Shifting the Payment Stream

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President Bush’s budget proposal landed with a thud on the desks of hospital and physician practice leaders. Introduced in January, the budget slices Medicare spending by up to $36 billion over the next five years in an attempt to reduce growth in spending by 1.5 percent. The proposed cuts have sparked predictable gnashing of teeth from healthcare provider lobbying groups, and the cuts may ultimately be gutted when the Democrat-controlled Congress gets hold of them. But regardless of what happens with the budget, providers are sensing a long-term shift.

Providers can’t indefinitely rely on predictable incremental adjustments in the third-party payment system to maintain the margin. That’s why many forward-thinking organizations are embracing new lines of business that don’t necessarily depend on third-party reimbursement—and are taking them further away from the acute-care business model.

Wealth in wellness?

Chicago’s Northwestern Memorial Hospital sees its Northwestern Memorial Wellness Institute not only as a path to better patient care, but also as an experiment in how hospitals might cushion future financial blows if the reimbursement-based system continues to take hits in the form of Medicare reimbursement cuts. The institute is also a trial on whether patients will pony up their own dough for the services it offers as the portion of bills traditionally footed by commercial payers gradually shifts to the patient.

Originally more obesity-focused, the institute has expanded into partnership with many of the acute-care divisions of the academic medical center in an attempt to provide care in a way that involves the coordination of several acute-care service lines. “Things should change in the way patients are cared for away from the episodic, acute-care model,” says Julie Roth, MD, the medical director of clinical programs at the institute. “Even though reimbursement in some cases isn’t there, there’s no longer any way to ignore this part of the continuum of care.”

The institute is not just a way to diversify Northwestern’s revenue stream, says Roth—it’s pioneering an economically sustainable way for hospitals to draw patients and make sure they receive care that goes beyond the procedural. “If you took a small fraction of what we spend on episodic care and put it in wellness, we’d be much better off in overall healthcare spending, but that’s not where the money is being spent right now,” says Roth. “We think that is slowly changing.”

If that’s true, smart hospitals and physician practices should be trying different ways to diversify their income streams and get into the consumer discretionary part of the business, many experts think. The institute boasts nine dieticians, three health psychologists, 1.5 full-time equivalent exercise physiologists, two physicians and two nurse practitioners—one for wellness and one for sexual health. Roth is working on developing informal coordination of care alliances with acute-care programs within the hospital such as the Bluhm Cardiovascular Institute and the Alberto-Culver Women’s Health Center. For instance, with cardiovascular health, Roth says she touts the institute’s services with the cardio docs by promoting a disease management-based wellness program for their patients that’s physician-supervised. The wellness institute attacks “big hitters like high blood pressure and high cholesterol, motivating patients by promoting the value of exercise to help wean themselves off of some medications,” Roth says.

But as the payment system shifts rapidly underneath the institute’s financial footing, having a supply of reimbursable services is critical to remain financially viable. “It’s a struggle determining which services to offer and what the right mix is,” she says. “Reimbursement has been a larger driver than we anticipated.”

Taking chances

Despite the risk involved, Max Reiboldt is telling his clients that to maintain their margins, physician practices must follow the lead of innovative providers such as Northwestern. Reiboldt, managing partner and chief executive officer of The Coker Group, a consulting firm in Alpharetta, GA, says physician groups should seek working relationships with other groups or hospitals to increase opportunities for ancillary consumer discretionary spending. He advises on such transactions as physician practice acquisitions by hospitals, mergers between practices and gainsharing arrangements, and he says physicians are becoming more entrepreneurial out of necessity.

A key to maintaining physician practices’ independence is developing ancillary sources of revenue, whether that means offering Botox treatments, in-house lab work, or other consumer discretionary services like wellness. “We’ve done several business plans on wellness, and we ask our clients to take more of a proactive approach to healthcare with their patients,” he says.

Traditionally, physicians—particularly primary-care doctors—are reluctant to invest outside reimbursable services, Reiboldt says, “but they are becoming more entrepreneurial” by developing joint venture partners such as hospitals or private investors to balance out the necessary capital outlays.

Reiboldt’s clients have developed sleep centers, aesthetic centers and wellness operations that aren’t well-reimbursed. But in many such cases, patients are happy to pay their way out-of-pocket. Doing such ventures “comes with some risk,” he says, but even reimbursement may not totally be out of the future profitability picture with some of these ideas, he says. “The more sophisticated insurance companies really do understand that cost-wise, this is the long-term way to go.”

The physician as entrepreneur

Lawrence Anderson, MD, had grand entrepreneurial plans from the beginning for his practice, which he started 11 years ago in Tyler, TX, about halfway between Dallas and Shreveport, LA. “My model was to have an academic practice in a private practice setting,” he says.

Dermatology Associates of Tyler now boasts nine dermatologists practicing in the central office and four satellite offices. Three physician assistants and a nurse practitioner round out the professional staff, who also operate pathology lab services and an outpatient surgery center. The practice offers the full range of high-margin “aesthetic” treatments as well, including microdermabrasions, chemical peels to treat acne, sclerotherapy, Botox treatments and hair removal.

Anderson says his fellow physicians need to be open to the possibilities of branching out. “Physicians can expand by looking at what they refer out,” he says, mentioning another local group he knows that decided to start performing stress tests in house when patients started facing unacceptably long waits to get the test at a local hospital.

Physicians sometimes have a hard time embracing the entrepreneur’s mentality, Anderson says. “One of my partners says he’d rather cut grass than do cosmetic dermatology.” But Anderson adds that physicians have to look at profitable ways of maximizing their expertise and avoid worrying too much about overhead if they have a good business plan for an ancillary product or service. “I would rather have 50 percent overhead and make $1 million than 20 percent overhead and make $500,000.”

Philip Betbeze is finance editor with HealthLeaders. He can be reached at




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