Thanks to health reform, a massive change is going on that can wreak havoc on attempts to value hospitals, physician practices, and other healthcare providers.

Here’s the deal: The traditional fee-for-service revenue model is giving way to one where revenue is based on the quality of care. Provider revenue will depend on the performance of a patient’s caregivers during his or her entire “episode of care.” For example, if a patient’s care after discharge is not up to par and the patient must be readmitted, the hospital would be penalized—and so would others in the chain of care, such as a rehab center. Provider payments from Medicare are already being affected, and private payers are following suit.

“We’re all struggling with this,” says Alan B. Simons (CliftonLarsonAllen), who spoke at a recent BVR webinar on valuing home health service providers.

In the new world of healthcare, providers will band together to monitor patient outcomes. “We’re clearly seeing all of this evolving into what is becoming known as the accountable care organization, or ACO,” says Gary R. Massey (also with CLA). An ACO is a group of healthcare providers that are accountable to patients and third-party payers for the quality of care they provide to a certain population of patients.

What to do: Valuation experts will have to rely less on projections based on historical results because of the new evolving payment models. Expected future patient volume will be relatively easy to forecast but not so with expected future reimbursement levels. As Simons observes: “No one is really sure how it will all play out.”

For more information on ACOs, see the Healthcare Intelligence Network's Essential Guide to Accountable Care Organizations.