managed care pricing strategies in the “new normal ... · determine what’s happening ......
TRANSCRIPT
August 13, 2020
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Managed Care Pricing
Strategies In The “New
Normal” Environment● Christopher Kalkhof, MHA, FACHE
Partner, Healthcare Strategy, Guidehouse
● Jeffrey S. West, MHA
Vice President, Insurance Services, Lehigh
Valley Health Network
● Steven Prosser
Director, Healthcare Strategy, Guidehouse
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Emerging Challenges To Traditional Pricing StrategiesCompounding Effects on Bottom Lines
Considerations
• What will my revenue look
like over the next 3 years?
• What will my margins look
like over the next 3 years?
• What services provide
yield today and is that
sufficient for tomorrow?
• Where am I over/under
priced?
Margin
Pressure
Employers
Payor
Pressure
Competition
Consumerism
Site
Neutral
Reimb.
Price
Transp.Pricing
Strategy
Considerations
• If all of my negotiated rates
were publicly available,
what would public reaction
be?
• How sustained are these
challenges?
• How can I plan for these
challenges vs. react to
them?
• Can traditional pricing
approaches be successful?
Traditional Pricing Strategies Are Insufficient In The “New Normal”
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Traditional Approach to Contract Pricing StrategiesSet It And Inflate It Based On Aggregate Budget Needs.
• Prices for each service were set at some point in history, rooted in some relevant basis at the time they were set.
• Prices were inflated based on “get what you negotiate”, “squeaky wheels” service line and political clout, leverage, etc.
• Often myopic regarding hitting aggregate accretive revenue targets year-over-year and disassociated from other dimensions
Price
Costs?
Profit?
Target Prices are based on how much you can
extract from the payor and what they organization
signals it’s priority service lines are often
relegated to high volume + high rate equals better
profitability
Floor Prices are generally an unknown to most systems
and represent the price point at which the specific
service breaks even. Today, break even analysis
typically resides at the service line or entity level.
Ceiling Prices are rates at which your
competitiveness from a Payers’ point of view,
is reaching a threshold for what they are
willing to pay. Payors vary in their approach
but are incented via actuarial underwriting
to aggregate impacts across a book of
business as it relates to premium price or
fully-insured equivalent impact
Not only does the common
historical approach ignore
detailed understandings of
costs and profits at the service
level, it also lacks connectivity
to the emerging challenges
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How Are These Historic Pricing Strategies Holding Up?COVID-19 Laid Bare The Deficiencies Of Traditional Pricing Strategies
• Elective/Non-Emergent Care
• IP Revenue Deceleration in Favor of OP Revenue
• Referral Channel Disruptions
• High Volume Correlation To High Margin
• Insufficient Margin on Medium and Low Volume
Services
• Volume Dependencies in the Ambulatory Space
• Reliance on Specific Services Sets to Drive
Enterprise Profitability
• Inability to Accurately Forecast Impacts
• Revenue and Margins Tied to Discretionary
Services.
• Revenues and Margins Unbalanced
• Susceptibility to Disruption
Specific Service Margin Dependencies
Specific Service Volume Dependencies
Insufficient Margin Prevalence Across the Service Portfolio
Risks Exposed
1
2
4
3
The AHA Estimated In May of 2020 A Four Month Total Financial Impact of $202.6 Billion in Hospital Losses
American Hospital Association, May 2020 Guides/Reports www.aha.org
Payors Are
Holding Firm
On Their
Strategic
Objective Of
Rate Trend
Controls and
Strongly
Signaling
They Will Not
Participate in
a “Bailout”
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Poll Question #1
Do you feel the traditional approach to Managed Care Pricing Strategies - “set it and
inflate it” - can continue to be a successful in the emerging healthcare landscape?
• Yes, it can continue to be successful…I’m not concerned about my organizations prices or the rates
we have with payers.
• No, it can’t be successful…the converging forces in healthcare require an innovative and new
approach to traditional managed care strategies.
• I’m not sure…it might be just fine or it might not; it’s too early to tell.
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Dynamic Enterprise Pricing ModelApproach and Objectives
TREND ANALYSIS
Determining what’s
happening to your patient
revenues
LONG RANGE FINANCIAL
PLANNING
Driven by reimbursement,
volume and cost trends, plus
population health
assumptions
BENCHMARKING
PERFORMANCE TO
IDENTIFY OPPORTUNITIES
Revenue cycle, CDM pricing,
reimbursement pricing/rates
and volume
MARKET PROJECTIONS
Determine what’s happening
in your market
ProspectiveRetrospective
Inte
rnal
Exte
rnal
Key Objectives
1. Overarching…revise enterprise revenue portfolio
strategy for payer contracting by “product” including
carve-outs and outliers
2. Strategic reimbursement rate targets and FFS
revenue rebalancing… which are competitive…
support key service lines and margin improvement
strategies and hedge against distruption
3. Optimize unit price realization while balancing with
associated proprietary and commoditized service
volume risks…move your eggs to as many baskets as
possible
4. Align…“what and how” we get paid with…“where
and how” we will deliver patient care
5. Mitigate future operating period margin and revenue
degradation risks
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Dynamic Pricing - Rebalancing Revenues and MarginsMultivariant Approach To Price Setting
What Pricing
Strategy(ies)?
Proprietary
Commodity
Mixed
P4X
Value
Offense/Defense
Which Payers and
Which Products?
Commercial (PPO vs.
HMO Exchange vs. non-
Exchange)
Self-Insured Groups
Medicare Advantage vs.
Traditional Medicare
Managed Medicaid vs.
Traditional Medicaid
Where Are My Service Specific Margins?
Inpatient Outpatient Physician Ambulatory
Year 1 Year 2 Year 3 Year 4
What Time Lines for Initiatives
Future Pricing Design
Pricing Strategies Must Move
From a Revenue to Margin
Conversation at the Service
Level Which Entails Highly
Cooperative and Integrated
Revenue and Cost Strategies
Alliances?FFS / VBC Balance?
Plan to Optimize Revenue or Margin?
Service Configurations &
Strategic Growth?
• Understand where prices are
out of alignment with the
market
• Bottom up approach to margin
management from service, to
service line to operating unit to
facility to enterprise
• Discretely and proactively
address price and margin
disparities across the service
portfolio
• Identify required commercial
margins at the service level to
cover government payors, bad
debt and charity care
• Rationalized pricing with a
defensible narrative
Achievements
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Impact of CMS Price Transparency Rule on Your Pricing Strategies?
● Additional Scrutiny on High Prices/Rates from Media, Competitors: A defensible charge master and set of
contracted rates and a clear quality story will help hospitals prepare to defend against accusations of high rates.
● Price Competition on Shoppable Services & Ambulatory Competition: Organizations should review their own price
parity and ambulatory and free-standing strategies to ensure it can compete in this new dynamic.
● Pricing Strategy Shift—from Optimization to Rebalancing: Payers and providers may need to agree to a
rebalancing strategy, shifting higher rates to higher value services, and lower rates to more commodity, shoppable, and
price sensitive services.
● More Challenging Negotiations w/Payors: Hospitals must publish minimum and maximum cash prices, including the
lowest cash payment they will accept from consumers… this provides payors, self-insured companies and labor unions
with a low floor from which to negotiate their rates.
● “Wild West” of Market Pricing: Prices for some hospital services will become more competitive for commoditized and
shoppable services as intended by CMS... while other prices will need to be raised on more emergent and
complex/higher risk services to close the revenue gap… while in some markets, hospitals/health systems whom have
long viewed that they were under-reimbursed by payors will seek material rate increases.
● Poor Planning and Execution: When all the above market dynamics are added up together… insufficient planning,
lack of anticipation of market change and poor execution… can lead to material revenue, volume and margin
reductions.
Plausible Scenario(s) Beyond CMS Compliance or Non-Compliance Considerations
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Traditional Strategies, Price Positions and Associated RisksOnce The Veil Has Fallen….
LOW PRICE VARIATION
AND HIGH PRICE POSITION
VS. MARKET
HIGH PRICE VARIATION &
HIGH PRICE POSITION VS.
THE MARKET
LOW PRICE VARIATION &
MODERATE PRICE
POSITION VS. THE MARKET
HIGH PRICE VARIATION &
MODERATE PRICE
POSITION VS. THE MARKET
Degree of Price Variation
Price P
ositio
n v
s.
Mark
et
Providers must be
cognizant of the risks
associated with their price
position to the market and
the degree of price variation
across and within their
payor portfolios.
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Case Study – Lehigh Valley Health Network
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LVHN Initial Dynamic Pricing Blue Print and Key Goals
Key Project Constraints
1. Commercial margins must fund charity care, bad debt, public sector payer shortfalls, meet cash/capital needs
2. At some near-term point... commodity pricing must align w/consumer value perceptions of services
3. Pricing transitions tied to Tier 1 payers
4. Potential competing resource barriers tied to overall transformation initiative
Key Project Uncertainties
1. Payer willingness to re-balance rates and/or move to risk out of renewal cycle
2. Local competitive responses to patient/payer value focus
Key Project Assumptions
1. Varied data will be available
2. Workgroups will be formed
3. Pursuing a service mix and service line margin management strategy integrated with clinical redesign and related initiatives
4. Payer rates to be rebalanced
Project Objectives
1. Increase net revenue yield and margins from commercial volumes
2. Invest in, grow those services most likely to provide the strongest margin returns over longer-term
3. Rebalance commercial FFS pricing to reduce price risk outmigration & address price transparency needs
4. Accelerate risk contract process to attain accretive revenue value
5. Build payer/cost P&L database and a consumer price estimator model
6. Coordinate and integrate with clinical redesign/MD optimization
Project Scope
Description
1. Revenue Model Strategy Formulation
2. Tactical Game Plan Development
3. Dynamic Strategy Implementation
(Support Overall EBIDA Improvements)
Project Acceptance
Criterion
1. To be developed jointly with client with respect to:
a. Overall project governance structure and workgroups
b. Resultant, multiple strategy implementation plans
Project Deliverables
1. An dynamic revenue/margin model strategy across three strategic dimensions:
a. Enterprise / b. Business Unit / c. Functional
b. Multiple project/workgroup outputs
2. Strategy/Tactics detailed implementation plan with supporting business cases
3. Coordinate with other EBIDA improvement initiatives
Develop
Dynamic
Strategies and
Implement
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Multivariant Data Framework: Margin & Risk Adj. PricingAnalytic Framework To Enable Continuous Generation of Insights and Performance Monitoring
The complexity of strategic service line pricing in the pursuit of greater value and margin
enhancement requires a equally complex multivariant analytic capability and approach
STRATEGIC
Revenues At Risk and
Future Value
Transition to Deeper
Levels of Value
COMPRE-HENSIVE
IP, OP and Physician
All Financial Classes
SPECIFIC
Discrete Patient Claims by
Location and Site of Service
Discrete Patient Claims by
DRG, ICD & CPT
Granularity
LONGITUDINAL
Three years of claims
data
Hospital(s) & Employed Physicians
RELATIVE RISK
Hierarchical Condition
Categories (HCC)
Network View (now & future)
MARGINS
Costing at Patient Claim
Level
Corporate Overhead
Reallocation
Case Study: Health System Multivariant Data Framework
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Contract Modeling Scenario TestingMethodology/Approach to Testing
• .
• All commercial tier 1 payors (P1, P2, P3, P4, P5, and P6)
• All Hospital facilities (Legacy and Northern Tier)
• Physician (Legacy)
Scope Classification
• Leveraged 3 year longitudinal data set and payor facility and professional/physician contracts
• Assessed margin performance at the service, service line, operating unit and facility levels
• Applied terms and language from payor contracts to claims data
• Recalculated allowed amounts to create contract model baselines
Baseline Value Calculation
• For proprietary, Target 145% of Cornerstone Rates for Tier 2 payors; Current + 2.5% for P3;
Current +3.6% for P1
• For mixed, Current +3% for Tier 2 payors; Current +3.6% for P1; Current +2.3 for P3; Current
+5% for P5
• For commodity, measure revenue/margin impact from price concessions (e.g., MRI, X-Ray, CT
Scan)
• For professional, Target % of Medicare/Cornerstone Rates by Primary Care/Specialty Care/Sub-
Specialty Care, Payor, and Location
Scenario by Service Classification
Contract Modeling
Scenario Testing
• Slide #13 for
example of
enterprise-level
IP outputs
1
2
3 Scenario 5a: Baselines
manipulated by scenario
assumptions outlined to
left
Scenario 5b: Baselines
plus annual rate inflators
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General Surgery
Obstetrics
General Medicine
Cardiac Services
Neonatology
Orthopedics
Neurosurgery
Oncology/Hematology
Spine
Neurology
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
50% 70% 90% 110% 130% 150% 170% 190% 210% 230% 250%
Marg
in P
erc
enta
ge
Rate to Market Median
Note: Margin calculated using Strata Allowed Amount – Strata Total Cost; Growth = % increase compared to previous year’s allowed amount
Commercial Neonatology and Obstetrics are growing in volume while they continue to make margin and have high rates. Inpatient
oncology/hematology on the other hand has relatively lower prices/rates. Is this an opportunity to increase prices/rates if ABC can exhibit
differentiated services?
Commodity
Mixed
Proprietary
Commercial IP Service Lines Margin and Rate to Market Median
Color of bubble: Service type with largest share of Allowed Amount FY18
Size of bubble: Total Allowed Amount FY18
Revenue Shift Analysis Overview: Margin and MarketAcademic Case Study Illustration: Proprietary Services Classifications and Services Margin Analysis
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Poll Question #2
Access to detailed analytics that provide me with the ability to model pricing scenarios
across my organization’s payer portfolio including, but not limited to impact to margin,
utilization patterns and service growth projections would enable me to negotiate better
contracts for my organization and my organization’s patients.
• Strongly Agree
• Agree
• Somewhat Agree
• Somewhat Disagree
• Disagree
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Prioritizing The Rebalancing of Fee-For-Service DollarsA Revenue Distribution Plan That Considers Revenue Priorities
• .
1. Shoppable to
Proprietary
a) Tier 1
b) Tier 2
c) Tier 3
1. Strategic Urban
Rate
Reductions
2. Strategic
Regional Rate
Lifts
1. Physician
Specialty Fee
Schedules
2. Physician
Primary Care
Fee Schedules
Physician Fee
Schedule
Inter-Facility
(Regional Facilities)
Intra-Facility
(IP/OP Fee Schedule)
1 2 3
1. FFS Rate
Reserves
Aligned to Value
Based
Strategies
2. Create Revenue
Capture
Strategies for
Value Based
Agreements
Value-Based
Arrangements
Enterprise Revenue Distribution Categories
1. Home Health
2. HNL
3. Post-Acute
4. Etc.
Other Revenue
Strategies
54
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Illustration: Preferred Rate Methodologies by Site of ServiceUnified Rate Methodology: Each IP/OP/Professional Rate is a Factor of a Target Rate
Hospital 1 Hospital 2 Hospital 3 Hospital 4 Hospital 5 Hospital 6 Hospital 7
150% 120% 105%Cornerstone
Rates97% 90% 75%
MS-DRG-based with carveouts
Inpatient Facilities Priced to Cornerstone Rates
• Transplant
• Ortho
• Cardio
• OB
• Cataract
Surg.
• Endoscopy
• Colonoscopy
• Implants
Potential
Carveout
Candidates
Outpatient Facilities Priced to Cornerstone Rates
OP
OP ED
Amb.
Surg.
Centers
Off-
Campus
Ambula-
tory
Urgent
CareIDTFs1 Lab Imaging
Tele-Health
Capabilities
200% 150%Cornerstone
Rates90% 90% 80% 80% 50%
Negotiated payor fee schedule and grouper-based with carveouts
IP
Note: 1) Independent Diagnostic Testing Facility (IDTF)
Benefit: A Cornerstone Rate unified payment methodology minimizes price parity misalignments, accounts
for different facility service mixes and operating costs and is intended to support margin optimization
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Target Rates Translated into Aggregate Rebalancing Outputs by Type of Service
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Target Rates Aggregated Rebalancing Outputs by Facility / Location / POS
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From Pricing Model To Strategy: The Path ForwardPreparing For Implementation and Operationalization
Five, Multipart
Revenue
Distribution
Scenarios Were
Developed and
Tested for
Alignment with
Business Goals
and Objectives.
These “What-If”
Scenarios Within
the Dynamic
Pricing Model
Afforded the Ability
to Understand the
Impact of Certain
Rate/Revenue
Changes Across
and Within the
Enterprise
1. Revenue Model Strategy Formulation
• Fact base creation: current payments vs. market and assess pricing, volume, product operational and competitive risks
• Business goals and objectives
• Provider market scenarios at a PSA/SSA sub-region level for primary market region
• Strategy development and formulation by entity, SL, BU, Payer and Payer FC
• Payor Disposition
2. Tactical Game Plan Development
• Proposed revenue shifts by payor, service line, entity and service
• Payor “pre-wire”
• Business case development and quantification
• Resources required to execute analysis
• Business case revenue tracking by payor
• Business case tactical contingency planning and options by payor
3. Strategy Implementation
• Periodic refresh of pricing model (6 mos. intervals)
• Ensure evolutionary alignment with enterprise and service line strategies over time
• Sequence execution glidepath over 1-5 year horizon
• Incorporate ancillary opportunities into strategy and execution
• Execute Managed Care, Medicare and Medicaid revenue model strategies and tactics
Implementation and
Operationalization of
Dynamic Pricing
E.G., 3RD PARTY PAYER FINANCIALLY FOCUSED STRATEGY AND TACTICAL GAME PLAN DEVELOPMENT
1-5 Year Plan
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Commercial Payor Revenue Redesign
• .
Payor
Revenue Distribution Category
LVHN Spend $ to MovePhysician Fee
ScheduleIP Fee Schedule
Regional Hospitals/
Other
Value-Based
Agreements
Payer 1
Payer 2
Payor 3
Payer 4
Payer 5
Payer 6
Payer 7
Payer 8
Total $1B $107M $16M $70M $19M $2M
Universe of Revenue Distribution by Category and Commercial Tier 1 Payor
Key Take Away: The above shows an overall maximum revenue re-distribution figure of ~$107M throughout the Network. This includes revenues
shifting in and out of each category (net). As LVHN looks to redistribute revenue throughout the Network, a multi-year approach will need to be
leveraged and Payor disposition will be a limiting factor.
Removed for Confidentiality
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Business Case Overview – Analytics to Strategy
Insurance Services Master Business Cases
Includes: FFS/VBC Commercial, FFS/VBC MA, FFS/VBC Medicaid, and FFS Other
Total Revenue Impact: $XX.XM - $XX.XM1
Timeframe: FY2020 - FY2022
FFS Commercial:
Total Revenue Impact: $X.XM - $XX.XM
Timeframe: FY2020 - FY2022
FFS Medicare Advantage:
Total Revenue Impact: Deferred to VBC
Timeframe: FY2020 - FY2022
FFS Managed Medicaid:
Total Revenue Impact: $X.XM - $X.XM
Timeframe: FY2020
FFS Other:
Total Revenue Impact: $X.XM - $X.XM
Timeframe: FY2020
Total Accretive Dollars: $XX.XM -
$XX.XM
Timeframe: FY2020 – FY2022
Note: 1) Excluding FFS Medicare Advantage
VB Commercial:
1) Expand current risk based product offering
2) Enable increased VB performance through increased membership
3) Increase responsiveness of clinical initiatives through closer data sharing
4) Develop standardized economics and discrete funds flow models
5) Continue development of value proposition for membership in PHO
6) Enable increased VB performance through targeted membership and
geographic growth and participation in quality performance initiatives
7) Enable new revenue streams through access to non-cannibalizing revenue
(e.g., drug rebates, etc.)
8) Increase data sharing and reporting consistency by keeping measures
consistent for YoY internal tracking
9) Rationally recapture minimal excess revenues necessary for net-neutral
book of business resulting from FFS revenue rebalancing
10)Achieve enhanced line of sight into Payor 2 planning and processes
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# BUSINESS CASE INCREMENTAL REVENUE CAPTURED
FY2020 FY2021 FY2022
1.1 FFS Commercial 55%-43%
1.3 FFS Managed Medicaid 155%-89%
1.4 FFS Other 53%-31%
Cash Settlements 53%-31%
Total 80%-54%
FFS Master Business Case UpdateFY2020 – FY2022
• .
# BUSINESS CASE OUTCOME KPIs1 BASELINE INFLATOR NET SHIFT REV.
INCREMENTAL
REVENUE
TARGET
FY2018 FY2020
1.1 FFS Commercial
Referenced in each respective business
case.
$968.5M 7.7% $1.8M - $4.4M
1.3 FFS Managed Medicaid $30.0M 0% N/A
1.4 FFS Other N/A N/A N/A
Total $6.2 – $10.2
WORKSTREAM / AREA FFS ContractingNET FINANCIAL IMPACT $6.2M – $10.2M
# OF BUSINESS CASES 13+
LVHN PRIMARY OWNER(S) Greg Kile, Jeff WestOVERALL STATUS On-Track
NCI LEAD(S) Christopher Kalkhof, Steven Prosser, Blake Szostak
Note: 1) Applicability Caries by Business Case;
2) Excluding FFS Medicare Advantage
Green = On Track = Rising Risk Red = At Risk
3
Removed for Confidentiality
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Dynamic PricingStrategically Addressing Emerging Challenges & Capitalizing
Margin
Pressure
Employers
Payor
Pressure
Competition
Consumerism
Site
Neutral
Reimb.
Price
Transp.
Dynamic
Pricing
Strategy
Each service is a winner vs. winners and losers
Know what/where to compete – and where not
Be defensible in the market
Proliferate positive margin distribution
Self determination and margin management
Pay me right vs pay me more
Retain, maintain and cultivate
Aligned value, rational pricing
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24
Contact
24
Christopher J. Kalkhof, MHA, FACHE
Partner, Guidehouse
(716) 912-0309
Steve Prosser
Director, Guidehouse
(763)234-6070
Jeffrey West
Vice President, Insurance Services
Lehigh Valley Health Network