Shift Happens – What the Revenue Shift From FFS to Outcomes Means to Hospital Valuations

The consequences of a shift in the Fee-for-Service (FFS) revenue model to outcomes-based compensation is creating a tsunami of change for hospitals. Let’s look at how this shift is affecting the valuation of hospitals in a buy or sell situation. 

In an FFS revenue model, valuations were based on how much revenue generated was attributed to volume. That is all changing with the Affordable Care Act (ACA). Today, hospitals face a variety of issues that impact day-to-day operations and the bottom-line:

• Declining inpatient volumes
• Lower reimbursement rates  per patient from Medicaid and Medicare with private payors starting to follow the trend
• The advent of high deductible plans in private pay
• Changing diagnosis codes
• Enhanced regulatory vigilance 

These factors contribute to a financial model where  operating expenses are outpacing revenue.

What this means to valuations 

Hospital valuations are now more sharply focused on the factors that demonstrate agility to the changing compensation culture, such as: 

• Location
• Demographics
• Capital investments
• Payor mix for reimbursement
• Quality and reputation of the facility
• Workplace culture that supports clinical care teams
• Your position relative to local competition
• Technology adoption – Electronic Health Records (EHR), telemedicine, etc.
• Position relative to local competition

Hospitals that have started preparing for the future deeply understand that there is a shift in the payer mix that is moving from inpatient care to alternative sites in the continuum of care. Under the FFS model, it was easier to chase inpatient volume. With the new ACA driven model, the importance of managed contracts with risk and fixed income play a larger role in revenue.

The chart below shows figures from the Congressional Budget Office (CBO) that illustrate the downward trend of Medicare reimbursements over the next several years.

ACA IMPLENTATION IMPACT ON REIMBURSEMENTS 2013 - 2022 

Book, Robert A., and Ramlet, Michael, “What is the Regional Impact of the Medicare Fee-For -Service and Medicare Advantage Payment Reductions?” 

The risks and benefits of ACOs 

With the way Accountable Care Organizations (ACOs) work, there is initially no downside risk to hospitals unless a provider is a member of a Pioneer ACO. Risk becomes a factor when a facility is measured against competitors to see how well it is leveraging the opportunities ACOs provide. The way to maintain market share is to create a methodology that channels patients to appropriate care settings. The ability to do this efficiently will impact the value of the facility in the future. 

Valuations will also take into consideration how far along hospitals are in creating clinical teams that use technology to create evidenced-based care protocols, and whether they have started successfully using models like bundled care solutions to improve patient outcomes and drive down costs. Practice variation is a new concept and if systems have not begun to identify and improve operations, the value of their organization may be adversely affected going forward.

Although these changes bring uncertainty, they also bring great opportunities for hospitals. It is exciting to look at the benefits of creating more efficient models that cut wasteful and potentially harmful tests and procedures and long hospital stays – and as a result, better outcomes for patients. The hospitals that stay on the sidelines waiting out any potential shift back to FFS risk being left behind. Shift happens. And it is happening now.