Jimmy Peterson

Physicians, hospitals align as industry moves toward new reimbursement models

Ultimately, it’s not just politics driving the changes in healthcare … it’s economics.

Jimmy Peterson, a principal with Deloitte Financial Advisory Services (FAS), said regardless of what happens in next month’s election or how reform legislation evolves over time, the reality is consolidation and integration are trends that are going to continue because costs are growing faster than revenues. To continue to deliver care, providers must find sustainable operating models.

Even before the Supreme Court ruling this summer, he noted, “Our perspective was that a lot of the changes in the healthcare industry were already in motion and were going to stay in motion.”

While the Affordable Care Act was a catalyst for change, Peterson, the Atlanta-based national healthcare provider sector leader for Deloitte FAS, pointed out the industry already recognized the current fee-for-service reimbursement model wasn’t sustainable in the wake of rising costs and the need to manage an increasingly older, sicker population. To offset cost drivers, hospitals and physicians are turning to the economies of scale.

“The popular notion right now is that to truly survive and excel, a level of integration and scale will be necessary,” he said. “Scale should give you additional levers to take costs out of the system … and then scale also helps tremendously with the management of capital needs.”

Access to capital … or a lack thereof … is fueling a wave of mergers and acquisitions within the hospital sector and driving the trend of hospitals buying up practices and ancillary provider facilities. Peterson said there was an ‘outrageous’ amount of M&A activity among hospitals and added his team doesn’t see that trend slowing any time soon. “We classify hospitals as predators or prey with very little in between,” he said of the current environment.

A large part of the ‘bigger is better’ mentality comes from the movement away from fee-for-service reimbursement to value-based payment, which Peterson said is just a fancy way of saying ‘capitation.’ In the pay-for-performance world, integration and alignment are key factors in achieving outcomes success, which in turn results in financial success.

“Clinical integration between physicians and hospitals is what will drive the ability to manage a population under different payment models,” he stated.

In their debut as Medicare pilot programs, accountable care organizations (ACOs) were not universally embraced. “It seems now as those rules have been redefined, there is more interest,” noted Peterson. “I think people are inching into it, but it is becoming a reality.” For some health systems, he continued, the model is already front-and-center. One reason is because it has the potential to support both the ideological vision of caring holistically for patients and the tangible rewards needed to keep the doors open.

However, Peterson cautioned, growth for the sake of growth rarely works. “Just employing a lot of doctors isn’t alignment. It takes additional steps to make that strategy successful.”

Peterson noted, “The wave of physician acquisition and employment is all over the board … some acquirers have a clear strategy and some are just reacting.”

He elaborated, saying there are a number of defensive buyers who are motivated either from a fear factor or a herd mentality that don’t have a real sense of how to engage their newly-acquired physician staff in the mission of the hospital. When that happens, Peterson said rather than saving costs, the hospital is likely to see large losses.

“You don’t want a bunch of employed physicians who just came to the hospital because the hospital was offering the most money and stability in the short-term,” Peterson said.

On the flip side, he continued, “There are plenty of health systems that are employing, integrating or affiliating with doctors and doing so in the right way and having the doctors buy into the overall strategy of the system.” When that happens, Peterson said, “It’s a great way to defend market share and start managing costs of the system.”

He said there are four buckets that must each be addressed in order to make a successful alliance between health systems and physician partners. “You need to be aligned through a leadership perspective, a clinical perspective, an operational perspective, and a financial perspective.”

To achieve that requires physician engagement. “That’s including physicians in the decision-making process all the way from the exam room to the board room,” Peterson said, stressing that having physicians in leadership positions is paramount to success.

In defense of systems that have had a harder time making an integration, alignment or employment strategy work as well as hoped, Peterson noted the robust M&A environment has compounded the problem by cycling in new players and visions. “The industry is in flux. In a lot of markets, it’s very difficult to build a long-term strategy.”

Change rarely comes easily or willingly. As Peterson pointed out, as long as hospitals receive a reasonable fee-for-service rate, there’s no real impetus to change from a volume to value system. The unsustainable economics of the current reimbursement system, however, have become all too real. For the first time, hospitals are seriously considering how they could survive on just Medicare reimbursement levels.

Just as population management asks individual patients to change behaviors in order to optimize health, moving to a pay-for-performance system will require providers and facilities to change long-entrenched operational behaviors to a more programmatic, holistic approach.

“It takes true dedication to change how you deliver care because in the short-term, it may feel like it’s hurting you not helping you,” Peterson concluded. “Hospitals need to have the foresight to make good decisions now that will position them for success in different operating environments in the future.”