By Dan Gebremedhin, MD

October 2018 – As a physician and health plan executive turned healthcare tech/service investor, I’ve enjoyed bringing a fresh perspective to examine the gamut of healthcare business models over the last 3+ years. In that survey, I’ve come to appreciate a factor of paramount importance in successful business models: alignment of incentives between the company (start-up), enterprise customer, and population/patients served. In today’s healthcare economy, I’ve been surprised to find pervasive incentive misalignment between a company trying to change healthcare, the enterprise customer looking to maintain competitiveness (usually a Payer or Provider of care), and the patient populations receiving care. Countless startups looking to foster value-based care business models are rudely surprised when they learn a key “dirty secret” of the Fee for Service System.

The ”Dirty Secret” of the FFS System

Despite best efforts, much of our healthcare system remains a Fee for Service (FFS) care system for treating illness and accidents. Healthcare providers interact with patients with acute ailments, and providers get paid by providing services, procedures, and drugs to ill patients. Hospitals and doctors are not alone in this incentivization scheme. There are several other service providers, for example dialysis companies, skilled nursing facilities, and laboratories, who largely receive payment with every service regardless of impact on total medical expense or quality of outcome of the patients served. This payment system incentivizes service providers to do more for patients, even if more is not better for patients.

The Key Performance Indicators (KPIs) of FFS operators that drive decision-making are mainly volume based, not outcomes based; namely capacity, utilization, and throughput. Some compare hospitals to very expensive hotels, where the main goal is to fill the beds with patients for a certain time, and then turn over those beds with new patients after a certain “length of stay.” The patients/populations that fuel this misaligned FFS system are those that interact with doctors and hospitals the most and are subject to the myriad services. Commonly, these high utilizing patients are known as “complex care” patients. “Complex” patients have three or four chronic, advanced medical conditions, requiring care by multiple specialists. These chronic advanced conditions frequently become too complicated to manage in the outpatient setting by an under-resourced Primary Care Physician (PCP), prompting admission to the hospital several times a year.

The dirty secret of the FFS system is that, while stakeholders know these patients could benefit from less interaction with the healthcare system, these businesses rely on the frequent utilization and payment by third party payers to fill their beds, utilize their capacity, and provide margin on invested inventory. The complex care patient in a FFS system essentially ping-pongs between care providers, diagnostic tests, procedures, hospital and rehab admissions and discharges, with no entity’s majority payment tied to overall reduction in care utilization.

Accountable Care 1.0

There has been a push to assign “accountability” to organizations like hospital-centric health systems, primary care groups, and other service providers to provide proactive comprehensive care to complex care patients and keep them out of the healthcare system. This symbolic “accountability” does two things: it ties a small portion of payment (usually 5-10%) to cost performance of that patient, but more importantly, it labels a patient as “belonging” to a care system. In version 1.0 of accountability, we’ve heard a majority of these “Accountable Care Organizations” are underperforming in their cost and performance goals, and many of them are considering exiting these risk arrangements if the portion of risk-based payments is increased.

I would contend the desire for “accountability” of these complex patients is not to manage total cost of care and improve outcomes, but rather to maintain a market for the services provided. Given the lion’s share of payments is still derived from a FFS system, high utilizers keep these FFS service providers in business, and the incentives are not strong enough to change provider behavior.

ESRD is the most “complex” of the chronic conditions

A poignant illustration of the problem is End Stage Renal Disease (ESRD), among the most complex of chronic conditions. Patients with ESRD require dialysis several times a week to maintain proper fluid and electrolyte balance to compensate for failed kidneys. In addition, a majority of ESRD patients have a variety of other serious chronic conditions such as cardiovascular disease, diabetes, depression, and sleep disorders. For these reasons, ESRD patients are among the most prominent high utilizers in our healthcare system, showing up to Emergency Rooms, being admitted and re-admitted to hospitals, and generally requiring high levels of reactive care.

The Kidney Care market has been formed by the FFS System

While service provision in healthcare is generally regionally fragmented, the kidney care industry is unique in that over 80% of all care is provided by two giant companies, and it has been this way for over a decade. This evolved via aggressive M&A practices and natural barriers to entry created by the infrastructure and human capital-intensive nature of dialysis care. It should not be surprising then that these giant companies are built on a FFS foundation and have structured much of their internal contracts (with nephrologists) and external contracts (with payers and providers) in traditional FFS terms. These terms emphasize patient volume and driving patients into in-center dialysis. Further, en bloc, most of these contracts incentivize more care, not less.

There are 30 million individuals in the U.S. living with Chronic Kidney Disease (CKD) and ESRD. Perhaps more concerning, National Health and Nutrition Examination Survey (NHANES) data sets suggest that 15% of the general population is living with CKD and that over 7% of the general population has advanced CKD (Stage 3-5) with potential near-term progression to ESRD. Collectively, care for these individuals costs Medicare over $80 billion. Due to misaligned incentives unique to the kidney care market, our healthcare system provides meager education, management, and care coordination for patients as they progress though the 5 clinical stages of CKD.

A lack of proactive management results in CKD patients acquiring a sudden diagnosis of ESRD, with nearly 40% of patients requiring costly, emergent initiation of inpatient/in-center dialysis treatment. Once initiated on dialysis, only ~ 10% of U.S. ESRD patients will receive lower cost, home-based Peritoneal Dialysis (PD), while other countries have PD usage rates above 30%. The ESRD population, which is at the highest risk of unplanned hospitalizations, readmissions, and complications, is the costliest patient cohort, accounting for a per patient cost near $90,000 per year and total U.S Medicare spend. of over $40 billion. Finally, the gold standard treatment for most ESRD patients is a kidney transplant, which has been proven to improve morbidity, mortality, and lower costs. Yet, currently only 13% of ESRD patients are placed on the transplant list, and likelihood of receiving a transplant correlates directly with socioeconomic status, ethnicity, and type of dialysis facility.

Given the persistent lack of aligned incentives and the resulting financial and human costs, the kidney care patient population needs a better approach to treatment. Success would benefit not just these patients but anyone with a stake in the U.S. healthcare system – all of us.

About The Author

@dangebremedhin is a Principal at Flare Capital Partners, a Healthcare Technology and Services focused VC Firm, where he serves on the Board of Somatus, an innovative vertically integrated, value-based Kidney Care Services Provider. He is a practicing physician at the Massachusetts General Hospital, previously served as a Medical Director at the Harvard Pilgrim Health Plan, and spent five years as an entrepreneur in the Health IT Industry.