Accountable Care Economics

Topics: Margin Performance, Finance, Accountable Care, Market Trends, Strategy, Health Care Reform

By reading this study, members will learn about:

• The impact of value-based purchasing and readmissions penalties
• The early experiences of hospitals and health systems pursuing bundled payment, shared savings, and medical home pilots
• The underlying economic drivers of the industry’s major payment innovations
• The strategic goals advanced by bundled payment, shared savings, and medical homes
• The pitfalls and challenges to be aware of in evaluating and implementing risk-based contracts

Executive Summary

New initiatives from CMS and private payers changing the industry landscape

This eventful year brought several new CMS initiatives to advance the quality agenda—placing a growing portion of health system revenue at risk for process, patient satisfaction, and outcome metrics. Pilot projects from CMS and private payers aim to reward systems for lowering costs for discrete episodes of care and for entire populations.

Two mandatory initiatives increase volatility in revenue and profits

Two CMS initiatives—the Value-Based Purchasing (VBP) program and readmissions penalties—are mandatory. Under VBP, hospitals will be subject to penalties and entitled to bonuses of up to 2% of inpatient Medicare revenue by 2015, depending on their performance against a predetermined set of quality and patient satisfaction metrics.

In the same year, the Hospital Readmissions Reduction Program will recoup reimbursement for readmissions in excess of the national average for eight conditions, up to a maximum of 3% of Medicare inpatient revenue. Readmissions penalties and VBP, along with the inevitable parallel private sector initiatives, will increase year-to-year volatility in revenue and profits.

Other risk-based contracts demand strict profitability analysis and challenging implementation

Meanwhile, CMS and private payers continue to experiment with bundled payment and shared savings initiatives. Bundled payment provides lump sum reimbursement for a defined clinical episode, including both hospital and physician payments, and in some cases extending past the inpatient stay.

Shared savings programs attribute patient lives to participating systems, which are responsible for the total cost of care for their patient populations. Health systems and providers are typically eligible to keep a portion of any savings. Each of these risk-based contracting mechanisms creates a need for finance teams to conduct profitability analyses; those that elect to proceed face important changes to finance department operations.

There has also been growing interest in medical homes, raising questions about how this care innovation will be funded and its impact on downstream revenues.

Members, read on to learn more

This study summarizes the most important financial aspects of accountable care and risk-based contracting, and provides guidance for finance executives who will determine how to approach them. We have included case studies from early adopters, financial models, key considerations for evaluation, and implementation advice for each of five key payment reforms.

An Uneven March to Accountability