Bob Matthews

March 19, 2018

Whither Revenue?

Medisync Blog

Last week the American Medical Group Association (AMGA), an organization of larger medical groups, held its annual meeting and 2200 physician group leaders – the majority physicians themselves -- spent four days together. These are difficult and uncertain times for medical groups and there was a certain tension in the air.

Key to any business is revenue. For the past ten or so years, AMGA meetings (and other gatherings of physician group leaders) have been told that payments to doctors and hospitals will be radically changed. Not knowing how your future revenue will be calculated or paid is pretty unsettling.

In the past, doctors and medical groups were paid based upon two variables. The first was “rate.” The second was how many services were provided. Physician reimbursement was paid, “by the piece” for most providers, including physicians. So the number of services provided times the rate of pay per service generated top line revenue.

Medicare and Medicaid rates were mandated by law and regulation but rates for patients enrolled in commercial health insurance were negotiated. Medicare’s annual rate increases have lagged overhead cost inflation by over 65% over the past sixteen years and the trend will continue into the future. For many groups, commercial rates are tied to Medicare, so the trend has been unfavorable to medical groups.

Rate negotiations with commercial insurers favored the party with the most market power. A very large medical group or a medical group affiliated with a dominant hospital/health system can demand higher rates under the theory that the insurer must have certain large providers in its health insurance products or those products won’t sell to employers.

In some markets, an insurance entity has a huge market position and can swing the negotiating power against providers. In many markets, very large insurance companies battle to a standoff with very large health systems and rates just go up. This is not entirely unwelcome to the insurer because insurers charge a percentage of medical costs. Medical group rates often vary by more than 100% for the exact same service from one region to another. Local employers and patients suffer or enjoy those differences.

In a payment environment in which the only dynamic variable is volume, a lot of factors are not very important. Physicians and medical group leaders did not have to ask or answer important questions like: • Was the correct service provided?
• Was the service provided correctly?
• What percent of the time did the service “work” (i.e. achieve a desired outcome)?
• What was the total cost of treating a condition when all the services had been provided and the total bill calculated?

Since these questions and answers were blinded to the purchasing market, they were not important to business success. In this way providing medical care is different from selling cars, computers or, for that matter, most goods and services where cost and quality – collectively calculated as value – are very important to the seller’s success.

It has been touted for about ten years that payments for medical services were going to be switching from “volume based” to “value based” where value is some combination of cost and quality.

Despite constant announcements that “value is happening” the transition has been slow, uncertain, confusing and generally not very successful to date. There are several reasons: • Changing the payment model for a $3.2 trillion dollar part of the US economy is a huge project and inevitably disruptive. There will be winners and losers and the losers will complain loudly.
• The calculation of quality and cost effectiveness in healthcare is difficult. There is no perfect formula although many formula options have been attempted and refined. • Insurance companies and large health systems have used their current market positions to resist change. After all, they are making money today and, as Machiavelli pointed out centuries ago, “The innovator has for enemies all those who have done well under the old conditions…” Until the 2016 election the federal government was dedicated to moving more payments to some value formula. However, the first draft iterations for value were excessively cumbersome and the infrastructure inadequate to properly measure cost and quality.

Then, President Trump’s first HHS Secretary, Doctor Tom Price, made it clear that he did not see a need to move the healthcare market place towards value based payments. Since Medicare and Medicaid represent over half the total expenditures in healthcare, this caused doubts that payments would change. Price’s preferred option was to have patients pay more and more of their own bill with the theory that they could they learn to shop for health quality and cost. At this time, the position of his replacement, HHS Secretary Alex Azar is unclear.

For five or more years various medical groups have begun to explore value. The most common route was to sign up to be recognized as an Accountable Care Organization (ACO), a device created in the Accountable Care Act (ACA) most famously known as Obamacare. The ACO model was designed as a transitional federal model to share saving with healthcare delivery systems that could save monies.

In 2018 there are 518 recognized ACOs in the US. What was interesting was that many ACOs did not prepare much to change their care of business models prior to signing up and few spent significant monies or effort after signing up to be an ACO. It has been for many – not all, but many – a passive experiment until recently. One result is that only about 30% of ACOs have earned any revenue at all.

Now, with the Trump Administration apparently determined to put an end to the components of the ACA/Obamacare, surprisingly we find more organizations starting to experiment seriously with efforts to improve quality and cost. One wonders, “Why now?”

I find two explanations the most likely: 1. There is more and more recognition that the country simply cannot afford and sustain the healthcare costs we now have. Companies, patients and the government simply can’t pay their insurance bills.
2. The rates that are paid to physicians are evaporating leading to a financial crisis in medical groups. The fact that government rates were so far below overhead inflation for groups has created a financial vice that now squeezes physicians and medical groups to an extreme degree. Many now realize that they need another source of revenue and value revenue looks to be the best option. One prominent theme at AMGA was physician burnout as they attempt to compensate for lower rates with higher activity.

While all these machinations and procrastinations proceed, the US economy continues to be unable to afford its healthcare or health insurance bill. At some point the cost crisis will demand action but when and how that crisis will play out remains unclear. Meanwhile, as evidenced at AMGA, the medical group industry is struggling to manage this prolonged transition in payment models.



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