Health Affairs Examines Evolving Payment Mechanisms

In its September 2012 issue, Health Affairs, the premier policy journal of the healthcare industry, takes an in-depth look at the current means of compensating providers across a broad swath of the industry. Because of the influence this journal exercises over the agencies and payers in charge of healthcare spending, valuation and financial consultants can stay aware of industry trends that are critical to forecasting future cashflow and assessing relative risk of business strategies employed by healthcare providers.

Highlights of the issue include:

• Fee-for-service incentives. Geisinger Health System executives discuss how fee-for-service incentives can be combined with incentives that support improvements in quality and efficiency. For example, areas incented for specialist physicians with approximately 20% of physician compensation include quality, innovation, legacy, growth, and financial performance.

• Steering consumers to low-cost, high-quality hospitals. Leaders from the Berkeley Center for Health Technology examine insurer and employer efforts to steer consumers to make price-conscious choices. They review a “reference pricing” method—a relatively new form of “preferred provider” payment that involves the insured in the economic decision of where to seek care. Through this method, the insurer pays a fixed amount toward the cost of a service and the insured is responsible for the balance. Thus, if the insurer and/or employer have a contract with a provider who accepts the fixed amount as full payment, the insured has no out of pocket exposure. This is analogous to the way some auto collision coverage works—where the insurer has contracts with certain auto body shops that do the work for the “estimate” provided by the insurer. The article also explores centers of excellence (typically a designation given by an insurer based on claims analysis) pricing strategies in which a provider agrees to accept a lower price in exchange for greater patient volume.

• Abandonment of capitation applied to ACOs. Looking at the lessons learned in the 1990s from the rise and abandonment of capitation in most markets, this article seeks to apply those lessons to accountable care organizations (ACOs).
  
  This topic is also a central thesis of chapters in The Financial Professional’s Guide to Healthcare Reform addressing the history of payment mechanisms in the U.S., Medicare Advantage Plans (where capitation remains successful in some markets), and in ACOs themselves. 

• Patient-centered medical homes and payment structures. Healthcare reform legislation places a heavy emphasis on implementing medical homes as a means of coordinating care particularly for chronically ill patients and dual eligibles covered by both Medicare and Medicaid. This article, highlighting Horizon Health of New Jersey’s medical home pilot program for patients with diabetes, provides considerable detail on the amount physicians received, incentive payments, and other financial terms that are highly insightful for practice managers, analysts, appraisers, and others looking to learn how these programs work from a financial standpoint.

The current issue of Health Affairs contains some 18 articles running the gamut of payment mechanisms and provider types. Whether your organization is assessing valuation consultants and transaction advisers or you are doing that type of work yourself, Health Affairs is an excellent source to keep your finger on the pulse of current and future trends in provider payments. We highly recommend this publication to our colleagues.

ECG Management Consultants Releases Findings From Provider Compensation, Production and Benefits Survey

ECG Management Consultants recently released its 13th annual Provider Compensation, Production, and Benefits Surveys. Incorporating input from more than 18,000 healthcare providers from across specialties, this survey contains performance benchmarks ranging from physician compensation and production to CPT procedure code distributions.

Here’s a snapshot of the findings:

• Compensation for primary care physicians increased by 1.6%, while specialists realized a 3.1% gain over 2011.
• Compensation relative to work RVU production for primary care physicians remained somewhat flat at 0.7% greater than 2011 medians as a result of compensation gains of 1.5% on declining work RVU production of 0.4%.
• Nearly half of member organizations are part of or working toward developing an accountable care organization with a majority reporting that they are partnering with a health plan as part of this initiative.

M&A Activity on the Rise in the Healthcare Industry

PitchBook reports high exit activity in the healthcare industry over the past few years with a spike in private equity investors having “sold or taken public 200 U.S. companies in the healthcare industry.” According to the Wall Street Journal, several healthcare-related deals have closed since the Supreme Court upheld the healthcare overhaul plan in June, “signaling an easing of investor uncertainty that hit the industry this year.” Recent mergers and acquisitions include last month’s announcement that Aetna would buy Coventry Health Care for $5.7 billion in cash and stock as well as Cigna’s purchase of HealthSpring earlier this year.

One of investors’ primary concerns during the debate preceding healthcare reform legislation was that cost containment provisions would be enacted and limit the future profitability of healthcare enterprises. For most sectors, the legislation as enacted does not contain any cost control or profit limitation provisions. The primary exceptions are tanning salons; medical device manufacturers, now subject to a 2.3% federal excise tax that presumably will be passed on to the consumer; and physician-owned hospitals. Cutbacks in Medicare affecting hospitals will, for the most part, likely be passed back to non-Medicare insureds through the negotiation of their non-Medicare payer contracts. Healthcare reform ultimately strengthened the position of the larger insurers such as Aetna, while undermining smaller insurers, particularly those in the individual market who cannot meet the 80% medical loss ratio requirement. Size remains key to effectively competing in the healthcare sector.