Managed Care Pricing Strategies In The “New Normal ... · Determine what’s happening ... “Wild West” of Market Pricing: Prices for some hospital services will become more

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

1©2020 Guidehouse Inc. All Rights Reserved

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”


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


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”


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.


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


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


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


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.


Case Study – Lehigh Valley Health Network


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


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


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


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


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


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


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


Target Rates Translated into Aggregate Rebalancing Outputs by Type of Service


Target Rates Aggregated Rebalancing Outputs by Facility / Location / POS


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


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


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


FFS Medicare Advantage:

Total Revenue Impact: Deferred to VBC


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


# 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


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


24

Contact

24

Christopher J. Kalkhof, MHA, FACHE

Partner, Guidehouse

(716) 912-0309

[email protected]

Steve Prosser

Director, Guidehouse

(763)234-6070

[email protected]

Jeffrey West

Vice President, Insurance Services

Lehigh Valley Health Network

mailto:[email protected]

mailto:[email protected]

Managed Care Pricing Strategies In The “New Normal ... · Determine what’s happening ... “Wild West” of Market Pricing: Prices for some hospital services will become more

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