decision to identify the need for strategic partners to collaborate on developing their ACOs, value-based contracts or even their own private label health plans.

There are now 360 organizations participating in the Medicare Shared Savings Program covering approximately 5 million beneficiaries, and at least 250 commercial ACO partnerships covering several million commercial enrollees. The challenge is that many of these emerging ACOs will lack the infrastructure and predictive modeling tools necessary to take on significant financial risk and to manage population health. Provider networks are increasingly seeking new strategic partnerships to improve quality, care management and efficiency, and employers are increasingly willing to trade off network breadth for better value and closer working relationships between payers and providers. The traditional adversarial relationships between health plans and providers are giving way to more effective partnerships with new civility and mutual respect. Systematic deliberation of partnership opportunities to decide cultural, financial and organizational capabilities and fit will be an ongoing leadership challenge over the next few years.

Health care reform has always been a so-called wicked problem; that is, messy, hard to organize, financially complex and without easy solutions. It appears, however, that many of the current reform efforts are beginning to make a difference in meeting the goals of improved quality, reduced costs and achieving a better patient experience. The tools for transformation are out there, and this is the time to be sure your organization has the necessary building blocks in place for success.

Richard E. Wesslund (rick.wesslund@bdcadvisors.com) is founder and chairman of BDC Advisors, LLC and the Leadership Institute; David Anderson, Ph.D. (dave.anderson@bdcadvisors.com) is managing director at BDC Advisors, LLC.