A Conversation With Thomas A. Scully: Managing the Transition From Hospital to Nursing Home

But not just nursing homes. The former CMS chief wants to create efficiencies in all post-acute care settings, and looks to health plans as customers.

As administrator of the Centers for Medicare & Medicaid Services from 2001 to 2004, Thomas A. Scully oversaw a long list of reforms. He led charges to change the name of the agency, overhaul Medicare Advantage, launch Medicare Part D, and introduce a series of quality reporting requirements for hospitals, nursing homes, home health agencies and dialysis centers.

He didn’t, however, create a bundled payment system for post-acute care — a move he would now like to see.

Known for his transitions between government and the private sector, Scully today sees managing the money spent on post-acute care as a huge business opportunity. He has helped found a company that promotes a model in which third-party, PBM-like companies would manage a patient’s move from the hospital to a nursing home or other post-acute setting.

CMS launched pilot projects on bundled payments for post-acute care in January, and Scully’s NaviHealth is participating. But CMS could have done a better job of structuring the payments, he says, and he predicts that the road to change may be long. Convincing health plans may be easier for now, he believes. “There is no bureaucracy involved in going to a health plan and saying, ‘Hey, we guarantee we are going to lower your post-acute care costs by 2%, and we think we’ll lower them by 15%, with better outcomes,’” he says.

Scully is chairman of NaviHealth, which he founded in 2011; senior counsel at the law firm Alston & Bird; and a general partner at Welsh Carson Anderson & Stowe, the private equity company that backed NaviHealth. In addition to running CMS for George W. Bush’s administration, Scully served as deputy assistant to George H. W. Bush and as an associate director of the Office of Management and Budget during that administration. Scully worked for five years with Slade Gorton, a Republican senator from Washington.

He also has served as president and CEO of the Federation of American Hospitals, was a partner at Patton Boggs, and worked with the law firm Akin Gump Strauss Hauer & Feld. Scully received his bachelor’s degree from the University of Virginia and his law degree from Catholic University of America. He spoke recently with Managed Care contributing editor MargaretAnn Cross.

Managed Care: The New York Times Magazine ran a pretty comprehensive article about you and NaviHealth in October (“The President Wants You to Get Rich on Obamacare,” Oct. 31, 2013). What was the response?

Thomas A. Scully: You have heart failure, obviously, when the New York Times calls, but it turned out OK. The reporter was very thorough and fair. The reaction has been positive.

MC: You explained that as you explored business openings created by health care reform, the post-acute care market stood out to you as the biggest opportunity.

CMS is going to have to go to a bundled payment for post-acute care, much as it did for hospitals with DRGs.

Scully: The post-acute world is very understructured and very undermanaged. The focus of managed care plans has been much more on the pre-acute and acute sides than on the post-acute side. Plans are trying to create incentives that lower hospitalizations and the overall net cost of care. When you talk about post-acute care, you get a blank stare. Some plans have done a very good job, but most of them acknowledge that it’s not a big area for them. If somebody comes out of the hospital after a stroke, they can go to rehab or a nursing home or home health. There’s no incentive to look at the overall quality of care or the cost. Inevitably CMS is going to have to go to a bundled payment for post-acute care, much as it did for hospitals with DRGs. That’s what’s coming.

MC: And that’s why you started the company?

Scully: Yes. But it’s going to take CMS longer than I had hoped to get there. It’s going to take three or four or maybe five years as opposed to what I thought when I got started, which was two. So we have focused on developing the product and selling it to managed care plans as a subcapitation, post-acute care product where we can say we will lower your costs for managed care.

MC: What was the initial concept?

Scully: I thought that if the time had come for CMS to do a post-acute bundled payment for services, let’s try to get ahead of that trend. I really started thinking about the opportunity. Seventy percent of the population in Medicare is still fee for service, and there are a lot of reasons for Medicare to operate a lot more efficiently than it does. That was the original idea, and I found this small IT company in Nashville that had a great tool to build it on. It was called SeniorMetrix, and had been doing the infrastructure for Kaiser’s post-acute management for years, and for Scripps Health and a couple of other small health plans, too. As I got into trying to build out SeniorMetrix into a broader company, I discovered that the reality was that it was going to take CMS years to restructure its payment system and go through all of the necessary demonstration programs and processes.

MC: So managed care plans became your first customers, rather than hospitals or Medicare?

Scully: We are doing a bunch of Medicare demonstrations with acute-care hospitals, but that is going to take a while to develop. We are working with hospitals, too, in the short term. But health plans don’t have to follow the rules that fee-for-service Medicare does; they can just become more efficient. Working through a fee-for-service model at CMS is much more difficult, unfortunately. So we are adjusting to reality.

MC: What do the bundled payments look like in the pilot projects?

Scully: We are involved in five demonstrations that started January 1. My frustration is that we spent a lot of time with CMS people when they were developing it, and they should have designed it a little differently. In the demonstration program, the hospital has to take the entire bundle — from the day the patient walks into the hospital to the day he gets out of post-acute care. That scares a lot of hospitals. They don’t want to do it. CMS should have broken out the post-acute part into a separate bundle. They did a bundled payment for nursing homes and home health agencies, but it doesn’t start until the patient gets to that setting. So if you are a home health agency or a nursing home, you can take all the risk once the person gets to you. But if a patient walks out of a hospital, determining from the get-go which is the most efficient place to go is step one. Should he be in home health, a nursing home, rehab? That initial decision drives a lot of behavior. CMS could have done the bundles differently, but we are doing everything we can to make them work. A more rational way to do it is to come up with a post-acute bundled payment that looks more like a Part D Medicare payment, where you have kind of a PBM function, a convener for risk for the post-acute side.

MC: Would you explain a little more?

Scully: The right thing to do is to come up with 55 or 60 post-acute DRGs, like on the inpatient side, and say, if a patient comes out of a hospital with the following diagnosis, then we are going to use the post-acute convener, like PBMs. The post-acute bundle should be just like what Medicare does for drugs. We give a third-party convener the money and say, “You manage this.” Years ago, I was the president of the Federation of American Hospitals, the for-profit hospital trade association. I knew from that point that while there are some exceptions, most hospitals do not manage post-acute care. They just don’t see managing nursing homes and home health as their core function. Some hospitals may want to do it, but most don’t. The missing ingredient is somebody who is basically a care manager to take the risk and manage this, to drive efficient services across the different settings — which are basically home health, nursing homes, and long-term acute care hospitals. The goal is to have the right patient in the right place to get the best outcomes.

MC: NaviHealth starts working with patients when they are in the hospital?

Scully: In our best models with managed care plans, we have a nurse practitioner or a nurse in the hospital talking to the patient on the second day of a hospitalization, saying, “Mrs. Jones, you’ve had a stroke, and here’s our plan for the next 60 days. You need to go to a rehab hospital for X number of days and you can go home after that, or you can go to a nursing home for Y days and get Y therapy.” We have a very detailed data-driven methodology that tells us based on the treatment histories of 800,000 prior clients where a patient should go and for how long.

MC: Are Medicare Advantage plans your biggest market?

Scully: Commercial plans have post-acute spending on nursing homes, but our business is heavily focused on Medicare Advantage because the senior population uses post-acute services so much more than the commercial population. They are the ones who are getting hip replacements and having strokes. It happens in commercial populations, but it’s a much smaller spend for the client.

MC: What is your pitch to managed care executives?

Scully: You are not as aware of what’s going on with your rehab hospitals, your nursing homes, your long-term-care hospitals, and your home-health utilization as you probably could be. For example, health plans may have 1,800 nursing home days per thousand per year in their Medicare population. Our long-term clients have 600 to 1,000 days per thousand. We have been working with Kaiser — as SeniorMetrix — for 12 years. I think we can go in and manage post-acute care better. Most nursing home patients who are on fee-for-service Medicare go to a nursing home for 20 days because that is what is covered in full. The same thing happens with managed care plans. But frequently a patient who has a minor stroke can be in a nursing home for 12 days and then go home, where they get better care and better outcomes and they are happier patients. So our pitch is: “Tell us what you are spending on your post-acute care and your Medicare managed care plan today, and we are very comfortable that we can come in and improve your star ratings, improve your performance, and raise your patient satisfaction. We’ll guarantee you that we’ll lower your costs by 2%, and if we save more, we’ll do a gain share and split it with you.” We believe that we can lower costs as much as 20%.

MC: That’s the agreement?

Scully: Every contract is different. When we take full risk, it would be with a small plan with 15,000 or 20,000 members. For a bigger plan, it’s usually some kind of hybrid risk share. So every model is different, but we always look at the percentage that we save. There’s generally not an upfront fee.

MC: The range of savings has been from 2% to 20%?

Scully: It depends on what you are measuring. If you look at Kaiser, we have helped reduce their nursing home utilization significantly over the past 12 years. One very large national health plan gave us a state a year ago. We really focused on nursing homes and mental health and lowered their spending by over 15%. Various plans have different levels of how much they are willing to give up the reins, but we have yet to find a plan where we couldn’t reduce spending by close to 10%.

MC: When you were at CMS, you encouraged people in the private sector to consider public service. Why?

Scully: I spent 16 years in the government, and I enjoyed every minute of it. I’m not sure how my family felt about it — the reimbursement’s not as good. But I loved my time at CMS, and I liked my time in the White House. I think it’s great that people do public service. But I also think that people in public service would like to work in the private sector. If you are regulating hospitals, it’s important to spend some time working in a hospital so you understand the impact of the regulations. It doesn’t mean that you are going to agree with them, but it’s important to understand the lives of the people you are regulating.

MC: How did having industry experience inform your perspective when you were at CMS?

Scully: I happened to like the Tenet guys, but I had a huge regulatory fight with Tenet when I was at CMS. I wasn’t easy on my former federation members; some of them are still mad at me about it. But the ones that are good actors, I treated fairly, and the ones who were not treating the public programs well, I didn’t go easy on. That’s the way it should be. When I ran the for-profit hospital association, hospital companies could go to Capitol Hill and say, “We’re starving, we’re doing terribly,” and then would fly to New York and tell investors how great things were — “so buy our bonds and stocks.” If people are underpaid, the government should understand and pay them more. If they are overpaid, they should also understand that and pay them less.

MC: You brought others from industry into CMS. Can you give us some examples?

Scully: I thought it was very important to get Wall Street information and CMS’s point of view and give it to the agency, so I hired a guy who was a Wall Street analyst. He stayed long after I was gone. He came in basically just to consolidate the Wall Street investor reports on the health care industry for the people at CMS. Whether they are nonprofit or for-profit, companies can’t mislead their bondholders or shareholders. They have to tell the truth. Consolidating that information so that regulators could tell whether a nursing home or a hospital or a health plan was underpaid or overpaid is important. Also, when I got there, nobody understood kidney dialysis very well. I had been on the board of a dialysis company, so I hired a guy from a dialysis company and it improved the understanding of the dialysis sector. It didn’t mean we were nice to them or mean to them, it just meant that we had a much better understanding of what they were doing.

MC: That sounds like something you are proud of. You were brought in as a reformer.

Measuring quality differences and paying people differently is a good thing.

Scully: I am very proud of it. I changed the name the first week I was there to CMS, the Centers for Medicare & Medicaid Services. The Health Care Financing Administration was perceived to be bureaucratic. I spent a lot of time coming up with patient satisfaction surveys and hospital quality measures. I used to say that the chairman of the surgery department at Harvard gets paid the same for surgery as the worst doctor in Boston. That’s not a rational setup, so measuring quality differences and paying people differently is a good thing. CMS is doing a lot more of that now, but we started that back in 2003. When I first got there, there was no such thing as the Hospital Consumer Assessment of Healthcare Providers and Systems, there were no patient satisfaction surveys. We standardized those, and they are now part of how providers get paid.

MC: What else are you proud of?

Scully: I am very proud of Medicare Advantage, which used to be called Medicare+Choice. When I got there in 2001, we had 3% of people in the Medicare risk program, and now we’ve got over 30%. A lot of that is because of the redesigning we did in 2003. The fundamental problem with fee-for-service Medicare is that it fixes prices. When every hospital gets paid the same, it just doesn’t work. So I was committed to trying to get people out of single-payer, fixed-price health care and into capitated health care. And I went back into the government in 2001 mainly to get a drug benefit passed. We spent a lot of time designing Medicare Part D and getting that passed. I am very proud of both of those.

MC: Why was the drug benefit so important to you?

Scully: Reagan passed the Medicare Catastrophic Coverage Act with a drug benefit in ’88, with a Democratic Congress. It was a bipartisan bill, and it was repealed before it started in the summer of ’89. When I was in the White House in 1989, my first job with President Bush was trying to keep that law from being repealed, and we failed. I always thought it was crazy to have an insurance benefit with no drug benefit, especially for low-income seniors, so I spent a lot of my time outside of the government thinking about that. I worked for Bush senior for many years. I didn’t really know President Bush 43, but when he won and came in, he asked me to run CMS. When I agreed to do that, I told him my primary goal was to design a drug benefit and get it through Congress. Unfinished business, I guess. A lot of people thought we’d never do that. They thought we weren’t serious about it. But seniors needed a drug benefit, especially poor seniors. Medicare Part D was a compromise. I personally would never have subsidized wealthy seniors, but to get the bill through, we had to do that.

MC: What do you wish you had done differently at CMS?

Scully: It would take forever to answer that question. But when I look back, there are some things that you spend a lot of time on, so you lose sight of other things. Post-acute bundles are a perfect example. If only I had thought about it at the time.

MC: Thank you.

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