CAN HEALTHCARE PROVIDERS BE HAPPIER WITH LESS REVENUE? Finding Win-Win-Win Approaches to Reducing Healthcare Spending

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1 CAN HEALTHCARE PROVIDERS BE HAPPIER WITH LESS REVENUE? Finding Win-Win-Win Approaches to Reducing Healthcare Spending Harold D. Miller President and CEO Center for Healthcare Quality and Payment Reform and Strategic Initiatives Consultant Network for Regional Healthcare Improvement

2 Where is the Money Going Now? 2

3 Only 16% of Medicare Spending Goes to Physicians Physicians: 16% 3

4 Almost Half Goes to Hospitals Hospitals: 42% Physicians: 16% 4

5 Hospitals Have Been Fastest Growing Part of Health Spending Hospital Expenditures 5

6 Hospital Fees Have Increased, Physician Fees Have Not Hospitals Inflation Physicians 6

7 5-17% of Hospital Admissions Are Potentially Preventable Source: AHRQ HCUP 7

8 What Happens to Hospital Finances With Fewer Patients? 8

9 Lower Revenue What Happens to Hospital Finances With Fewer Patients? The change in revenue is directly proportional to the change in patients 9

10 Lower Revenue What Happens to Hospital Finances With Fewer Patients? The change in revenue is directly proportional to the change in patients Lower Costs The change in costs is not proportional to the change in patients 10

11 A Small Percentage of Hospital Costs Vary With # of Patients Variable/Out-of-Pocket Costs (10-20%) (all costs saved with fewer patients) Drugs Materials (syringes, gowns, etc.) 11

12 Many Costs Change Only With Large Changes in Patient Volume Variable/Out-of-Pocket Costs (10-20%) (all costs saved with fewer patients) Drugs Materials (syringes, gowns, etc.) Semi-Variable Costs (40-50%) (savings only if significantly fewer patient days) Room Costs (Daily room costs nursing care, etc.) Services (Radiology, Lab work, etc.) Procedures (Surgery, etc. performed on patient) 12

13 And Many Costs Cannot Change At All in the Short/Medium-Term Variable/Out-of-Pocket Costs (10-20%) (all costs saved with fewer patients) Drugs Materials (syringes, gowns, etc.) Semi-Variable Costs (40-50%) (savings only if significantly fewer patient days) Room Costs (Daily room costs nursing care, etc.) Services (Radiology, Lab work, etc.) Procedures (Surgery, etc. performed on patient) Fixed Costs (30-50%) (little savings with fewer patients) Indirect Costs (Administration, hospital-wide services) Facility Capital Costs 13

14 What Happens to a Hospital s Finances When Volume Changes? 14

15 A Very Simple Hypothetical Example Fixed Costs: $6.7 million Variable Costs: $3,000 per patient Payment: $10,000 per patient 15

16 A Very Simple Hypothetical Example Fixed Costs: $6.7 million Variable Costs: $3,000 per patient Payment: $10,000 per patient 1,000 patients Costs: $9.7 million ($6.7 million + $3,000 x 1,000 patients) Revenue: $10.0 million ($10,000 x 1,000 patients) Margin: $0.3 million (3%) 16

17 A Very Simple Hypothetical Example Fixed Costs: $6.7 million Variable Costs: $3,000 per patient Payment: $10,000 per patient 1,000 patients Costs: $9.7 million ($6.7 million + $3,000 x 1,000 patients) Revenue: $10.0 million ($10,000 x 1,000 patients) Margin: $0.3 million (3%) Fixed Costs: 69% ($6.7 million/$9.7 million) Variable Costs: 31% ($3.0 million/$9.7 million) 17

18 What Happens With More Patients? Fixed Costs: $6.7 million Variable Costs: $3,000 per patient Payment: $10,000 per patient 1,200 patients Costs: $10.3 million ($6.7 million + $3,000 x 1,200 patients) Revenue: $12.0 million ($10,000 x 1,200 patients) Margin: $1.7 million (14%) Fixed Costs: 65% ($6.7 million/$10.3 million) Variable Costs: 35% ($3.6 million/$10.3 million) 18

19 What Happens With Fewer Patients? Fixed Costs: $6.7 million Variable Costs: $3,000 per patient Payment: $10,000 per patient 800 patients Costs: $9.1 million ($6.7 million + $3,000 x 800 patients) Revenue: $8.0 million ($10,000 x 800 patients) Margin: -$1.1 million (-14%) Fixed Costs: 74% ($6.7 million/$9.1 million) Variable Costs: 26% ($2.4 million/$9.1 million) 19

20 Comparing the 3 Scenarios 20

21 How the Picture Changes Depending on Volume 21

22 +2% Patients = +50% Margin -2% Patients = -50% Margin 22

23 Total Hospital Margins Depend on High-Margin Services Profit Profit Loss Profit Loss Loss 23

24 Commercial Rates Make Up for Losses on Other Patients Profit Profit Loss Loss Loss 24

25 Dealing with Cross-Subsidy Excess margin on key service lines is just another form of fixed cost that the hospital needs to cover Payment levels at lower volumes need to cover those fixed costs the same as the fixed costs for the stranded capital invested in facilities/equipment for the service line itself There is still a win-win opportunity for providers and payers if the price is set properly for lower volume 25

26 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 26

27 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% 27

28 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% 28

29 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??? 29

30 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 30

31 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% 31

32 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 32

33 What Should Matter to Hospitals is Margin, Not Revenues (Volume) 33

34 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 $2,415,000 34

35 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 $2,415,000 35

36 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 $2,415,000 36

37 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 $2,415,000 37

38 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 $2,415,000 38

39 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 $2,415,000 39

40 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% 40

41 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% 41

42 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 $2,415,000 42

43 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% 43

44 $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

45 $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

46 $12,000 Variation in Cost of Cervical Implants Across CA Hospitals 46

47 $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,

48 $51,000 Variation in Cost of Lumbar Implants Across CA Hospitals 48

49 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. 49

50 Does This Work When Margins Are Really High or Low? Profit Profit Loss Profit Loss Loss 50

51 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% 51

52 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, $3,215,000 52

53 Cover Fixed Costs, Reduce Variable Costs, & 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% 53

54 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% 54

55 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, $1,715,000 55

56 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% 56

57 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% 57

58 It s Impractical to Renegotiate Fees for Individual Services 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 $360,000 Margin $550 5% $110,000 $121, % Subtotal $11, $2,200,000 $10, $1,911,000-13% Total Pmt/Cost $2,415,000 $2,187,000-9% 58

59 Fee Levels Would Depend on Volume, Efficiencies, Splits 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% 59

60 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% 60

61 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% 61

62 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% 62

63 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% 63

64 Would Shared Savings Achieve the Same Thing? 64

65 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 65

66 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 $237,000 66

67 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 67

68 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% 68

69 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 69

70 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 70

71 Condition-Based Payment More Likely to Achieve True 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 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% 71

72 A Critical Element is Shared, Trusted Data Physician/Hospital need to know the current utilization and costs for their patients to know whether the condition-based or global payment amount 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 condition-based or global 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! 72

73 Where Does the Necessary Cost Information Come From? 73

74 Where Does the Necessary Cost Information Come From? Not Claims Claims data tells you what was paid for a service, not what it cost 74

75 Where Does the Necessary Cost Information Come From? Not Claims Claims data tells you what was paid for a service, not what it cost Not EHRs Clinical data tells you what was done, not what it cost 75

76 Where Does the Necessary Cost Information Come From? Not Claims Claims data tells you what was paid for a service, not what it cost Not EHRs Clinical data tells you what was done, not what it cost Not Charges or Cost-to-Charge Ratios Hospitals charges bear no relationship to their costs 76

77 Where Does the Necessary Cost Information Come From? Not Claims Claims data tells you what was paid for a service, not what it cost Not EHRs Clinical data tells you what was done, not what it cost Not Charges or Cost-to-Charge Ratios Hospitals charges bear no relationship to their costs Cost Accounting Systems? Cost accounting tells you what costs are today Cost accounting does NOT tell you what costs will be if volume changes, if care is redesigned, etc. 77

78 Where Does the Necessary Cost Information Come From? Not Claims Claims data tells you what was paid for a service, not what it cost Not EHRs Clinical data tells you what was done, not what it cost Not Charges or Cost-to-Charge Ratios Hospitals charges bear no relationship to their costs Cost Accounting Systems? Cost accounting tells you what costs are today Cost accounting does NOT tell you what costs will be if volume changes, if care is redesigned, etc. You Need Cost Models Method of determining what costs will be when conditions change 78

79 Developing Cost Models for Cardiology Services 79

80 What Are the Costs of Setting Up and Operating a Cath Lab? 80

81 How Many Cases Do You Need to Cover The Costs? 81

82 Is 3% Good Enough? 82

83 Strong Incentive for Hospital to Do More Procedures 83

84 Lower Volume Creates Large Losses for Hospital 25% lower volume = 42% lower margin = $1.9 million loss 84

85 Higher Payment Per Procedure at Lower Volume Still Saves $ 85

86 Not Just Payment Method, But Price is Critical Changing the payment method removes the incentives to increase volume and removes barriers to reducing costs But under any payment method, prices may be too high or too low If the price is (too) high, there are no savings and no incentive to transform care If the price is too low, providers will be unable to deliver high-quality care and risk financial disaster 86

87 How Should Prices Be Set? 87

88 How Should Prices Be Set? APPROACHES TO SETTING PRICES (All Payer) Regulation State sets all-payer rates for hospital services 88

89 Many States Used to Regulate Hospital Prices Rate Setting Discontinued Wisconsin (1986) Washington (1989) Massachusetts (1991) New Jersey (1992) Connecticut (1994) Maine (1995) Minnesota (1995) New York (1996) Rate Setting Today Maryland (All Payer) West Virginia (Commercial Payers 89

90 Maryland s Two-Path Rate Regulation Structure All-Payer Payment Rates All payers pay the same, including Medicare Costs of uncompensated care included in the all-payer rates Adding incentives for quality, complications, readmissions Problem: No control over volume; hospitals could always make more money by admitting more patients and doing more procedures 90

91 Maryland s Two-Path Rate Regulation Structure All-Payer Payment Rates All payers pay the same, including Medicare Costs of uncompensated care included in the all-payer rates Adding incentives for quality, complications, readmissions Problem: No control over volume; hospitals could always make more money by admitting more patients and doing more procedures Total Patient Revenue (TPR) Global budget for hospital services, adjusted for population, not actual level of services No incentive to admit more patients or do more procedures; incentive to reduce readmissions and avoidable admissions Focused on isolated, rural hospitals, where one hospital serves the entire population 91

92 Dilemma: Maryland s Dilemma and New Solution Strategy Maryland s Medicare waiver required it to have lower costs per admission than Medicare achieves elsewhere Under a total patient revenue strategy, cost per patient may be higher in Maryland, even though total Medicare spending might be lower 92

93 Dilemma: Maryland s Dilemma and New Solution Strategy Maryland s Medicare waiver required it to have lower costs per admission than Medicare achieves elsewhere Under a total patient revenue strategy, cost per patient may be higher in Maryland, even though total Medicare spending might be lower Solution A revised Medicare waiver based on total growth in hospital spending per capita, not based on cost per admission A revised approach to hospital regulation in Maryland, limiting per capita hospital spending growth to 3.85% per year 93

94 Dilemma: Maryland s Dilemma and New Solution Strategy Maryland s Medicare waiver required it to have lower costs per admission than Medicare achieves elsewhere Under a total patient revenue strategy, cost per patient may be higher in Maryland, even though total Medicare spending might be lower Solution A revised Medicare waiver based on total growth in hospital spending per capita, not based on cost per admission A revised approach to hospital regulation in Maryland, limiting per capita hospital spending growth to 3.85% per year The Challenge Devising a fair way to regulate individual hospital revenue growth in multi-hospital communities 94

95 How Should Prices Be Set? APPROACHES TO SETTING PRICES (All Payer) Regulation Maryland sets all-payer rates for hospital services Large Payer Dictation Congress/CMS establish the rates Medicare will pay 95

96 Medicare s Method of Setting Hospital Payments Standard Amount Geographic Adj. Factor DRG Weight Medical Education Low-Income (DSH) Patient Volume/Mix Capital DRG Payment HOSPITAL PAYMENT Payment Adjustments Operating DRG Payment Geographic Adj. Factor Standard Amount Wage Index > % Wage Index % Labor-Related Amount Non-Labor-Rel. Amount Labor Market Grouping Occupational Mix Adj. Average Hourly Wage DSH, SCH, MDH Performance Outlier/ Transfer Quality Reporting P4P Gain Sharing 96

97 Medicare Payment Adjustments Based on Hospital Volume Critical Access Hospitals get paid based on costs, not DRGs Sole Community Hospitals get paid based on inflation from historic costs Low Volume/Rural Adjustments Hospital low-volume adjustment Rural psychiatric hospitals Rural inpatient rehabilitation hospitals ESRD low-volume adjustment 97

98 How Should Prices Be Set? APPROACHES TO SETTING PRICES (All Payer) Regulation Maryland sets all-payer rates for hospital services Large Payer Dictation Small Payer Negotiation Congress/CMS establish the rates Medicare will pay Result varies depending on size of payer vs. provider 98

99 Ability to Negotiate Depends on Market Power PAYER Provider Provider Provider Provider Provider Provider PAYER Provider Provider Provider 99

100 Ability to Negotiate Depends on Market Power PAYER Provider Provider Provider Provider Provider Provider PAYER Provider Provider Provider Payer Payer PROVIDER Payer Payer Payer PROVIDER 100

101 How Should Prices Be Set? APPROACHES TO SETTING PRICES (All Payer) Regulation Maryland sets all-payer rates for hospital services Large Payer Dictation Small Payer Negotiation Competition Congress/CMS establish the rates Medicare will pay Result varies depending on size of payer vs. provider Providers set prices in order to attract more patients 101

102 Barriers In Current Benefit Designs Co-pays, co-insurance, and high deductibles provide little or no incentive for patients to choose the highest-value providers for expensive services 102

103 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 6/26/11 103

104 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 6/26/11 104

105 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 6/26/11 105

106 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 6/26/11 106

107 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 6/26/11 107

108 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 6/26/11 108

109 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,

110 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,

111 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,

112 What Would Happen If Consumers Had Choice & Considered Value? Minnesota Patient Choice started by the Buyers Health Care Action Group (BHCAG) in the 1990s care systems bid on risk-adjusted (total) cost of patient care (i.e., riskadjusted global payment) care systems are divided into cost/quality tiers based on their relative bids consumers pay the difference in the bid price to select a care system in a higher cost tier Results Many consumers switched to lower cost providers High cost providers reduced their costs to retain/attract patients 112

113 Today: Hard to Know if Better Price Means Better Value Payment for Procedure Provider 1: $25,000 dded Provider 2: $23,000-8% 113

114 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% 114

115 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 115

116 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 116

117 Why Is It So Much Cheaper to Fly to Pittsburgh Than Cleveland? Boston? Cleveland Non-Stop Coach Fare: $1,107 Boston? Pittsburgh Non-Stop Coach Fare: $188 Airfares for July 6-7, 2011 as of 6/26/11 117

118 Is It The Shorter Distance? 551 Air Miles Boston? Cleveland Non-Stop Coach Fare: $1,107 Boston? Pittsburgh 483 Air Miles Non-Stop Coach Fare: $188 Airfares for July 6-7, 2011 as of 6/26/11 118

119 Or Greater Competition? NON- COMPETITIVE MARKET Boston Choice: United Non-Stop: $1,107 (No other non-stop choice)? Cleveland COMPETITIVE MARKET Airfares for July 6-7, 2011 as of 6/26/11 Boston Pittsburgh? Choice #1: Delta Non-Stop: $188 Choice #2: JetBlue Non-Stop: $188 Choice #3: USAirways Non-Stop: $

120 Four Things Needed For Win-Win-Win Solutions 120

121 Four Things Needed For Win-Win-Win Solutions 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? 121

122 Four Things Needed For Win-Win-Win Solutions 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? 122

123 Four Things Needed For Win-Win-Win Solutions 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 123

124 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 124

125 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 125

126 Four Things Needed For Win-Win-Win Solutions 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 Physicians & Hospitals Appropriately Changing payment to the provider organization (physician practice/group/ipa/health system) does not automatically change compensation to physicians & hospitals 126

127 Learn More About Win-Win-Win Payment and Delivery Reform Center for Healthcare Quality and Payment Reform Network for Regional Healthcare Improvement Robert Wood Johnson Foundation 127

128 For More Information: Harold D. Miller President and CEO Center for Healthcare Quality and Payment Reform (412)

129 APPENDIX

130 To Set A Fair Price, Start With Existing Costs COST Costs in FFS Costs in FFS Costs in FFS TIME 130

131 Set a Payment Level That Is Expected Costs COST Bundled or Episode Payment Level Costs in FFS Costs in FFS Costs in FFS TIME 131

132 If All Goes Well, Costs Will Be Lower Than the Payment Level COST Bundled or Episode Payment Level Costs in FFS Costs in FFS Costs in FFS Costs in New Pmt TIME 132

133 ...And Both the Payer and Physician Will Win COST Bundled or Episode Payment Level Costs in FFS Costs in FFS Costs in FFS $$$ $$$ Costs in New Pmt Savings For Payer Bonus for Physician TIME 133

134 What Everybody Fears: All Won t Go Well (Costs Go Up) COST Bundled or Episode Payment Level Costs in FFS Costs in FFS Costs in FFS Costs in New Pmt TIME 134

135 COST Bundled or Episode Payment Level Many Different Reasons Costs May Increase Beyond Payment Costs in FFS Costs in FFS Costs in FFS Excess Cost Costs in New Pmt Many Avoidable Complications Failure to Follow Guidelines Overutilization of Services Large Random Variation New, High-Cost Treatment Unusually Costly Patient Higher-Severity Patients TIME 135

136 COST Bundled or Episode Payment Level Physicians Should NOT Be Expected To Take Insurance Risk Costs in FFS Costs in FFS Costs in FFS Excess Cost Costs in New Pmt Many Avoidable Complications Failure to Follow Guidelines Overutilization of Services Large Random Variation New, High-Cost Treatment Unusually Costly Patient Higher-Severity Patients Provider Performance Risk Insurance Risk TIME 136

137 COST Bundled or Episode Payment Level Four Mechanisms for Separating Insurance and Performance Risk Costs in FFS Costs in FFS Costs in FFS Excess Cost Costs in New Pmt Many Avoidable Complications Failure to Follow Guidelines Overutilization of Services Large Random Variation New, High-Cost Treatment Unusually Costly Patient Higher-Severity Patients Performance Risk (Physician s Responsibility) Risk Corridors Risk Exclusions Outlier Pmt/ Stop-Loss Severity Adjustment TIME 137

138 APPENDIX

139 What about Primary Care and Non-Proceduralists?

140 Example: Reducing Hospital Readmissions TODAY $/Patient # Pts Total $ Physician Svcs Office Visits $ $30,000 Hospital Pmt $7, $1,400,000 Total Pmt/Cost $1, $1,430,000 Readmissions for Chronic Disease Patients 1000 patients discharged from hospital Primary care practices only see 30% of patients after discharge 20% of patients are readmitted within 30 days Payer is spending over $1400 per patient on PCPs and readmissions 140

141 Most of the Money Today Is NOT Going to the Physician TODAY $/Patient # Pts Total $ Physician Svcs Office Visits $ $30,000 Hospital Pmt $7, $1,400,000 Physician Payment is 2% of Total Spending Total Pmt/Cost $1, $1,430,

142 Pay Physicians Differently To Better Manage Post-Acute Care TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % Hospital Pmt $7, $1,400,000 Total Pmt/Cost $1, $1,430,000 Better Payment for Post-Discharge Care Physician paid more to ensure patients are seen soon after discharge with adequate time for assistance 142

143 Pay Physicians Differently To Better Manage Post-Acute Care TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt $7, $1,400,000 Total Pmt/Cost $1, $1,430,000 Better Payment for Post-Discharge Care Physician paid more to ensure patients are seen soon after discharge with adequate time for assistance Practice has a nurse care manager available to do patient education and make home visits to high-risk patients 143

144 Can We Afford a 6-Fold Increase in Spending on Primary Care? TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt $7, $1,400,000 Total Pmt/Cost $1, $1,430,000 Better Payment for Post-Discharge Care Physician paid more to ensure patients are seen soon after discharge with adequate time for assistance Practice has a nurse care manager available to do patient education and make home visits to high-risk patients 144

145 Yes, IF It Successfully Prevents Readmissions TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt $7, $1,400,000 $7, $840,000-40% Total Pmt/Cost $1, $1,430,000 $1, $1,013,750-29% Better Payment for Post-Discharge Care A 40% reduction in readmissions will more than pay for a dramatic increase in spending on improved primary care 145

146 Win-Win for Physicians & Payer, But What About The Hospital?? TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt $7, $1,400,000 $7, $840,000-40% Total Pmt/Cost $1, $1,430,000 $1, $1,013,750-29% Physician Wins Hospital?? Payer Wins 146

147 Adequacy of Payment Depends On Fixed/Variable Costs & Margins TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt Fixed Costs $4,200 60% $840,000 Variable Costs $2,450 35% $490,000 Margin $350 5% $70,000 Subtotal $7, $1,400,000 Total Pmt/Cost $1, $1,430,

148 Now, if the Number of Readmissions is Reduced TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt Fixed Costs $4,200 60% $840,000 Variable Costs $2,450 35% $490,000 Margin $350 5% $70,000 Subtotal $7, $1,400, Total Pmt/Cost $1, $1,430,

149 Fixed Costs Will Remain the Same (in the Short Run) TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt Fixed Costs $4,200 60% $840,000 $840,000-0% Variable Costs $2,450 35% $490,000 Margin $350 5% $70,000 Subtotal $7, $1,400,000 Total Pmt/Cost $1, $1,430,

150 Variable Costs Will Go Down in Proportion to Readmissions TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt Fixed Costs $4,200 60% $840,000 $840,000-0% Variable Costs $2,450 35% $490,000 $2,450 $294,000-40% Margin $350 5% $70,000 Subtotal $7, $1,400,000 Total Pmt/Cost $1, $1,430,

151 Let s Give The Hospital an Increase in Contribution Margin TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt Fixed Costs $4,200 60% $840,000 $840,000-0% Variable Costs $2,450 35% $490,000 $2,450 $294,000-40% Margin $350 5% $70,000 $73,500 +5% Subtotal $7, $1,400,000 Total Pmt/Cost $1, $1,430,

152 Hospital Has Much Lower Revenue, But is Covering Its Costs Better TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt Fixed Costs $4,200 60% $840,000 $840,000-0% Variable Costs $2,450 35% $490,000 $2,450 $294,000-40% Margin $350 5% $70,000 $73,500 +5% Subtotal $7, $1,400,000 $10, $1,207,500-14% Total Pmt/Cost $1, $1,430,

153 And the Payer Still Saves Money (Just Not As Much) TODAY TOMORROW $/Patient # Pts Total $ $/Patient # Pts Total $ Chg Physician Svcs Office Visits $ $30,000 $ $93, % RN Care Mgr $0 $80,000 Subtotal $30,000 $173, % Hospital Pmt Fixed Costs $4,200 60% $840,000 $840,000-0% Variable Costs $2,450 35% $490,000 $2,450 $294,000-40% Margin $350 5% $70,000 $73,500 +5% Subtotal $7, $1,400,000 $10, $1,207,500-14% Total Pmt/Cost $1, $1,430,000 $1, $1,381,250-3% 153