The Special Session: Re-imagining hospital and community health funding

This is part of our series “The Special Session” on health policy ideas for states as they respond to COVID-19.


This is a thought experiment. It tries to take the reality of our health care system, laid bare by COVID, and deal with that reality in a comprehensive way. In this essay, I suggest a pathway that would seem to connect the dots between what’s politically possible and perhaps realistically necessary.

In politics and policy, as in life, there are always more folks saying “This can’t be done” than there are “This is doable.”

But, this is a time we need to think beyond what was possible two months ago. Two months from now will be a whole new world, with new expectations, new rules and new pressures.

If you would have told me two months ago that a Republican administration would be directly sending $1200 to bank accounts, or that 26m people would have filed jobless claims, or even that I would be 12 pounds heavier today than I was back then, I would have shaken my head: “Not possible.”

And yet those have all come to pass.

This essay is not for the naysayers. Indeed, this series is not for the naysayers. It’s for folks looking ahead to what is coming and what policy makers might be able to do about it.



The COVID-19 experience has laid bare a fundamental paradox in American health care that is not likely to stand.

On the one hand, as community members we expect our hospital and health care systems to respond to the coronavirus pandemic.

We expect them to convert operating suites to negative pressure ICU beds. We expect them to have enough PPE on hand and be able to support community testing for pandemic viruses. We expect them to forego high-margin, elective procedures to focus on keeping people alive when the virus hits.

In short, we expect them to respond to the community’s need in a time of crisis.

On the other hand, we also expect them to be sustainable. We expect them to be here for us when things return to normal.


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Yet, during the shift to prepare for COVID, hospitals project taking revenue hits of up to 40%. By cutting high-margin services, like hip and knee replacements, and creating service-ready suites for long-term ventilator use, hospitals have created a revenue cliff as a result of meeting community needs.

John Fox is CEO of Beaumont Health, Michigan’s largest health care system. In a recent column, he speaks to the central paradox I’m talking about.

As American hospital systems have rapidly shifted their operations to screen, test and treat patients infected with the COVID-19 virus, an immediate healthcare financial crisis is looming. It will be large and come on faster than people expect and could cripple the core of America’s hospital systems during this pandemic.

Both of these things cannot exist at once. We cannot ask our hospital and health systems to respond to the community needs of a pandemic if that means going out of business. We cannot also ask them to focus on financial performance and not respond to community needs.

If we assume that the post-COVID health care world will be different than the pre-COVID world, this paradox is a good place to start.

Here are the principles I think solving this paradox requires us to address.

  1. We want high performing health care systems that are resilient and adaptable to community needs. This won’t be the last acute community health experience we face. It won’t even be the last pandemic experience of this virus, which is expected to come back this fall and into next year. We want our hospitals and health systems to be ready to meet the need.
  2. We also want our hospitals and health systems to be financially sustainable in good times and in bad times. When we need them most as a community, we don’t want them to be at their weakest financially. We want funding to be sustainable, regardless of the mix of care offerings at a system at any given time.

Addressing both of these needs – resiliency and sustainability – requires a different model than what the pre-COVID health system allowed.



The pre-COVID hospital and health system model included characteristics that inhibit our ability to address both resiliency and sustainability at once. For example, the pre-COVID system:

  • Fostered a cost shift model. It chased high margin services over other services, hoping those margins would help fund shortfalls in other service areas. It also elevated commercial reimbursement over an increasingly larger share of public reimbursement.
  • Fostered monopoly-like pricing power. The ACA catalyzed a wave of consolidation across the country among hospital providers. This had little to do with benefits of scale to the cost side of the P&L ledger. Rather, hospital consolidation allowed for monopoly-like pricing in more markets, driving higher reimbursement to systems as a result.
  • Fostered complexity. This complexity led to a rapid rise in overhead from IT systems to IT system administrators. Since 1970, the number of physicians has gone up about 200%. The number of administrative staff has gone up 1115%. That overhead is not altruism in the form of voluntary job creation. It’s a function of increasing complexity.
  • Exposed consumers, employers and purchasers to price shocks. The lack of transparency in pricing, both among actuaries determining insurance product pricing and by providers masking the billed charges, led to significant price shocks to the market. Up to 66.5% of all bankruptcies are tied to medical costs, a uniquely US experience.

There are a wide range of other challenges in today’s health care system, including workforce needs, quality variation, a lack of coordination, etc. This essay is not trying to solve them all.

This essay simply wants to address the paradox in the system exacerbated by COVID: how can we have a resilient, high quality and agile hospital and health system while also remaining financially sustainable?

Let me stipulate to begin that simply adding more money to the system won’t get us there.

Plenty of hospital administrators tell me the fundamental problem in the system is that there is not enough money. If that’s the problem, the answer is a linear one: we need more money. Health care administrators are good at solving linear problems.

I don’t believe a review of the data suggests the US health care system is too poor. I believe it’s the opposite: there is enough money in the US health care system. The question is allocation. And, that requires a non-linear solution.

Put differently, if the problem is that we have all of the jigsaw pieces on the table (meaning all of the resources we need), but we just haven’t fit them together into a coherent system, then the solution to solving this puzzle, together as a community, requires vision.

We need to have a vision for how these pieces fit together. Once that non-linear, creative visioning challenge is addressed, fitting one piece into another becomes a linear problem.



In other words, once our community can develop a vision for what health care should look like, with a policy structure to support it, I think our health care system leaders will be able to execute against that community vision well and quickly.



So, what does this vision look like? I don’t think we have to re-create the wheel too much.

I think the answer comes from a mix of what has worked in Maryland, in Hawaii and in Oregon. Here’s what I mean.


First, we should pull from what works in Maryland’s “all payer model” of global budgets

That model, which has been in place since 2014, addresses a number of the basic flaws in how we paid for health care in the pre-COVID era. It provides predictable revenue for hospitals, on a per capita basis, so that these centers of community health can think about the health of their community rather than the central importance of procedures.

At a State of Reform event in 2017, former Governor of Maryland Martin O’Malley talked through the shift he implemented there and the rationale for moving to a forward-looking budget model for hospitals.

What if we stopped paying hospitals like hotels?

Instead of rewarding hospitals for how many sick beds they could keep filled, we decided to reward them for how many patients they could keep well.

According to the New England Journal of Medicine, Maryland saved Medicare alone in the first year of trying $116m, the first year of this shift to align the profit incentive to pay for wellness.”

O’Malley said this new system allowed a complete re-thinking of how health care was delivered in Maryland.



The Maryland approach includes three central building blocks.

The first block is Maryland’s rate setting model. This model is a collaborative, data-driven model that reviews pricing for all services in the commercial market. It then sets uniform prices for those services for all commercial payers.

By setting rates that apply to all payers, it reduces administrative complexity to providers, resulting in lower costs.

However, cost shift can still exist. So, by setting rates for commercial reimbursement and by leveraging the state’s Medicaid authority, a state can eliminate cost shift. This will result in the single largest positive impact to lower commercial insurance rates that a state can do.

Moving commercial rates downward and concurrently moving Medicaid rates upward will further reduce administrative complexity for providers. Moreover, the “price to consumers” will be relatively easily knowable and ultimately shareable. It will support consumer engagement.

Yes, that will mean a near term increase in Medicaid spend by the state. However, FMAP contributions mean these costs will be primarily borne by federal partners. Moreover, states stand to gain more cost savings upon complete implementation.

With rates now aligned across payers, the second block is a common platform to align patient health information. This is essentially an HIE tool. The experience of the last twenty years of tech has allowed a flourishing of these tools across claims and clinical data points.

The third block of the Maryland model is a global budget for hospitals. This is a prospective model like traditional per member per month (PMPM) models. It’s reconciled to changes in population and reviewed at the end of the year.

This global payment model is the tool that everyone has been talking about in health care for years. It took a policy action to make it happen, however.

If a hospital can transparently demonstrate its cost needs, then the payers, with aligned reimbursement, can contribute to a global budget on a PMPM basis based on the share of the market they have in a given hospital service area.

In a state like California, this won’t be easy. However, the former Maryland Hospital Association CEO now leads the California Hospital Association where she is socializing ideas learned from Maryland. If this can happen in Maryland, and if it’s being discussed in California, it can certainly happen in the states in between.


Next, we can learn from the experience in Hawaii where they have created a per capita payment model for primary care.

HMSA is the dominant health plan in the market across all lines of business. In 2017, HMSA implemented a payment transformation model to move primary care out of a fee for service world and to reorient it towards health. The idea was, in part, to allow primary care practices to begin to address health issues beyond the billing codes.

The payment model looks very much like a modified per member per month model there, too. However, rather than a global payment model where primary care clinics are at risk for specialty or hospital services, the primary care clinics are paid essentially only a primary care capitation.



This payment model is prospective and forward looking, but is limited to those things that work for the primary care setting. So, these clinics are providing more tele-health, more behavioral health, and meeting more needs from social determinants that impact health.

More mid-level and community-level caregivers are getting employed so that care can be provided at the top of the license and at a level appropriate to the need. This has resulted in actually expanding access for a community with a severe workforce shortage.

The plan worked closely with primary care offices to support mental health provisioning and to address the social determinants of health.

Their plan has worked, creating a fundamental realignment of primary care across the entire market and all lines of business.



Former HMSA CEO Mike Stollar laid out his vision for payment transformation with us at the 2017 Hawaii State of Reform Health Policy Conference.

We called this strategy Mahie 2020, which comes from an old allegory where Mahie means transformation…

If I had done this presentation even a few years ago, we would have had this universe of bubbles with an HMSA right in the middle, because it was all about us… But it’s not about us, we get that. To achieve this mission, it takes all of us… And we’re all going to have to change…

The current system isn’t sustainable. We all know that means change is needed… No doubt it will be challenging as hell, with a lot going back to the social contract… We have to build those bridges of trust to continue to work together.

We are here to be a catalyst. Whatever happens nationally, the work we do here and the work we do together can take us through just about anything.


Third, we learn from Oregon to govern health care at the community level and pull this together into a system.

By learning from Maryland, we move our big institutions into global budgets and common pricing. By learning from Hawaii, we reorient primary care towards social determinants.

Now, we connect community directly to the health care system through a community governance model, and tie the work from Maryland and Hawaii together.

Oregon’s Coordinated Care Organization (CCO) transformation project is the state’s effort to realign the delivery system to better allocate scarce public dollars to improved health outcomes. Practically across the board, the model has had success.

It’s brought transparency to outcomes and process via public reporting of metrics. This has elevated the level of accountability across the system. The model commits to a 3.4% cost trend in Medicaid – a full two points off the previous trend – which it has been able to meet.

But, for our purposes, the key element in the CCO model to learn from and employ is the governance model.

All Medicaid funds pass from the state to the CCO in a fixed global budget model, with adjustments on a per capita basis. The CCO is something like an MCO but with community governance and oversight. There’s more to it, but if you’re unfamiliar with the model, you can think of it this way.

There is generally one CCO per region. On the governing board of the CCO you have primary care, hospitals and at least one health plan. You also have mental health providers, and social service providers like housing entities. The governing structure also includes county commissioners and the chair of a consumer-centered community advisory group.

In other words, you have all of the community health care stakeholders at the table to govern the flow of funds throughout the system.

Because of the transparency tools, each of the different silos are able to have conversations with one another about costs and comparative outcomes, regardless of their sophistication about funds flow, FMAP or encounter data.

In a given region, there is only one risk-bearing entity at the table – the CCO – so any investments in community health and social determinants will be captured by the risk bearing entity in the years down the road. There are certainly models of sub-delegated risk within the CCO, but the CCO umbrella covers them all in a given region.

For example, the CCO could have multiple health plans within the CCO, and sometimes does in Oregon. It can have multiple hospitals too, either on the board or as network providers, and almost always does there.

So, imagine a board meeting where everyone is looking at the global budget for the year. Because of the Maryland model the board is set to allocate a fixed 55% of the budget to hospitals in a global model. Because of the Hawaii model, the governing structure is set to allocate 20% of the global budget to primary care.

It’s here where the magic happens. This is where the mutual accountability within the system has transformational impacts on performance, quality and efficiency.

Imagine the board says that there needs to be an increase of investment to primary care – something everyone agrees with – to better meet community need.

In a fixed global budget model at the regional level, where no additional money is coming from the state, where cost shift has ended due to aligned rates like Maryland, the stakeholders have to agree amongst themselves about how best to allocate fixed resources.

Here’s how that board conversation might play out.

Primary care: We think we need to significantly improve primary care. We’d like a 10% increase in our budget, moving the primary care capitation from 20% of the total to 22%. That is a massive investment to us, and really a quite small cost to the system overall. With those funds, we can make meaningful investments in mental and community health, and address social determinants for downstream savings.

Board:  Yes, yes… Good idea. But where will the money come from? Hospitals, you have the largest portion of our budget at 55%, what would it take for you to contribute 2% from your global budget to primary care?

Hospitals: Well, we certainly agree with the idea of supporting primary care and social determinants. But, those cost savings may take years to take shape and we need a sustainable budget this year. So, we’ll give you 2%, a relatively small percentage of our total budget at about 4% of our total funds.

But, in exchange, you primary care folks need to make sure you keep diabetics from collapsing and showing up in our ER. You need to make sure folks with chronic mental health needs don’t fall into crisis and they also stay out of our ERs. We can find real savings and improve both our care and our P&L if you hold up your end of the bargain on this.

Primary care: Excellent. We’ll contribute a portion of that 2% to our mental health partners in the community, including crisis services, and we’ll make it happen.

By moving the conversation about money from one that has each silo asking for more to one where each silo is working together, and doing so within various models of capitation, the community can re-align its local system to better meet the needs of its community.

Moreover, while this starts with Medicaid funds, it shouldn’t stop there. With the state as an active partner, it can roll in public employees and teachers. Those reimbursements (public employees and Medicaid) will now be the same, given the model outlined above, and their addition will add scale.

Commercial plans should be at the table as well in the governance model, as should employers. The extent to which they participate in the governance is the extent to which they can share the costs and benefits of the coordinated model.

I’ve left Medicare out of this discussion. But, Medicare is ripe to be added, too, as Congress faces similar cost and quality concerns as does any state Medicaid agency.

Former Oregon Governor John Kitzhaber spoke at our 2020 Washington State of Reform Health Policy Conference in Seattle and connected the dots between the increasing role of public dollars and the new reality facing health care.

“The path to a more equitable and sustainable health care system runs through that part of the system that is financed with public resources. It involves a market approach that consolidates public sector purchasing power.

Now I know that most providers don’t believe that public reimbursement covers their cost. And that’s certainly true if you don’t make any changes to your business model or cost structure. But I would suggest that’s a very perilous assumption given what’s going on around us. which include more aggressive efforts by large self-insured employers to shield themselves from the cost shift and this relentless increase in public sector reimbursement as a share of the payer mix resulting from the increasing age of the population.

Constraints on public spending on health care are coming. They are inevitable. So the smart play is to build that into our long term strategy rather than pretend it doesn’t exist.”




These are tools that are already employed in other states. If a community can build a capitation model for providers, governed by community stakeholders with transparency and mutual accountability, it will address the fundamental paradox laid bare through this COVID experience.

It will provide resiliency and sustainability to the health system and to the community which it is meant to serve.