Changing the Mythology of Hospital Led Value Based Purchasing

By William De Marco

William J. DeMarco | Pendulum HealthHospitals whose only product is acute care will have a difficult time managing in the post reform environment. Many hospitals have ventured into outpatient services competing with physicians. This has proven to be a mistake long term when seeking collaboration with physicians. Many hospitals do not understand how ACOs actually make money and have been so confused about managed care controlling their utilization and revenue that they believe this is the same strategy, yet it is not.

There are successful collaborations between hospitals and physicians such as Geisinger, Baylor (now Baylor Scott and White Heath) and Intermountain. There are also several new PHOs emerging as underlying structures to contract with the ACO. However, there are still traditional scenarios where the hospital runs it all and then the PHO becomes the HPO.

When starting an ACO there needs to be a separate corporation with physicians as major leaders, yet often times the hospital foots the bill for the startup and ends up feeling it is a disadvantaged partner because it is going to have its length of stay and admissions restricted. When the hospital pays for all the startup cost there is an expectation that these costs will be recovered when savings are created. This expectation can wipe out any bonus monies and if there is no bonus money earned the hospital is carrying this debt forward.

Both overspending a bonus or not earning a bonus will create major long lasting conflict for both parties and the finger pointing may last for years. This finger pointing is not just between the hospital and the physicians but sometimes between the physicians themselves, primary versus specialty, older doctor versus younger doctor, etc. If the hospital does not head this off immediately, the collaboration will be in trouble. Suddenly it is all about the bonus, but not really; it’s about how the physician feels he/she has been treated by the hospital. A fire begins burning that may never be quenched. Sometimes new managers being brought to hospitals report that the doctors do not trust them even though they never did anything to them.

The essential point being missed here is that when no one is held accountable, everyone can blame each other without consequence.

Using the joint venture organizational structure and a strategy that fits the marketplace there is a better chance to build a foundation for open cooperation and accountability and this does several things.

  1. Structure provides limits in terms of what powers or authority hospitals have over physicians in the relationship. This is reflected in the participation agreements and the board make up. There is an understanding that the hospitals will have the “physicians enforce physicians” rule and the hospital will run its own departments in accordance with the clinical guidelines that formulate part of the essential strategy to manage results that earn savings against the benchmark.
  2. Committees (several) hold the organization accountable for clinical guideline creation and enforcement. Non-compliant physicians may still practice at the hospital but they do not share the bonus unless they successfully correct their utilization issues. Several committees are required but we would add management, technology assessment, finance, and reimbursement committees to support the organization.
  3. While this list of committees can go on, I am constantly amazed when asking ACO executives what kind of bonus they are expecting under optimal conditions and I get a blank look.
  4. If no feasibility study has been done, two things will fall apart – the vision is tarnished because no one can articulate why they are doing this and the reimbursement sharing (if any) is left out until there is money on the table. And then the fight begins. Like a big family when a relative with money dies, it can be nasty. Those who put more money into the early investment (the hospital) want their cut.

If part of ownership by the physician included some money up front, with the hospital matching this amount with the understanding more dollars will come that, after expenses, can be divided in accordance with a schedule, this may be a start to fixing this problem. But nothing is simple here. It will get the physician’s attention to come to meetings if he/she want a return on investment and hospitals will reduce their risk by having to match what’s put up instead of putting all the money up. Perhaps a commercial loan for any additional money could be used to share the risk further. This may sound simple, but to not discuss the ins and outs of capital before getting started often leaves one partner holding the bag if the ACO should fail to produce savings.

Unifying the structure at the top and pushing down the accountability throughout the organization with delegated committee responsibilities and then supporting this with a capital plan to launch and divide rewards as earned avoids the PHO from becoming a HPO and unifies the medical and hospital staff around a common set of goals and vision that will likely lead to other joint ventures. Hospitals can form successful ACOs but must find that simple but effective way to form a true collaboration.

William DeMarco is President and CEO of DeMarco & Associates, Inc.  Mr. DeMarco created the firm based upon 20 years experience in health plan development and management, earning his credentials working with several community based health plans in the competitive St. Paul /Minneapolis marketplace. For more information see Pendulum Healthcare and follow on Twitter via @WJDeMarco


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  1. Great post Bill.

    I would caveat only one aspect of your on-point commentary. The impulse on the front end since many can not see a scaled glide-path nor what the realistic milestones let alone the ‘end game’ looks like is the temptation to focus on the ‘OG&E’ piece, i.e., the organization, governance and equity questions which pull in – you guessed it – the lawyers and consultants.

    While OG&E is a key consideration, too often the emphasis is on structure vs. building a culture of trust towards an uncertain future of change. The ‘triple aim’ sounds good, but to many it’s a lofty and unattainable goal operationally given current and more often than not conflicting incentives and decades of practice inertia.

    So while structure is key and who ‘leads’ the effort prime, ultimately it’s the people in the mix that matter. The capital partner needs relinquish control to mission driven primary care doctors, let them manage the relationship with their specialty colleagues and bring the hospital along with a morphing series of changed workflows. They’ll both get religion as referral patterns change and savings targets materialize.

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