Provider competition cools prices on ‘shoppable’ services, drives consolidation

In an era of increased transparency, rising labor costs and a changing market, many providers are struggling with declining revenue and are turning to consolidation, changing pricing structures and new reimbursement models to protect their revenue.

Healthcare experts say that for many physician groups and provider systems, revenue is diminishing, forcing many providers to rethink their business model and practices. 

“Some of the most striking examples where providers get less revenue is in the public insurance exchanges, where so many of the plans have limited networks,” explains Paul Ginsburg, professor at The Leonard D. Schaeffer Center for Health Policy and Economics and the University of Southern California. 

A number of factors are driving the overall revenue decline for providers including rising costs, particularly labor costs, and declining reimbursement per unit, according to Mitch Morris, U.S. providers sector leader for Deloitte.

“The feeling is that’s going to continue and we’re seeing many of our clients, provider clients, making the assumption that the best rates that they’re going to get are Medicare rates, and that commercial is going to gradually drift down there,” he says. “No one knows exactly how fast but [they believe] that they need to get the cost structure in order so that they can be viable at a reimbursement rate that’s around Medicare rates.” 

A decade ago, many provider systems began moving their margins to outpatient services. The increased focus on transparency in healthcare reform has caused many health systems to rethink their former strategies, says Amy Fahrenkopf, MD, MPH, vice president of clinical strategy and design for Castlight Health. Instead of viewing services in terms of inpatient or outpatient, Fahrenkopf says that many are looking at their services as shoppable versus non-shoppable. 

Provider groups are now starting to decrease or freeze prices for services that are considered shoppable, such as labs, radiology and outpatient visits, in an effort to prevent consumers from taking their business elsewhere. 

“We are really seeing reduction there, but what we’re going to see is a swing back toward increases in prices for non-shoppable services,” Fahrenkopf says. 

Healthcare experts say that in addition to shifting pricing structures, provider systems also are turning to consolidation and new reimbursement strategies to try to preserve their revenue in an era of healthcare reform. 

Consolidation, whether it’s hospitals buying other hospitals or hospitals buying physician groups, is on the rise. 

A reason for this is partly because provider groups are trying to achieve scale so they can lower per-unit costs, Morris says.

“We’re seeing consolidation not only to help with things like bond ratings and debt market, but more importantly to be able to lower costs,” he says, noting that hospitals also are buying other hospitals to achieve more influence in the market. 

“If you’re not going to be influential in a market, you probably shouldn’t own a hospital there, so maybe you should sell it,” Morris says. “If you are going to buy into a market, make sure you are the number one or two-or at worst the number three-player so you have enough influence on contracting and the ability to attract doctors as well as have some market share on patients.”

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Reducing price variation

The rationalization of services can be another positive outcome to these mergers. 

“Sometimes when consolidations happen, you finally achieve the shutdown of services that shouldn’t be existing in certain places,” Fahrenkopf says.

Healthcare experts say vertical integration also is on the rise, with more hospital systems acquiring physician practices, medical office buildings, ambulatory surgery centers and post-acute care or home health centers. 

“They can control the entire spectrum of care and diversify their revenue away from the acute care setting,” Morris says. 

In an era of increased transparency, whether it’s vertical or horizontal integration, provider systems are turning to consolidation to reduce the price variation within a market. 

“If you have 70% market share and you own all of the diagnostic imaging centers, then there really is only one price,” Fahrenkopf says. 

Buying physician groups makes it easier for health systems to move toward risk sharing arrangements. 

“The conventional wisdom is that any consolidation is bad, but I do think-at least from the viewpoint of the provider-it’s very scary to think about agreeing to a contract where you take on risk when you don’t have more control over the physicians and their costs and behavior,” she says. “So if they are employed, it really does make that much easier, and this could be anything from simple episodes and bundles all the way to risk contracts on total cost of care and capitation.” 

Hospital systems and providers are beginning to cautiously approach the idea of risk sharing as a way to earn or maintain revenue. However, Bill Copeland, U.S. LSHC industry leader and U.S. plans sector leader for Deloitte, says there still isn’t a lot of true risk sharing going on in the market. 

“There’s gains sharing, you know all upside, but there isn’t a lot of downside yet,” he says. “That’s prudent because there’s just not enough of the technology infrastructure that needs to be in place to facilitate that making it a good business decision for both parties.” 

Providers and health plans are more likely to engage in bonuses for good performance than true risk sharing at this point, he says.

The increased emphasis on value has been a shift for providers, who were once able to rely on volume and price to drive revenue, but Ginsburg says this shift could ultimately be a benefit to providers. 

“Pay-for-performance tends to be an opportunity for providers because, basically if they do well on the performance metrics, they’ll get paid bonuses,” he says.

While provider systems are turning to alternative reimbursement methods, consolidation and changing pricing structures to preserve or maintain what they can of their revenue, healthcare experts say these solutions aren’t without their obstacles. 

While it may be easy from the outside to say large health systems need to go toward shared savings agreements, models with downside risk or episode payment structures, changing physician behavior is often anything but easy, Fahrenkopf says.

“It’s hard to understand just how difficult it is to control physician behavior in such a way that you can manage the costs underneath those new reimbursement models,” she says. 

In the traditional fee-for-service world, physicians made more money based on the numbers of services performed. Now, the market is pressed to better controls costs.

“It’s very challenging,” Fahrenkopf adds. 

Acquiring physician practices can often be another challenge. And providers also don’t always have a lot of negotiating power against payers. 

“Every health plan is different, and if you’re a hospital system in a fragmented market with one strong health plan, you are a price taker and not a price setter,” Fahrenkopf says. “If you’re not ready to move over to a contract in which you’re taking risk, it’s very easy to lose quite a bit of money very quickly.” 

Experts say the negotiation process between payers and providers has gotten much more complicated.

“You have the lines of business, so Medicaid, Medicare and commercial, whether it be individual exchange or self-funded business versus fully insured business,” Copeland says. “It’s more complicated than ever in terms of what the health plans are trying to achieve.” 

For the exchange business, most health plans are targeted at a certain price point to make coverage more affordable so they are able to gain market share. 

“Contracting with providers was really much more focused on achieving what that premium was targeted to be,” he says. 

Overcoming payer, provider challenges

The Affordable Care Act has presented challenges to the payer and the provider, which can be evident during the negotiation process. 

“They each have their own way that they make money and both are threatened in some ways by the changes in the market, as well as some of the changes that have been brought on by health reform,” Fahrenkopf says.

Health plans can work to make the most of their healthcare dollar while also being reasonable in negotiations. Flexibility is key when bringing on risk, as well as helping providers gain access to necessary data, she says.

“There’s always an inequality of data on both the health plan and provider side,” Fahrenkopf says. “Health plans really don’t have the cost data that the health systems have, and the health systems don’t have a more comprehensive view of pricing.”  

Ginsburg says that while health plans and providers are always going to be somewhat adversarial when it comes to setting rates, he’s seen increasing evidence that the two entities are working together as the healthcare landscape evolves. 

“I’ve been very much impressed at the degree to which health plans and providers have been partnering on innovative payment methods,” he says. “They still can disagree about how much they should be paid, but often they are both interested in going to a payment method that really offers some upside for the two of them that, if it works, they can share.”

One important aspect for all parties to keep in mind is that the healthcare landscape is rapidly changing and that the financial success or lack thereof of insurance exchanges, state decisions to expand Medicaid and the upcoming elections could ultimately have significant impacts on alternative payment mechanisms, lower reimbursement trends and revenue, Morris says.

“Without a crystal ball it’s hard to say what’s going to [transpire], other than to say that change is going to happen pretty quickly,” he says. 

Jill Sederstrom is a freelance writer based in Kansas City.