top of page

Hospital Systems’ Adapting to Healthcare Reform


Healthcare systems face an uncertain and challenging business environment. The health systems anticipated accelerating growth in overall income as more of their patients would be covered by insurance due to the Accountable Care Act (ACA). Instead, the growth rate in healthcare spending is significantly down compared to previous spending growth rates before the adoption of the ACA, as shown in the following chart:[i]

While the growth rate in healthcare spending is slower, overall prices are higher, as shown below:[ii]

Multiple health service buyers of all types remain extremely concern even with a lower rate of growth by the continual increase in health care costs.

Politicians from both parties continue to call for healthcare reform. Democratic Presidential Candidates are proposing Medicare-For-All. Republicans, also unhappy with the continued cost increases, are advocating International Pricing Indexing and other reforms. Commercial plans, who pay more than CMS for care services, have been experiencing a rising cost differential of over 14% annually as health systems cost shift. A recent Rand study[iii] indicates that relative prices for hospital services paid by commercial plans now average 241% of the CMS’s charges. Commercial payers are separately pursing strategies to bring their costs into line. Hospital executives planning for the future are in a quandary about what to do in light of regulatory and marketplace uncertainty.

Demographic changes add to the uncertainty. Aging baby boomers are leaving commercial coverage and joining the Medicare Population. Legislative efforts expanding Medicaid are also shifting patients into coverage categories that pay the hospitals less for the same service.

Payers of all types are adopting complex value-based reimbursement structures to reward improved outcomes and reduce costs. Changes include plan designs with penalties for excessive readmissions and inappropriate ER use. Buyers have a continuing interest in bundled payments for expensive elective surgical procedures and specialty pharmaceutical treatments to create a situation where providers and their partners share the risk. Finally, plans are narrowing the size of provider networks and focusing care on Centers of Excellence for cancer and transplant services.

Employers are forming collaborative healthcare groups to share best practices and increase their negotiation ability to move the market. Organizations, like the Health Transformation Alliance (HTA), are integrating employer data to develop alternative PBM models, assess direct provider contracting options, and evaluate the use of specialized surgery centers. Old trends, like the use of onsite healthcare facilities, and new trends, like Direct Primary Care, are alternatives larger buyers of care see as opportunities to control their costs outside of the traditional health delivery systems.

Regulatory concerns compound the pressures on health systems as efforts to require price transparency or apply index-based pricing solutions that will reduce health system revenues and profits. The regulatory discussion purpose is to disrupt the current health systems’ business models to achieve the society goals of more controlled costs and higher care quality for the payers.

Healthcare System Strategies

1. Health System Consolidation: Many Health Systems have responded by purchasing other regional service delivery organizations and consolidating administration. Southeast Pennsylvania provides excellent examples of service consolidation. .Jefferson Health System’s acquired Abingdon Hospital and merged with NJ Kennedy Health / Aria while Penn Medicine acquired Chester County Hospital and Lancaster General. Both groups are effectively working to create a brand expansion in the Delaware Valley. In some markets, these consolidations have resulted in the closure of smaller rural hospitals. Measurable administrative savings to date are uncertain. Hospital prices in monopoly markets are 15.3 percent higher than in markets with four or more hospitals.[iv] Unless these consolidations achieve lower costs for their region, the Health Systems strategy of monopolizing care may experience regulatory responses in the midterm.

2. Health System Insurance partnership: New Jersey Virtua Health’s collaboration with Aetna is creating a Whole Health Insurance Product for local NJ employers. Aetna has created similar health plan solutions in Texas, Tennessee, Puget Sound, and Orlando, Aetna also provides local solutions in Delaware to the State Employee plan that utilizes local health system resources to manage the health of that population. This approach can achieve several potential benefits. For example, both the Health System and the Health Plan tend to offer overlapping services that, in the aggregate, add expense, and confuse the patient. Due to agreement on care protocols, there are fewer subsequent negotiations on clinical practice and price. It can also support improved outcomes-oriented payment processes. These efforts have as yet uncertain results.

3. Direct Contracting with Employers: Health Systems are direct contracting in specific markets with a large concentration of local employees. These systems usually own health insurance subsidiaries or have strong partnerships with health plans/TPAs. This relationship allows the contracted system to offer coverage outside of their service area via contracts with secondary provider national networks. Henry Ford Health System’s Health Alliance Plan arrangement with GM, Providence Health System with Intel in Albuquerque NM, and Providence-Swedish Alliance deal with Boeing are all examples of such arrangements. These efforts offer significant potential but are unproven.

4. Health System Driven Contracting Networks: Hospitals create organized partnerships to develop provider/hospital networks for joint contracting without the lengthy and expensive process needed for acquisition and mergers. Vanderbilt Health Affiliated Network is an example of a network providing coverage within Tennessee while health systems remain independent. They share data and enter into performance based contracts with the capacity to contract with employers. An expansion of such a system beyond state boundaries provides a new approach to work with payors who require a national presence and is likely to continue to evolve as health systems start to gain experience working with employers.

The Future

MedWorks has outlined the current strategies health systems have adopted, but all of these approaches are at risk if they do not achieve cost and quality benefits for their regional employer and health plan clients. Specialty hospitals and other start-ups are entering the market to address the growing price concerns of consumers.

The large integrated health system model created since the ’60s will be hard to maintain if they fail to achieve reduced costs and improved outcomes. Private insurers, the most profitable business segment, are not waiting for the Government to solve these problems. To quote Roy Bennett, “It’s only after you’ve stepped outside your comfort zone that you begin to change, grow, and transform.”

MedWorks can provide new thinking on these matters critical to your success.





47 views0 comments
bottom of page