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Population Health Management

An Unstoppable Transformation
David Feygin, PhD, MBA and Donald G. Ross
In 2014, annual U.S. healthcare spending topped $3.0 trillion, or $9,523 per person. 1 Not only is the spending
growth unsustainable, 30 percent of each healthcare dollar is wasted, according to the Institute of Medicine
(2009). 2 The urgent need to reduce waste and control healthcare costs has spawned policies promoting ValueBased Care (VBC), which promises to reduce spending while improving patient outcomes.
Enabled by new information availability and connectedness, value-based care policies are transforming the
delivery of healthcare and fundamentally changing priorities. The US Department of Health and Human
Services, a key bellwether of healthcare change, seeks to have 85 percent of Medicare payments tied to quality
or value by 2016 and 90 percent by 2018.3 To further accelerate reforms, the Medicare Access and CHIP
Reauthorization Act of 2015 (MACRA) defines two pathways:
1. Merit-Based Incentive Payment System (MIPS): a system in which healthcare professionals will be
measured on quality, resource use, clinical practice improvement, and meaningful use of electronic
health records.
2. Advanced Alternative Payment Models (Advanced APMs): new methods to pay providers for the care
they give Medicare beneficiaries, including lump-sum incentive payments and increased transparency
of physician-focused payment models.
For payers and providers, the transformation of care has begun.
Nearly two-thirds (64%) of hospital c-suite executives identified
Managing the switch to value-based reimbursement models as their
top challenge, followed by Coordinating care (56%) and Managing
patient populations (54%).4 Population health management is the
top priority for hospital CIOs, with 75% of those surveyed saying work
will begin in the next 12 months.5 For Aetna, a representative payer,
value-based contracting now represents about 30% of Aetnas medical
spend and their goal is to achieve 75% by the end of the decade. 6
With healthcare system priorities changing, long-term success will
depend on understanding the motivations, drivers and barriers to
value-based care transformation. Despite mixed early results and the
challenges of pioneering implementations, there is reason to believe
that value-based care will arrive quickly and abruptly.

Population Health is the

discipline of managing the
clinical and financial risk of a
defined group or population.
The goal of population health is
to improve clinical outcomes
and reduce financial cost for a
population, via targeted
engagement by caregivers,
coordinated across all settings
of care.
Barclays Capital Inc.7

By simultaneously improving care and reducing costs for health systems and their populations,
Population Health Management (PHM) is the primary enabling discipline of the transformation
to value-based care.

Donald G. Ross and David Feygin

The Good, Bad and Often Ugly Early Resultsand Recent Successes
Population Health Management cannot fix broken healthcare systems, nor is it a panacea that can
indiscriminately open the spigot of services for all. When applied in this way, PHM increases costs with minimal
outcomes improvement. However, when PHM is built on the right foundations and focuses on the largest
inefficiencies, the results in savings and outcomes can be impressive.
Early results from Value-Based Care
models were mixed. Only 24% of
Medicare Pioneer Accountable Care
Organizations (ACOs) achieved their
goal of earning Shared Savings and
over a third of the original Pioneer
ACOs have exited the program.
Although physician-led ACOs had
better success than hospital-led ACOs,
few organizations had the proper
infrastructure. They could not
implement value-based, accountable
care. Nor could they provide sufficient
incentives to alter physician and
consumer behaviors to drive savings.
Hospitals such as Brigham lost 10s of
millions as they expanded services,
but were unable to control costs.

Figure 1: Best Practices for Shared Savings (ACO/VBC) Programs

The Advisory Board Company

ACOs represented the first major Centers for Medicare & Medicaid Services initiative in value-based care
reimbursement models. Today, organizations are learning what is required to implement value-based care
[See Figure 1], how to focus resources for greatest impact, and how to align incentives to drive savings while
improving outcomes.
Several levers enable health systems
to achieve 20 40% savings from PHM
initiatives while improving outcomes
[see Figure 2]. These levers include:

expanded partnerships across

sites of care,
narrow provider networks,
low-cost/high-quality partners,
incentivized consumers,
alignment of physician pay
and incentives with
efficiencies, and
risk-stratified patients
(targeting incremental
services at the most expensive
and highest risk patients).
Figure 2: Example of PHM Success
The Advisory Board Company
Donald G. Ross and David Feygin

Transformation Dynamics How and When

Today, provider CEOs frequently highlight the challenge of simultaneously running two business models with
opposing goals within a single care delivery entity:

Fee for service (FFS) Goal: Drive revenue by attracting patients and increasing expensive services
rendered and reimbursed.
Value-based care (VBC/PHM) Goal: Avoid costs and improve outcomes by preventing the need for
expensive services and driving efficient use of resources.

Running two conflicting business models is unsustainable. It requires two financial systems and physician
incentives must reward conflicting behaviors. This is so challenging, that health systems are divesting assets
that are in financial conflict with todays (yesterdays) fee for service world even though CEOs know they will
need these assets for value-based care. [See Figure 3.]
Because running two divergent business models within one care delivery system is not sustainable, the
transition to Value-Based Care for organizations cannot be gradual. Transition, for any system that successfully
implements VBC, is likely to be abrupt.

Figure 3: Health Systems Divesting Population Health Assets in a FFS World (2012)

Donald G. Ross and David Feygin

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When will this shift occur?
In 2014 Barclays estimated that the
percentage of Managed Care Revenue in
either performance based or ValueBased Reimbursement (VBR) contracts
would increase to 34% by 2018. [See
Figure 4.] With only a third of revenue
tied to value-based care, one would
assume that the shift would not occur
before 2018.
However, successful value-based care
has much higher profitability than feefor-service (FFS). Profitability for valueP4P: Pay for Performance
VBR: Value Based Revenue
based care implementations (also called
Fee-for-Value FFV) ranges from 20 40%, Figure 4: Percent Revenue from Value-Based Care Contracts
or 5x (~30% vs ~6%) the profitability of
Barclays Capital Inc.
successful fee-for-service.
When just 20% of lives are in value-based care contracts, profits from Fee-for-Value exceed profits from Feefor-Service [See Figure 5 from Oliver Wyman]. This analysis reflects the early years of implmentation, when
value-based care strategies generally are applied to highest risk/highest cost populations. Although this
overestimates average profitability across the entire patient population, it is accurate for early years of valuebased care implementations.

FFS: Fee for Service

FFV: Fee for Value

Figure 5: Relative profitability from value-based care contracts

Oliver Wyman

Donald G. Ross and David Feygin

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Although 2018 projections call for only 34% of
revenues from value-based care, VBC provides
most of the profits. For organizations that
implement PHM successfully, profits from VBC
likely will exceed profits from FFS much
quicker than 2018.

35%

34%

30%

30%
27%

25%

23%

20%

Although the graph on the right [Figure 6] is

15%
only illustrative, it is modeled with only 20%
10%
profitability for VBC/FFV the low end of
successful implementations. With a higher
percentage profitability model, VBC profits will 5%
exceed FFS profits even sooner.

% of Managed
Care Revenue

20%
Profit from
Managed Care
Revenue

17%

Profit from Fee

for Service
Revenue

0%
2013 2014 2015 2016 2017 2018

Beyond economics, care delivery efficiency

Figure 6: Comparing Profit Contributions from
has become a moral imperative in healthcare.
Value-Based Care vs Fee-for-Service
Efficiency is engrained in the attitudes and
cultures of the current and next generation of healthcare providers and healthcare managers. Delivering
inefficient care is not only wasteful, it violates todays guiding healthcare principles.
Combined with the challenge of managing two opposed business models, profitability will drive
abrupt near-term change in organizations capable of successful PHM implementation.
Additionally, since practically all providers will be engaged in value-based contracting, it is
likely that aggregate payer and provider focus will move disproportionately from fee-forservice to value-based care (fee-for-value) within the next 23 years.

Systemic Restructuring of Payment and Care Delivery

Across the U.S., new payer-provider care delivery models are emerging. Goals are in alignment with valuebased care and include allocating resources more optimally and reducing expensive care episodes. Overall, the
systemic changes intend to lower the overall cost of care and improving outcomes:

New care delivery entrants are creating another Front Door

to healthcare. These entrants deliver basic care, improve
management of chronic disease, and support wellness.
Examples include CVS MinuteClinic, Walgreens healthcare
clinics, and Rite-Aid RediClinics.
Payers/insurers are providing primary care services. Examples
include Oscar Health and WellPoint. Note: Oscar Health
provides Tele-Health access to physicians within their
insurance portal.
Payers/insurers are providing sub-acute care services.
Examples include United with Optum Urgent Care, Humana,
and Cigna
Payers are merging with providers. Goals are to align
eliminate structural inefficiencies and align incentives toward
efficient and effective care. Examples include HighMark
Health/Allegheny Health Network.

Donald G. Ross and David Feygin

Application:
In practice, this means that
healthcare providers are
examining the patient
populations they serve and
attempting to apply best
practices, analytics and
connectivity to engage,
influence and coordinate
caregivers and patients in
ways that improve care and
reduce costs.
Barclays Capital Inc.7

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Figure 7 illustrates examples of incumbent health plans expanding into patient care.

Figure 7: Examples of Health System Structural Changes The Advisory Board Company
However, as shown in Figure 8, no player has all the required capabilities

Figure 8: Capability Assessment of Health System Incumbents The Advisory Board Company
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In addition to the incumbents, Digital/Health IT disruptors are creating solutions that break down historic
siloes and barriers to efficient care delivery by addressing various aspects of what Oliver Wyman calls the
Hassle Map [Figure 9].

Figure 9: Oliver Wymans Hassle Map

https://twitter.com/oliverwyman/status/651858566144462848

With the ultimate winner(s) unclear, the key is to focus on solving critical problems and inefficiencies
represented by the hassle map, as opposed to focusing on specific incumbents. During the transformation to
PHM, suppliers must solve problems first and remain flexible regarding the customer/channel.

New Capabilities Are Needed

Regardless of emergent health system structure, population
health management is the enabler of value-based care and
requires capabilities that have not existed in hospital,
physician or payer organizations. Health IT delivers several
capabilities, including:

connecting and aggregating data,

measuring and analyzing cost and quality of

procedures,

analyzing patient risk to stratify access to resources,

enabling engagement and coordination, and

monitoring and analyzing the overall cost of care and

the quality of outcomes.

Health IT provides the transparency and tools to identify and

reduce waste and inefficiency while driving optimal care.

Capabilities:
To improve a populations health, providers
must develop the capability to:
1) identify patients across healthcare
settings and systems,
2) stratify the patient population
based on individual patients clinical
and financial risk,
3) based on risk, engage providers to
coordinate care and engage the
patient as an active participant in
determining their health, and
4) measure the impact of these
actions on outcomes, cost and
patient satisfaction.
Barclays Capital Inc.7

Donald G. Ross and David Feygin

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Figure 10 illustrates the capabilities needed for population health. Because most capabilities require
information technology, Health IT is intrinsically linked to, and a key enabler of, Population Health
Management.

Figure 10: Capabilities Needed for Population Health

Companies often categorized as Digital or Health IT, are actually providing technologies to enable population
health management. And, many of the companies we think of as new players and startups, are now
established, profitable, population health management providers. Figure 11 illustrates the capability needs of
population health management and the early leaders in the growing and dynamic Health IT ecosystem.

Figure 11: Health IT and PHM EcoSystem Leaders Barclays Capital Inc. (2014)
Donald G. Ross and David Feygin

Implementation Barriers and Emerging Accelerators

Tremendous structural, infrastructure, cultural, and behavioral barriers still confront value-based care. Yet,
change is happening and even accelerating. Decades of healthcare practice inertia are being overcome by:

new patient and economic benefits,

disruptive technologies and business models,
systemic restructuring,
consumer momentum, and
financial incentives.

Even with new payer-delivery structures and aligned incentives, tactical implementation of population health
management encounters significant infrastructure barriers:

Data Collection Burden When data is not collected automatically, care providers are overburdened
with manual data entry.
Data Scarcity Because operational and clinical data becomes incredibly scarce outside the acute care
setting, actionable information is unavailable to manage care across the continuum.
Data connectivity and interoperability Even when data exists, it is a challenge to connect. Even
matching data to a specific patient requires extra efforts. Note: The U.S. is one of the few countries
without a unique patient identifier.
EMR/EHR connectivity A handful of major electronic medical record vendors are reluctant to provide
connectivity to potentially competitive solutions.

Although these barriers are significant, they are being overcome:

Interoperability/connectivity initiatives and awareness are driving openness.

New, disruptive technologies and business models are solving the hassle map and circumventing
historic infrastructure by engaging patients and physicians directly (e.g., Tele-Health).
Hospital acquisition of physician practices is standardization infrastructure and enabling connectivity
and interoperability.
Consumer companies and products (e.g., Health Kit, Research Kit) are providing transparency outside
professional care settings.

Strategic Implications for Startups and Suppliers

By aligning reimbursement and incentives toward efficiency, value-based care provides viable business
opportunities in the elimination of waste and inefficiency. For the first time in U.S. healthcare, eliminating
errors, eliminating overuse, driving adherence, reducing the cost of care delivery, ensuring optimal care
delivery, reducing readmissions, preventing complications, preventing hospital acquired conditions, etc. can be
profitable business models. New startups and existing players are responding rapidly.
However, a consequence of cost-mitigating initiatives is volume and price pressure on suppliers:

Reduced Volumes due to reduced overuse and more efficient resource utilization (reduced diagnostic
tests, reduced antibiotic use, fewer hospital visits, few medical supplies used)
Margin Pressure as product differentiation becomes less relevant than the economic and clinical
impact of system-level solutions
Channel Relevance decreases as health system C-suites look to system level solutions. Offerings that
are not top population health management priorities lose relevance

Donald G. Ross and David Feygin

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Questions to Consider

Who will be your customers in 5-7 years? (Payers, Providers, Health Systems?)
What are the priorities of your current customers and potential customers?
What Population Health Management initiatives are relevant to your offering?
Regardless of who your customers will be, are you positioned to solve healthcares key challenges and
address the hassle map?

An Aside on Global Implications

Single-payer systems outside the U.S. have the structure to lead in population health management. Yet, the
European Union has been slow to implement PHM. Key factors include their highly-fragmented IT
infrastructure and low levels on investment in innovative solutions. By comparison, the U.S. has a plethora of
population health and Health IT companies as well as ongoing investment in innovation. As a result, the U.S.
has emerged as the leader population health management and value-based care.

Conclusions
The world is changing and the change is profound. Much like Health IT 5 years ago, it is now clear that the
transition to Value-Based Care is unstoppable. For innovators and entrepreneurs, this represents both a
tremendous opportunity and significant risk.

Dr. David Feygin is Vice President of Health IT Integration and Strategic Innovation at Becton Dickinson. David
also is Chair of the Executive Council for The Center for Patient Safety Research and Practice, a thought leader
in information-enabled healthcare safety with a primary focus on medication error and patient safety research.
David serves as a board member and co-Chair of the Digital Health Committee for the Life Science Angels, the
#1 ranked angel investor group in the US. He is an advisory board member for Health XL, a cross-industry
consortia devoted to care transformation. As a strategic advisor to several population health management
companies and through his work for Digital Health accelerators and incubators, David strives to help
entrepreneurs and companies develop profitable businesses that profoundly improve care quality and efficiency.
Don Ross is Board Director and Managing Partner Digital Health at Life Sciences Angels. He also is a member of
Sierra Angels and Sand Hill Angels, and was co-founder a group of private investors dedicated to investing in
digital health. Mr. Ross serves on several company boards and is a frequent speaker on entrepreneurship and
startup investing. He pioneered software development for psychological testing, anxiety intervention, health
risk appraisal, health behavior change, and blood pressure monitoring. Mr. Ross is a published author and has
two textbooks currently in 6th editions.

https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-andreports/nationalhealthexpenddata/nationalhealthaccountshistorical.html
2
http://resources.iom.edu/widgets/vsrt/healthcare-waste.html. See Appendix B for waste breakdown.
3
https://www.cms.gov/newsroom/mediareleasedatabase/fact-sheets/2015-fact-sheets-items/2015-02-27.html
4
Into the Minds of the C-Suite. Peer 60 Survey of 320 Hospital C-Suite executives. Peer60.com. Appendix A.
5
JP Morgan CIO Survey. November, 2014. Appendix A.
6
http://www.forbes.com/sites/brucejapsen/2015/05/15/value-based-care-may-drive-aetna-bid-for-cigna-or-humana/
7
Definitions of Population Health, Applications, and Capabilities from: Barclays Capital Inc., U.S. Healthcare Distribution & Technology:
HCIT: What we talk about When We Talk About Population Health, March, 2014

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Appendix A: Hospital C-Suite Priorities

Donald G. Ross and David Feygin

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Appendix B: Healthcare Waste

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Appendix C: How Health IT Enables Healthcare Transparency

Fundamentally, Health IT enables care delivery transparency a foundational requirement and one of the
biggest barriers to the implementation of successful population health management. As the saying goes, you
cannot manage what you do not measure.

Source: The Advisory Board Company

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Appendix D Care Standardization & Practice Management Example

With improved data transparency, Health Systems already are tracking physician performance and seeing
greater than 20% reductions in cost of care and double-digit reductions in readmissions.

Donald G. Ross and David Feygin