Read the following case study :

THE OFFER: PURCHASE OF A PRIVATE PRACTICE: Dr. Daniel Davidson, a neurosurgeon, has been approached by the administrator of Harbor View Hospital to explore his level of interest in joining the hospital’s Accountable Care Organization (ACO). Dr. Davidson has admitting privileges at the hospital. He has been reading about the shift to value-based payments, whereby up to half of provider payments in five years will be based on quality of care. The impetus for this new type of payment methodology is that the U.S. Department of Health and Human Services (DHHS) is looking to cut back on the volume of unnecessary surgical procedures while improving patient outcomes. The U.S. currently lags behind many other countries, including so-called "third world" countries in patient outcomes. Dr. Davidson is aware of the complexity of the health care industry. As the transition from volume to value becomes more imminent, both Harbor View Hospital and his own practice will need to be agile in evaluating the likely trajectories in their markets; to identify their desired role; and, to make the significant structural and operational changes necessary to succeed in the changing business environment.

UNDERSTANDING HEALTHCARE FINANCE REFORM: While still mulling over the hospital's overture, Dr. Davidson feels unprepared to make an informed decision. He has often heard "Accountable Care Organizations" or "ACOs" and "bundled payments" at hospital staff meetings. At a philosophical level, Dr. Davidson understands that providers are wary of blindly adopting risk-sharing payment models, or risk contracting based on quality and cost, since "quality" is yet to be fully defined and elides reduction to a numeric algorithm. According to the Chief Medical Officer for the Centers for Medicare and Medicaid Services (CMS), Alternative Payment Methodologies will be adopted by the Medicare Share Savings Programs (MSSP) and 50% of all fee-for-service payments made to providers will be made based on hitting quality metrics and, thus, qualifying for quality incentives. Not surprisingly, the goal for this transition is to curtail health care costs. As the program name implies, providers who participate in MSSP share in the saving through a percentage of funds that goes back to the ACO. ACOs are healthcare models that are designed to promote accountability, share risk and savings, and improve outcomes for the health of a defined population. An ACO is a voluntary virtual conglomeration of healthcare providers who share responsibility for delivering high quality care to Medicare patients while curtailing the growth of health care costs. All providers within an ACO share accountability for their patients’ health outcomes and saving money by correcting overutilization of healthcare services and thus, improving the value of care. If these goals are met, providers who contribute toward such saving while meeting quality goals receive a financial incentive from the money that is saved. Success as an ACO is predicated on key core competences including leadership; a collegial, teamwork-oriented organizational culture; synergistic relationships between providers; an IT infrastructure that supports population analytics and management as well as enabling the coordination of care; an infrastructure that enables the monitoring, analysis, management, and reporting of quality indicators; financial risk management; patient education and support resources; and, a financial infrastructure for the receipt and distribution of payments and/or savings. A bundled payment is a single payment to providers and/or healthcare facilities for all services provided to a patient to treat a given condition, or provide a given treatment. Payments are made to the providers based on expected costs for clinically-defined episodes that may involve several provider types, settings of care, and services or procedures over time. As a payment methodology to improve value, bundled payments should include clearly defined quality metrics that are focused on desired clinical outcomes. Providers must successfully demonstrate achieving these – or better – outcomes to maximize the payment they receive. These payments are even more critical to reforming healthcare finance because they address specific issues of care and quality directly and could be adopted more quickly than ACOs.

YOUR TASK You are a business consultant and Dr. Davidson has solicited your advice on what trajectory he should pursue. Specifically, he wants you to advise him on the following:

• Current industry trends on consolidation in general and hospitals acquiring physician practices in particular. What is the financial impact of such acquisitions for the hospital?

• What financial statements will Dr. Davidson need to provide to Harbor View Hospital if he decided to accept the offer?

• Can Dr. Davidson expect financial stability and a healthy work-life balance if he decides to sell his practice to Harbor View Hospital?

• Based on these three factors, what recommendation would you make to Dr. Davidson?