Convergence holds allure, risk, governance complexity for providers and payors

Potential benefits abound for health care providers and payors that join forces. They lean in together on cost savings, control more of the health care marketplace and drive quality care improvements. Convergence can be a boon to both parties. Potential disadvantages await them as well. There’s age-old animosity to overcome, decision-making and mammoth integration issues to work through. Convergence can be a bane to both parties.

Whether a provider or payor organization is deciding about converging or the decision has been made, sound governance overview is invaluable, but only when leaders understand the convergence itself — the impetus from the marketplace, the pluses, the minuses and the work to be done.

Take a high-level look at the motivations and cautions Arguably, the health care landscape is changing more rapidly now than at any other time in recent history. These themes have emerged across the industry for both providers and payors:

  • The demise of the traditional growth model, with heightened regulatory scrutiny, limitations on pricing increases, reimbursement cuts and long-term deficit reduction plans
  • The rise of consumerism, with employer cost shifting and the growing popularity of exchange purchased products, high deductibles and patient engagement measures

Effects have been felt in the provider marketplace via government mandates and reform — most notably, the Affordable Care Act, consumer-driven health plans and cost sharing, an aging population, provider shortages, expectations regarding service delivery, reimbursement reductions, charges of health care claims fraud, and changing technology.

For the payor marketplace, effects are in areas like minimum medical loss ratios, increased regulatory control over rates, establishment of health insurance exchanges, prohibition on certain factors (e.g., health status and gender), back to creation of rating bands for certain rating factors (e.g., age and smoking), guaranteed issue and renewability, prohibition on denials for pre-existing conditions, prohibition on lifetime limits and restrictions on annual limits, and expansion of mandated benefits.
The major market dynamics for both providers and payors intersect in payment transformation — the transition from fee-for-service models to pay-for-performance or value-based payment models. 
The major market dynamics for both providers and payors intersect in payment transformation — the transition from fee-for-service models to pay-for-performance or value-based payment models. These considerations and many others inform the decision about convergence, which amounts to an integration of these two disparate subsectors of the health care marketplace that previously operated separately. Convergence today is very much accelerated by health care reform, and it is transforming the industry and creating new delivery models for the populace.

Goals are set for mutual benefit

  • Gaining effective coordination of health care for policyholders
    – Focusing efforts on most costly patients/conditions
  • Improved monitoring of medical management/patient care
  • Monitoring quality and outcome
    – Enhancement of wellness programs
  • Combining financial resources, for example:
    – Availability of capital
    – Funding for IT and physical investments
    – Investments in innovation
  • Creating long-standing, stable provider networks
    – Assuring policyholder access to providers
    – Assuring patient volume for providers

It seems there are almost weekly headlines that tell of yet another provider entering the health plan business. While intriguing, there are practical areas of risk and concern, including these:

  • Regulatory
    – Firewall issues related to sharing information
    – Effect of integration on competition
    – Imposition of insurance regulatory requirements across the system
       (e.g., insurance reserves for provider system balance sheets)
  •  Business
    – What do providers know about managing payor operations?
    – What do payors know about managing provider operations?
    – Does integration increase business risk across the system?
    – Is there a single point of failure?

Organizations on both sides of these relationships — large, national SEC-registered insurers to small, local provider-owned plans, and all sizes of providers — have common concerns, operational and strategic, as noted by Grant Thornton LLP Health Care Advisory Services Principal David Tyler. He says the concerns can be grouped into five opportunity areas for avoiding risk:

  1. Strategic
  2. Operational
  3. Financial
  4. Cultural
  5. People

1. Strategic opportunities
Match the market, selecting the where, when and who. Pick where to operate, selecting specific communities, as well as segments that are aggressive and ready for change. Look for the right timing and the appropriate partners. The best approach is a well-vetted decision, with corporate support, to enter into convergence because it is appropriate for your organization, not because the flow is headed that way.

The point is to not overpay and to not take on more risk than is reasonable.

Sometimes it makes the most sense to go with a specific line of business such as a commercial business, an exchange or a Medicaid program like Johns Hopkins’. For payors, that might mean working with either hospitals, physicians or a specialty community. Grant Thornton is guiding a payor client that has narrowed its preferences to employment of a large proportion of primary care physicians in the selected market.

Start with the overall premise that governance must be rightly established, not just from a regulatory perspective and compliance with Centers for Medicare and Medicaid Services, but also in messaging to the business and patient communities. Your governance should reflect your intention in that marketplace.

2. Operational opportunities
New businesses require new skill sets and the understanding of regulations, IT and technical requirements, and management’s capabilities. Give balanced attention to core functions of each side so that clinical and patient care delivery, as well as actuarial and administrative services, remain strong.

Be realistic about where the yield will be. It won’t be in every area. Cost reduction, improvement in care management, administrative simplification — they might progress at different paces. Dual-sided analytics are utilized here in designating the revenue center and the cost center.

Be realistic about where the yield will be. It won’t be in every area.In determining the infrastructure and centralized business capabilities, do you buy, build or lease? Where will cost shifting happen, and how will cost reduction play out in driving out expense and premium dollars? Will the savings be passed along to the premium payor? Making the answers part of the upfront plan will show where risks are so you can avoid them.

3. Financial opportunitiesConsider the effect on the balance sheet in both directions. For example, a provider will need to know the state reserve requirements necessary to operate as an insurance company.

Integrating your financial system will benefit from vigorous business intelligence, including the integration of electronic health record/enterprise resource planning and claims platforms. Assuring that analytics are based on a consistent platform and data that is actionable for budgeting, cost accounting and planning is more important than ever.

4. Cultural opportunities
It can be challenging to take on new roles and work with new colleagues after a possibly historically tense relationship. Diminish suspicions at the outset; utilize change management and arbitrate internally. Strengthen corporate resolve and count on the right data in order to minimize risks in tough decision areas.

No component exceeds the significance of medical management. If the hospital leadership culture has been convincing physicians to perform more procedures and bring in more patients, the change to rationalize care in the best possible way will be difficult. Responsibilities might need reassignment. Who will handle negotiations and talent? Who decides if another hospital in the area will be part of the network? Who will set premium levels? How much of the savings will be passed on to the patient? Who will make discharge decisions?

Success will be based on who ultimately leads and makes the important decisions in critical areas — the provider side or the payor side. Achieving a balance that benefits the patient will be critical.
5. People opportunitiesAny acquisition or other transaction can bring on employee exits. “In joining forces with ‘the enemy,’” Tyler says, “there’s an even higher flight risk for executives.”

“Make sure everyone is rowing in the same direction.” Successful convergences welcome hospital executives into a health plan environment, and vice versa.To minimize retention risk, find and identify skill sets and talent pools. Cross-pollinate ideas and tactics, and circulate talent to all aspects of your business. As Tyler advises, “Make sure everyone is rowing in the same direction.” Successful convergences welcome hospital executives into a health plan environment, and vice versa.

Incentive alignment drives behaviors and is critical because of the shift in roles taking place. If a professional has been paid to drive down hospital costs and is now in charge of a hospital, familiar incentives will need to be thrown out. For example, a hospital executive has been in charge of bottom-line costs and incentives through increasing patient admissions and care. The hospital becomes a cost center, so every new patient is a “bad thing.” Incentives must be adjusted.

Evaluations will also be completed from a different perspective. Adjust the feedback process for management progression, and make clear the values and behaviors expected in the new corporate culture. Avoiding the risk of dissatisfaction and loss of key employees is worth focusing integration efforts from the start.

Successful convergence ultimately relies on governance and data Balancing the five key opportunity areas relies on effective corporate structure and informed decision-making. Continued success after a convergence depends on many factors, most importantly thoughtful corporate governance, which in turn counts on meaningful data and analysis. Building an infrastructure to capture and use clinical, cost, electronic health records and health information exchange data provides valuable business intelligence for planning and risk management.

Convergence can be rewarding, and certainly a generator of fiscal performance, but more importantly, a route to improving clinical performance. In combing end-to-end assets — from payor skills in administrative underwriting, distribution and group management capabilities to provider experience in clinical and patient interfaces — the opportunities are tremendous for being on the successful side of risk.

Providers embarking on the insurance business and payors entering the business of providing patient care are choosing convergence to satisfy their mutual need to reduce costs, sustain operations, improve outcomes, respond to regulatory requirements and deal with shifts in reimbursement.

Read more about ways to create scale and competitive advantage: “Provider/payor convergence: A prescription for growth?” and “Converging for improvement: Health care costs, efficiency.” See also “Providers, payors converge on innovation.”