In professional sports, a salary cap is established primarily as a method of keeping overall costs down and to ensure all teams are competitive. It limits the amount of money that a team can spend on player salaries by determining a maximum amount for the entire roster. According to a recent study by the consulting firm Oliver Wyman, more than half the U.S. population (52%) lives in primary care service areas served by emerging care delivery models known as “accountable care organizations” or ACOs, which reward doctors and hospitals for working together to improve quality and controlling costs. The unsustainable growth of health costs have forced the U.S. to reconsider how healthcare is delivered and with the proliferation of ACOs focused managing population health we may be looking at the healthcare industry’s latest version of a salary cap.
Each of the four major professional sports (MLB, NBA, NFL, & NHL) has a unique way of handling how player salaries are managed and the amount of money its teams can spend. These strategies span from a no cap system with luxury taxes, to a fully capped system with monetary penalties.
Generally speaking, teams must adhere to a predetermined amount of money to spend on all of its players. This amount is calculated using a complicated mathematical equation involving how much money the league made in the previous year, ticket sale profits, merchandise sales, and television contracts all of which is divided by how many teams are in each league (subject to variation depending on the sport). Within this framework, it is the role of each team to acquire quality players that produce success on the field, court or ice and creates an accountability for how well that money is spent.Enforcing a limit on how much teams can spend on their players' salaries has been around since the Great Depression when in the early days of the NHL, the league was under financial pressure established its salary cap at $62,500 per team, and $7,000 per player. Last year, the NHL cap limit was at $60M per team. Ultimately, the salary cap is a mechanism that provides team owners with a safeguard to maintain the league's profitability by ensuring that player salaries don’t spiral out of control. If salaries, which are “costs” to the owners, grow faster than revenue, the individual teams and eventually entire leagues would quickly lose its financial viability……which brings us to healthcare.
Total health care spending in the U.S. is expected to reach $4.8 trillion in 2021, up from $2.6 trillion in 2010 and a mere $75 billion in 1970. To put it in context, this means that health care spending will account for nearly 20 percent of gross domestic product (GDP), or one-fifth of the U.S. economy by 2021. With costs escalating at this rate, it’s easy to see the challenge to achieving financial viability that hospitals and health systems face. In fact, the American Hospital Association (AHA) showed that one in four hospitals operate in the red and nearly 30% percent of hospitals had negative operating margins according to a 2011 report.While estimates vary, wasteful spending likely accounts for between one-third and one-half of all U.S. health care spending. PricewaterhouseCoopers calculates that up to $1.2 trillion, or half of all health care spending, is the result of waste. An Institute of Medicine (IOM) report estimated unnecessary health spending totaled $750 billion in 2009 alone.
Compounding these inefficiencies going forward, the Affordable Care Act (ACA) or “Obamacare” will extend health insurance to an additional 32 million people at a time when the aging baby boomer population is increasing the need for chronic care management. As part of the ACA, a number of specific demonstrations are being conducted by the CMS Innovation Center to develop new payment and service delivery models such as ACOs and Shared Saving Programs. The traditional model of healthcare delivery is not structured financially to incentivize efficiency, or practically to care for this growing and changing population. In these new models, the ACO assumes some financial risk and responsibility for the care of a defined population with the aggregate results across all patients being the metrics that matter.While the financial risk implications will differ based the type of model (i.e. Pioneer ACO Model, Advance Payment ACO Model, or some other Shared Savings program), much like professional sports each has its own unique way of calculating that risk that involves a complicated mathematical equation. Today, in its most generic form, most follow a “shared savings and losses” model, under which they will share in any savings or losses that are achieved when compared against a benchmark or predetermined amount for a specific set of beneficiaries. Eventually though, a population-based payment or per-beneficiary per month payment amount is intended to replace a significant portion of an ACO’s fee-for-service (FFS) payments thus creating its own version of a salary cap.
Professional sports are “copycat” leagues and once one team has been able to demonstrate sustainable success others will follow. Healthcare is no different however we often refer that as “following best practice”. Providers and payors alike are watching closely to see if these new models can evolve into best practice and help to curb the rising costs of care delivery. The industry is approaching a tipping point in which greater risk and responsibility will be shifted onto the providers. In order to achieve success in the future state, it will be critical for organizations to have the right delivery model to effectively manage their “salary cap”.