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2017-08-28

Part 3: The Physician-Hospital Alignment Decision

Part 3 of the Successful Health and Wellness MACRA article series explores the impact of the legislation on the physician-hospital alignment strategy

In Part 2 of the Successful Health and Wellness MACRA Article Series, we introduced the physician-hospital alignment as a key strategic decision in response to the legislation. A clinician’s level of alignment falls into one of three broad categories: independent, independent and aligned, and employed, each with varying levels of independence and functional support. The drive to align is motivated by a clinician’s need for support in the following five functional areas:

  1. Planning and modeling financial implications and needed investments under MACRA;
  2. Identifying necessary capabilities for new reporting requirements;
  3. Identifying necessary capabilities for bearing increased financial risk;
  4. Exploring multiple options for physician alignment, ranging from employment models to network relationships; and,
  5. Implementing change management strategies and managing cultural shifts.

Because success under MACRA, and other value-based payment arrangements, requires support in the five areas listed above, clinicians are looking to other larger organizations to provide support in areas they may be lacking.

In assessing alignment opportunities, it is clear that direct hospital employment is a trend that is becoming more common across the industry. Since 1998, hospital employment of physicians has grown to roughly 25 percent of total physicians, including physicians in non-profit foundations. This growth represents a 74 percent increase in physician employment.[i] Physician employment can be a costly investment for hospitals but it allows hospitals to participate in shared goal setting with physicians, and creates an opportunity to influence primary care physician referral patterns.

Before making the decision to employ physicians, hospitals should analyze the composition of their current physician network. If that network is more heavily weighted toward specialty physicians, the hospital might look to acquire primary care physician practices in order to increase specialty referrals within their network. Additionally, hospitals might decide to pursue the direct employment option in order to prevent independent physicians from aligning with a competitor, and thereby allowing unrealized market share to escape the hospital network.

Oftentimes, physicians do not want to be acquired in order to maintain their independence and autonomy to practice. In these situations, non-employed alignment vehicles such as Accountable Care Organizations (ACOs) and Clinically Integrated Networks (CINs) create opportunities to achieve closer physician alignment. For hospitals, these opportunities present a method of alignment that allows them to escape the responsibility of additional salary and benefit expenses, while still gaining access to increased referrals.

These models have been gaining in popularity in recent years. Knowing that ACOs are a critical entry point into the QPP’s Advanced APM track, this trend is expected to continue into the future. CINs have also been growing in popularity with over 500 in existence today. These organizations present a unique strategic opportunity for hospitals to better coordinate care across the network, reduce the total cost of care, and increase the amount of revenue for the hospital. A McKinsey & Company study found that hospitals that were part of a CIN generated an additional $3.9 million in annual profit. To achieve these results, hospitals must listen to physicians and provide the resources that physicians need.[ii]

In any alignment strategy, hospitals have an opportunity to decrease the administrative burden and relative cost for all employed or affiliated physicians by maximizing economies of scale of their existing infrastructure. Areas for opportunity for economies of scale maximization include: electronic medical records, data collection and reporting systems, and revenue cycle management. The Medical Group Management Association (MGMA) 2016 Cost Survey demonstrated that practice-support expenses are 40 percent lower in hospital-sponsored multispecialty groups due to the ability to leverage a hospital’s existing administrative infrastructure.[iii] The ability to efficiently allocate costs across the organization will benefit physicians and hospitals as they advance their operations under MACRA to prepare for new physician payment models.

As part of this evolution, MACRA introduces financial risk for all providers. For the well-prepared organization, increased financial risk also means an increased opportunity to grow. Whether employing physicians directly, or building another alignment structure, hospitals serve as the vehicle to bring physicians together in a way that promotes care coordination while sharing resources in a more effective manner. By realizing economies of scale for capital investments and efficient allocation of clinical support tools such as centralized care management models, comprehensive population analytics, and IT infrastructure, hospitals can provide the financial and non-financial support that can lessen barriers that often impede the move toward value-based care.

By expanding the clinical enterprise to include new physicians, the hospital can also boost revenues in traditional payment models by increasing referral volume and engaging patients with the hospital network. In a study completed by Merritt Research in 2013, family practice physicians created $2.07 million of annual net revenue for a hospital through downstream referrals.[iv] In addition, these primary care physicians had a revenue to compensation ratio of $10.94 to $1, meaning they generated $10.94 for every $1 they were paid. To analyze the impact of this additional revenue created by increasing the number of network PCPs, it is important to consider that the average Medicare Shared Savings Program (MSSP) ACO that generated shared savings in performance year 2015 received a shared savings payment of $5.4 million from CMS.[v] By applying the 50 percent sharing rate in the MSSP program, an ACO had to create $10.8 million in total savings to receive a payment of $5.4 million. It is important to note that savings is synonymous with forgone revenue, so most of $10.8 million in savings likely came out of hospital revenue through a reduction in services like hospital admissions or emergency department visits. This means that a hospital has to increase their network with the referrals of five primary care physicians ($10.8 million / $2.07 of net revenue generated) in order to nearly breakeven on lost revenue in a value-based care arrangement. In this scenario, the hospital would also share some portion of the shared savings with physicians, creating a net positive impact on both the physicians and the hospital.

The decision tree below provides an example of the basic questions a hospital must answer when deciding which – alignment strategy is best for their organization.

There are several nuances to an organization, so this decision tree is meant for purely illustrative purposes. At the basic level an organization must evaluate their current capabilities, financial position, and appetite for risk when determining what alignment strategy is best for them.

The strategic decisions made in response to MACRA will have significant financial implications for hospitals and physicians. These financial implications include both upfront financial investments and future organizational revenue, and must be weighed when determining what alignment strategy to choose. Part 4 of the MACRA article series will further explore the implications of the legislation, assessing what it may mean for an organization’s financial outlook.

[i] Burns, Lawton, Kaufman, Nathan, Goldsmith, Jeff. The Tangled Hospital Physician Relationship. Health Affairs. http://healthaffairs.org/blog/2016/05/09/the-tangled-hospital-physician-relationship/ Published May 2016. Accessed November 20, 2016.

[ii] Kumar, Pooja; Levine, Edward. Clinically integrated networks: Can they create value? McKinsey & Company healthcare Systems and Services Practice. http://healthcare.mckinsey.com/sites/default/files/Clinically%20integrated%20networks.pdf. Published June 2016. Accessed November 4, 2016.

[iii] Medical Group Management Association. 2016 Cost Survey. http://www.hhnmag.com/articles/7605-how-hospitals-can-get-the-most-value-from-their-physicians>.  Published October 2016. Accessed November 23, 2016.

[iv] Merritt Research. 2013 Physician Inpatient/Outpatient Revenue Survey. http://www.beckershospitalreview.com/compensation-issues/51-statistics-on-physician-salaries-vs-hospital-revenue-generated.html. Published May 2013. Accessed November 21, 2016.

[v] Kocot, Lawrence S., White, Ross. Medicare ACOs: Incremental Progress, But Performance Varies. http://healthaffairs.org/blog/2016/09/21/medicare-acos-incremental-progress-but-performance-varies/. Published September 2016. Accessed November 15, 2016.

 

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