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In the land of uncertainty, a map to prepare for the ACO model

PwCs PRTM Management Consulting

In the land of uncertainty, a map to prepare for the ACO model

Is the drive to promote Accountable Care Organizations (ACOs) an intriguing idea of the moment or a lasting trend? If the latter, should healthcare providers make their move now, or wait until the early dust settles?
Thats a big dilemma for many hospital executives who wait in limbo until more evidence surfaces. Meanwhile, they are feeling a significant margin squeeze as costs rise, patients and Commercial payers resist further price hikes, and while further Medicare pay cuts loom around the corner. The stakes have risen, as healthcare provision is changing inexorably from an activity-based model to one in which providers and payers are rewarded for quality of patient outcomes. The ACO model merges both imperatives, but requires a long-term investment in resources and capabilities, as well as the willingness to place a big bet and change key processes and mindsets. If Medicare scales up its ACO program across the system, many commercial payers will likely follow. So theres a risk that latecomers will be left behind by early movers. A wait-and-see stance may be appropriate for some hospitalsthose in onehospital towns where the dominant payers do not want to move quickly into ACO mode, or large academic medical centers that can survive commercial insurance pricing pressures. Many hospitals, however, should get more aggressive about making the shift, especially if they live in a highly competitive environment or have a large Medicare population. Each provider should calculate the risk it faces in its own environment when determining how quickly to make the transition.

Navigating Terra Incognita

We view the ACO model as neither blip nor aberration, but rather a solid model that will grow in scope and influence as the fee-for-service paradigm diminishes. But how to proceed in a land of uncertainty where, like the blank portions of maps of old, one never knows whether here be dragons? To be successful, hospitals must both time their strategic moves correctly and accurately anticipate the actual implementation issues and their solutions. It helps to see what the industrys pioneers are doing as they push ahead with ACO experiments. Aware of the size of the opportunity, they see advantage in being first to access lower-risk capital and first to build the capabilities needed to survive lower reimbursement rates in the future. Their experiences, and our own work with hospitals on ACO strategy, suggest four areas that hospital executives to get right in order to make the ACO shift successfully.

In the land of uncertainty, a map to prepare for the ACO model

1. Align the senior team with scenario-based financial modeling

The entire executive team should be in lockstep with the shift to an ACO modelwhich, of course, is easier said than done. The best way to begin is to model the organizations current cost structures, accurately modeling the potential risks of the fee-for-service model and the size of the ACO opportunity. For instance, base-case analyses may reveal the extent to which adverse changes to Medicare and Commercial reimbursement will dampen gross revenue and cause gross margin to decline. Further modeling can reveal the pros and cons of other scenarios. The model we developed for one provider showed that it would need at least an 8 percent reduction in inpatient utilization to make money, assuming no incremental market share growth. However, we showed a significant risk-based revenue opportunity with only conservative inpatient and emergency room utilization reductions (see Exhibit 1). Exhibit 1: Scenario analysis for risk-based contracting

To deliver as complete a cost picture as possible, hospital executives should conduct full opportunity assessments using fast-paced executive workshops that help cut through the clutter of business model options. Seeing the hard numbers and long-term financial implications is a powerful tonic. Every executive has a significant transformation role; none should assume that the ACO shift is someone elses job. There is no shortage of tasks, given so many unknown legal, clinical, financial impacts and such an array of vested interests. But, unless the whole senior team rallies around the same strategy and commits all of their resources, the effort is likely to fail.

In the land of uncertainty, a map to prepare for the ACO model

2. Choose carefully which capabilities to develop first

Too rapid a transition to the ACO model will overwhelm the organization or break the budget, putting the current business model at risk. The antidote is to have a clear idea of exactly which capabilities executives will need to add to be successful in this new model, and to devise a sequenced plan to acquire those capabilities. Scenario modeling will reveal which steps best suit which circumstances. It will help to show the scope and pace of the transition needed to protect the ongoing business while striving for first-mover advantage in an ACO model. It will also indicate which kinds of capabilities require aggressive investment and which must wait until a strong risk contract is in place. A sequenced approach allows a hospital to synchronize its investment in capabilities with its risk-contracting cadence, as demonstrated by the example in Exhibit 2. This example shows how one kind of capability can be improved over time to parallel the migration in reimbursement model. Leading providers start moving toward an ACO model within their existing contracts through no-lose capabilities. Here, they develop capabilities that will not erode their current fee-for-service revenuessuch as improving the performance of patient length of staywhile simultaneously developing the foundation for the ACO capability portfolio. Exhibit 2: Expanded capabilities drive enhanced utilization outcomes which should link to contracting

In the land of uncertainty, a map to prepare for the ACO model

It is often wisest and easiest to seek initial contract modifications that allow providers to share in the upside only savings for any reduced utilization. Here, one focuses on the most complex patients who can account for a third or more of costs because of a major diagnosis as well as non-disease complicating factors. Using care management or better decision support systems, this step begins to reduce unnecessary utilization and provide an immediate improved experience for the patients. To succeed in upside only shared savings however providers must effectively target utilization that is both clinically unnecessary and currently low margin for the hospital. Careful analysis and good activity-based costing assumptions can identify this group. Moving to the next level, providers again need new contract terms that expand their ability to share in savings or risk for the populations they manage. Here, the incentives tend to broaden the population and types of services offered. To support these contracts in our example, providers could build or improve readmission prevention programs and specific disease management programs for the chronically ill. And the next step further widens services and the patient population, in our example a provider may choose to rely on such practices as telemonitoring or wellness coaching for those in relatively good health (see Exhibit 3). Exhibit 3: Each level of implementation should expand both breadth and depth of capabilities

Note that such a stepwise progress does not mean partial progress. An operating model such as shared savings will not work just because it produces some benefits compared to conventional fee-for-service models. Providers that stay in the middle of the road for longwith, say, a shared savings model that does not change incentives will eventually succumb to a spiral of lower margins and a lack of momentum to capture greater savings.
In the land of uncertainty, a map to prepare for the ACO model 4

3. Involve a wide group of stakeholders in designing the new model

The magnitude of change involved in moving to an ACO model can knock an organization off its hinges unless it prepares and learns to adapt. People who have measured financial success largely by the throughput of patients now have to focus on quite different goals and metrics. Patients themselves will face a big adjustment as well. The key is to design the new model, processes, and metrics with the participation of all the relevant stakeholders through a methodology best characterized as co-creation. Instead of designing the ACO in isolation in a board room or doctors lounge, co-creation calls for the administration, physicians, staff and ultimately consumers and purchasers to collaborate at various stages of the planning to create a more personalized, tailored model of care. Stakeholders wont wholeheartedly participate in co-creation unless it produces value for them, too. They need to have a stake in designing the services; otherwise, why bother participating? Providers and payers, for instance, have a mutual interest in controlling medical costs and finding innovative solutions. So providers should turn the tables and invite payers into a more unguarded dialogue on mutual key criteria for success. A scenario mapping exercise, similar to that carried out in-house when aligning the senior management team, can be effective here. Its partly a communication of intentso that payers are aware of your plans to move to the next ACO level, for instanceand partly a test of the payers operational capabilities. The discussions can help to confirm historical baseline expenses and account for risk payments. The parties can also jointly plan how to adopt relevant information technology such as high-speed Internet access, eprescribing, disease registries, and data exchange tools. If its hard for providers to establish trust with payers, it is even more difficult to do so with independent physicians and medical practices. The idea of changing their incentives to align with better patient outcomes can be downright daunting. When working with physicians on co-creation, a prudent approach is to win over a few at a time. When crafting new incentive programs, focus on a few practices or departments at a time. New physician-hospital alignment arrangementssometimes called comanagement or joint venturesaim to promote a collaborative care approach toward disease management that results in better patient outcomes.

In the land of uncertainty, a map to prepare for the ACO model

The good news is that our early evaluations of physician-hospital partnerships indicate that financial incentives can indeed motivate the behavioral and care delivery changes needed. This higher level of quality care does not necessarily translate into higher costs. If physicians and hospitals can perfect how they work together on one service line under a co-management structure, theyll be better prepared to create an ACO or accept bundled payment. Orchestrate these efforts to appeal to early adopters the physicians most likely to gain from the ACO model and who are the most amenable to using new technology.

4. Start small but plan big

Weve described a step-wise approach for design of the new ACO model. Providers identify the no-lose capabilities and first risk contracts to get comfortable with the new dynamics and new incentives. After some early wins, momentum will build to win over a wider swath of employees, patients, and other stakeholders. From the start, however, its critical to keep the end state in sight. The cultural change is so profound that senior management will need to articulate the business case and the benefits to stakeholders again and again, so that everyone understands the opportunity that lies on the far side of the map. Without that end state as a guide, each change will seem like a mere distraction from the way weve always done it. Over time, the ACO model should reduce utilization for the patient population and increase the potential for cost savings and better health outcomes. But the transition has to be done without destroying the current business and of course by first and foremost endeavoring to improve the lives of patients. Be clear on the big opportunity, promote it at every turn, and act boldly or not at all.

In the land of uncertainty, a map to prepare for the ACO model

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To have a deeper conversation about how this subject may affect your business, please contact: Jeff Gruen Principal jeffrey.m.gruen@us.pwc.com Brett M Hickman Partner brett.m.hickman@us.pwc.com Cassandra Earley Manager cassandra.m.earley@us.pwc.com Warren H Skea Director warren.h.skea@us.pwc.com

2011. PricewaterhouseCoopers PRTM Management Consultants, LLC, a Delaware limit ed liability company (PRTM). All rights reserved. PwC US and PRTM refers to US member firms, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.