The Medicare Shared Savings Program saved the agency $1.19 billion in 2019, according to CMS performance results of 541 accountable care organizations released Monday.
This marks the third year of savings for the value-based care program and its largest yet, CMS Administrator Seema Verma wrote in a Health Affairs blog post Monday. ACOs taking on more risk continued to outperform those that didn’t, Verma wrote, including those under its Pathways to Success rule rolled out in December 2018.
ACOs in the Pathways to Success program generated net per-beneficiary savings of $169 compared to $106 for legacy track ACOs, Verma said, suggesting the policies are incentivizing ACOs to deliver more coordinated and efficient care.
ACOs are groups of doctors, hospitals and other providers with payments tied to the cost and quality of care they provide beneficiaries. According to Verma’s post, the number of ACOs taking on downside financial risk has nearly doubled since the Pathways to Success program launched for those in the Medicare Shared Savings Program.
New participation options under the rule require accountability for spending increases, generally after two years for new ACOs, and close evaluation of care quality. The new benchmarks and speed at which ACOs would need to take on downside risk was initially shot down by ACOs.
But CMS also created an option for “low-revenue” ACOs, generally run by physician practices rather than hospitals, allowing them an additional year before taking on downside risk for cost increases.
According to the blog post, physician-led ACOs performed better than hospital-led ACOs.
“To get program growth back on track, Congress needs to take a close look at the Value in Health Care Act, which makes several improvements to the Medicare ACO program and better incentivizes Advanced Alternative Payment Models,” trade group CEO Clif Gaus said in a statement.
Farzad Mostashari, CEO of the Aledade, pointed to physician-led ACOs out-performing hospital ACOs in a statement on the results. “What we need now is to help more practices participate in these models of care,” he said.
Low-revenue ACOs, typically physician-led, had per beneficiary savings of $201 compared to $80 per beneficiary for high-revenue ACOs. Low-revenue ACOs in the Pathways to Success program saved $189 per beneficiary while high-revenue ACOs in the program saved $155 per beneficiary, according to the 2019 performance results.
Several factors will shape the financial performance of physician- and hospital-led organizations under total cost of care payment models.
Broad consensus has long existed among public- and private-sector leaders in US healthcare that improvements in healthcare affordability will require, among other changes, a shift away from fee-for-service (FFS) payments to alternative payment models that reward quality and efficiency. The alternative payment model that has gained broadest adoption over the past ten years is the accountable care organization (ACO), in which physicians and/or hospitals assume responsibility for the total cost of care for a population of patients.
Launched by the Centers for Medicare & Medicaid Services (CMS) Innovation Center in 2012, Pioneer ACO was the first such model design to generate savings for Medicare. In this incarnation, Medicare set a benchmark for total cost of care per attributed ACO beneficiary: If total cost of care was kept below the benchmark, ACOs were eligible to share in the implied savings, as long as they also met established targets for quality of care. If total cost of care exceeded the benchmark, ACOs were required to repay the government for a portion of total cost of care above the benchmark.
Payment models similar to the one adopted by Pioneer ACOs also have been extended to other Medicare ACO programs, with important technical differences in estimates for savings and rules for the distribution of savings or losses as well as some models offering gain sharing without potential for penalties for costs exceeding the benchmark. State Medicaid programs as well as private payers (across Commercial, Medicare Advantage, and Medicaid Managed Care) also have adopted ACO-like models with similar goals and payment model structures. Of the roughly 33 million lives covered by an ACO in 2018, more than 50 percent were commercially insured and approximately 10 percent were Medicaid lives.2
On the whole, ACOs in the Medicare Shared Savings Program (MSSP) have delivered high-quality care, with an average composite score of 93.4 percent for quality metrics. However, cost savings achieved by the program have been limited: ACOs that entered MSSP during the period from January 1, 2012 to December 31, 2014, were estimated to have reduced cumulative Medicare FFS spending by $704M by 2015; after bonuses were accounted for, net savings to the Medicare program were estimated to be $144M.3 Put another way, in aggregate, savings from Medicare ACOs in 2015 represented only 0.02 percent of total Medicare spending. The savings achieved were largely concentrated among physician-led ACOs (rather than hospital-led ACOs). In fact, after accounting for bonuses, hospital-led ACOs actually had higher total Medicare spending by $112M on average over three years.4
While savings from MSSP have been relatively limited, in aggregate, numerous examples exist of ACOs that have achieved meaningful savings—in some cases in excess of 5 percent of total cost of care—with significant rewards to both themselves as well as sponsoring payers (for example, Millennium, Palm Beach, BCBSMA AQC).567 The wide disparity of performance among ACOs (and across Medicare, Medicaid, and Commercial ACO programs) raises the question of whether certain provider organizations are better suited than others to succeed under total cost of care arrangements, and whether success is dictated more by ACO model design or by structural characteristics of participating providers.
In the pages that follow, we examine these questions in two ways. First, we analyze “the math of ACOs” by isolating four factors that contribute to overall ACO profitability: bonus payments, “demand destruction,” market share gains, and operating expenses. Following these factors, we illustrate the math of ACOs through modeling of the performance of five different archetypes: physician-led ACOs; hospital-led ACOs with low ACO penetration and low leakage reduction; hospital-led ACOs with high ACO penetration; hospital-led ACOs with high leakage reduction; and hospital-led ACOs with high penetration and leakage reduction.
The Math of ACOs
In the pages that follow, we break down “the math of ACOs” into several key parameters, each of which hospital and physician group leaders could consider evaluating when deciding whether to participate in an ACO arrangement with one or more payers. Specifically, we measure the total economic value to ACO-participating providers as the sum of four factors: bonus payments, less “demand destruction,” plus market share gains, less operating costs for the ACO (Exhibit 1).
In the discussion that follows, we examine each of these factors and understand their importance to the overall profitability of ACOs, using both academic research as well as McKinsey’s experience advising and supporting payers and providers participating in ACO models.
1. Bonus payments
The premise of ACOs rests on the opportunity for payers and participating providers to share in cost savings arising from curbing unnecessary utilization and more efficient population health management, thus aligning incentives to control total cost of care. Because ACOs are designed to reduce utilization, the bonus—or share of estimated savings received by an ACO—is one factor that significantly influences ACO profitability and has garnered the greatest attention both in academic research and in private sector negotiations and deliberations over ACO participation. Bonus payments made to ACOs are themselves based on several key design elements:
The baseline and benchmark for total costs, against which savings are estimated8 ;
The shared savings rate and minimum savings/loss rates;
Risk corridors, based on caps on gains/losses and/or “haircuts” to benchmarks; and,
Frequency of rebasing, with implications for benchmark and shared savings.
1a. Baseline and benchmark
Most ACO models are grounded in a historical baseline for total cost of care, typically on the population attributed to providers participating in the ACO. Most ACO models apply an annual trend rate to the historical baseline, in order to develop a benchmark for total cost of care for the performance period. This benchmark is then used as the point of reference to which actual costs are compared for purposes of determining the bonus to be paid.
Historical baselines may be based either on one year or averaged over multiple years in order to mitigate the potential for a single-year fluctuation in total cost of care that could create an artificially high or low point of comparison in the future. Trend factors may be based on historically observed growth rates in per capita costs, or forward-looking projections, which may depart from historical trends due to changes in policy, fee schedules, or anticipated differences between past and future population health. Trend factors may be based on national projections, more market-specific projections, or even ACO-specific projections. For these and other reasons, a pre-determined benchmark may not be a good estimate of what total cost of care would have been in the absence of the ACO. As a result, estimated savings, and hence bonuses, may not reflect the true savings generated by ACOs if compared to a rigorous assessment of what otherwise would have occurred.
Recent research suggests that an ACO’s benchmark should be set using trend data from providers in similar geographic areas and/or with similar populations instead of using a national market average trend factor.9 It has been observed in Medicare (and other) populations that regions (and therefore possibly ACOs) that start at a lower-than-average cost base tend to have a higher-than-average growth trend. For example, Medicare FFS spending in low-cost regions grew at a rate 1.2 percentage points faster than the national average (2.8 percent and 1.6 percent from 2013 to 2017 compound annual growth rate, respectively). This finding is particularly relevant in low-cost rural communities, where healthcare spending grows faster than the national average.10 Based on this research, some ACO models, such as MSSP and the Next Generation Medicare ACO model, have developed benchmarks based on blending ACO-specific baselines with market-wide baselines. This approach is intended to account for the differences in “status quo” trend, which sponsoring payers may project in the absence of ACO arrangements or associated improvements in care patterns. Some model architects have advocated for this provider-market blended approach to benchmark development because they believe such an approach balances the need to reward providers who improve their own performance with a principle tenet of this model: That ACOs within a market should be held accountable to the same targets (at least in the long term).
The shared savings rate is the percentage of any estimated savings (compared with benchmark) that is paid to the ACO, subject to meeting any requirements for quality performance. For example, an ACO with a savings rate of 50 percent that outperforms its benchmark by 3 percent would keep 1.5 percent of benchmark spend. Under the array of Medicare ACO models, the shared savings rate percentage ranges anywhere from 40 percent to 100 percent.11
In some ACO models, particularly one-sided gain sharing models that do not introduce downside risk, payers impose a minimum savings rate (MSR), which is the savings threshold for an ACO to receive a payout, typically 2 percent, but can be higher or lower.12 For example, assume ACO Alpha has a savings rate of 60 percent and MSR of 1.5 percent. If Alpha overperforms the benchmark by 1 percent, there would be no bonus payout, because the total savings do not meet or exceed the MSR. If, however, Alpha overperforms the benchmark by 3 percent, Alpha would receive a bonus of 1.8 percent of benchmark (60 percent of 3 percent). An MSR is common in one-sided risk agreements to protect the payer from paying out the ACO if modest savings are a result of random variations. ACOs in two-sided risk arrangements may often choose whether to have an MSR.
Both factors impact the payout an ACO receives. Between 2012 and 2018, average earned shared savings for MSSP ACOs were between $1.0M and $1.6M per ACO (between $10 and $100 per beneficiary).13 However, while nearly two out of three MSSP ACOs in 2018 were under benchmark, only about half of them (37 percent of all MSSP ACOs) received a payout due to the MSR.14
1c. Risk corridors
In certain arrangements, payers include clauses that limit an ACO’s gains or losses to protect against extreme situations. Caps depend on the risk-sharing agreement (for example, one-sided or two-sided) as well as the shared savings/loss rate. For example, MSSP Track 1 ACOs (one-sided risk sharing) cap shared savings at the ACO’s share of 10 percent variance to the benchmark, while Track 3 ACOs (two-sided risk sharing) cap shared savings at the ACO’s share of 20 percent variance to the benchmark and cap shared losses at 15 percent variance to the benchmark.15 In contrast with these Medicare models, many Commercial and Medicaid ACO models have applied narrower risk corridors, with common ranges of 3 to 5 percent. In our experience, payers have elected to offer narrower risk corridors. Their choice is based on their desire to mitigate risk as well as the interest of some payers (and state Medicaid programs) to share in extraordinary savings that may be attributable in part to policy changes or other interventions undertaken by the payers themselves, whether in coordination with ACOs or independent of their efforts.
Payers also may vary the level of shared savings (and/or risk), between that which applies to the first dollar of savings (versus benchmark) compared with more significant savings. For example, by applying a 1 percent adjustment or “haircut” to the benchmark, a payer might keep 100 percent of the first 1 percent of savings and share any incremental savings with the ACO at a negotiated shared savings rate. Depending on what higher shared savings rate may be offered in trade for the “haircut,” such a structure has the potential to increase the incentive for ACOs to significantly outperform the benchmark. For example, an ACO that beats the benchmark by 4 percentage points and earns 100 percent of savings after 1 percentage point would net 75 percent of total estimated savings. However, under the same risk model, if the ACO were to beat the benchmark by 2 percentage points, they would only earn 50 percent of total savings. Such a structure could therefore be either more favorable or less favorable than 60 percent shared savings without a “haircut,” depending on the ACO’s anticipated performance.
1d. Frequency of rebasing
In most ACO models (including those adopted by CMS for the Medicare FFS program), the ACO’s benchmark is reset for each performance period based (at least in part) on the ACO’s performance in the immediate prior year. This approach is commonly referred to as “rebasing.” The main criticism of this approach toward ACO model design—which is also evident in capitation rate setting for Managed Care Organizations—is that ACOs become “victims of their own success”: Improvements made by the ACO in one year lead to a benchmark that is even harder to beat in the following year. The corollary is also true: An ACO with “excessive” costs in Year 1 may be setting themselves up for significant shared savings in Year 2 simply by bringing their performance back to “normal” levels.
Even in situations where ACOs show steady improvements in management of total cost of care over several years, the “ratchet” effect of rebasing can have significant implications for the share of estimated savings that flow to the ACO. Exhibit 2 illustrates the shared savings that would be captured by an ACO, if it were to mitigate trend by 2 percentage points consistently for 5 years (assumes linear growth), under a model that provides 50 percent shared savings against a benchmark that is set with annual rebasing. In this scenario, although the ACO would earn 50 percent of the savings estimated in any one year (against benchmark), the ACO would derive only 16 percent of total savings achieved relative to a “status quo” trend.
Some ACO model designs (including MSSP) have mitigated this “ratchet” effect, to some extent, by using multi-year baselines, whereby the benchmark for a given performance year is based not on the ACO’s baseline performance in the immediate prior year but over multiple prior years. This approach smooths out the effect of one-year fluctuations in performance on the benchmark for subsequent years; by implication, improvements made by an ACO in Year 1 and sustained in Year 2 create shared savings in both years. Under a three-year baseline, weighted toward the most recent year 60/30/10 percent (as applies to new contracts under the MSSP), the ACO in Exhibit 2 would capture 22 percent of total estimated savings over 5 years. If the model were instead to adopt an evenly weighted three-year baseline, that same ACO would capture 28 percent over 5 years.
In select cases, particularly in the Commercial market, payers and ACOs have agreed to multi-year prospective benchmarks. Under this approach, the benchmark for performance Years 1 to 5 (for example) are set prospectively in Year 0; the benchmarks for Years 2 and 3, for example, are not impacted by the ACO’s performance in Year 1. If this approach were to be applied to the ACO depicted in Exhibit 2, they would earn fully 50 percent of the total savings, assuming that the prospectively established 5-year benchmark was set at the “status quo” trend line. While prospective multi-year benchmarks may be more favorable to ACOs, they also increase the sensitivity of ACO performance to both the original baseline as well as the reasonableness of the prospectively applied trend rate.
While in many cases healthcare organizations are highly focused on the percent of shared savings they will receive (shared savings rate), in our experience, the financial sustainability of ACO arrangements may be equally or more greatly affected by several other design parameters outlined here, among them: the inclusion of an MSR or a “haircut” to benchmark, either of which may dampen the incentive to perform; benchmark definitions including the use of provider-specific, market-specific, and/or national baseline and trend factors; and the frequency of rebasing, as implied by the use of a single-year or multi-year baseline, or the adoption of prospectively determined multi-year benchmarks.
2. Demand destruction
Although shared savings arrangements are meant to align providers’ incentives with curbing unnecessary utilization, the calculation of bonus payments based on avoided claims costs (as described in Section 1) does not account for the foregone provider revenue (and margins) attached to reductions in patient volume. The economic impact of this reduction in patient volume, sometimes referred to as “demand destruction,” is described in this section, which we address in two parts:
Foregone economic contribution based on reduced utilization in the ACO population; and,
Spillover effects from reduced utilization in the non-ACO population, based on clinical and operational changes that “spillover” from the ACO population to the non-ACO population.
2a. Foregone economic contribution
Claims paid to hospital systems for inpatient, outpatient, and post-acute facility utilization typically comprise 40 to 70 percent of total cost of care, with hospital systems that own a greater share of outpatient diagnostic lab and/or imaging and/or skilled nursing beds falling at the upper end of this range. These same categories of facility utilization may comprise 60 to 80 percent of reductions in utilization arising from improvements in population health management by an ACO. Given the high fixed costs (and correspondingly high gross margins) associated with inpatient, outpatient, and post-acute facilities, foregone facility volume could come at an opportunity cost of 30 to 70 percent of foregone revenue—that opportunity cost being the gross contribution margin associated with incremental patient volume, calculated as revenue less variable costs: Commercially insured ACO populations are more likely to fall into the upper end of this range and Medicaid populations into the lower end. This is the reason savings rates tend to be higher in the Commercial market, to offset the larger (negative) financial impact of “demand destruction.”
For example, a hospital-led ACO that mitigates total cost of care by 3 percent (or $300 based on a benchmark of $10,000 per capita) might forego $180 to $240 of revenue per patient (assuming 60 to 80 percent of savings derived from hospital services), which may represent $90 to $120 in foregone economic contribution, assuming 50 percent gross margins. As this example shows, this foregone economic contribution may represent a significant offset to any bonus paid under shared savings arrangements, unless the shared savings percentage is significantly greater than the gross margin percentage for foregone patient revenue.
For some hospitals that are capacity constrained, the lost patient volume may be replaced (that is, backfilled) with additional patient volume that may be more or less profitable depending on the payer (for example, an ACO that backfills with more profitable Commercial patients). However, the vast majority of hospitals are not traditionally capacity constrained and therefore must look to other methods (for example, growing market share) to be financially sustainable.
In contrast, physician-led ACOs have comparatively little need to consider the financial impact of “demand destruction,” given that they never benefitted from hospitalizations and thus do not lose profits from forgone care. Furthermore, primary care practices may actually experience an increase, rather than decrease, in patient revenue, based on more effective population health management. Even for multi-specialty physician practices that sponsor ACO formation, any reductions in patient volume arising from the ACO may have only modest impact on practice profitability due to narrow contribution margins attached to incremental patient volume. Physician-led ACOs may need to be concerned with “demand destruction” only to the extent that a disproportionate share of savings is derived from reductions in practice-owned diagnostics or other high-margin services; however, the savings derived from such sources are typically smaller than reductions in utilization for emergency department, inpatient, and post-acute facility utilization.
2b. Spillover effects
Though ACOs are not explicitly incentivized to reduce total cost of care of their non-ACO populations (including FFS), organizations often see increased efficiency across their full patient population after becoming an ACO. For example, research over the last decade has found reductions in spend for non-ACO lives between 1 and 3 percent (Exhibit 3).
The impact of spillover effects on an ACO’s profitability depends on the proportion of ACO and non-ACO lives that comprise a provider’s patient panel. Further, impact also depends on the ACO’s ability to implement differentiated processes for ACO and non-ACO lives to limit the spillover of the efficiencies. Although conventional wisdom implies that physicians will not discriminate their clinical practice patterns based on the type of payer (or payment), nonetheless many examples exist of hospitals and other providers with the ability to differentiate processes based on payer or payment type. For example, many hospitals deploy greater resources to discharge planning or initiate the process earlier for patients reimbursed under a Diagnosis Related Group (case rate) than for those reimbursed on a per diem or percent of charges model. Moreover, ACOs and other risk-bearing entities routinely direct care management activities disproportionately or exclusively toward patients for whom they have greater financial accountability for quality and/or efficiency. For physician-led ACOs, differentiating resource deployment between ACO- and non-ACO populations may be necessary to achieve a return on investment for new care management or other population health management activities. For hospital sponsors of ACOs that continue to derive the majority of their revenue from FFS populations outside the ACO, differentiating population health management efforts across ACO and FFS populations are of paramount importance to overall financial sustainability. To the extent that hospital-led ACOs are unable to do so, they may find total cost of care financial arrangements to be financially sustainable only if extended to the substantial majority of their patient populations in order to reduce the severity of any spillover effects.
The adverse impact of “demand destruction” is what most distinguishes the math of hospital-led ACOs from that of physician-led ACOs. The structure of ACO-sponsoring hospitals—whether they own post-acute assets, for example—further shapes the severity of demand destruction, which then provides a point of reference for determining what shared savings percentage may be necessary to overcome the impact of demand destruction. Though in the long term, hospitals may be able to right size capacity, in the near term when deciding to become an ACO, there is often limited ability to alter the fixed-cost base. Finally, the extent of “spillover effects” from the ACO to the non-ACO population further impacts the financial sustainability of hospital-led ACOs. Hospital-led ACOs can seek to minimize the impact through 1) differentiating processes between the two populations, and/or 2) transitioning the substantial majority of their patient population into ACO arrangements.
3. Market share gains
Providers can further improve profitability through market share gains, specifically:
Reduced system leakage through improved alignment of referring physicians across both ACO and non-ACO patients; and,
Improved network status as an ACO.
3a. Reduced system leakage
ACOs can grow market share by coordinating patients within the system (that is, reduce leakage) to better manage total cost of care and quality. This coordination is often accomplished by improving the provider’s alignment with the referring physician; for example, ACOs can establish a comprehensive governance structure and process around network integrity, standardize the referral process between physicians and practices, and improve physician relationships within, and with awareness of, the network. Furthermore, ACOs can develop a process to ensure that a patient schedules follow-up appointments before leaving the physician’s office, optimizing the scheduling system and call center.
Stark Laws (anti-kickback regulations) have historically prevented systems from giving physicians financial incentives to reduce leakage. While maintaining high-quality standards, ACOs are given a waiver to this law and therefore are allowed to pursue initiatives that improve network integrity to better coordinate care for patients. In our experience, hospitals generally experience 30 to 50 percent leakage (Exhibit 4), but ACOs can improve leakage by 10 to 30 percent.
3b. Improved network status
In some instances for Commercial payers, an ACO may receive preferential status within a network by entering into a total cost of care arrangement with a payer. As a result, the ACO would see greater utilization, which will improve profitability. For example, in 2012, the Cooley Dickinson Hospital (CDH) and Cooley Dickinson Physician Hospital Organization, a health system in western Massachusetts with 66 primary care providers and 160 specialists, joined Blue Cross Blue Shield of Massachusetts’ (BCBSMA) Alternative Quality Contract (AQC), which established a per-patient global budget to cover all services and expenses for its Commercial population. As a result of joining the AQC, reducing the prices charged for services, and providing high quality of care, CDH was “designated as a high-value option in the Western Mass. Region,” which meant BCBSMA members with certain plans “[paid] less out-of-pocket when they [sought] care” at CDH.16 Other payers have also established similar mutually beneficial offerings to providers who assume more accountability for care.1718 An ACO can benefit from these arrangements up until most or all other provider systems in the same market join.
These factors to improve market share (at lower cost and better quality) can help an ACO compensate for any lost profits from “demand destruction” (foregone profits and spillover effects) and increased operating costs. The opportunity from this factor, which requires initiatives that focus on reducing leakage, can be the difference between a net-neutral hospital-led ACO and a significantly profitable ACO. An example initiative would be performance management systems that analyze physician referral patterns.
4. Operating costs
Finally, profitability is impacted by operating costs or any additional expenses associated with running an ACO. These costs generally are lower for physician-led ACOs than for hospital-led ACOs (and also depend on buy-versus-build decisions). In our experience, operating costs to run an ACO vary widely depending on the provider’s operating model, cost structure (for example, existing personnel, IT capabilities), and ACO patient population (for example, number and percent of ACO lives). However, we will focus on three specific types of costs:
Care management costs, often variable, or a marginal expense for every life;
Data and analytics operating costs, which can vary widely depending on whether the ACO builds or buys this capability; and
Additional administrative costs, which are fixed or independent of the number of lives.
4a. Care management costs
In our experience, care management costs to operate an ACO range from 0.5 to 2.0 percent of total cost of care for a given ACO population. These care management costs include ensuring patients with chronic conditions are continuously managing those conditions and coordinating with physician teams to improve efficacy and efficiency of care. A core lever of success involves reducing use of unnecessary care. ACOs that spend closer to 2 percent and/or those whose efforts focus on expanding care coordination for high-risk patients struggle to achieve enough economic contribution to break even. This is because care coordination (devoting more resources to testing and treating patients with chronic disease) often does not have a positive return on investment.19 ACOs that do this effectively and ultimately spend less on care management (around 0.5 percent of the total cost of care) tend to create value primarily through curbing unnecessary utilization and steering patients toward more efficient facilities rather than managing chronic conditions. This value creation is particularly true for Commercial ACO contracts, where there is greater price variation across providers compared with Medicare and Medicaid contracts, where pricing is standardized.
4b. Data and analytics operating costs
Data and analytics operating costs are critical to supporting ACO effectiveness. For example, high-performing ACOs prioritize data interoperability across physicians and hospitals and constantly analyze electronic health records and claims data to identify opportunities to better manage patient care and reduce system leakage. ACOs can either build or license data and analytics tools, a decision that often depends on the number of ACO lives. In our experience, an ACO that decides to build its own data and analytics solutions in-house will on average invest around $24M for upfront development, amortized over 8 years for $3M per year, plus $6M in annual costs (for example, using data scientists and analysts to generate insights from the data), for a total of $9M per year. Alternatively, ACOs can license analytics software on a per-patient basis, typically costing 0.5 to 1.5 percent of the total cost of care. Thus, we find the breakeven point at around 100,000 covered ACO lives; therefore, it often makes financial sense for ACOs with more than 100,000 lives to build in-house.
4c. Additional administrative costs
Organizations must also invest in personnel to operate an ACO, typically including an executive director, head of real estate, head of care management, and lawyers and actuaries. The ACO leadership team’s responsibilities often include setting the ACO’s strategy (for example, target markets, lines of business, services offered, through which physicians and hospitals) and developing, managing, and communicating with the physician network to support continuity of care.
Operating costs to run an ACO are significant. Ability to find ways to invest in fixed costs that are more transformational in nature may result in lower near-term profitability but can provide a greater return on investment in the long term both for the ACO and the rest of the system. The decision to make these investments is dependent on the number of lives covered by an individual ACO.
Drawing on the analysis outlined above, we conducted scenario modeling of “the math of ACOs” using five different ACO archetypes, which vary in structure and performance under a common set of rules. These five archetypes include:
Typical physician-led ACO
Hospital-led ACO with low ACO penetration and low leakage reduction
Hospital-led ACO with high ACO penetration
Hospital-led ACO with high leakage reduction
Hospital-led ACO with high leakage reduction and high ACO penetration
Subsequently, taking an ACO’s structure as a given, we describe for each ACO archetype the key model design parameters and other strategic and operational choices that ACOs might make to maximize their performance.
Comparision of archetypes based on scenario modeling
Summarizing the four factors, the profitability of each archetype reveals certain insights (Exhibit 5).
[Readers’ Note: This is the first of two articles on the Future of Hospitals in Post-COVID America. This article
examines how market forces are consolidating, rationalizing and redistributing acute care assets within the
broader industry movement to value-based care delivery. The second article, which will publish next month,
examines gaps in care delivery and the related public policy challenges of providing appropriate, accessible
and affordable healthcare services in medically-underserved communities.]
In her insightful 2016 book, The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore,
Michelle Wucker coins the term “Gray Rhinos” and contrasts them with “Black Swans.” That distinction is
highly relevant to the future of American hospitals.
Black Swans are high impact events that are highly improbable and difficult to predict. By contrast, Gray Rhinos are foreseeable, high-impact events that we choose to ignore because they’re complex, inconvenient and/or fortified by perverse incentives that encourage the status quo. Climate change is a powerful example
of a charging Gray Rhino.
In U.S. healthcare, we are now seeing what happens when a Gray Rhino and a Black Swan collide.
Arguably, the nation’s public health defenses should anticipate global pandemics and apply resources
systematically to limit disease spread. This did not happen with the coronavirus pandemic.
Instead, COVID-19 hit the public healthcare infrastructure suddenly and hard. This forced hospitals and health systems to dramatically reduce elective surgeries, lay off thousands and significantly change care delivery with the adoption of new practices and services like telemedicine.
In comparison, many see the current American hospital business model as a Gray Rhino that has been charging toward unsustainability for years with ever-building momentum.
Even with massive and increasing revenue flows, hospitals have long struggled with razor-thin margins, stagnant payment rates and costly technology adoptions. Changing utilization patterns, new and disruptive competitors, pro-market regulatory rules and consumerism make their traditional business models increasingly vulnerable and, perhaps, unsustainable.
Despite this intensifying pressure, many hospitals and health systems maintain business-as-usual practices because transformation is so difficult and costly. COVID-19 has made the imperative of change harder to ignore or delay addressing.
For a decade, the transition to value-based care has dominated debate within U.S. healthcare and absorbed massive strategic, operational and financial resources with little progress toward improved care outcomes, lower costs and better customer service. The hospital-based delivery system remains largely oriented around Fee-for-Service reimbursement.
Hospitals’ collective response to COVID-19, driven by practical necessity and financial survival, may accelerate the shift to value-based care delivery. Time will tell.
This series explores the repositioning of hospitals during the next five years as the industry rationalizes an excess supply of acute care capacity and adapts to greater societal demands for more appropriate, accessible and affordable healthcare services.
It starts by exploring the role of the marketplace in driving hospital consolidation and the compelling need to transition to value-based care delivery and payment models.
COVID’s DUAL SHOCKS TO PATIENT VOLUME
Many American hospitals faced severe financial and operational challenges before COVID-19. The sector has struggled to manage ballooning costs, declining margins and waves of policy changes. A record 18 rural hospitals closed in 2019. Overall, hospitals saw a 21% decline in operating margins in 2018-2019.
COVID intensified those challenges by administering two shocks to the system that decreased the volume of hospital-based activities and decimated operating margins.
The first shock was immediate. To prepare for potential surges in COVID care, hospitals emptied beds and cancelled most clinic visits, outpatient treatments and elective surgeries. Simultaneously, they incurred heavy costs for COVID-related equipment (e.g. ventilators,PPE) and staffing. Overall, the sector experienced over $200 billion in financial losses between March and June 20204.
The second, extended shock has been a decrease in needed but not necessary care. Initially, many patients delayed seeking necessary care because of perceived infection risk. For example, Emergency Department visits declined 42% during the early phase of the pandemic.
Increasingly, patients are also delaying care because of affordability concerns and/or the loss of health insurance. Already, 5.4 million people have lost their employer-sponsored health insurance. This will reduce incremental revenues associated with higher-paying commercial insurance claims across the industry. Additionally, avoided care reduces patient volumes and hospital revenues today even as it increases the risk and cost of future acute illness.
The infusion of emergency funding through the CARES Act helped offset some operating losses but it’s unclear when and even whether utilization patterns and revenues will return to normal pre-COVID levels. Shifts in consumer behavior, reductions in insurance coverage, and the emergence of new competitors ranging from Walmart to enhanced primary care providers will likely challenge the sector for years to come.
The disruption of COVID-19 will serve as a forcing function, driving meaningful changes to traditional hospital business models and the competitive landscape. Frankly, this is long past due. Since 1965, Fee-for-Service (FFS) payment has dominated U.S. healthcare and created pervasive economic incentives that can serve to discourage provider responsiveness in transitioning to value-based care delivery, even when aligned to market demand.
Telemedicine typifies this phenomenon. Before COVID, CMS and most health insurers paid very low rates for virtual care visits or did not cover them at all. This discouraged adoption of an efficient, high-value care modality until COVID.
Unable to conduct in-person clinical visits, providers embraced virtual care visits and accelerated its mass adoption. CMS and
commercial health insurers did their part by paying for virtual care visits at rates equivalent to in-person clinic visits. Accelerated innovation in care delivery resulted.
THE COMPLICATED TRANSITION TO VALUE
Broadly speaking, health systems and physician groups that rely almost exclusively on activity-based payment revenues have struggled the most during this pandemic. Vertically integrated providers that offer health insurance and those receiving capitated payments in risk-based contracts have better withstood volume losses.
Modern Healthcare notes that while provider data is not yet available, organizations such as Virginia Care Partners, an integrated network and commercial ACO; Optum Health (with two-thirds of its revenue risk-based); and MediSys Health Network, a New Yorkbased NFP system with 148,000 capitated and 15,000 shared risk patients, are among those navigating the turbulence successfully. As the article observes,
…providers paid for value have had an easier time weathering the storm…. helped by a steady source of
income amid the chaos. Investments they made previously in care management, technology and social
determinants programs equipped them to pivot to new ways of providing care.
They were able to flip the switch on telehealth, use data and analytics to pinpoint patients at risk for
COVID-19 infection, and deploy care managers to meet the medical and nonclinical needs of patients even
when access to an office visit was limited.
Supporting this post-COVID push for value-based care delivery, six former leaders from CMS wrote to Congress in
June 2020 calling for providers, commercial insurers and states to expand their use of value-based payment models to
encourage stability and flexibility in care delivery.
If value-based payment models are the answer, however, adoption to date has been slow, limited and difficult. Ten
years after the Affordable Care Act, Fee-for-Service payment still dominates the payer landscape. The percentage of overall provider revenue in risk-based capitated contracts has not exceeded 20%
Despite improvements in care quality and reductions in utilization rates, cost savings have been modest or negligible. Accountable Care Organizations have only managed at best to save a “few percent of Medicare spending, [but] the
amount varies by program design.”
While most health systems accept some forms of risk-based payments, only 5% of providers expect to have a majority (over 80%) of their patients in risk-based arrangements within 5 years.
The shift to value is challenging for numerous reasons. Commercial payers often have limited appetite or capacity for
risk-based contracting with providers. Concurrently, providers often have difficulty accessing the claims data they need
from payers to manage the care for targeted populations.
The current allocation of cost-savings between buyers (including government, employers and consumers), payers
(health insurance companies) and providers discourages the shift to value-based care delivery. Providers would
advance value-based models if they could capture a larger percentage of the savings generated from more effective
care management and delivery. Those financial benefits today flow disproportionately to buyers and payers.
This disconnection of payment from value creation slows industry transformation. Ultimately, U.S. healthcare will not
change the way it delivers care until it changes the way it pays for care. Fortunately, payment models are evolving to
incentivize value-based care delivery.
As payment reform unfolds, however, operational challenges pose significant challenges to hospitals and health
systems. They must adopt value-oriented new business models even as they continue to receive FFS payments. New
and old models of care delivery clash.
COVID makes this transition even more formidable as many health systems now lack the operating stamina and balance sheet strength to make the financial, operational and cultural investments necessary to deliver better outcomes, lower costs and enhanced customer service.
MARKET-DRIVEN CONSOLIDATION AND TRANSFORMATION
Full-risk payment models, such as bundled payments for episodic care and capitation for population health, are the
catalyst to value-based care delivery. Transition to value-based care occurs more easily in competitive markets with many attributable lives, numerous provider options and the right mix of willing payers.
As increasing numbers of hospitals struggle financially, the larger and more profitable health systems are expanding their networks, capabilities and service lines through acquisitions. This will increase their leverage with commercial payers and give them more time to adapt to risk-based contracting and value-based care delivery.
COVID also will accelerate acquisition of physician practices. According to an April 2020 MGMA report, 97% of
physician practices have experienced a 55% decrease in revenue, forcing furloughs and layoffs15. It’s estimated the
sector could collectively lose as much as $15.1 billion in income by the end of September 2020.
Struggling health systems and physician groups that read the writing on the wall will pro-actively seek capital or strategic partners that offer greater scale and operating stability. Aggregators can be selective in their acquisitions,
seeking providers that fuel growth, expand contiguous market positions and don’t dilute balance sheets.
Adding to the sector’s operating pressure, private equity, venture investors and payers are pouring record levels of
funding into asset-light and virtual delivery companies that are eager to take on risk, lower prices by routing procedures
and capture volume from traditional providers. With the right incentives, market-driven reforms will reallocate resources to efficient companies that generate compelling value.
As this disruption continues to unfold, rural and marginal urban communities that lack robust market forces will experience more facility and practice closures. Without government support to mitigate this trend, access and care gaps that already riddle American healthcare will unfortunately increase.
WINNING AT VALUE
The average hospital generates around $11,000 per patient discharge. With ancillary services that can often add up to
more than $15,000 per average discharge. Success in a value-based system is predicated on reducing those discharges and associated costs by managing acute care utilization more effectively for distinct populations (i.e. attributed lives).
This changes the orientation of healthcare delivery toward appropriate and lower cost settings. It also places greater
emphasis on preventive, chronic and outpatient care as well as better patient engagement and care coordination.
Such a realignment of care delivery requires the following:
A tight primary care network (either owned or affiliated) to feed referrals and reduce overall costs through
better preventive care.
A gatekeeper or navigator function (increasingly technology-based) to manage / direct patients to the most
appropriate care settings and improve coordination, adherence and engagement.
A carefully designed post-acute care network (including nursing homes, rehab centers, home care
services and behavioral health services, either owned or sufficiently controlled) to manage the 70% of
total episode-of-care costs that can occur outside the hospital setting.
An IT infrastructure that can facilitate care coordination across all providers and settings.
Quality data and digital tools that enhance care, performance, payment and engagement.
Experience with managing risk-based contracts.
A flexible approach to care delivery that includes digital and telemedicine platforms as well as nontraditional sites of care.
Aligned or incentivized physicians.
Payer partners willing to share data and offload risk through upside and downside risk contracts.
Engaged consumers who act on their preferences and best interests.
While none of these strategies is new or controversial, assembling them into cohesive and scalable business models is something few health systems have accomplished. It requires appropriate market conditions, deep financial resources,
sophisticated business acumen, operational agility, broad stakeholder alignment, compelling vision, and robust
Providers that fail to embrace value-based care for their “attributed lives” risk losing market relevance. In their relentless pursuit of increasing treatment volumes and associated revenues, they will lose market share to organizations that
deliver consistent and high-value care outcomes.
CONCLUSION: THE CHARGING GRAY RHINO
America needs its hospitals to operate optimally in normal times, flex to manage surge capacity, sustain themselves
when demand falls, create adequate access and enhance overall quality while lowering total costs. That is a tall order requiring realignment, evolution, and a balance between market and policy reform measures.
The status quo likely wasn’t sustainable before COVID. The nation has invested heavily for many decades in acute and
specialty care services while underinvesting, on a relative basis, in primary and chronic care services. It has excess
capacity in some markets, and insufficient access in others.
COVID has exposed deep flaws in the activity-based payment as well as the nation’s underinvestment in public health.
Disadvantaged communities have suffered disproportionately. Meanwhile, the costs for delivering healthcare services
consume an ever-larger share of national GDP.
Transformational change is hard for incumbent organizations. Every industry, from computer and auto manufacturing to
retailing and airline transportation, confronts gray rhino challenges. Many companies fail to adapt despite clear signals
that long-term viability is under threat. Often, new, nimble competitors emerge and thrive because they avoid the inherent contradictions and service gaps embedded within legacy business models.
The healthcare industry has been actively engaged in value-driven care transformation for over ten years with little to
show for the reform effort. It is becoming clear that many hospitals and health systems lack the capacity to operate profitably in competitive, risk-based market environments.
This dismal reality is driving hospital market valuations and closures. In contrast, customers and capital are flowing to
new, alternative care providers, such as OneMedical, Oak Street Health and Village MD. Each of these upstart
companies now have valuations in the $ billions. The market rewards innovation that delivers value.
Unfortunately, pure market-driven reforms often neglect a significant and growing portion of America’s people. This gap has been more apparent as COVID exacts a disproportionate toll on communities challenged by higher population
density, higher unemployment, and fewer medical care options (including inferior primary and preventive care infrastructure).
Absent fundamental change in our hospitals and health systems, and investment in more efficient care delivery and
payment models, the nation’s post-COVID healthcare infrastructure is likely to deteriorate in many American communities, making them more vulnerable to chronic disease, pandemics and the vicissitudes of life.
Article 2 in our “Future of Hospitals” series will explore the public policy challenges of providing appropriate, affordable and accessible healthcare to all American communities.
New report finds the growth of telemedicine visits has plateaued and accounts for a relatively small percentage of rebounding ambulatory care.
On Monday, 340 organizations signed a letter urging Congress to make telehealth flexibilities created during the COVID-19 pandemic, permanent.
Those signing the letter include national and regional organizations representing a range of healthcare stakeholders in all 50 states, the District of Columbia and Puerto Rico.
Congress quickly waived statutory barriers to allow for expanded access to telehealth at the beginning of the COVID-19 pandemic, providing federal agencies with the flexibility to allow healthcare providers to deliver care virtually.
Stakeholders also want Congress to remove restrictions on the location of the patient to ensure that all patients can access care at home, and other appropriate locations; to maintain and enhance HHS authority to determine appropriate providers and services for telehealth; ensure federally qualified health centers and rural health clinics can furnish telehealth services after the public health emergency; and make permanent the Health and Human Services temporary waiver authority for future emergencies.
While federal agencies can address some of these policies going forward, the Centers for Medicare and Medicaid does not have the authority to make changes to Medicare reimbursement policy for telehealth under current law, stakeholders said.
In a statement separate from the letter to Congress, Lux Research Associate Danielle Bradnan said key concerns for legislators are broadband internet access, payer reimbursement and licensure barriers, since, currently, medical licenses are only valid for specific states.
WHY THIS MATTERS
If Congress does not act before the COVID-19 public health emergency expires, current flexibilities will disappear, according to stakeholders.
The PHE is scheduled to expire in July.
In a tweet late yesterday, Michael Caputo, the assistant secretary of the Department of Health and Human Services for public affairs, said HHS is expected to renew the PHE before it expires. It has already been renewed once.
THE LARGER TREND
The use of telehealth has skyrocketed under in-person restrictions under COVID-19.
Private health plans have followed suit, the letter said, resulting in a 4,300% year-over-year increase in claims for March 2020.
However, a new report from the Commonwealth Fund has found that the growth of telemedicine visits has plateaued and account for a relatively small percentage of rebounding ambulatory care services.
As states experiment with reopening – and re-closing – their economies in response to concerns around rising coronavirus cases, the report found that telemedicine visits have actually been declining since April.
Healthcare is Hard: A Podcast for Insiders; June 11, 2020
Over the course of nearly 20 years as Chief Research Officer at The Advisory Board Company, Chas Roades became a trusted advisor for CEOs, leadership teams and boards of directors at health systems across the country. When The Advisory Board was acquired by Optum in 2017, Chas left the company with Chief Medical Officer, Lisa Bielamowicz. Together they founded Gist Healthcare, where they play a similar role, but take an even deeper and more focused look at the issues health systems are facing.
As Chas explains, Gist Healthcare has members from Allentown, Pennsylvania to Beverly Hills, California and everywhere in between. Most of the organizations Gist works with are regional health systems in the $2 to $5 billion range, where Chas and his colleagues become adjunct members of the executive team and board. In this role, Chas is typically hopscotching the country for in-person meetings and strategy sessions, but Covid-19 has brought many changes.
“Almost overnight, Chas went from in-depth sessions about long-term five-year strategy, to discussions about how health systems will make it through the next six weeks and after that, adapt to the new normal. He spoke to Keith Figlioli about many of the issues impacting these discussions including:
Corporate Governance. The decisions health systems will be forced to make over the next two to five years are staggeringly big, according to Chas. As a result, Gist is spending a lot of time thinking about governance right now and how to help health systems supercharge governance processes to lay a foundation for the making these difficult choices.
Health Systems Acting Like Systems. As health systems struggle to maintain revenue and margins, they’ll be forced to streamline operations in a way that finally takes advantage of system value. As providers consolidated in recent years, they successfully met the goal of gaining size and negotiating leverage, but paid much less attention to the harder part – controlling cost and creating value. That’s about to change. It will be a lasting impact of Covid-19, and an opportunity for innovators.
The Telehealth Land Grab. Providers have quickly ramped-up telehealth services as a necessity to survive during lockdowns. But as telehealth plays a larger role in the new standard of care, payers will not sit idly by and are preparing to double-down on their own virtual care capabilities. They’re looking to take over the virtual space and own the digital front door in an effort to gain coveted customer loyalty. Chas talks about how it would be foolish for providers to expect that payers will continue reimburse at high rates or at parity for physical visits.
The Battleground Over Physicians. This is the other area to watch as payers and providers clash over the hearts and minds of consumers. The years-long trend of physician practices being acquired and rolled-up into larger organizations will significantly accelerate due to Covid-19. The financial pain the pandemic has caused will force some practices out of business and many others looking for an exit. And as health systems deal with their own financial hardships, payers with deep pockets are the more likely suitor.”
Prospect Medical Group will double in size when it completes the acquisition of three medical practices later this year.
Prospect Medical Group, owned by Los Angeles-based Prospect Medical Holdings, entered into an agreement April 22 to acquire certain assets of CalCare IPA and Los Angeles Medical Center IPA, both of which serve Los Angeles County, and Vantage Medical Group in San Diego, San Bernardino and Riverside, Calif.
The transaction, which is subject to customary closing conditions and approvals from contracted health plans, is expected to close this summer.
The three independent medical associations, representing more than 10,000 physicians, will join Prospect’s existing network of about 10,000 providers when the transaction closes.
“This is a great opportunity to expand Prospect’s system of coordinated care to a much larger market,” said Prospect Medical Systems CEO Jim Brown. “Our vision is that everyone has access to quality health care when they need it, and we look forward to partnering with a new network of physicians to make that a reality.”
As health systems take tentative steps to resume non-emergent procedures and office visits, it’s increasingly clear that volume will not quickly return to pre-COVID levels. According to a health system chief physician executive we spoke with this week, this has forced medical group leadership to reevaluate physician compensation, at least for the rest of 2020.
“We’ve kept our doctors pretty much whole for the past three months,” she said, “but given the losses we’re facing for the rest of the year, we can’t keep it up much longer.” We’ve had a flurry of calls in the past two weeks with systems in the same position. Most of their doctors are primarily paid based on their productivity. “We all loved the upside opportunity,” mused one physician leader, “but we never thought something could happen that would completely wipe us out.”
This point got us wondering whether we might be seeing the beginning of the end of RVU-based physician compensation, as physicians seek greater stability and safety. But moving to a salary-driven model is far from easy. How much upside are doctors willing to trade off for security? The survey data used to benchmark compensation, based on last year’s business model, is essentially irrelevant—and likely will be for next year as well. According to one consultant, “Given that there’s no consistency in volume or compensation strategy, the 2020 data will be garbage, too.” Not to mention, dramatically shifting the way doctors are paid has huge cultural and operational ramifications.
There are no easy answers, but we think this conversation about the future of compensation, and the larger issues it raises about doctors’ relationship to, and role in, the health system, is long overdue. One executive shared his system’s plan to pay their doctors 85 percent of their 2019 compensation through the summer. He’s not sure yet what the other side of August looks like. “Maybe we’ll have physicians who want to continue to be paid on productivity like a car salesman. But if you want that kind of upside now, the safety net likely won’t be there the next time.” However, he hopes this experience “provides a reset point that gets us to a more sustainable—and professional—way of working together for the future.”
As visits plummet because of the coronavirus, small physician practices are struggling to survive.
Autumn Road in Little Rock, Ark., is the type of doctor’s practice that has been around long enough to be treating the grandchildren of its eldest patients.
For 50 years, the group has been seeing families like Kelli Rutledge’s. A technician for a nearby ophthalmology practice, she has been going to Autumn Road for two decades.
The group’s four doctors and two nurse practitioners quickly adapted to the coronavirus pandemic, sharply cutting back clinic hours and switching to virtual visits to keep patients and staff safe.
When Kelli, 54, and her husband, Travis, 56, developed symptoms of Covid-19, the couple drove to the group’s office and spoke to the nurse practitioner over the phone. “She documented all of our symptoms,” Ms. Rutledge said. They were swabbed from their car.
While the practice was never a big moneymaker, its revenues have plummeted. The number of patients seen daily by providers has dropped to half its average of 120. The practice’s payments from March and April are down about $150,000, or roughly 40 percent.
“That won’t pay the light bill or the rent,” said Tabitha Childers, the administrator of the practice, which recently laid off 12 people.
While there are no hard numbers, there are signs that many small groups are barely hanging on. Across the country, only half of primary care doctor practices say they have enough cash to stay open for the next four weeks, according to one study, and many are already laying off or furloughing workers.
“The situation facing front-line physicians is dire,” three physician associations representing more than 260,000 doctors, wrote to the secretary of health and human services, Alex M. Azar II, at the end of April. “Obstetrician-gynecologists, pediatricians, and family physicians are facing dramatic financial challenges leading to substantial layoffs and even practice closures.”
By another estimate, as many as 60,000 physicians in family medicine may no longer be working in their practices by June because of the pandemic.
The faltering doctors’ groups reflect part of a broader decline in health care alongside the nation’s economic downturn. As people put off medical appointments and everything from hip replacements to routine mammograms, health spending dropped an annualized rate of 18 percent in the first three months of the year, according to recent federal data.
While Congress has rushed to send tens of billions of dollars to the hospitals reporting large losses and passed legislation to send even more, small physician practices in medicine’s least profitable fields like primary care and pediatrics are struggling to stay afloat. “They don’t have any wiggle room,” said Dr. Lisa Bielamowicz, a co-founder of Gist Healthcare, a consulting firm.
None of the money allocated by lawmakers has been specifically targeted to the nation’s doctors, although the latest bill set aside funds for community health centers. Some funds were also set aside for small businesses, which would include many doctors’ practices, but many have faced the same frustration as other owners in finding themselves shut out of much of the funding available.
Federal officials have taken some steps to help small practices, including advancing Medicare payments and reimbursing doctors for virtual visits. But most of the relief has gone to the big hospital and physician groups. “We have to pay special attention to these independent primary care practices, and we’re not paying special attention to them,” said Dr. Farzad Mostashari, a former health official in the Obama administration, whose company, Aledade, works with practices like Autumn Road.
“The hospitals are getting massive bailouts,” said Dr. Christopher Crow, the president of Catalyst Health Network in Texas. “They’ve really left out primary care, really all the independent physicians,” he said.
“Here’s the scary thing — as these practices start to break down and go bankrupt, we could have more consolidation among the health care systems,” Dr. Crow said. That concerns health economists, who say the steady rise in costs is linked to the clout these big hospital networks wield with private insurers to charge high prices.
While the pandemic has wreaked widespread havoc across the economy, shuttering restaurants and department stores and throwing tens of millions of Americans out of work, doctors play an essential role in the health of the public. In addition to treating coronavirus patients who would otherwise show up at the hospital, they are caring for people with chronic diseases like diabetes and asthma.
Keeping these practices open is not about protecting the doctors’ livelihoods, said Michael Chernew, a health policy professor at Harvard Medical School. “I worry about how well these practices will be able to shoulder the financial burden to be able to meet the health care needs people have,” he said.
“If practices close down, you lose access to a point of care,” said Dr. Chernew, who was one of the authors of a new analysis published by the Commonwealth Fund that found doctor’s visits dropped by about 60 percent from mid-March to mid-April. The researchers used visit data from clients of a technology firm, Phreesia.
Nearly 30 percent of the visits were virtual as doctors rushed to offer telemedicine as the safest alternative for their staff and patients. “It’s remarkable how quickly it was embraced,” said Dr. Ateev Mehrotra, a hospitalist and associate professor of health policy at Harvard Medical School, who was also involved in the study. But even with virtual visits, patient interaction was significantly lower.
Almost half of primary care practices have laid off or furloughed employees, said Rebecca Etz, an associate professor of family medicine at Virginia Commonwealth University and co-director of the Larry A. Green Center, which is surveying doctors with the Primary Care Collaborative, a nonprofit group. Many practices said they did not know if they had enough cash to stay open for the next month.
Pediatricians, which are among the lowest paid of the medical specialties, could be among the hardest hit. Federal officials used last year’s payments under the Medicare program to determine which groups should get the initial $30 billion in funds. Because pediatricians don’t generally treat Medicare patients, they were not compensated for the decline in visits as parents chose not to take their children to the doctor and skipped their regular checkups.
“This virus has the potential to essentially put pediatricians out of business across the country,” said Dr. Susan Sirota, a pediatrician in Chicago who leads a network of a dozen pediatric practices in the area. “Our waiting rooms are like ghost towns,” she said.
Pediatricians have also ordered tens of thousands of dollars on vaccines for their patients at a time when vaccine rates have plunged because of the pandemic, and they are now working with the manufacturers to delay payments for at least a time. “We don’t have the cash flow to pay them,” said Dr. Susan Kressly, a pediatrician in Warrington, Pa.
Even those practices that quickly ramped up their use of telemedicine are troubled. In Albany, Ga., a community that was an unexpected hot spot for the virus, Dr. Charles Gebhardt, a doctor who is treating some infected patients, rapidly converted his practice to doing nearly everything virtually. Dr. Gebhardt also works with Aledade to care for Medicare patients.
But the telemedicine visits are about twice as long as a typical office visit, Dr. Gebhardt said. Instead of seeing 25 patients a day, he may see eight. “We will quickly go broke at this rate,” he said.
Although he said the small-business loans and advance Medicare payments are “a Godsend, and they will help us survive the next few months,” he also said practices like his need to go back to seeing patients in person if they are to remain viable.Medicare will no longer be advancing payments to providers, and many of the small-business funding represents a short-term fix.
While Medicare and some private insurers are covering virtual visits, which would include telephone calls, doctors say the payments do not make up for the lost revenue from tests and procedures that help them stay in business. “Telehealth is not the panacea and does not make up for all the financial losses,” said Dr. Patrice Harris, the president of the American Medical Association.
To keep the practices open, Dr. Mostashari and others propose doctors who treat Medicare and Medicaid patients receive a flat fee per person.
Even more worrisome, doctors’ groups may not be delivering care to those who need it, said Dr. Mehrotra, the Harvard researcher, because the practices are relying on patients to get in touch rather than reaching out.
Some doctors are already voicing concerns about patients who do not have access to a cellphone or computer or may not be adept at working with telemedicine apps. “Not every family has access to the technology to connect with us the right way,” said Dr. Kressly, who said the transition to virtual care “is making disparities worse.”
Some patients may also still prefer traditional office visits. While the Rutledges appreciated the need for virtual visits, Kelli said there was less time to “talk about other things.”
“Telehealth is more inclined to be about strictly what you are there for,” she said.
Private equity firms and large hospital systems are already eying many of these practices in hopes of buying them, said Paul D. Vanchiere, a consultant who advises pediatric practices.
“The vultures are circling here,” he said. “They know these practices are going to have financial hardship.”
In our decades in healthcare, we’ve never seen a faster care transformation than the rapid growth in telemedicine sparked by COVID-19. Every system we’ve spoken with over the past two months reports its doctors are now performing thousands of “virtual visits” each week, often up from just a handful in February. As one chief digital officer told us, “We took our three-year digital strategic plan and implemented it in two weeks!”
This week, we convened leaders from across our Gist Healthcare membership to share learnings and questions about their telemedicine experiences. COVID-19 brought down regulatory and payment hurdles, as well as internal cultural barriers to adoption—but leaders expressed a concern that current payment levels and physician enthusiasm could dissipate. Some insurers have hinted at pulling back on payment, although they will have a hard time doing so as long as Medicare maintains “parity” with in-person visits.
Switching to 100 percent telemedicine was easier than most doctors anticipated. But as practices now begin to ramp up office visits, new questions are emerging about how to integrate digital and physical visit workflow, requiring providers to rethink office layout and technology within the practice: is there a good physical space in the office to conduct televisits? Zoom and FaceTime have worked in a pinch, but what platform is best for long-term operational sustainability and consumer experience?
Telemedicine has also raised consumer expectations: patients expect providers to be on time for a virtual appointment—setting a bar for punctuality that will likely carry over to their next in-person office visit. Across the rest of this year, health systems and physician groups will continue to push the boundaries of virtual care, establishing how far it can be extended to provide quality care in a host of specialties.
But at the same time, systems must also prepare for growing complexity in 2021: what is the right balance of in-person versus virtual care? How should telemedicine integrate with urgent and emergency care offerings? How should physician compensation change? And as payers and disruptors expand their virtual care offerings, how can providers differentiate their own platforms in the eyes of consumers? We’ll continue to share learnings as our members work through the myriad challenges and opportunities of this new virtual care expansion.
Just three weeks ago, Dr. Kathryn Davis worried about the coronavirus, but not about how it might affect her group of five OB-GYNs who practice at a suburban hospital outside Boston.
“In medicine we think we’re relatively immune from the economy,” Davis said. “People are always going to get sick; people are always going to need doctors.”
Then, two weeks ago, she watched her practice revenue drop 50% almost overnight after Massachusetts officials told doctors and hospitals to stop performing elective tests and procedures. For Davis, that meant no more non-urgent gynecological visits and screenings.
Late last week, as Davis and her partners absorbed the stunning turn of events, they devised a stopgap plan. The 35 nurses, medical assistants and secretaries they employ would have two options: move from full-time to part-time status or start collecting unemployment. Doctors in the practice would take a substantial pay cut. Davis said she’s hearing from colleagues who may have to permanently close their offices if the focus on crisis-level care continues for months.
“It’s shocking,” she said. “Everyone has been blindsided.”
Atrius Health, the largest independent physician group in Massachusetts, said patient volume is down 75% since mid-March. It is temporarily closing offices, placing many nonclinical employees on furlough and withholding pay for those who remain. The average withholding is 20%, and the company pledges that pay withheld will be returned. The lowest-paid workers, those earning up to $55,000, are exempt.
“What we’re trying to do is piece together a solution to get through the crisis and keep employed as many people as we can,” said Dr. Steven Strongwater, Atrius Health’s CEO.
Atrius cares for 745,000 patients in clinics that often include primary care, specialists, radiology and a pharmacy under one roof.
Strongwater said physician groups must be included when the federal government distributes $100 billion to hospitals from the $2 trillion stimulus package.
It’s not clear if that money will stop the tide of layoffs and lost pay at hospitals as well as in doctor’s offices. A Harvard Medical School physician group will suspend retirement contributions starting April 1.
Beth Israel Lahey Health, the second-largest hospital network in Massachusetts, announced executive pay cuts Monday.
“The suspension of elective procedures and decline in visits to our primary care practices and urgent care centers have resulted in financial challenges,” wrote CEO Dr. Kevin Tabb in an email to employees. Tabb said he would take a 50% salary cut. Other executives and hospital presidents in the system will forgo 20% of their salaries for the next three months.
“Although executive leadership compensation is being reduced, we will never compromise on doing the things that are essential to protect your safety and the safety of our patients,” Tabb told staff.
Dallas-based Steward Health Care has told hospital employees in Massachusetts and eight other states where it operates to expect furloughs focused on nonclinical staff. In a statement, Steward Health Care said it prepared for the pandemic but is experiencing a “seismic financial shock.”
“Elective surgeries are the cornerstone of our hospital system’s operating model — and the negative impact due to the cancellations of these procedures cannot be overstated. In addition, patients are understandably cautious and choosing to defer any nonemergency treatments or routine visits until this crisis has passed.”
Dr. Kaarkuzhali Babu Krishnamurthy, an assistant professor of neurology at Harvard Medical School who studies medical ethics, said employers need to think more carefully about the ethics of asking doctors and nurses to live on less when many are working longer hours and putting the health of their families at risk.
“At a time when health care systems are calling on doctors and nurses to do more, this is not the time to be making it more difficult to do that,” said Krishnamurthy.
There’s talk of redeploying laid-off health care workers to new COVID-19 units opening in shuttered hospitals or to patient overflow sites. Tim Foley, executive vice president for the largest health care union in Massachusetts, 1199SEIU, is promoting the development of a staff registry.
“It is more important, now more than ever, to explore all options to maintain the level of urgent care needed across the state and we look forward to working with all stakeholders to do just that,” Foley said in an email.