Hospital Suppliers: The New ACO Value Math

December 17, 2013 — Leave a comment

Slide1What is value? Early in my career, I worked on a key account management team that managed contracting and pricing for a medical devices company in the United States. In the throws of customer negotiations, I would often hear key account executives say that we needed to give the customer “more value.” I soon learnt that this was a euphemism for we need to lower our prices.

Price was often confused with value. As Warrant Buffet says, “Price is what you pay, and value is what you get.” Few in that business, including me at that time, actually understood the value that we provided to customers. We had no real idea of the value that we delivered, let alone having it quantified.

With the introduction of healthcare reform, healthcare suppliers (companies that sell devices, diagnostics, supplies, drugs, and services to providers) are faced with an even more complex challenge. Accountable Care Organizations (ACOs), Value-Based Purchasing (VBP), and other reimbursement rules are changing how customers are rewarded and their business model. This means understanding value has become more complex. Combine this with the changes to the buying process, and many suppliers face a challenging environment.

Healthcare Value Basics

It’s helpful to think about value in the broadest context. There are many definitions of value. Value is usually quantifiable and is based on consequences or outcomes. Value includes the economic, clinical, and other benefits provided to stakeholders. Lastly, value is always relative to some alternative. Figure 1 provides an integrated way to think about value in the healthcare market. There are three key elements of value – clinical, economic, and emotional.

The first two elements of value, clinical and economic, tend to be more rational and quantifiable. These elements of value are also ones that payers, policy makers, and other economic buyers look to when making decisions. The third element of value is meant to capture all of the intangible elements of value involved in purchase decisions. Despite the need for quantitative value, individuals and groups making buying decisions are human beings. This means that decisions often involve subjective and emotional factors as well.

With all of reimbursement pressures facing providers, economic value is becoming the dominant focus in many buying decisions. It’s estimated that approximately two-thirds of hospitals now have value analysis committees. These groups have a number of roles. One of the key roles is to balance economic and clinical factors in buying decisions. Therefore, it’s important that suppliers understand the value math behind their solutions.

The New ACO Value Math for Suppliers

Healthcare reform is changing the value math for suppliers. As an example, consider a company launching a new procedure with a new medical device in the old Medicare fee-for-service payment model. In the old fee-for-service model, the company might have tried to convince hospital executives that the new procedure opens up a new service line or revenue stream. With a high fixed cost structure, many hospitals have had a “fill the beds” and “efficient factory” view. In other words, keeping the hospital full and busy in order to bill more and leverage the fixed costs was the goal.

However, in the new world of accountable care, selling to the hospital based on growing its revenue might not be the right strategy. Medicare ACOs are new legal entities that are voluntary. There are two basic organization types – physician-led ACOs and hospital-physician collaborations. Without getting into all the details and to keep it simple for now, Medicare ACOs basically get rewarded to reduce the total cost to care for a Medicare population over a three-year period. If the ACO is able to beat a per Medicare beneficiary expenditure target, the ACO gets to share in the savings. This expenditure target includes in-patient as well as outpatient costs.

If a hospital is part of an ACO, hospital in-patient revenue actually becomes a cost to the ACO. The goal of the ACO is to keep patients out of the hospital and ER. However, the hospital still has its high-fixed cost infrastructure. In this case, the ACO-hospital collaboration has to consider what is the best care pathway and care setting for the patient. For this type of entity, it’s no longer the old model of do more and get paid more.

The new math requires that suppliers carefully consider the customer base and do some segmentation. The value story and messaging will likely be different for the various segments based on their payment and business model. Although growth of ACOs has slowed recently, by some estimates there are 500 Medicare and private payer ACOs out there. Many predict that accountable care isn’t going away, and will continue to be part of the health system. Therefore, suppliers need to be able to decipher the new ACO value math in order to effectively communicate their value.

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