WINNING IN ACCOUNTABLE CARE How Hospitals and Health Systems Can Survive and Thrive Under Payment and Delivery Reform

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1 WINNING IN ACCOUNTABLE CARE How Hospitals and Health Systems Can Survive and Thrive Under Payment and Delivery Reform Harold D. Miller President and CEO Center for Healthcare Quality and Payment Reform

2 Healthcare Spending Is the Biggest Driver of Federal Deficits 46% of Spending Growth is Healthcare Source: CBO Budget Outlook August

3 Federal Cost Containment Policy Choices Cut Services to Seniors? Cut Fees to Providers? MEDICARE SPENDING SERVICES = TO SENIORS X FEES TO PROVIDERS 3

4 If It s A Choice of Rationing or Rate Cuts, Which is More Likely? Cut Services to Seniors? Cut Fees to Providers? MEDICARE SPENDING SERVICES = TO SENIORS X FEES TO PROVIDERS Guess which one they ll try to reduce? 4

5 Medicare Payments to Physicians Below Inflation for Over a Decade Physician Practice Costs 23% Effective Reduction Physician Payment Increases If SGR Cut Is Made 5

6 If Congress Wants to Increase Doc Pay, Where Will They Cut? Hospitals Inflation Physicians 6

7 Past Solutions: Cost-Shifting Gov t Cuts to Private Payers Hospital Payment-to-Cost Ratios for Private Payers, Medicare, and Medicaid, % 130% 120% 110% 100% 90% 80% 70% Private Payer Medicare Medicaid Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2008, for community hospitals. 7

8 Percentage of GDP 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Cost-Shifting to Private Insurance Makes Businesses Uncompetitive 1.5% 2.8% 6.6% Public and Private Health Expenditures as a Percentage of GDP, U.S. and Selected Countries, % 1.3% 1.5% 2.5% 2.1% 1.7% 3.1% 7.2% 7.2% 6.5% 7.0% 7.7% 7.3% 2.4% 2.5% 8.1% 8.1% 4.4% 6.3% 2.5% 8.7% 8.5% 7.4% Private Healthcare Expenditures in U.S are Highest in World Private Expenditure Public Expenditure Source: Organisation for Economic Co-operation and Development (2010), "OECD Health Data", OECD Health Statistics (database) Notes: Data from Australia and Japan are 2007 data. Figures for Canada, Norway and Switzerland, are OECD estimates. Numbers are PPP adjusted. 8

9 Businesses Are Now Cost-Shifting to Employees $14,000 $12,000 $10,000 $8,000 Average Annual Contributions to Health Insurance Premiums Employer Contribution Worker Contribution Employer Contribution More Than Doubled $9,773 $6,000 $4,000 $2,000 $0 $1,878 $4,150 $318 $899 Single Coverage 1999 Single Coverage 2010 Employee Contribution Nearly Tripled $4,247 $1,543 Family Coverage 1999 $3,997 Family Coverage

10 What We Need: A Way to Reduce Costs Without Rationing or Fee Cuts 10

11 What We Need: A Way to Reduce Costs Without Rationing or Fee Cuts It Can t Be Done from Washington; It Has to Happen at the Local Level, Where Health Care is Delivered 11

12 Reducing Costs Without Rationing: Can It Be Done? 12

13 Reducing Costs Without Rationing: Prevention and Wellness Healthy Consumer Continued Health Health Condition 13

14 Reducing Costs Without Rationing: Avoiding Hospitalizations Healthy Consumer Continued Health Health Condition No Hospitalization Acute Care Episode 14

15 Reducing Costs Without Rationing: Efficient, Successful Treatment Healthy Consumer Continued Health Health Condition No Hospitalization Acute Care Episode Efficient Successful Outcome High-Cost Successful Outcome Complications, Infections, Readmissions 15

16 Healthy Consumer Reducing Costs Without Rationing: Is Also Quality Improvement! Continued Health Health Condition Better Outcomes/Higher Quality No Hospitalization Acute Care Episode Efficient Successful Outcome High-Cost Successful Outcome Complications, Infections, Readmissions 16

17 How Big Are the Opportunities? 17

18 5-17% of Hospital Admissions Are Potentially Preventable Source: AHRQ HCUP 18

19 Millions of Preventable Events Harm Patients and Increase Costs Medical Error # Errors (2008) Cost Per Error Total U.S. Cost Pressure Ulcers 374,964 $10,288 $3,857,629,632 Postoperative Infection 252,695 $14,548 $3,676,000,000 Complications of Implanted Device 60,380 $18,771 $1,133,392,980 Infection Following Injection 8,855 $78,083 $691,424,965 Pneumothorax 25,559 $24,132 $616,789,788 Central Venous Catheter Infection 7,062 $83,365 $588,723,630 Others 773,808 $11,640 $9,007,039,005 TOTAL 1,503,323 $13,019 $19,571,000,000 3 Adverse Events Every Minute Source: The Economic Measurement of Medical Errors, Milliman and the Society of Actuaries,

20 Many Ways to Reduce Tests & Services Without Harming Patients 20

21 Instead of Starting With How to Limit Care for Patients Contributors to Healthcare Costs How Do We Limit: New Technologies Higher-Cost Drugs Potentially Life-Saving Treatment 21

22 We Should Focus First on How to Improve Patient Care How Do We Help: Patients Stay Well Avoid Preventable Emergencies and Hospitalizations Eliminate Errors and Safety Problems Reduce Costs of Treatment Reduce Complications and Readmissions Contributors to Healthcare Costs How Do We Limit: New Technologies Higher-Cost Drugs Potentially Life-Saving Treatment 22

23 How Big Are the Opportunities in Florida? 23

24 Florida Has Second-Highest Medicare Spending in the U.S. Florida 24

25 Florida Has 13 th -Highest Rate of Hospitalizations for Medicare Florida 25

26 Florida Has Above-Average Rates of Hospital Readmissions Florida 26

27 Reducing Costs Without Rationing: Reduces Provider Revenues in FFS Healthy Consumer Continued Health Health Condition Fewer Patients Fewer Procedures & Admissions Less Revenue Per Procedure No Hospitalization Acute Care Episode Efficient Successful Outcome High-Cost Successful Outcome Complications, Infections, Readmissions 27

28 Most Payment Reforms Don t Fix The Problems with FFS P4P PMPM Shared Savings Shared Savings FFS FFS FFS FFS 28

29 Fortunately, There Are Good Alternatives to Fee for Service BUILDING BLOCKS Bundled Payment HOW IT WORKS Single payment to 2+ providers who are now paid separately (e.g., hospital+physician) 29

30 Fortunately, There Are Good Alternatives to Fee for Service BUILDING BLOCKS Bundled Payment Warrantied Payment HOW IT WORKS Single payment to 2+ providers who are now paid separately (e.g., hospital+physician) Higher payment for quality care, no extra payment for correcting preventable errors and complications 30

31 Fortunately, There Are Good Alternatives to Fee for Service BUILDING BLOCKS Bundled Payment Warrantied Payment Condition- Based Payment HOW IT WORKS Single payment to 2+ providers who are now paid separately (e.g., hospital+physician) Higher payment for quality care, no extra payment for correcting preventable errors and complications Payment based on the patient s condition, rather than on the procedure used 31

32 Who Says Congress and the President Can t Agree? Sustainable Growth Rate Repeal and Reform Proposal Providers can choose to participate in an Alternative Payment Model We envision a system where providers have the flexibility to participate in the payment and delivery model that best fits their practice. The overarching goal is to reward providers for delivering high quality, efficient health care House Energy & Commerce Committee and House Committee on Ways and Means Request for Input from Stakeholders on Sustainable Growth Rate Reform Our utlimate goal is for Medicare to pay physicians in a way that results in high quality, affordable care for seniors. We support identifying Alternative Models Senate Finance Committee President s Budget Proposal to Encourage Adoption of New Physician Payment Models The Administration supports the continued development of scalable accountable payment models [to] encourage care coordination, reward practitioners who provide high-quality efficient care, and hold practitioners accountable President s Budget for Fiscal Year 2014, p.37 32

33 Alternative Payment Models Allow Win-Win-Win Approaches BUILDING BLOCKS HOW IT WORKS HOW PHYSICIANS AND HOSPITALS CAN BENEFIT HOW PAYERS CAN BENEFIT Bundled Payment Single payment to 2+ providers who are now paid separately (e.g., hospital+physician) Higher payment for physicians if they reduce costs paid by hospitals Physician and hospital offer a lower total price to Medicare or health plan than today Warrantied Payment Higher payment for quality care, no extra payment for correcting preventable errors and complications Higher payment for physicians and hospitals with low rates of infections and complications Medicare or health plan no longer pays more for high rates of infections or complications Condition- Based Payment Payment based on the patient s condition, rather than on the procedure used No loss of payment for physicians and hospitals using fewer tests and procedures Medicare or health plan no longer pays more for unnecessary procedures 33

34 Example: Reducing Cost of Joint Replacement COST TYPE TODAY Physician Fee $ 1,500 Device Cost $ 7,500 Other Hospital Cost $ 6,750 Hosp. Margin (5%) $ 750 Total Hospital Pmt $15,000 Total Cost to Payer $16,500 34

35 What If You Could Get Medical Devices At a Lower Cost? COST TYPE TODAY CHANGE Physician Fee $ 1,500 Device Cost $ 7,500-33% ($2,500) Other Hospital Cost $ 6,750 Hosp. Margin (5%) $ 750 Total Hospital Pmt $15,000 Total Cost to Payer $16,500 35

36 Today: All Savings Goes to the Hospital, No Reward for Physician COST TYPE TODAY CHANGE SPLIT Physician Fee $ 1, % Device Cost $ 7,500-33% ($2,500) Other Hospital Cost $ 6,750 Hosp. Margin $ % ($2500) Total Hospital Pmt $15,000 Total Cost to Payer $16,500-0% 36

37 Bundling Eliminates Boundary Between Hospital & Physician Pmt COST TYPE TODAY CHANGE SPLIT Physician Fee $ 1,500 Device Cost $ 7,500 Other Hospital Cost $ 6,750 Hosp. Margin $ 750 Total Cost to Payer $16,500 37

38 Bundling Allows Savings Split Among Docs, Hospitals, Payers COST TYPE TODAY CHANGE SPLIT Physician Fee $ 1, % ($750) Device Cost $ 7,500-33% ($2,500) Other Hospital Cost $ 6,750 Hosp. Margin $ % ($750) Total Cost to Payer $16,500-6% ($1000) 38

39 So Joint Replacement is Cheaper But More Profitable COST TYPE TODAY CHANGE SPLIT NEW Physician Fee $ 1, % ($750) $ 2,250 Device Cost $ 7,500-33% ($2,500) $ 5,000 Other Hospital Cost $ 6,750 $ 6,750 Hosp. Margin $ % ($750) $ 1,500 Total Cost to Payer $16,500-6% ($1000) $15,500 39

40 $8,000 Variation in Avg Costs of Joint Implants Across CA Hospitals Source: Implantable Medical Devices for Hip Replacement Surgery: Economic Implications for California Hospitals, Emma L. Dolan and James C. Robinson, Berkeley Center for Health Technology, May

41 Not Just Devices: Other Savings Opportunities From Bundling Better scheduling of scarce resources (e.g., surgery suites) to reduce both underutilization & overtime Coordination among multiple physicians and departments to avoid duplication and conflicts in scheduling Standardization of equipment and supplies to facilitate bulk purchasing Less wastage of expensive supplies Reduced length of stay Etc. 41

42 Medicare Acute Care Episode (ACE) Demonstration Bundled Medicare Part A (hospital) and Part B (physician) payments together for cardiac and orthopedic procedures Total Medicare payment was lower than what standard Medicare DRG + physician fee would have been Payment was made to a Physician-Hospital Organization, which then divided the payment between hospital and surgeon Surgeon could receive up to 25% above Medicare fee Patient cost-sharing reduced by up to 50% of Medicare s savings CMS waived Stark rules for gainsharing Implemented in 2009/2010 in five hospital systems based on competitive bids: Hillcrest Medical Center, Oklahoma (orthopedic procedures) Baptist Health System, Texas (cardiac + orthopedic procedures) Oklahoma Heart Hospital, Oklahoma (cardiac procedures) Lovelace Health System, New Mexico (cardiac + orthopedic procedures) Exempla Saint Joseph Hospital, Colorado (cardiac procedures) No formal evaluation results published, but participants have informally reported significant savings 42

43 Alternative Payment Models Allow Win-Win-Win Approaches BUILDING BLOCKS HOW IT WORKS HOW PHYSICIANS AND HOSPITALS CAN BENEFIT HOW PAYERS CAN BENEFIT Bundled Payment Single payment to 2+ providers who are now paid separately (e.g., hospital+physician) Higher payment for physicians if they reduce costs paid by hospitals Physician and hospital offer a lower total price to Medicare or health plan than today Warrantied Payment Higher payment for quality care, no extra payment for correcting preventable errors and complications Higher payment for physicians and hospitals with low rates of infections and complications Medicare or health plan no longer pays more for high rates of infections or complications Condition- Based Payment Payment based on the patient s condition, rather than on the procedure used No loss of payment for physicians and hospitals using fewer tests and procedures Medicare or health plan no longer pays more for unnecessary procedures 43

44 Yes, a Health Care Provider Can Offer a Warranty Geisinger Health System ProvenCare SM A single payment for an ENTIRE 90 day period including: ALL related pre-admission care ALL inpatient physician and hospital services ALL related post-acute care ALL care for any related complications or readmissions Types of conditions/treatments currently offered: Cardiac Bypass Surgery Cardiac Stents Cataract Surgery Total Hip Replacement Bariatric Surgery Perinatal Care Low Back Pain Treatment of Chronic Kidney Disease 44

45 Payment + Process Improvement = Better Outcomes, Lower Costs 45

46 Warranties Can Be Offered By Individual Docs & Small Hospitals In 1987, an orthopedic surgeon in Lansing, Michigan and the local hospital, Ingham Medical Center, offered: a fixed total price for surgical services for shoulder and knee problems a warranty for any subsequent services needed for a two-year period, including repeat visits, imaging, rehospitalization and additional surgery Results: Health insurer paid 40% less than otherwise Surgeon received over 80% more in payment than otherwise Hospital received 13% more than otherwise, despite fewer rehospitalizations Method: Reducing unnecessary auxiliary services such as radiography and physical therapy Reducing the length of stay in the hospital Reducing complications and readmissions. Johnson LL, Becker RL. An alternative health-care reimbursement system application of arthroscopy and financial warranty: results of a two-year pilot study. Arthroscopy Aug;10(4):

47 A Warranty is Not an Outcome Guarantee Offering a warranty on care does not imply that you are guaranteeing a cure or a good outcome It merely means that you are agreeing to correct avoidable problems at no (additional) charge Most warranties are limited warranties, in the sense that they agree to pay to correct some problems, but not all 47

48 Prices for Warrantied Care Will Likely Be Higher 48

49 Prices for Warrantied Care Will Likely Be Higher Q: Why should we pay more to get good-quality care?? A: In most industries, warrantied products cost more, but they re desirable because TOTAL spending on the product (repairs & replacement) is lower than without the warranty 49

50 Cost of Success Example: $5,000 Procedure, Added Cost of Readmit 20% Readmission Rate Rate of Readmits $5,000 $5,000 20% 50

51 Cost of Success Average Payment for Procedure is Higher than the Official Price Added Cost of Readmit Rate of Readmits Average Total Cost $5,000 $5,000 20% $6,000 51

52 Cost of Success Average Payment for Procedure is Higher than the Official Price Added Cost of Readmit Rate of Readmits Average Total Cost $5,000 $5,000 20% $6,000 So how much should you charge to offer this same procedure with a warranty? 52

53 Cost of Success Starting Point for Warranty Price: Actual Current Average Payment Added Cost of Readmit Rate of Readmits Average Total Cost Price Charged Net Margin $5,000 $5,000 20% $6,000 $6,000 $ 0 53

54 Cost of Success Limited Warranty Gives Financial Incentive to Improve Quality Added Cost of Readmit Rate of Readmits Average Total Cost Price Charged Net Margin $5,000 $5,000 20% $6,000 $6,000 $ 0 $5,000 $5,000 15% $5,750 $6,000 $250 Reducing Adverse Events...Reduces Costs... Improves The Bottom Line 54

55 Cost of Success Higher-Quality Provider Can Charge Less, Attract Patients Added Cost of Readmit Rate of Readmits Average Total Cost Price Charged Net Margin $5,000 $5,000 20% $6,000 $6,000 $ 0 $5,000 $5,000 15% $5,750 $6,000 $250 $5,000 $5,000 15% $5,750 $5,900 $ 150 Enables Lower Prices Still With Better Margin 55

56 Cost of Success A Virtuous Cycle of Quality Improvement & Cost Reduction Added Cost of Readmit Rate of Readmits Average Total Cost Price Charged Net Margin $5,000 $5,000 20% $6,000 $6,000 $ 0 $5,000 $5,000 15% $5,750 $6,000 $250 $5,000 $5,000 15% $5,750 $5,900 $150 $5,000 $5,000 10% $5,500 $5,900 $400 Reducing Adverse Events...Reduces Costs... Improves The Bottom Line 56

57 Cost of Success Win-Win-Win Through Appropriate Payment & Pricing Added Cost of Readmit Rate of Readmits Average Total Cost Price Charged Net Margin $5,000 $5,000 20% $6,000 $6,000 $ 0 $5,000 $5,000 15% $5,750 $6,000 $250 $5,000 $5,000 15% $5,750 $5,900 $150 $5,000 $5,000 10% $5,500 $5,900 $400 $5,000 $5,000 10% $5,500 $5,700 $200 $5,000 $5,000 5% $5,250 $5,700 $450 Quality is Better......Cost is Lower......Providers More Profitable 57

58 Cost of Success In Contrast, Non-Payment Alone Creates Financial Losses Added Cost of Readmit Rate of Readmits Average Total Cost Payment Net Margin $5,000 $5,000 20% $6,000 $6,000 $ 0 $5,000 $5,000 20% $6,000 $5,000 -$1,000 $5,000 $5,000 10% $5,500 $5,000 -$ 500 $5,000 $5,000 0% $5,000 $5,000 $0 Non- Payment for Readmits Causes Losses While Improving 58

59 Warranty Pricing Should Capture Costs of New Programs 59

60 Cost of Success Warranty Pricing Should Capture Costs of New Programs Added Cost of Readmit Rate of Readmits Average Total Cost Warranty Price Net Margin $5,000 $5,000 20% $6,000 $6,000 $0 60

61 Cost of Success Provider Offering Warranty Must Focus on Cost & Performance Added Cost of Readmit Rate of Readmits Average Total Cost Warranty Price Net Margin $5,000 $5,000 20% $6,000 $6,000 $0 $5,200 $5,200 16% $6,032 $6,000 -$32 Higher Cost to Reduce Readmits Even If Somewhat Successful Means Losses 61

62 Cost of Success Option 1: Improve Performance Enough to Justify Higher Costs Added Cost of Readmit Rate of Readmits Average Total Cost Warranty Price Net Margin $5,000 $5,000 20% $6,000 $6,000 $0 $5,200 $5,200 16% $6,032 $6,000 -$32 $5,200 $5,200 10% $5,720 $6,000 +$280 Better Results Means Better Margins 62

63 Cost of Success Option 2: Reduce Costs of Added Cost of Readmit Interventions Rate of Readmits Average Total Cost Warranty Price Net Margin $5,000 $5,000 20% $6,000 $6,000 $0 $5,200 $5,200 16% $6,032 $6,000 -$32 $5,200 $5,200 10% $5,720 $6,000 +$280 $5,050 $5,050 16% $5,858 $6,000 +$ 142 Lower Program Costs Means Better Margins 63

64 Cost of Success Added Cost of Readmit Then Offer the Payer Some Savings Rate of Readmits Average Total Cost Warranty Price Net Margin $5,000 $5,000 20% $6,000 $6,000 $0 $5,200 $5,200 16% $6,032 $6,000 -$32 $5,200 $5,200 10% $5,720 $5,900 +$180 $5,050 $5,050 16% $5,858 $5,900 +$ 42 Lower Price to Payer 64

65 A Critical Element is Shared, Trusted Data Physicians and Hospitals need to know the current utilization and costs for their patients to determine whether a bundled/warrantied payment amount will cover the costs of delivering effective care to the patients Purchasers and Payers need to know the current utilization and costs for their employees/members to determine whether the bundled/warrantied payment amount is a better deal than they have today Both sets of data have to match in order for providers and payers to agree on the new approach! 65

66 Many Variations Possible in Combining Bundles and Warranties 66

67 PATIENT Starting with a Hospital Procedure Procedure Hospital DRG Physician Fee 67

68 PATIENT Simplest Bundle, Already Working SINGLE PMT in CMS Demonstrations Procedure Hospital DRG Physician Fee 68

69 PATIENT Bundling All Physicians Promotes SINGLE PMT More Care Coordination Procedure Hospital DRG Lead Doc. Fee Consultant Fee Consultant Fee 69

70 PATIENT Not All Care Providers Are Inside the Hospital Walls SINGLE PMT Procedure Hospital DRG Lead Doc. Fee Consultant Fee Consultant Fee Post-Acute Rehab Home Health PCP Specialist PROBLEM: No incentive to reduce unnecessary use of expensive post-acute care 70

71 Medicare Payments for Inpatient Admissions Source: RTI Inc, Post- Acute Care Episodes: Expande d Analytic File, June

72 Medicare Payments for Inpatient + Post-Discharge Svcs Source: RTI Inc, Post- Acute Care Episodes: Expande d Analytic File, June

73 Post-Discharge Costs 100% of Inpatient Spending Source: RTI Inc, Post- Acute Care Episodes: Expande d Analytic File, June 2011 PAC= 98% of Hosp Stay PAC= 175% of Hosp Stay PAC= 259% of Hosp Stay PAC= 214% of Hosp Stay PAC= 173% of Hosp Stay 73

74 Florida Has Highest Post-Acute Care Spending of Any State Florida 74

75 PATIENT Bundling Inpatient and Post-Acute Care Promotes Coordination SINGLE PAYMENT Procedure Hospital DRG Lead Doc. Fee Consultant Fee Consultant Fee Post-Acute Rehab Home Health PCP Specialist 75

76 PATIENT Does the Bundle Stop When Things Go Bad in the Hospital? SINGLE PAYMENT Procedure Hospital DRG Complication DRG/Outlier Post-Acute Rehab Lead Doc. Fee Lead Doc. Fee Home Health Consultant Fee Consultant Fee PCP Consultant Fee Consultant Fee Specialist PROBLEM: Hospital and physicians are paid more to treat expensive infections and complications 76

77 PATIENT Including a Warranty for Complications in the Bundle SINGLE PAYMENT Procedure Hospital DRG Complication DRG/Outlier Post-Acute Rehab Lead Doc. Fee Lead Doc. Fee Home Health Consultant Fee Consultant Fee PCP Consultant Fee Consultant Fee Specialist 77

78 PATIENT What About Complications That Occur After Discharge? SINGLE PAYMENT Procedure Hospital DRG Complication DRG/Outlier Post-Acute Rehab Readmission Hospital DRG Lead Doc. Fee Lead Doc. Fee Home Health Lead Doc. Fee Consultant Fee Consultant Fee PCP Consultant Fee Consultant Fee Consultant Fee Specialist Consultant Fee PROBLEM: Hospitals and physicians make more money when patients are readmitted 78

79 PATIENT Adding a Warranty for Post-Discharge Events SINGLE PAYMENT Procedure Hospital DRG Complication DRG/Outlier Post-Acute Rehab Readmission Hospital DRG Lead Doc. Fee Lead Doc. Fee Home Health Lead Doc. Fee Consultant Fee Consultant Fee PCP Consultant Fee Consultant Fee Consultant Fee Specialist Consultant Fee 79

80 PATIENT How Long Does the Warranty Last? SINGLE PAYMENT Procedure Hospital DRG Complication DRG/Outlier Post-Acute Rehab Readmission Hospital DRG Lead Doc. Fee Lead Doc. Fee Home Health Lead Doc. Fee Consultant Fee Consultant Fee PCP Consultant Fee Consultant Fee Consultant Fee Specialist Consultant Fee Days Post-Discharge

81 Newest CMS Bundling Demo Includes a Range of Opportunities Model 1 (Inpatient Gainsharing, No Warranty) Hospitals can share savings with physicians No actual change in the way Medicare payments are made Model 2 (Virtual Full Episode Bundle + Warranty) Budget for Hospital+Physician+Post-Acute+Readmissions Medicare pays bonus if actual cost < budget Providers repay Medicare if actual cost > budget Model 3 (Virtual Post-Acute Bundle + Warranty) Budget for Post-Acute Care+Physicians+Readmissions Bonuses/penalties paid based on actual cost vs. budget Model 4 (Prospective Inpatient Bundle + Warranty) Single Hospital + Physician payment for inpatient care & readmissions 81

82 Newest CMS Bundling Demo Includes a Range of Opportunities Model 1 (Inpatient Gainsharing, No Warranty) Hospitals can share savings with physicians No actual change in the way Medicare payments are made Model 2 (Virtual Full Episode Bundle + Warranty) Budget for Hospital+Physician+Post-Acute+Readmissions Medicare pays bonus if actual cost < budget Providers repay Medicare if actual cost > budget Model 3 (Virtual Post-Acute Bundle + Warranty) Budget for Post-Acute Care+Physicians+Readmissions Bonuses/penalties paid based on actual cost vs. budget Model 4 (Prospective Inpatient Bundle + Warranty) Single Hospital + Physician payment for inpatient care & readmissions 82

83 Florida Hospitals Are Participating in the CMS Bundled Pmt Demo Model 1 (Inpatient Gainsharing, No Warranty) None in Florida Model 2 (Virtual Full Episode Bundle + Warranty) St. Vincent Medical Center Memorial Regional Hospital Model 3 (Virtual Post-Acute Bundle + Warranty) St. Vincent Medical Center Chatsworth at Wellington Green Brooks Health System Boynton Health Care Center Lake Placid Health Care Center Model 4 (Prospective Inpatient Bundle + Warranty) Florida Hospital 83

84 Examples of Episode Payment in the Private Sector Blue Cross Blue Shield of North Carolina Knee and Hip Replacements Horizon Healthcare Services (New Jersey BCBS) Knee and Hip Replacements Plan to include CABG Integrated Healthcare Association (California) Knee and Hip Replacements Plan to include cardiac procedures, maternity care 84

85 PATIENT What If The Procedure Could Be Done Outside the Hospital? SINGLE PAYMENT Procedure Hospital DRG Complication DRG/Outlier Post-Acute Rehab Readmission Hospital DRG Lead Doc. Fee Lead Doc. Fee Home Health Lead Doc. Fee Consultant Fee Consultant Fee PCP Consultant Fee Consultant Fee Consultant Fee Specialist Consultant Fee Alternate Setting Facility Fee Physician Fee PROBLEM: No incentive to use lowercost setting, since payer gains all savings from lower facility fees 85

86 PATIENT A Facility-Independent Bundle SINGLE PAYMENT Procedure Hospital DRG Complication DRG/Outlier Post-Acute Rehab Readmission Hospital DRG Lead Doc. Fee Lead Doc. Fee Home Health Lead Doc. Fee Consultant Fee Consultant Fee PCP Consultant Fee Consultant Fee Consultant Fee Specialist Consultant Fee Alternate Setting Facility Fee Physician Fee SOLUTION: Providers keep some of the savings from moving procedures to lower-cost settings 86

87 PATIENT What if An Alternative Procedure Would Be Better or Cheaper? SINGLE PAYMENT Procedure Hospital DRG Complication DRG/Outlier Post-Acute Rehab Readmission Hospital DRG Lead Doc. Fee Lead Doc. Fee Home Health Lead Doc. Fee Consultant Fee Consultant Fee PCP Consultant Fee Consultant Fee Consultant Fee Specialist Consultant Fee Alternate Setting Facility Fee Physician Fee Alternate Procedure Facility Fee Prof. Fee PROBLEM: No incentive to use lower-cost procedures (or to use no procedure at all) 87

88 PATIENT A Condition-Based (Not Procedure-Based) Bundle SINGLE PAYMENT Procedure Hospital DRG Complication DRG/Outlier Post-Acute Rehab Readmission Hospital DRG Lead Doc. Fee Lead Doc. Fee Home Health Lead Doc. Fee Consultant Fee Consultant Fee PCP Consultant Fee Consultant Fee Consultant Fee Specialist Consultant Fee Alternate Setting Facility Fee Physician Fee Alternate Procedure Facility Fee Prof. Fee SOLUTION: Provider keeps some of the savings from using lower-cost procedures 88

89 PATIENT Procedure-Based Bundles Inside Condition-Based Bundles SINGLE CONDITION-BASED PAYMENT PROCEDURE A EPISODE PAYMENT FOR PROCEDURE A PROCEDURE B EPISODE PAYMENT FOR PROCEDURE B MEDICAL MANAGEMENT FFS 89

90 Different Episode/Bundling Concepts for Different Problems PROBLEM/OPPORTUNITY Savings on medical devices or reduction in inpatient inefficiencies Variation in consulting physicians Reducing infections, complications Efficient use of post-acute care Preventable readmissions Availability of lower-cost facilities Option for lower-cost procedures None of the above WHAT TO BUNDLE Hospital + Lead Physician Hospital + All Physicians Procedure + Complications Inpatient + Post-Acute Care Initial Admission + Readmits Any Facility for Procedure Any Procedure for Diagnosis Nothing: Not Worth the Effort 90

91 Alternative Payment Models Allow Win-Win-Win Approaches BUILDING BLOCKS HOW IT WORKS HOW PHYSICIANS AND HOSPITALS CAN BENEFIT HOW PAYERS CAN BENEFIT Bundled Payment Single payment to 2+ providers who are now paid separately (e.g., hospital+physician) Higher payment for physicians if they reduce costs paid by hospitals Physician and hospital offer a lower total price to Medicare or health plan than today Warrantied Payment Higher payment for quality care, no extra payment for correcting preventable errors and complications Higher payment for physicians and hospitals with low rates of infections and complications Medicare or health plan no longer pays more for high rates of infections or complications Condition- Based Payment Payment based on the patient s condition, rather than on the procedure used No loss of payment for physicians and hospitals using fewer tests and procedures Medicare or health plan no longer pays more for unnecessary procedures 91

92 Example: Reducing Avoidable Procedures TODAY $/Patient # Pts Total $ Physician Svcs Evaluations $ $45,000 Procedures $ $170,000 Subtotal $215,000 Hospital Pmt $11, $2,200,000 Total Pmt/Cost $2,415,000 Optional Procedure for a Condition Physician evaluates all patients Physician performs procedure on 2/3 of evaluated patients Up to 10% of procedures may be avoidable through patient choice or alternative treatment 92

93 Typical Health Plan Approach: Prior Auth/Utilization Controls TODAY w/ UTILIZATION CTRL $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $45,000 Procedures $ $170,000 $ $153,000 Subtotal $215,000 $198,000 Hospital Pmt $11, $2,200,000 $11, $1,980,000 Total Pmt/Cost $2,415,000 $2,178,000-10% 93

94 Under FFS, Payer Wins, Physicians and Hospitals Lose TODAY w/ UTILIZATION CTRL $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $45,000 Procedures $ $170,000 $ $153,000 Subtotal $215,000 $198,000-8% Hospital Pmt $11, $2,200,000 $11, $1,980,000-10% Total Pmt/Cost $2,415,000 $2,178,000-10% 94

95 Is There a Better Way? TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000??? Procedures $ $170,000??? Subtotal $215,000???? Hospital Pmt $11, $2,200,000??? Total Pmt/Cost $2,415,000??? 95

96 A Better Way: Pay Physicians Differently TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 Hospital Pmt $11, $2,200,000 $11, $1,980,000 Total Pmt/Cost $2,415,000 $2,202,000 Better Payment for Condition Management Physician paid adequately to engage in shared decision making process with patients Physician paid adequately for procedures without needing to increase volume of procedures 96

97 Physicians Could Be Paid More While Still Reducing Total $ TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt $11, $2,200,000 $11, $1,980,000-10% Total Pmt/Cost $2,415,000 $2,202,000-9% 97

98 Do Hospitals Have to Lose In Order for Physicians To Win? TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt $11, $2,200,000 $11, $1,980,000-10% Total Pmt/Cost $2,415,000 $2,202,000-9% Physician Wins Hospital Loses Payer Wins 98

99 What Should Matter to Hospitals is Margin, Not Revenues (Volume) 99

100 $000 Hospital Costs Are Not Proportional to Utilization Cost & Revenue Changes With Fewer Patients 20% reduction in volume 7% reduction in cost $1,000 $980 $960 $940 $920 $900 $880 $860 $840 $820 $800 Costs. #Patients 100

101 $000 Reductions in Utilization Reduce Revenues More Than Costs Cost & Revenue Changes With Fewer Patients 20% reduction in volume 7% reduction in cost 20% reduction in revenue $1,000 $980 $960 $940 $920 $900 $880 $860 $840 $820 $800 Revenues Costs #Patients 101

102 $000 Causing Negative Margins for Hospitals Cost & Revenue Changes With Fewer Patients Payers Will Be Underpaying For Care If Adverse Events, Readmissions, Etc. Are Reduced $1,000 $980 $960 $940 $920 $900 $880 $860 $840 $820 $800 Revenues Costs #Patients 102

103 $000 But Spending Can Be Reduced Without Bankrupting Hospitals Cost & Revenue Changes With Fewer Patients Payers Can $1,000 Still Save $ $980 Without Causing $960 Negative Margins $940 for Hospital $920 $900 $880 Revenues $860 Costs $840 $820 $800 #Patients 103

104 Adequacy of Payment Depends On Fixed/Variable Costs & Margins TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt Fixed Costs $7,150 65% $1,430,000 Variable Costs $3,300 30% $660,000 Margin $550 5% $110,000 Subtotal $11, $2,200,000 Total Pmt/Cost $2,415,

105 Now, if the Number of Procedures is Reduced TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt Fixed Costs $7,150 65% $1,430,000 Variable Costs $3,300 30% $660,000 Margin $550 5% $110,000 Subtotal $11, $2,200, Total Pmt/Cost $2,415,

106 Fixed Costs Will Remain the Same (in the Short Run) TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000-0% Variable Costs $3,300 30% $660,000 Margin $550 5% $110,000 Subtotal $11, $2,200, Total Pmt/Cost $2,415,

107 Variable Costs Will Go Down in Proportion to Procedures TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000-0% Variable Costs $3,300 30% $660,000 $3,300 $594,000-10% Margin $550 5% $110,000 Subtotal $11, $2,200, Total Pmt/Cost $2,415,

108 And Even With a Higher Margin for the Hospital TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000-0% Variable Costs $3,300 30% $660,000 $594,000-10% Margin $550 5% $110,000 $113,000 +3% Subtotal $11, $2,200, Total Pmt/Cost $2,415,

109 The Hospital Gets Less Total Revenue (But More Per Case) TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $7,944 $1,430,000-0% Variable Costs $3,300 30% $660,000 $3,300 $594,000-10% Margin $550 5% $110,000 $628 $113,000 +3% Subtotal $11, $2,200,000 $11, $2,137,000-3% Total Pmt/Cost $2,415,

110 And The Payer Still Saves Money TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $7,944 $1,430,000-0% Variable Costs $3,300 30% $660,000 $3,300 $594,000-10% Margin $550 5% $110,000 $628 $113,000 +3% Subtotal $11, $2,200,000 $11, $2,137,000-3% Total Pmt/Cost $2,415,000 $2,359,000-2% 110

111 I.e., Win-Win-Win for Physician, Hospital, and Payer TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt Physician Wins Hospital Wins Payer Wins Fixed Costs $7,150 65% $1,430,000 $7,944 $1,430,000-0% Variable Costs $3,300 30% $660,000 $3,300 $594,000-10% Margin $550 5% $110,000 $628 $113,000 +3% Subtotal $11, $2,200,000 $11, $2,137,000-3% Total Pmt/Cost $2,415,000 $2,359,000-2% 111

112 If The Physician Can Reduce the Hospital s Costs Per Procedure. TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 Procedures $ $170,000 Subtotal $215,000 Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000 Variable Costs $3,300 30% $660,000 $2,000 $360,000-46% Margin $550 5% $110,000 Subtotal $11, $2,200, Total Pmt/Cost $2,415,

113 Everyone Can Win Even More TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000 Variable Costs $3,300 30% $660,000 $2,000 $360,000 Margin $550 5% $110,000 $672 $121, % Subtotal $11, $2,200, $1,911,000-13% Total Pmt/Cost $2,415,000 $2,187,000-9% 113

114 $2,200 Variation in Average Cost of Drug-Eluting Stents in CA Hospitals Source: Coronary Angioplasty with Drug Eluting Stents: Device Costs, Hospital Costs, and Insurance Payments, Emma L. Dolan and James C. Robinson Berkeley Center for Health Technology, September

115 $16,000 Variation in Avg Costs of Defibrillators Across CA Hospitals Source: Pacemaker and Implantable Cardioverter-Defibrillator Implant Procedures in California Hospitals, James C. Robinson and Emma L. Dolan, Berkeley Center for Health Technology,

116 Not Just Devices: Other Savings Opportunities From Bundling Better scheduling of scarce resources (e.g., surgery suites) to reduce both underutilization & overtime Coordination among multiple physicians and departments to avoid duplication and conflicts in scheduling Standardization of equipment and supplies to facilitate bulk purchasing Less wastage of expensive supplies Reduced length of stay Etc. 116

117 What Payment Model Supports This Win-Win-Win Approach? TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000 Variable Costs $3,300 30% $660,000 $2,000 $360,000 Margin $550 5% $110,000 $672 $121, % Subtotal $11, $2,200, $1,911,000-13% Total Pmt/Cost $2,415,000 $2,187,000-9% 117

118 Pay Based on the Patient s Condition, Not on the Procedure TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000 Variable Costs $3,300 30% $660,000 $2,000 $360,000 Margin $550 5% $110,000 $672 $121, % Subtotal $11, $2,200, $1,911,000-13% Total Pmt/Cost $8, $2,415,000 $2,187,000-9% 118

119 Plan to Offer Care of the Condition at a Lower Cost Per Patient TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000 Variable Costs $3,300 30% $660,000 $2,000 $360,000 Margin $550 5% $110,000 $672 $121, % Subtotal $11, $2,200, $1,911,000-13% Total Pmt/Cost $8, $2,415,000 $7, $2,187,000-9% 119

120 Use the Payment as a Budget to Redesign Care TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000 Variable Costs $3,300 30% $660,000 $2,000 $360,000 Margin $550 5% $110,000 $672 $121, % Subtotal $11, $2,200, $1,911,000-13% Total Pmt/Cost $8, $2,415,000 $7, $2,187,000-9% 120

121 And Let the Providers Decide How They Should Be Paid TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000 Variable Costs $3,300 30% $660,000 $2,000 $360,000 Margin $550 5% $110,000 $672 $121, % Subtotal $11, $2,200, $1,911,000-13% Total Pmt/Cost $8, $2,415,000 $7, $2,187,000-9% 121

122 Would Shared Savings Achieve the Same Thing? 122

123 Same Example As Before Year 0 Physician Svcs Evaluations $45,000 Procedures $170,000 Subtotal $215,000 Hospital Pmt Procedures $2,200,000 Subtotal $2,200,000 # Patients $/Patient 300 $ $ $11,000 Optional Procedure for a Condition Physician evaluates all patients Physician performs procedure on 2/3 of evaluated patients Up to 10% of procedures may be avoidable through patient choice or alternative treatment Total Pmt/Cost $2,415,000 Savings 123

124 Year 1: Physicians & Hospitals Both Lose With Fewer Procedures) Year 0 Year 1 Chg Physician Svcs Evaluations $45,000 $45,000 Procedures $170,000 $153,000 $0 Subtotal $215,000 $198,000-8% Hospital Pmt Procedures $2,200,000 $1,980,000 Reduce Procs by 10% Year 1: Lower Revenue for Docs & Hospital Subtotal $2,200,000 $1,980,000-10% Total Pmt/Cost $2,415,000 $2,178,000-10% Savings $237,

125 Physician Svcs Year 2: Losses Are Lower If Shared Savings Are Paid (No) Year 0 Year 1 Chg Year 2 Chg Evaluations $45,000 $45,000 $45,000 Procedures $170,000 $153,000 $153,000 Shared Savings $0 $17,000 Subtotal $215,000 $198,000-8% $215,000-0% Hospital Pmt Procedures $2,200,000 $1,980,000 $1,980,000 Shared Savings $0 $101,500 Subtotal $2,200,000 $1,980,000-10% $2,081,500-6% Total Pmt/Cost $2,415,000 $2,178,000-10% $2,296,500-5% Savings $237,000 $118,500 Reduce Procs by 10% Year 1: Lower Revenue for Docs & Hospital Year 2: Shared Savings Offsets Some Losses 125

126 But Physicians and Hospitals Still Have Net 2-Year Losses Year 0 Year 1 Chg Year 2 Chg Cumulative Physician Svcs Evaluations $45,000 $45,000 $45,000 Procedures $170,000 $153,000 $153,000 Shared Savings $0 $17,000 Subtotal $215,000 $198,000-8% $215,000-0% -$17,000-4% Hospital Pmt Procedures $2,200,000 $1,980,000 $1,980,000 Shared Savings $0 $101,500 Subtotal $2,200,000 $1,980,000-10% $2,081,500-5% -$338,500-8% Total Pmt/Cost $2,415,000 $2,178,000-10% $2,296,500-5% $355,500 Savings $237,000 $118,500-7% 126

127 It s Even Worse Than That There is no shared savings payment at all if a minimum total savings level is not reached With 10,000 Medicare beneficiaries and ~$100 million annual spending, $237,000 is only 0.2% savings, not 3.0% required by Medicare, so no shared savings payment would be made If spending increases elsewhere in the ACO, it may offset savings here, leaving nothing to be shared with physicians or hospital If there is a shared savings payment, it s reduced if quality thresholds aren t met, even if the quality measures have nothing to do with where savings occurred The shared savings payment ends at the end of the 3-year contract period, even if utilization remains lower, and the payer keeps 100% of the savings in future years 127

128 So Why Do Payers Like The Shared Savings Model So Much?? It s easy for them to implement: No changes in underlying fee for service payment and no costs to change claims payment system Additional payments only made if savings are achieved The payer sets the rules as to how savings are calculated Shared savings payments are made well after savings are achieved, helping the payers cash flow All of the savings goes back to the payer after the end of the shared savings contract 128

129 Condition-Based Payment Puts the Hospital+Physicians in Control TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000 Variable Costs $3,300 30% $660,000 $2,000 $360,000 Margin $550 5% $110,000 $672 $121, % Subtotal $11, $2,200, $1,911,000-13% Total Pmt/Cost $8, $2,415,000 $7, $2,187,000-9% 129

130 Total Hospital Margins Depend on High-Margin Services Profit Profit Loss Profit Loss Loss 130

131 Commercial Rates Make Up for Losses on Other Patients Profit Profit Loss Loss Loss 131

132 Starting With the Earlier Example TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 65% $1,430,000 $1,430,000 Variable Costs $3,300 30% $660,000 $2,000 $360,000 Margin $550 5% $110,000 $672 $121, % Subtotal $11, $2,200, $1,911,000-13% Total Pmt/Cost $8, $2,415,000 $7, $2,187,000-9% 132

133 What if This is a VERY High Margin Procedure for the Hospital? TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 48% $1,430,000 Variable Costs $3,300 22% $660,000 Margin $4,550 30% $910,000 Subtotal $15, $3,000,000 Total Pmt/Cost $8, $3,215,

134 Cover Fixed Costs, Reduce Variable Costs, and Preserve/Improve Margin TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Fixed Costs $7,150 48% $1,430,000 $1,430,000 0% Variable Costs $3,300 22% $660,000 $2,000 $360,000-45% Margin $4,550 30% $910,000 $955,500 +5% Subtotal $15, $3,000, $2,745,500-8% Total Pmt/Cost $8, $3,215,000 $7, $3,021,500-6% 134

135 Reducing Procedures and Cost Per Procedure Can Be a Win-Win-Win TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $105,000 Procedures $ $170,000 $ $171,000 Subtotal $215,000 $276, % Hospital Pmt Physician Wins Hospital Wins Payer Wins Fixed Costs $7,150 48% $1,430,000 $1,430,000 Variable Costs $3,300 22% $660,000 $2,000 $360,000 Margin $4,550 30% $910,000 $955,500 +5% Subtotal $15, $3,000, $2,745,500-8% Total Pmt/Cost $8, $3,215,000 $7, $3,021,500-6% 135

136 Fixed Costs Likely Lower for High-Volume Procedures TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $45,000 $ $60,000 Procedures $ $170,000 $ $162,000 Subtotal $215,000 $222,000 +3% Hospital Pmt Fixed Costs $5,225 35% $1,045,000 $1,045,000 0% Variable Costs $5,225 35% $1,045,000 $5,225 $940,500-10% Margin $4,550 30% $910,000 $937,300 +3% Subtotal $15, $3,000, $2,922,800-3% Total Pmt/Cost $8, $3,215,000 $7, $3,144,800-2% 136

137 What About Underpaid Medicaid Cases? TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $15,000 Procedures $ $100,000 Subtotal $115,000 Hospital Pmt Fixed Costs $7,150 48% $1,430,000 Variable Costs $3,300 22% $660,000 Margin ($2,450) 30% ($490,000) Subtotal $8, $1,600,000 Total Pmt/Cost $5, $1,715,

138 Losing Less is Winning, Too TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Evaluations $ $15,000 $ $30,000 Procedures $ $100,000 $ $108,000 Subtotal $115, % Hospital Pmt Fixed Costs $7,150 48% $1,430,000 $1,430,000 Variable Costs $3,300 22% $660,000 $2,000 $360,000 Margin ($2,450) 30% ($490,000) ($250,000) -49% Subtotal $8, $1,600,000 $11, $1,540,000-4% Total Pmt/Cost $5, $1,715,000 $5, $1,678,000-2% 138

139 Strategic Options for Hospitals 139

140 Strategic Options for Hospitals Payment for Hospital 1. Ask for an increase in hospital payment rates Spending for Payer Increase in hospital spending 140

141 Strategic Options for Hospitals Payment for Hospital 1. Ask for an increase in hospital payment rates 2. Encourage physicians to admit more patients Spending for Payer Increase in hospital spending Increase in hospital spending (new prior authorization?) 141

142 Strategic Options for Hospitals Payment for Hospital 1. Ask for an increase in hospital payment rates 2. Encourage physicians to admit more patients 3. Try to capture more market share (if there is any) Spending for Payer Increase in hospital spending Increase in hospital spending (new prior authorization?) Increase in spending if your hospital is more expensive (new narrow network?) 142

143 Strategic Options for Hospitals Payment for Hospital 1. Ask for an increase in hospital payment rates 2. Encourage physicians to admit more patients 3. Try to capture more market share (if there is any) 4. Lower prices and try to capture more market share Spending for Payer Increase in hospital spending Increase in hospital spending (new prior authorization?) Increase in spending if your hospital is more expensive (new narrow network?) Uncertain impact on spending 143

144 Strategic Options for Hospitals Payment for Hospital 1. Ask for an increase in hospital payment rates 2. Encourage physicians to admit more patients 3. Try to capture more market share (if there is any) 4. Lower prices and try to capture more market share 5. Develop a lower-priced bundled or warrantied payment and retain savings Spending for Payer Increase in hospital spending Increase in hospital spending (new prior authorization?) Increase in spending if your hospital is more expensive (new narrow network?) Uncertain impact on spending Reduction in spending per episode, but still concern about number of episodes 144

145 Strategic Options for Hospitals Payment for Hospital 1. Ask for an increase in hospital payment rates 2. Encourage physicians to admit more patients 3. Try to capture more market share (if there is any) 4. Lower prices and try to capture more market share 5. Develop a lower-priced bundled or warrantied payment and retain savings 6. Take a condition-based payment and manage the population more effectively Spending for Payer Increase in hospital spending Increase in hospital spending (new prior authorization?) Increase in spending if your hospital is more expensive (new narrow network?) Uncertain impact on spending Reduction in spending per episode, but still concern about number of episodes Reduction in total spending for the condition 145

146 Still to Come How do you design successful payment models? How does all this fit into ACOs? How many patients do you need to manage risk? What if the health plans won t pay you differently? How will consumers/patients fit into this? 146

147 Four Things Needed For Successful Payment Reform 1. Defining the Change in Care Delivery How can the physician, hospital, or other provider change the way care is delivered to reduce costs without harming patients? 147

148 Best Way to Find Savings Opportunities? Ask Physicians I have zero control over utilization or studies ordered. I don t get paid for calling a referring doctor and telling him/her the imaging test is worthless. Radiologist in Maine Patients often need to be in extended care to receive antibiotics because Medicare doesn t pay for home IV therapy. Patient stays in the hospital for 3 days to justify a nursing home/rehab stay. Orthopedist at AMA HOD Meeting I strongly suspect overutilization of abdominal CT scans in the ER and in the hospital; CT scans lead to further CT scans to follow up lung and adrenal nodules. The hospital focuses on length of stay, but never looks at appropriateness of radiologic studies. Internist at AMA HOD Meeting I do many unnecessary colonoscopies on young men. Give every PCP an anuscope to allow diagnosis of bleeding hemorrhoids in the office. Gastroenterologist in Maine 148

149 Four Things Needed For Successful Payment Reform 1. Defining the Change in Care Delivery How can the physician, hospital, or other provider change the way care is delivered to reduce costs without harming patients? 2. Analyzing Expected Costs and Savings What will there be less of, and how much does that save? What will there be more of, and how much does that cost? Will the savings offset the costs on average? How much variation in costs and savings is likely? 149

150 A Critical Element is Shared, Trusted Data Physician/Hospital need to know the current utilization and costs for their patients to know whether the new payment model will cover the costs of delivering effective care to the patients Purchaser/Payer needs to know the current utilization and costs to know whether the new payment model is a better deal than they have today Both sets of data have to match in order for providers and payers to agree on the new approach! 150

151 Four Things Needed For Successful Payment Reform 1. Defining the Change in Care Delivery How can the physician, hospital, or other provider change the way care is delivered to reduce costs without harming patients? 2. Analyzing Expected Costs and Savings What will there be less of, and how much does that save? What will there be more of, and how much does that cost? Will the savings offset the costs on average? How much variation in costs and savings is likely? 3. Designing a Payment Model That Supports Change Flexibility to change the way care is delivered Accountability for costs and quality/outcomes related to care Adequate payment to cover lowest-achievable costs Protection for the provider from insurance risk 151

152 Opportunities and Solutions Vary By Specialty Cardiology Orthopedic Surgery Psychiatry Opportunities to Improve Care and Reduce Cost Use less invasive and expensive procedures when appropriate Reduce infections and complications Use less expensive post-acute care following surgery Reduce ER visits and admissions for patients with depression and chronic disease Barriers in Current Payment System Payment is based on which procedure is used, not the outcome for the patient No flexibility to increase inpatient services to reduce complications & post-acute care No payment for phone consults with PCPs No payment for RN care managers Solutions via Accountable Payment Models Condition-based payment covering CABG, PCI, or medication management Episode payment for hospital and post-acute care costs with warranty Joint conditionbased payment to PCP and psychiatrist OB/GYN Reduce use of elective C-sections Reduce early deliveries and use of NICU Similar/lower payment for vaginal deliveries Condition-based payment for total cost of delivery in low-risk pregnancy 152

153 Examples from Other Specialties Neurology Gastroenterology Oncology Radiology Opportunities to Improve Care and Reduce Cost Avoid unnecessary hospitalizations for epilepsy patients Reduce strokes and heart attacks after TIA Reduce unnecessary colonoscopies and colon cancer Reduce ER/admits for inflammatory bowel d. Reduce ER visits and admissions for dehydration Reduce anti-emetic drug costs Reduce use of high-cost imaging Improve diagnostic speed & accuracy Barriers in Current Payment System No flexibility to spend more on preventive care No payment to coordinate w/ cardio No flexibility to focus extra resources on highest-risk patients No flexibility to spend more on care mgt No flexibility to spend more on preventive care Payment based on office visits, not outcomes Low payment for reading images & penalty for 2x Inability to change inapprop. orders Solutions via Accountable Payment Models Condition-based payment for epilepsy Episode or conditionbased payment for TIA Population-based payment for colon cancer screening Condition-based pmt for IBD Condition-based payment including non-oncolytic Rx and ED/hospital utilization Global payment for imaging costs Partnership in condition-based payments 153

154 Providers Need Protections From Two Major Types of Risk Insurance Risk Insurance Risk: Whether patients will have a health condition The payer/purchaser pays for this today, and should continue to do so Performance Risk: How much it costs to treat that health condition The payer/purchaser pays for this today, but the provider can control it How Do You Separate Insurance & Performance Risk? Risk/severity adjustment of payment Risk corridors in case costs were mis-estimated Outlier payments for unusually expensive patients Risk exclusions for some patient populations or situations where costs can t reasonably be controlled by the physician or hospital 154

155 Four Things Needed For Successful Payment Reform 1. Defining the Change in Care Delivery How can the physician, hospital, or other provider change the way care is delivered to reduce costs without harming patients? 2. Analyzing Expected Costs and Savings What will there be less of, and how much does that save? What will there be more of, and how much does that cost? Will the savings offset the costs on average? How much variation in costs and savings is likely? 3. Designing a Payment Model That Supports Change Flexibility to change the way care is delivered Accountability for costs and quality/outcomes related to care Adequate payment to cover lowest-achievable costs Protection for the provider from insurance risk 4. Compensating Providers Appropriately Changing payment to the provider organization (physician practice/group/ipa/health system) does not automatically change compensation to physicians and hospitals 155

156 How You Do Create a Successful ACO? PATIENTS Heart Disease ACO Diabetes Back Pain Pregnancy 156

157 Most ACOs Today Aren t Truly Reinventing Care MEDICARE/HEALTH PLAN PATIENTS Heart Disease Fee-for-Service Payment ACO Shared Savings Payment Enhanced Care Management Services Diabetes Back Pain Pregnancy Primary Care Psych. Cardiology Orthopedics OB/GYN 157

158 The Right Way: Give Each Patient an Accountable Medical Home PATIENTS Heart Disease Diabetes Back Pain Pregnancy Accountable Medical Home Primary Care Practice ACO 158

159 With a Medical Neighborhood to Consult With on Complex Cases PATIENTS Heart Disease Diabetes Back Pain Pregnancy Accountable Medical Home Primary Care Practice Endocrinology Neurology, Psychiatry ACO 159

160 ..Ask Specialists to Be Accountable for Conditions They Manage PATIENTS Heart Disease Diabetes Back Pain Accountable Medical Home Primary Care Practice ACO Cardiology Group Orthopedic Group Heart Episode/ Condition Pmt Back Episode/ Condition Pmt Pregnancy Endocrinology Neurology, Psychiatry OB/GYN Group Pregnancy Management Pmt 160

161 That s Building the ACO From the Bottom Up, Not the Top Down PATIENTS Heart Disease Diabetes Back Pain Accountable Medical Home Primary Care Practice ACO Cardiology Group Orthopedic Group Heart Episode/ Condition Pmt Back Episode/ Condition Pmt Pregnancy Endocrinology Neurology, Psychiatry OB/GYN Group Pregnancy Management Pmt 161

162 Now the ACO Can Take a Global Payment And Make It Work MEDICARE/HEALTH PLAN Global Payment PATIENTS Heart Disease Diabetes Back Pain Accountable Medical Home Primary Care Practice ACO Cardiology Group Orthopedic Group Heart Episode/ Condition Pmt Back Episode/ Condition Pmt Pregnancy Endocrinology Neurology, Psychiatry OB/GYN Group Pregnancy Management Pmt 162

163 And Accountable Pmt Models Can Be the Basis of Compensation PATIENTS Heart Disease Diabetes Back Pain Pregnancy MEDICARE/HEALTH PLAN Global Payment Physician Compensation Structure ACO Accountable Medical Home Primary Care Practice Endocrinology Neurology, Psychiatry Cardiology Group Orthopedic Group OB/GYN Group Heart Episode/ Condition Pmt Back Episode/ Condition Pmt Pregnancy Management Pmt 163

164 CAPITATION (WORST VERSIONS) No Additional Revenue for Taking Sicker Patients Isn t This Capitation? No It s Different RISK-ADJUSTED GLOBAL PMT Payment Levels Adjusted Based on Patient Conditions Providers Lose Money On Unusually Expensive Cases Providers Are Paid Regardless of the Quality of Care Provider Makes More Money If Patients Stay Well Limits on Total Risk Providers Accept for Unpredictable Events Bonuses/Penalties Based on Quality Measurement Provider Makes More Money If Patients Stay Well Flexibility to Deliver Highest-Value Services Flexibility to Deliver Highest-Value Services 164

165 Example: BCBS MA Alternative Quality Contract Single payment for all costs of care for a population of patients Adjusted up/down annually based on severity of patient conditions Initial payment set based on past expenditures, not arbitrary estimates Provides flexibility to pay for new/different services Bonus paid for high quality care Five-year contract Savings for payer achieved by controlling increases in costs Allows provider to reap returns on investment in preventive care, infrastructure Broad participation 14 physician groups/health systems participating with over 400,000 patients, including one primary care IPA with 72 physicians Positive two year results Higher ambulatory care quality than non-aqc practices, better patient outcomes, lower readmission rates and ER utilization, lower costs 165

166 How Many Patients Do You Need to (Successfully) Manage Total Risk?

167 Most Businesses With 200-1,000 Employees Take Total Cost Risk Sources: Employer Health Benefits 2012 Annual Survey. The Kaiser Family Foundation and Health Research and Educational Trust; State-Level Trends in Employer- Sponsored Health Insurance, April State Health Access Data Assistance Center and Robert Wood Johnson Foundation Fewer employees than typical physician practice panel size 167

168 The Keys to Managing Risk How Do Small Employers Manage Self-Insurance Risk? They know who their employees are and can estimate spending They start with what they spent last year and try to control growth They have reserves to cover year-to-year variation They purchase stop-loss insurance to cover unusually expensive cases 168

169 The Keys to Managing Risk How Do Small Employers Manage Self-Insurance Risk? They know who their employees are and can estimate spending They start with what they spent last year and try to control growth They have reserves to cover year-to-year variation They purchase stop-loss insurance to cover unusually expensive cases How Would Small Health Systems Manage Risk? They need to know who their patients are in order to project spending They need to start with last year s payments and control growth They need some reserves to cover year-to-year variation They need to purchase stop-loss insurance to cover unusually expensive cases 169

170 Building the Capabilities to Manage Accountable Payment Models CAPABILITY BARRIER SOLUTIONS 1. Know who your patients are 2. Start with last year s spending and control growth 3. Have reserves to cover year-to-year variation 4. Purchase stop-loss insurance to cover unusually expensive cases 170

171 Building the Capabilities to Manage Accountable Payment Models CAPABILITY BARRIER SOLUTIONS 1. Know who your patients are 2. Start with last year s spending and control growth 3. Have reserves to cover year-to-year variation 4. Purchase stop-loss insurance to cover unusually expensive cases PPO health plans don t require patients to designate PCPs or use a consistent set of physicians or hospitals for care 171

172 The Health Care Reform Election for Consumers THE INCUMBENT (PPO) FREEDOM TO USE AS MANY PHYSICIANS AS DESIRED THE CANDIDATE (HMO) LOCKED IN TO A SINGLE GATEKEEPER PROVIDER ACCESS TO ALL PROVIDERS & SERVICES DENIED ACCESS TO LOW-VALUE SERVICES EQUAL COST-SHARING FOR MOST SERVICES HIGH COST-SHARING TO DISCOURAGE UTILIZATION 172

173 Creating a Truly Patient-Centered Alternative THE INCUMBENT (PPO) FREEDOM TO USE AS MANY PHYSICIANS AS DESIRED ACCESS TO ALL PROVIDERS & SERVICES EQUAL COST-SHARING FOR MOST SERVICES A BETTER CANDIDATE Access to a PCP who advises and helps coordinate care Access to highvalue services and providers who coordinate services Cost-sharing based on value of services THE CANDIDATE (HMO) LOCKED IN TO A SINGLE GATEKEEPER PROVIDER DENIED ACCESS TO LOW-VALUE SERVICES HIGH COST-SHARING TO DISCOURAGE UTILIZATION 173

174 Building the Capabilities to Manage Accountable Payment Models CAPABILITY BARRIER SOLUTIONS 1. Know who your patients are 2. Start with last year s spending and control growth 3. Have reserves to cover year-to-year variation 4. Purchase stop-loss insurance to cover unusually expensive cases PPO health plans don t require patients to designate PCPs or use a consistent set of physicians or hospitals for care Redesign care to be sufficiently patient-friendly that patients will want to have physicians/hospitals coordinate their care 174

175 Building the Capabilities to Manage Accountable Payment Models CAPABILITY BARRIER SOLUTIONS 1. Know who your patients are 2. Start with last year s spending and control growth 3. Have reserves to cover year-to-year variation 4. Purchase stop-loss insurance to cover unusually expensive cases PPO health plans don t require patients to designate PCPs or use a consistent set of physicians or hospitals for care Physicians and hospitals don t have data on past spending in order to identify savings opportunities Redesign care to be sufficiently patient-friendly that patients will want to have physicians/hospitals coordinate their care Ask payers for their data and engage all specialties in finding ways to redesign care 175

176 Building the Capabilities to Manage Accountable Payment Models CAPABILITY BARRIER SOLUTIONS 1. Know who your patients are 2. Start with last year s spending and control growth 3. Have reserves to cover year-to-year variation 4. Purchase stop-loss insurance to cover unusually expensive cases PPO health plans don t require patients to designate PCPs or use a consistent set of physicians or hospitals for care Physicians and hospitals don t have data on past spending in order to identify savings opportunities Physician practices don t have retained earnings Hospitals may have reserves committed to debt Redesign care to be sufficiently patient-friendly that patients will want to have physicians/hospitals coordinate their care Ask payers for their data and engage all specialties in finding ways to redesign care Begin setting aside revenues to build reserves Transition to higher levels of risk over time 176

177 Building the Capabilities to Manage Accountable Payment Models CAPABILITY BARRIER SOLUTIONS 1. Know who your patients are 2. Start with last year s spending and control growth 3. Have reserves to cover year-to-year variation 4. Purchase stop-loss insurance to cover unusually expensive cases PPO health plans don t require patients to designate PCPs or use a consistent set of physicians or hospitals for care Physicians and hospitals don t have data on past spending in order to identify savings opportunities Physician practices don t have retained earnings Hospitals may have reserves committed to debt None insurance companies offer this and many capitated providers buy it Redesign care to be sufficiently patient-friendly that patients will want to have physicians/hospitals coordinate their care Ask payers for their data and engage all specialties in finding ways to redesign care Begin setting aside revenues to build reserves Transition to higher levels of risk over time Factor the cost of stop-loss insurance into costs of managing care for patients 177

178 Barrier: Gaining Support from a Critical Mass of Payers Health Plan Better Payment System Health Plan Current Payment System Provider Health Plan Current Payment System Patient Patient Patient Provider is only compensated for changed practices for the subset of patients covered by participating payers 178

179 For Most Employees, the Employer is the Insurer, Not a Health Plan Source: Employer Health Benefits 2012 Annual Survey. The Kaiser Family Foundation and Health Research and Educational Trust 179

180 Similar Rates of Self-Insurance in Florida as U.S. Average 180

181 Even Small Employers Are Increasingly Self-Insured Sources: Employer Health Benefits 2012 Annual Survey. The Kaiser Family Foundation and Health Research and Educational Trust; State-Level Trends in Employer- Sponsored Health Insurance, April State Health Access Data Assistance Center and Robert Wood Johnson Foundation 181

182 For Self-Funded Employers, The Health Plan is Just a Pass Through Purchaser Payment Self- Funded Purchasers ASO Health Plan (No Risk) Provider Claims Providers 182

183 Little Incentive for Health Plans to Support Payment Reforms Purchaser Payment Self- Funded Purchasers ASO Health Plan (No Risk) Provider Claims Providers True Payment Reform Means: Health plan incurs the costs of implementing new payment models Purchaser gains all the savings from reduced utilization and spending (because all claims are passed through) 183

184 A Better Approach: Purchaser/Provider Partnerships Self- Funded Purchasers Better Payment and Benefit Structure Lower Cost, Higher Quality Care Providers Willing to Manage Costs Purchasers and Patients win if: Providers reduce purchasers costs Patients stay healthy and have lower costsharing Provider wins if: Patients stay healthy and need less care Purchaser pays provider adequately to manage care efficiently 184

185 Health Plan Implements Changes Purchasers/Providers Agree On ASO Health Plan (No Risk) Implementation Self- Funded Purchasers Better Payment and Benefit Structure Lower Cost, Higher Quality Care Providers Willing to Manage Costs 185

186 What s the Patient s Role and Accountability? Patient Payment System Provider Ability and Incentives to: Keep patients well Avoid unneeded services Deliver services efficiently Coordinate services with other providers 186

187 Benefit Design Changes Are Also Critical to Success Ability and Incentives to: Improve health Take prescribed medications Allow a provider to coordinate care Choose the highest-value providers and services Benefit Design Patient Payment System Provider Ability and Incentives to: Keep patients well Avoid unneeded services Deliver services efficiently Coordinate services with other providers 187

188 Barriers In Current Benefit Designs Co-pays, co-insurance, and high deductibles discourage or prevent patients from using primary care, preventive treatments, and chronic disease maintenance medications 188

189 Example: Coordinating Pharmacy & Medical Benefits Single-minded focus on reducing costs here......could result in higher spending on hospitalizations Pharmacy Benefits Medical Benefits Drug Costs Hospital Costs Physician Costs High copays for brand-names when no generic exists Doughnut holes & deductibles Principal treatment for most chronic diseases involves regular use of maintenance medication Other Services 189

190 Barriers In Current Benefit Designs Co-pays, co-insurance, and high deductibles discourage or prevent patients from using primary care, preventive treatments, and chronic disease maintenance medications Co-pays, co-insurance, and high deductibles provide little or no incentive for patients to choose the highest-value providers for expensive services 190

191 Airfare Choices from Boston to Cleveland Boston? Cleveland USAirways 1-Stop Coach $622 United Non-Stop Coach $1,107 United Non-Stop First Class $1,355 Airfares for July 6-7, 2011 as of 6/26/11 191

192 What If We Paid for Travel the Way We Pay for Healthcare? Boston? Cleveland Consumer Share of Travel Cost USAirways 1-Stop Coach $622 United Non-Stop Coach $1,107 United Non-Stop First Class $1,355 Airfares for July 6-7, 2011 as of 6/26/11 192

193 Flat Copayments: First Class Fare Wins Boston? Cleveland Consumer Share of Travel Cost USAirways 1-Stop Coach $622 United Non-Stop Coach $1,107 United Non-Stop First Class $1,355 $100 Copayment: $100 $100 $100 Airfares for July 6-7, 2011 as of 6/26/11 193

194 Coinsurance: First Class Fare Probably Wins Boston? Cleveland Consumer Share of Travel Cost USAirways 1-Stop Coach $622 United Non-Stop Coach $1,107 United Non-Stop First Class $1,355 $100 Copayment: $100 $100 $100 10% Coinsurance: $62 $111 $136 Airfares for July 6-7, 2011 as of 6/26/11 194

195 High Deductible: First Class Fare Wins Boston? Cleveland Consumer Share of Travel Cost USAirways 1-Stop Coach $622 United Non-Stop Coach $1,107 United Non-Stop First Class $1,355 $100 Copayment: $100 $100 $100 10% Coinsurance: $62 $111 $136 $500 Deductible: $500 $500 $500 Airfares for July 6-7, 2011 as of 6/26/11 195

196 Price Difference: Lowest Coach Fare Wins Boston? Cleveland Consumer Share of Travel Cost USAirways 1-Stop Coach $622 United Non-Stop Coach $1,107 United Non-Stop First Class $1,355 $100 Copayment: $100 $100 $100 10% Coinsurance: $62 $111 $136 $500 Deductible: $500 $500 $500 Lowest Coach Fare: $0 $485 $733 Airfares for July 6-7, 2011 as of 6/26/11 196

197 Where Will You Get Your Knee Replaced? Knee Joint Replacement Consumer Share of Surgery Cost Price #1 $20,000 Price #2 $25,000 Price #3 $30,000 $1,000 Copayment: $1,000 $1,000 $1,000 10% Coinsurance $2,000 $2,000 $2,000 w/$2,000 OOP Max: $5,000 Deductible: $5,000 $5,000 $5,

198 Where Will You Get Your Knee Replaced? Knee Joint Replacement Consumer Share of Surgery Cost Price #1 $20,000 Price #2 $25,000 Price #3 $30,000 $1,000 Copayment: $1,000 $1,000 $1,000 10% Coinsurance w/$2,000 OOP Max: $2,000 $2,000 $2,000 $5,000 Deductible: $5,000 $5,000 $5,000 Highest-Value: $0 $5,000 $10,

199 Today: Hard to Know if Better Price Means Better Value Payment for Procedure Provider 1: $25,000 dded Provider 2: $23,000-8% 199

200 Payment for Procedure Provider 1: What Hidden Costs Accompany the Lower Price? Payment and Rate of Complications $25,000 $30,000 2% Provider 2: $23,000 $30,000 10% -8% 200

201 Payment for Procedure Provider 1: Total Spending May Be Higher With the Lower Price Provider Payment and Rate of Complications Average Total Payment $25,000 $30,000 2% $25,600 Provider 2: $23,000 $30,000 10% $26,000-8% +2% Provider 2 has a lower starting price, but is more expensive when lower quality is factored in 201

202 Bundled/Warrantied Pmts Allow Comparing Apples to Apples Payment for Procedure Provider 1: Provider 2: Payment and Rate of Complications Bundled/ Episode Payment 2% $25,600 10% $26,000 +2% Bundled prices show that Provider 1 is the higher-value provider 202

203 Which Health System or ACO Will You Choose? Total Annual Cost Per Patient/Member Health System/ ACO #1 $6,000 Health System/ ACO #2 $8,000 Health System/ ACO #3 $10,000 Consumer Share $0 $2,000 $4,

204 This All Sounds Really Hard

205 This All Sounds Really Hard Can t We Just Keep Doing What We re Doing Today Until We Retire?

206 The Opportunities to Reduce Costs Without Rationing Are Widely Known Reducing Hospital Readmissions Helping Patients with Chronic Disease Stay Out of Hospital Reducing Overutilization of Outpatient Services Shifting Preference-Sensitive Care to Lower-Cost Options Reducing the Cost of Expensive Inpatient Care 206

207 The Question is: How Will Purchasers Get The Savings? PURCHASER? Reducing Hospital Readmissions Helping Patients with Chronic Disease Stay Out of Hospital Reducing Overutilization of Outpatient Services Shifting Preference-Sensitive Care to Lower-Cost Options Reducing the Cost of Expensive Inpatient Care 207

208 The Payer-Driven Approach to Achieving Savings Managed Fee-for-Service PURCHASER Readmission Penalty PCP P4P High Deductibles Prior Authorization Narrow Networks Tiering on Cost Reducing Hospital Readmissions Helping Patients with Chronic Disease Stay Out of Hospital Reducing Overutilization of Outpatient Services Shifting Preference-Sensitive Care to Lower-Cost Options Reducing the Cost of Expensive Inpatient Care 208

209 The Provider-Driven Approach to Achieving Savings PURCHASER Global Pmt/Budget Reducing Hospital Readmissions Helping Patients with Chronic Disease Stay Out of Hospital Reducing Overutilization of Outpatient Services Shifting Preference-Sensitive Care to Lower-Cost Options Reducing the Cost of Expensive Inpatient Care Coordinated Care/ Accountable Care Organization 209

210 Very Different Models Managed Fee-for-Service PURCHASER Global Pmt/Budget Readmission Penalty PCP P4P High Deductibles Prior Authorization Narrow Networks Tiering on Cost Reducing Hospital Readmissions Helping Patients with Chronic Disease Stay Out of Hospital Reducing Overutilization of Outpatient Services Shifting Preference-Sensitive Care to Lower-Cost Options Reducing the Cost of Expensive Inpatient Care Coordinated Care/ Accountable Care Organization 210

211 And Very Different Impacts on Physicians and Hospitals Managed Fee-for-Service PURCHASER Global Pmt/Budget 1. Payer defines how care should be redesigned 2. Payer obtains all savings from lower utilization 3. Payer decides how much savings to share with provider 1. Provider determines how care should be redesigned 2. Provider and Purchaser or Payer agree on adequate price for provider care and amount of savings for payer 3. Providers get to keep any additional savings and to determine how to divide it 211

212 Opportunities From Completely Redesigning Payment & Delivery Better Payment for Physicians and Hospitals No threats of major fee cuts No health plan/benefit manager utilization review Physicians and hospitals paid based on quality, not volume Truly High Quality, Patient-Centric Care Coordinated care by multiple physicians Care mgt from providers, not health plans or disease mgt co s Flexibility for telephone, internet, & home visits if patients need them Greater Patient Engagement Zero or low copayments for essential medications and services Higher cost-sharing for unnecessary tests and services Incentives for patient wellness and adherence Less Spending on Administrative Costs Less spending for health plan administrative costs and profits Less spending by providers on payer-imposed administrative costs Lower Government Spending and Smaller Deficits Better Health for Citizens and More Affordable Insurance 212

213 Learn More About Win-Win-Win Payment and Delivery Reform Center for Healthcare Quality and Payment Reform 213