Improving Healthcare Affordability in a Volatile Time
Legislation passed in 2015 is providing powerful incentives for the U.S. healthcare system to pursue value-based care.
Also contributing to this article were director John Andrewes and manager Nicanor Rios, both of PwC US.
The continual volatility surrounding healthcare policy in the U.S. can have the effect of paralyzing decision making. At the same time, however, it is clear that improving affordability and removing cost and waste from the system are no-regrets moves that will pay dividends under virtually any policy scenario. Taking such steps can make healthcare companies of all sorts more resilient to changes.
Studies (pdf) indicate that about 30 percent of U.S. healthcare spending is wasted or unnecessary. Companies that focus on both short- and long-term measures can make significant headway toward reducing such waste. And as the healthcare system evolves into one in which providers are paid for value rather than volume, a law that impacts Medicare will provide a powerful stimulus for action — and potentially create new lines of business.
First, the short term. We believe the U.S. healthcare industry could reduce medical costs by 5–7 percent in the next 12–18 months — in the absence of significant reform. That is to say, the industry can simply do a better job of managing costs in the existing fee-for-service (FFS) model without fundamentally altering the practice of medicine. Companies can take three short-term steps in this regard. First, identify the major sources or drivers of waste in their particular areas — for example, overuse of the emergency room, avoidable readmissions, not optimizing the site of care for infusions. Second, use this knowledge to create a detailed utilization heat map — call it a “utilization MRI” — that will allow the industry to pinpoint which geographic areas, providers, particular facilities, departments, and procedures are the source of waste. Third, take aim at those specific targets using levers such as reimbursement policy, prior authorization, and provider and consumer incentives.
Although such efforts can yield results quickly, the largest margins can be gained only if the industry focuses on long-term efforts to reduce costs and waste much further. And the most likely way to do that lies in continuing to adopt and expand value-based care. The idea of compensating providers on outcomes and the quality of care, rather than on the volume of services, has been around for a couple of decades. But a significant piece of legislation passed two years ago has given a fresh impetus for one of the largest purchasers of health services to stimulate innovation in value-based care.
In 2015, Congress passed, with bipartisan support, the Medicare Access and CHIP Reauthorization Act (MACRA). The legislation is now being rolled out. In essence, MACRA seeks to control costs and promote value by replacing the current fee-for-service payment model in Medicare Part B — which provides non-hospital coverage for 55 million people — with two new value-based reimbursement methodologies: the Advanced Alternative Payment Model (AAPM) and the Merit-Based Incentive Payment Systems (MIPS).
AAPM is a methodology that encourages physicians to become more accountable in delivering higher quality, cost-efficient care by rewarding them with higher earning potential for shouldering more of the financial risk associated with delivering care. Physicians can be eligible for a 5 percent annual bonus on top of rewards specific to their value-based arrangements.
MIPS, the MACRA model that will apply to the vast majority of clinicians in the medium term, also offers powerful incentives. This performance-based payment methodology will effectively grade clinicians (e.g., physicians, nurse practitioners) on a curve based on metrics such as quality, cost, and improvement. By 2022, when MIPS is fully rolled out, providers may see their reimbursements adjusted up to 9 percent (higher or lower) based on their performance. In other words, there will be an 18 percent swing between the highest- and lowest-paid providers. In addition, for the first five years only, some providers with high MIPS scores are eligible to receive up to an additional 10 percent reimbursement adjustment, increasing the swing even further.
The largest margins can be gained only if the healthcare industry focuses on long-term efforts to reduce costs and waste.
Because the Center for Medicare and Medicaid Services (CMS) is the largest payor in the U.S. — and hence the largest customer for most providers — MACRA will surely have a significant impact on provider behavior. And history suggests that the effect of these changes will reach further. In the past, when CMS has rolled out mandatory payment changes, those practices have often rippled out into Medicare Advantage, Medicaid, and, ultimately, into private coverage. In fact, some insurance companies are already using MACRA to motivate their provider partners to embrace change.
Although efforts are just starting, it is clear that the industry should leverage MACRA to accelerate the transition to value-based care in four ways.
1. Create a MACRA readiness tool kit. Companies can offer advice, technology, and support service capabilities to providers to help them navigate the MACRA environment. This could potentially be a new line of business for insurers and providers.
2. Create a bank for value-based care. Companies can help providers by providing capital to develop capabilities and hedge against risk-losses (e.g., selling stop-loss insurance). Gathering and analyzing MACRA performance information will enable companies to make more informed bets on providers and finance them accordingly.
3. Upgrade value-based care contracts. Aligning existing value-based contracts with MACRA metrics where appropriate will speed the spread of MACRA throughout the provider community. As these efforts mature, they could eventually replace the existing fee-for-service payment systems.
4. Optimize provider networks. With the higher level of transparency into provider performance, payors should use MACRA metrics to choose network participants, negotiate contracts, and optimize networks. Payors can shore up independent physicians who are made vulnerable by MACRA to acquisition by larger players.
Regardless of what happens in Washington in the coming months, it is clear that MACRA will motivate a much-needed sharper shift to value-based care. This change presents a significant opportunity. When added to the short-term efforts, a successful long-term move to engage clinicians, motivate consumers, and fund and develop more efficient and innovative care models has the capacity to drive significant cost out of the healthcare system.