DLL’s John Sparta explains how the shift from fee-for-service to value-based payments in healthcare mirrors a broader trend affecting multiple industries — paying for results instead of paying for assets — and how usage-based agreements allow healthcare providers to take part in this trend.
For the past decade or so, “Triple Aim” has been a major focus in healthcare: improving patient experience, improving population health and reducing health costs. With non-profit and public hospital margins at their lowest point in ten years, some see the shift from fee-for-service to value-based reimbursement models in healthcare payments as another hole in a barely-floating ship. But shifting payment models are not unique to healthcare. In fact, there are parallels to the shifts in payment structures we see in many other industries as a result of consumer demand. There are also some lessons in these shifts that can help inform the capital strategy for health systems and hospitals. (Sanborn, 2018)
As connectivity and data availability increases, so has our ability to eliminate unnecessary costs associated with owning assets. The classic example is paying for a ride with Uber instead of buying or renting a car, but you can see the shift it in almost every sector – people are placing value on what a product can do for them instead of the product itself.
In music, we went from buying records and CDs to a Spotify subscription that lets us play whatever song we want whenever we want to hear it. It is even happening with clothing. Did you know that you can subscribe to a service that sends you a box of clothes to wear as many times as you want? Then you just send it back and receive another box in a matter of days.
Personally, I still like to own the clothes I wear. But you get the idea – we now have the technology and systems in place that enable us to purchase a result instead of an asset. Of course, this is the same idea behind the shift from fee-for-service to value-based payment models in healthcare. Instead of paying reimbursement for each appointment, test and procedure along the way, one payment is provided for the result, covering everything needed to treat a given medical condition or perform a procedure.
Recently, I had the privilege of speaking at the HFMA Region 3 Summit about how usage-based payment structures can improve the standard of patient care.
Paying for capital intensive assets like medical technology, devices, and IT infrastructure as they are used allows for more predictable budgeting and is better aligned with value-based payment models. Most importantly, usage-based payment structures enable healthcare providers to allocate capital where it will be the most impactful to patients – instead of tying up funds in depreciating assets.
There are numerous opportunities to take advantage of usage-based payment models. These can range from long-term agreements for entire service areas, to plans focused on fleets of ultrasound or drug delivery devices, to smaller-scale options for specific equipment or technology. Usage-based agreements can bundle the cost of the technology, include service and maintenance and can also be structured as “pay-per-use,” so that payments are only made based on the number of procedures or tests conducted. Importantly, the bundling of equipment and services available in usage-based models can also account for total cost of ownership (TCO), which is critical to understand in the low margin, cost-conscious world of healthcare providers.
Migrating to value-based payment models is ongoing, and it is still new territory for many healthcare providers, particularly in terms of impact on the revenue cycle. But just like music streaming, ride sharing and (maybe) not owning your own clothes, value-based payment is the future. So what does this mean for healthcare capital strategy?
Recently, Dr. Toby Cosgrove, former CEO of Cleveland Clinic, joined Google Cloud’s healthcare and life sciences team to aid their work on the so-called “Quadruple Aim.” In addition to improving patient experience, population health and reducing health costs, the Quadruple Aim is about creating a better experience for healthcare providers, so they are better equipped and enabled to deliver on the goals of the Triple Aim. (Christ, 2018)
Healthcare providers are in a position to expect more of their financial partners. These partners can contribute to the Quadruple Aim by enabling more efficient deployment of capital. They can make it easier for healthcare providers to understand the assets in their health systems and facilitate technology upgrades to maintain a higher standard of care. Providers will expect more than funding – they will expect a partner that understands their market intimately, contribute to the capital strategy, and can support fleet and asset management relative to equipment usage and technology lifecycles.
As technology continues to advance, consumers will demand increasingly personalized solutions designed to meet their exact needs. In markets ranging from apparel and music to transportation and healthcare, paying for a result instead of a product is a trend that continues to gain momentum. By following the lead of consumers and shifting toward usage- and value-based acquisition models, hospitals and healthcare networks can make the most of limited budgets and focus on what’s really important – improving patient outcomes.
Christ, G. (2018, July 25). Former Cleveland Clinic CEO Toby Cosgrove signs on to Google Cloud. Retrieved from Cleveland.com
Sanborn, B. J. (2018, April 24). Nonprofit, public hospital margins hit 10-year record low, Moody’s report says. Retrieved from Healthcare Finance News
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