Preparing for the Transition to Value-Based Payments

One thing I have learned over my 30 years in healthcare IT is that our industry will fight against change with its last breath, regardless of the logic or benefits of any new process that might be under consideration. ICD10 is the most recent example. It is simply a technical change in how one data element in healthcare patient information is recorded and processed.

Despite how it may impact the industry financially due to implementation costs and delays, it is a significant improvement in the quality of clinical data collected and a necessary step in the evolution of healthcare IT systems. The clinical and financial decisions that depend on the accuracy of diagnoses will benefit from the ability to establish new relationships regarding the effectiveness and cost benefits of different treatments plans. Once this new code set is established, new insights will be gained through this data that would not have been possible with the more general ICD9 codes.

Value-Based Payments

As we move beyond ICD10 and it becomes incorporated into provider and payer information systems, we will discover that most of our fears associated with this change are unfounded. This forced change is not unique in our recent history and shares similar characteristics to other issues that generated much more angst than was warranted. Here are a few examples:

  • The transition to DRGs in the 1980s
  • Moving from Medicare paper remittances to electronic remittances in the 1990s
  • Moving from custom paper claim forms to the standard UB and 1500 forms
  • Implementing the NPI
  • Changing from the National Standard Format to ANSI 837 electronic claim format
  • Adopting national code sets for claims

These are just a few examples that fit into this group. At the time that these projects were proposed and implemented, the general attitude was that they were going to be prohibitively expensive and that the effort required to complete them would not match the benefit received, at least by a large portion of the healthcare community.

Each of these changes provided fundamental benefits to the industry that did not previously exist. For DRGs, it helped control escalating costs in healthcare that was previously driven by fee for services reimbursement for inpatient stays. The other issues were all related to improving the efficiency of record keeping and claims administration, like ICD10. Now that they have been implemented, I believe that few people would argue that they were not worth the effort.

Soon we will be looking at ICD10 through the rear view mirror of technological advancement. My guess is that once it is all over, we will wonder how we got by with the limitations of the older code set.

Now, as we look ahead to the next disruptive trend in healthcare claims administration, we see the beginnings of value-based payment models and the associated problems that adopting this technology will cause. Like some of the other projects in our list, most of the actual process of documenting and creating a claim is not affected. Only a small portion, like ICD10 instead of ICD9 or using the NPI instead of the payer specific ID. Still, this minor change in the overall process is considered a major technological hurdle and represents new requirements for monitoring these transactions and new opportunities for messing them up.

Like DRGs in the 1980s, this new payment model may have a major impact on how healthcare is delivered. For those of you that have been around long enough to remember, the business model for hospitals before DRGs was similar to hotels. To efficiently cover your overhead, it was optimal to have as many occupied rooms as possible, each generating chargeable services for the patient with varying amounts of revenue and profit. After DRGs, many organizations struggled when specific fixed payments related to diagnosis replaced the older reimbursement models. The relationship between services (charges) and payments was eliminated for Medicare inpatient claims.

The previous business model was turned on its head. The objective was to discharge patients as quickly as possible to preserve your remaining revenue. This reimbursement change to inpatient care was dramatic and soon many hospitals had a majority of their inpatient rooms vacant. Many hospitals did not survive this transition. However, those that were capable of adapting to this new reimbursement method, began to thrive. Hospitals began transitioning their excess capacity into outpatient treatment centers and developing new methods of service delivery like home health.

Despite the cries from the healthcare community that DRGs would destroy the industry, the new payment methodology had the intended effect and taxpayer dollars previously paying for expensive inpatient services began to move to the other methods of care that were much cheaper to deliver. This trend mitigated the overall increase in healthcare costs between then and now.

Through value-based payments, we will see a similar transition in the industry and similar resistance to implementation. Like DRGs, the steps in processing healthcare claims will not change significantly, but the payment methodology will.

When DRGs were implemented, I created one of the first applications that would duplicate the calculations made by Medicare in the assignment of the DRG and the associated payment. These programs were called “Grouper” programs and hospitals would use them to calculate the expected payments in advance so they could figure out when patients were approaching the reimbursement threshold and also to detect coding errors or opportunities that might maximize reimbursement.

When value-based payment methodologies become common, we will see these same tools developed to predict the impact on reimbursement and the profitability of bundled services. The difference between then and now is that we now have the technology to model these new payment systems against years of data and make accurate predictions regarding the impact of these new reimbursement systems well in advance of their implementation.

This can be done through the data collected in the electronic remittance. Each 835 you receive provides full detail on the charges paid on each claim and the payments and adjustments made by the payer on these claims. Not only will this data be useful to monitor these new payments to make sure they are made accurately and according the established rules, but the data can also be used to model the future impact of these payment systems to the bottom line of the provider organization.

Each 835 provides the detail of how services were reimbursed at the claim level. Each shows the original charges, what was paid, and what was written off. To calculate the impact of any new value-based system, all you need to be able to do is develop software to calculate an expected payment for the new method and apply this method to your historical remittance data. You can then compare the new payment to the old one to determine if the new methodology would be better or worse for your organization, and by how much.

Your charge data with each claim can be used to compare cost to payments if you can calculate the cost of services. Even risk based payment plans, where future payments for the same services to the same patient are affected, can be modeled through remittances since claims for the same patient over time can be linked together. For example, your historical data will indicate which knee replacements had subsequent visits related to the initial procedure.

Systems like these are already available for analytics for your current reimbursement models. As you might guess, MEDTranDirect has a product called 835Direct that can perform this task. Once you determine that this process will be beneficial to your organization, it will take time to collect this data and initiate ERA delivery processes with payers who are not currently providing them.

Yesterday, I attended a webinar provided by CORE on the value of EFT and ERAs in medium size organizations. It includes some good advice on gathering this information and implementing this process. You can get more information through their web site, or view the presentation materials through this link.


By Kalon Mitchell – President, MEDTranDirect