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James Hereford, president and CEO of Fairview Health Services, a nonprofit academic health system based in Minneapolis, describes the economics of his industry as “a weird dance.” He says, “Traditionally, payers and providers have been so separate and so at odds, we’re almost competing with each other rather than competing for how we can improve care and make outcomes better.”

For years, there has been a cry for healthcare delivery and economics to be transformed from the fee-for-service model, in which providers receive payment for specific services. COVID-19, testing healthcare like few other events, has put more urgency into the cry.

“Right now, fee-for-service provides no incentive for wellness,” says Dave Morlock, managing director and co-head of the health system’s mergers and acquisitions practice at Cain Brothers, a division of KeyBanc Capital Markets. “It causes providers to invest in profitable services rather than necessary services the community needs. There are economic incentives to overtreat, but more care doesn’t necessarily mean better care.”

These issues existed before the pandemic, but COVID-19 revealed how ill-prepared hospitals and physician groups were for the economic shock caused by the increase in patient volumes. “It’s a thin-margin business,” Morlock says. “All those cracks in the economic system were exposed.”

The Current Approach Works for No One

The traditional healthcare model is not working for anyone, growing into one of the largest household expenditures in the United States and accounting for 18% of the economy. “Unexpected medical costs are placing significant financial burdens on families, resulting in an inability to pay,” says Agapito Morgan, senior vice president, commercial healthcare leader, for KeyBank. “Providers are typically collecting less than 50 cents on the dollar owed by patients.”

There is growing momentum to shift to a value-based model focused on patient wellness and prevention, which ultimately will reduce the amount of hospital stays and services needed. “Providers that engage in value-based care and take the top-line insurance risk were in a much better position to deal with the financial crisis that came on the heels of the pandemic than providers that depend on patient volumes,” Morlock says.

The call for value-based care faces numerous obstacles, however. Large healthcare systems have invested in buildings and other assets designed for a fee-for-services world. Both providers and insurance companies have underinvested in technology to allow billing and care systems to exchange information, and they have failed to provide consumers with transparency on the true cost of care. In addition, big health systems tend to be large employers, so any change that stokes fears of job loss brings up resistance from politicians in both parties.

“The major obstacles are all-around inertia,” Morgan says. “The current billing system would need to be revamped. Health plans, providers, employees and Washington, D.C., need to work together—and those are split groups with disparate motivations and goals.”

Signs of Change Emerging

Despite these stumbling blocks, the specter of healthcare costs continuing to spiral upwards, while care degrades, is leading to widespread acknowledgement that transformation is needed. “We will not transform healthcare until we transform the way we pay for healthcare,” Morlock asserts. Signs of change are emerging in both the private and government space.

In the past few years, the drive for value-based care has resulted in risk-sharing agreements among providers, insurance companies, medical device firms and others in the complex healthcare ecosystem. “New physicians’ groups created their mission and infrastructure to take risks,” says Rob Fraiman, president of Cain Brothers. “They are only treating a small portion of the population these days, but that’s where the investment dollars are flowing.”

The federal government is pushing for 50% of traditional Medicare Advantage payments to be tied to value-based care models within the next couple of years. “Medicare Advantage is the blueprint for how value-based care will play out,” Morlock says. “The blueprint is manifesting itself in the background of the consolidation and acquisition of physician groups, because healthcare systems and insurance companies will need to integrate and coordinate physicians at large scale to improve outcomes and lower costs.”

COVID-19 has not only exposed the issues, but also revealed some of the possibilities in reimagining healthcare. For example, during the pandemic, loosening of federal regulations led to unprecedented adoption of telehealth services.

“The reimbursement for telehealth, historically, was so low that it was against providers’ economic self-interest to interact with people that way, rather than bring them into an exam room,” Hereford says. “Once that changed, I was amazed at the speed of adoption of telehealth, especially for specialty services.”

Fairview has also partnered with a technology startup that can pull information out of electronic medical records and make them more visible. This data, combined with artificial intelligence, can guide physicians on providing better care and direct hospitals to make a better impact. Hereford sees initiatives like this—key to a value-based model—becoming more common.

“I’ve been in healthcare for 35 years, and healthcare has been in avoidance mode of major transformational change for 35 years,” he says. “Now is the time that begs for transformation of care delivery—not just how we can do more with less, but also how can we do things differently.”

To learn more or to speak to one of our healthcare experts, visit key.com/healthcare.

This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity.

“Cain Brothers, a division of KeyBanc Capital Markets” is a trade name of KeyBanc Capital Markets Inc. Member FINRA/SIPC.

KeyBanc Capital Markets Inc. and KeyBank National Association are separate but affiliated companies. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives. Banking products and services are offered by KeyBank National Association. Credit products are subject to credit approval.

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