Economists and policy-makers have been trying to determine whether the growth in healthcare spending has slowed and, more importantly, whether it will be slower in the future than the past. Although the precise trajectory of future healthcare spending will depend on a range of factors that are difficult to predict, it seems a safe bet that spending will continue to grow as fast as or faster than the economy as a whole. The reason is simple: the economics of the healthcare industry are still fundamentally the same as in every other industry – greater economic rewards accrue to those who sell more products and services – and unless that changes, we will continue to see the same kinds of profit-maximizing, entrepreneurial behavior that the nation celebrates in every other industry.
Hospital services have been the biggest and fastest growing share of healthcare spending in recent years. In most ways, the economics of running a hospital are similar to the economics of running a manufacturing firm – significant capital investment is needed in facilities and equipment, and as long as products/services can be sold for a price above the marginal cost of production, profits increase when more products/services are sold and vice versa.
However, unlike manufacturing firms, we expect hospitals to over-invest in facilities and equipment. We want the emergency room to be ready to go at all times in case we have an accident. We want the cardiac catheterization lab to be open 24/7 with the latest equipment and highly skilled staff ready to treat us quickly if we have a heart attack. But we don’t pay hospitals for this standby capacity, we only pay them when they actually treat someone. So the hospital has to find ways to deliver enough services to paying customers to cover the costs of the idle capacity we expect the hospital to maintain. That’s easier for hospitals to do than businesses in other industries because third party payers are covering most of the cost for consumers, and so it leads to faster growth in healthcare spending than in other industries.
What about physicians? What we most want doctors to do is keep us healthy, but Medicare and most commercial insurance plans don’t pay doctors at all when their patients stay healthy, they only pay when the physicians deliver services and procedures. Moreover, payers pay more for procedures than office visits even if the amount of time involved for the physician is the same. So if a physician is struggling to pay the rising fixed costs of running a practice – the office space, equipment, and staff – in the face of flat Medicare payments, the solution is to do more procedures on sick patients, not spend time helping patients stay well. Government cuts to payments and demands for greater price competition further increase the pressure to deliver more services. This is one area where hospitals and physicians have very “aligned incentives.”
The “shared savings” programs that are currently so popular with Medicare and commercial health plans don’t change these fundamental economic principles because they don’t change the underlying fee-for-service payment system. Since both hospitals and doctors have high fixed costs, the marginal revenue they receive for most procedures is much higher than the marginal cost of delivering the procedures. As a result, the losses they would experience by doing fewer procedures are far greater than what they would receive back through most shared savings programs. Moreover, the complexity and uncertainty of the shared savings formulas, combined with the delay in calculating and distributing shared savings payments, makes it even less likely that providers will willingly make major cuts in their own operating margins.
The conclusion is inescapable – if we don’t fundamentally change the way we pay for healthcare, we won’t change the economic principles that continue to drive the rapid growth in healthcare spending. Procedure-based episode payments for hospitals aren’t the answer; they don’t do anything to discourage unnecessary procedures and they may make procedures even more profitable than before. The solution is to pay physicians and hospitals based on the health problems their patients have, not based on the number and types of procedures they perform. These condition-based payments will give physicians and hospitals the flexibility they need to redesign care without unnecessary tests and procedures, but also the accountability to ensure that outcomes are better and total spending is lower.
As the Choosing Wisely® campaign has demonstrated, there are opportunities to reduce healthcare spending without rationing in every medical specialty. The American Medical Association, specialty societies such as the American College of Cardiology and the American Society of Clinical Oncology, and some provider organizations have been actively working to develop the kinds of true payment reforms that will support lower-cost, higher-quality care. The biggest barrier has been getting Medicare and commercial health plans to make fundamental changes in the way they pay for patient care.
The faster we can design and implement better ways of paying for healthcare, the sooner we will be able to reap the many benefits of higher quality, more affordable health care.
(This post first appeared on the Altarum Institute blog.)
There is growing national concern that consolidations of healthcare providers are leading to higher prices for healthcare services. The June 2014 issue of the policy magazine Health Affairs includes four separate papers that propose a range of policy options to try and address this issue. Unfortunately, those hoping for answers will not find the Health Affairs papers very satisfying. Not only is there little agreement among the authors about what to do, most of them do not express much enthusiasm about either the feasibility or benefits of the options they do identify.
False Premises Lead to Wrong Conclusions
Most policy prescriptions about prices and market power are based on three fundamentally false premises:
We Don’t Pay Hospitals and Doctors For What We Really Want Them To Do
When we’re injured, we want a hospital close by that is ready to treat the injury quickly and effectively. When we have the symptoms of a heart attack, we want a hospital close by that is ready to quickly and accurately determine if we’re having a heart attack and if so, to treat it quickly. If a disaster strikes our community, we want a hospital close by that can respond rapidly and treat all of those who are injured.
But we don’t pay hospitals to be there when we need them. We only pay them when they actually do something for us. If you’re not injured, the hospital doesn’t get paid for having the emergency room staffed and ready for you. If you don’t have a heart attack, the hospital doesn’t get paid for having a cardiac catheterization lab organized to ensure you have a low door-to-balloon time. If your community doesn’t have a disaster, a terrorist attack, a flu epidemic, or any similar unfortunate event, the hospital doesn’t get paid for the capacity it has created and the preparations it has made to deal with such events.
The hospital maintains a certain amount of standby capacity as a form of insurance for the community so it can respond to needs when they arise, and then it adds additional capacity in response to both actual patient needs and discretionary choices that physicians and patients make. However, Medicare, Medicaid, and commercial health plans pay only for the services provided, not the “insurance” of the standby services. As a result, the hospital has to treat enough patients in order to generate the revenues needed to cover its standby capacity, and that can lead to overutilization.
Not only do we expect hospitals to be there when we need them, we expect hospitals to care for people whether they can pay or not and to care for patients on Medicaid even if the Medicaid payment is less than what it costs to deliver care. As a result, hospitals have to charge the paying patients more in order to cover the losses they incur on the under-paying and non-paying patients.
Physicians face many of the same kinds of problems with current payment systems that hospitals face. What we really want a primary care physician to do is to keep people healthy, but a PCP isn’t paid at all if a patient doesn’t need office visits or if a problem can be handled over the phone. We’d like specialists to take the time to help patients decide whether they need a risky, invasive procedure, but if fewer patients choose to have the procedure, the specialists may not have enough revenues to cover their practice expenses, even though the patients may be better off. And if you think it’s only the hospital that needs to be available 24/7, imagine how the hospital will treat anyone during the night or on a weekend if there isn’t a physician available during those same times. However, physicians aren’t paid by Medicare or health plans to be available in case patients need them in the hospital, only hospitals pay them for that.
If doctors and hospitals do a better job of keeping patients well, they may need to be paid more for the patients who do get sick in order to continue covering the fixed costs of maintaining hospital standby capacity and the operating costs of physician practices. However, even with higher payment for individual services, overall spending can still be lower if fewer patients need expensive treatment.
Current Payment Reform Proposals Make the Problem Worse, Not Better
Although there is growing recognition that changes in payment systems are needed, most of the payment reforms being discussed or implemented by Medicare and commercial payers don’t really solve the problems with the current payment system and they may actually make some aspects of the problem worse.
The Right Approach: True Payment Reform
What’s needed are true payment reforms – accountable payment systems that give physicians and hospitals the flexibility to redesign care, reward them for keeping patients healthy, pay them adequately for treating the patients who do need care, and give them accountability for ensuring that costs are lower and quality is higher. Several different approaches to accountable payment systems could be used:
All of these payment systems would support the ability of physicians and hospitals to deliver better care at lower cost. Although in most cases, solo/small physician practices and independent hospitals would not be able to manage these types of payments on their own, there is no need for them to merge or consolidate to do so. Physicians can work together through an Independent Practice Association and physicians and hospitals can work together through a Physician-Hospital Organization to manage accountable payment systems.
What About Prices?
While better payment systems are a necessary element of a solution to controlling healthcare costs, payment reform isn’t sufficient. In addition to payment systems that reward providers for keeping patients healthy rather than giving them more expensive treatments, we also need ways to ensure they keep patients healthy at the lowest possible cost.
Rather than forcing patients into payer-defined narrow networks, patients should have the responsibility for choosing providers based on both cost and quality. However, it’s impossible for patients to compare prices on the over 7,000 CPT codes and over 700 DRGs used in today’s payment system, particularly when they don’t even know for sure which of those services they’re going to receive. The accountable payment models described above would define prices based on a patient’s health problems rather than the procedures they receive, so patients can choose the physicians and hospitals that offer the best combination of price and outcomes for the specific health problems those patients are facing.
Right-Sizing Healthcare Delivery for Choice and Competition
Of course, consumer choice can only control prices if there are choices of providers available. If we design payment systems that do not require physicians and hospitals to consolidate into large systems, and if we remove unnecessary regulatory requirements that increase costs for smaller providers or prevent them from participating in better payment models, then it will be more likely that patients will have multiple providers to choose from.
Purchaser-Provider Collaboration to Find Win-Win-Win Solutions
Physicians and hospitals will need to collaborate to determine what the right amount of care is for a patient population and how much it will cost to deliver that care. Purchasers will need to implement new payment systems and patient benefit designs that support the better care that providers want to deliver. Consequently, payment reforms have to be designed in collaboration with providers, not imposed on them by payers. In many cases, all of the stakeholders can “win” – i.e., patients can get better quality care, purchasers can spend less, and providers can be more financially viable – if they work together in a collaborative way to design “win-win-win” payment reforms. Instead of purchasers and providers treating each other as the enemy, and focusing on ways to beat the other in a war over prices, they need to recognize that each can help the other win.
Fortunately, a growing number of communities have neutral conveners ready to help find win-win-win solutions. Regional Health Improvement Collaboratives – non-profit multi-stakeholder organizations focused on improving healthcare quality and reducing costs – can facilitate discussions between purchasers and providers and provide the objective data analysis both sides can trust in designing truly higher-value healthcare delivery and the payment systems needed to support it. Purchasers and providers need to recognize the value of this kind of service and use it to move to better payment and delivery systems as quickly as possible.
A more detailed discussion of the above points can be downloaded at: www.chqpr.org/downloads/Payment_Reform-The_Antidote_to_Market_Power.pdf .
A bipartisan, bicameral bill was announced earlier this month as the result of a joint effort by the U.S. House Energy and Commerce Committee, House Ways and Means Committee, and Senate Finance Committee to repeal and replace the Sustainable Growth Rate formula in Medicare. There is no other industry in America that tells its key professionals that their compensation will be cut by 25% at the end of each year regardless of whether they are doing a good job or not, but that’s what the Sustainable Growth Rate formula requires in the Medicare program. Repeal is long overdue and the members and staff of the Committees should be commended for advancing a solution in a collaborative way.
The key challenge now is how to pay for the bill. Unless Congress can find over a hundred billion dollars to cover the projected cost of the legislation at a time when the federal deficit is one of the biggest challenges facing the country, the superb work of the three committees will go to waste.
Although Congress is looking at ways to cut fees to other healthcare providers, cut services to Medicare beneficiaries, or make cuts in non-healthcare programs in order to generate enough savings to pay for the bill, a better solution is actually contained within the bill itself in a little-discussed section that encourages the development and use of “Alternative Payment Models.”
Alternative payment models for physicians can save a lot of money for Medicare while actually paying physicians better because the vast majority of healthcare spending doesn’t go to physicians. In Medicare, physician fee schedule payments represent only 16% of total spending in Medicare Parts A, B, and D. Over the next decade, the Congressional Budget Office projects that physician fee schedule payments will represent only 12% of total Medicare spending. However, physicians prescribe, control, or influence most of the lab tests, images, drugs, hospital stays, and other services that make up the other 88%.
Study after study has shown that if healthcare services are redesigned to improve quality and efficiency, tens of billions of dollars in healthcare spending could be saved every year by avoiding unnecessary tests, procedures, emergency room visits, and hospitalizations; by reducing infections, complications, and errors in the tests and procedures which are performed; and by preventing serious conditions and providing treatment at earlier and lower-cost stages of disease. If physicians are given the ability to redesign care for patients in a way that reduces unnecessary spending on all of the other services, the physicians could be paid more and still reduce total Medicare spending.
How much would physicians have to save Medicare in order to pay for the SGR repeal?
The Congressional Budget Office projects that Medicare Part A, B, and D spending over the next decade will total more than $6 trillion. The cost of repealing the SGR is currently estimated to be about $115 billion. However, that figure is unrealistically low, because it assumes that physicians would receive no payment increases over the next decade, even though they haven’t received any payment increases over the past decade. The very modest 0.5% increase in physician fees contained in the compromise bill would add another $20-$30 billion to Medicare spending, bringing the total cost of the repeal and updates to about $140 billion.
$140 billion represents only 2.3% of total Medicare spending, and only 2.6% of the non-physician fee schedule spending. If physicians can reduce enough of the unnecessary and problematic spending in Medicare so that non-physician spending decreases by a mere 3%, they will have more than paid for the SGR repeal.
Alternative payment models are the key to this approach for a very simple reason. The current fee-for-service payment system poses major barriers to physicians who want to redesign care in ways that benefit patients and save money for Medicare:
• Today, physicians are financially penalized for reducing unnecessary services and improving quality. Under the current Medicare payment system, physicians lose revenue if they perform fewer procedures or lower cost procedures, even if their patients are better off. Most fundamentally, under Medicare, physicians don’t get paid at all when their patients stay well.
• Some high-value services aren’t paid for adequately or at all. Medicare doesn’t pay physicians to respond to a patient phone call about a symptom or problem, even though those phone calls can avoid far more expensive visits to the emergency room. Medicare won’t pay primary care physicians and specialists to coordinate care by telephone or email, yet it will pay for duplicate tests and the problems caused by conflicting medications.
Unfortunately, most of the “payment reforms” being pursued today don’t fix these problems. Pay for performance programs and shared savings programs have had very little impact on costs for a simple reason: the barriers described earlier aren’t solved by adding a small bonus or penalty on top of the existing fee-for-service system. Even tying payment to quality measures will have little impact on quality if physicians are forced to lose money in order to implement better care.
Truly different payment models create “win-win-win” approaches to paying physicians that can help improve quality and reduce total healthcare spending without forcing physicians to take financial losses themselves. These accountable payment models have three key characteristics:
• They give physicians the flexibility to deliver the care patients need without worrying about whether the payment for one type of service is lower than another or whether they will lose revenue by performing fewer procedures.
• They give physicians accountability for ensuring that changes in care result in spending that is lower than it would otherwise have been, but this accountability is limited to the kinds of spending the participating physicians can actually control or influence.
• They separate insurance risk and performance risk, so physicians are not penalized financially for taking care of sicker patients or patients with unusually complex conditions.
In order to use accountable payment models to pay for the SGR repeal bill, two things have to happen:
1. Accountable payment models need to be available in the Medicare program for every physician in every specialty; and
2.Those accountable payment models need to be designed by physicians in ways that will benefit patients and save money for Medicare, but also be feasible for physicians to implement.
Although CMS has done a lot of good work in advancing different payment models over the past several years, there are few alternative payment options available to most physicians today, particularly specialists. The only “payment reform” that exists as a formal Medicare program (rather than a demonstration project) is the Medicare Shared Savings Program, but as noted earlier, this is not really a payment reform, because it leaves the current fee for service payment system completely unchanged.
The barrier to getting more alternative payment models in place faster is the belief that these models have to be “tested” in a demonstration program before they can be made available for physicians to voluntarily choose to participate in. However, demonstration projects take years to put in place and evaluate, and they are unlikely to show the true impacts of a significantly different payment model because physician practices are unlikely to fundamentally redesign the way they deliver care in response to a payment change that may only last a few years.
Over the past 30 years, the payment systems that Medicare uses for its largest areas of expenditure have been implemented without conducting a demonstration or evaluation in advance. For example, the Inpatient Prospective Payment System (hospital DRGs) was designed and implemented for most hospitals across the country without a demonstration. The RBRVS Physician Fee Schedule was implemented for all physicians beginning in 1992 after it was mandated by Congress in 1989, with no demonstration or evaluation of the payment system before it was implemented. These payment systems were implemented in a phased approach and then monitored and regularly adjusted to correct any unanticipated problems and to adapt the payment systems to changes in science, technology, and other factors that occur over time.
Similarly, accountable payment models can be implemented and then monitored and regularly adjusted to correct any unanticipated problems. Each accountable payment model would have to be explicitly structured to assure CMS that Medicare spending would be lower than it would otherwise be. There would be no need to evaluate such an accountable payment model in order to determine whether it will save money; the physicians would be guaranteeing that it would reduce the types of Medicare spending covered by the model if the physicians were paid under the accountable payment model. If at any point, CMS identifies a situation where quality is being harmed for a particular provider’s patients, or where spending is not truly being reduced, that provider’s participation in the payment model could be terminated, similar to what CMS can do today in its standard payment systems. If physicians find they can’t successfully manage under the new payment model, they could work with CMS to improve it or return to fee for service payment.
Not all physicians will have the ability to successfully participate in alternative payment models that guarantee savings to CMS, particularly during the early years of implementation. Consequently, current payment systems should not be completely replaced by any alternative payment model, but rather, physicians and other providers who wish to participate in such models should be given the ability to do so voluntarily, the same way that the Medicare Shared Savings Program is structured today for ACOs.
Many physicians, medical societies, and multi-stakeholder Regional Health Improvement Collaboratives have been working to develop payment models that are specifically designed to improve patient care and save payers money. There needs to be a mechanism for them to bring those models to CMS on an ongoing basis, have them rapidly reviewed and refined, and then put into place quickly. This will not only ensure there are enough savings to pay for the SGR repeal bill, but it will also enable the largest number of Medicare beneficiaries to benefit from higher quality care.
1. Congressional Budget Office. May 2013 Medicare Baseline. May 14, 2013.
2. Congressional Budget Office. The Budget and Economic Outlook 2014 to 2024. February 2014.
3. Projected costs or savings from other provisions have led to cost estimates above or below that amount for the individual bills reported by the Committees.
4. Miller HD. Ten barriers to payment reform and how to overcome them. [Internet] Pittsburgh, PA: Center for Healthcare Quality and Payment Reform; 2013. Available from: http://www.chqpr.org/reports.html.
5. Miller HD. From volume to value: Better ways to pay for health care. Health Aff (Millwood). 2009 Sept-Oct; 28(5): 1418-28.
6. Section 1899(i) of the Social Security Act allows the Centers for Medicare and Medicaid Services to implement accountable payment models other than shared savings, but it has chosen not to do so.
YOU CAN DOWNLOAD A PDF VERSION OF THIS POST AT: www.paymentreform.org/downloads/Paying_for_SGR_Repeal.pdf
It’s the time of year when many people must choose a health insurance plan. Although the national news has focused on the problems people are having in signing up for coverage through the new federal health insurance exchange, thousands of senior citizens are also facing choices about whether to get their health coverage through the traditional Medicare program or one of many different Medicare Advantage insurance plans, and many workers with employer-sponsored insurance will have new choices to make during their open enrollment period.
Many people are being forced for the first time to evaluate different health plans based on which physicians and hospitals are “in-network,” because employers and health insurance companies are increasingly offering “narrow network” health plans in an effort to reduce premiums.
The dictionary defines a “network” as a “group or system of interconnected people or things.” Traditionally, most health plan networks haven’t really been coordinated systems, but merely lists of physicians and hospitals that have agreed to give a bigger discount to the health plan. However, research shows that patients can stay healthier and get better quality care at a lower cost if the patients use a true network of high quality physicians who work together in a coordinated way to deliver better outcomes.
What does such a “high-value” network look like?
The most important elements of a good network aren’t the hospitals, because the network’s first goal should be to help you stay well so you don’t need a hospital at all. Instead, the most important component of a network is an adequate number of high-quality primary care practices. A truly high quality primary care practice does four key things for you: (1) it helps you get the preventive care you need to stay as healthy as possible; (2) it accurately diagnoses new health problems you experience and then provides or arranges for the most appropriate treatment in a timely fashion; (3) if you have a chronic disease such as asthma, diabetes, emphysema, or heart disease, it helps you manage that chronic condition successfully so you don’t have problems and end up in the hospital; and (4) if you need specialists, the practice helps you find the right specialists and makes sure all of your care is coordinated.
Unfortunately, most people don’t get truly high-quality primary care in any network today. It’s not because the primary care physicians are bad, it’s because of the way the physicians are paid by the health plan. For example:
• If you’re frustrated by how little time your primary care physician (PCP) spends with you when you have a visit, blame your health insurance, not the doctor. Medicare and most health plans pay doctors on the assumption that a typical office visit will last only 15 minutes. Moreover, doctors get paid less if they address multiple issues in the same visit than if they bring you back multiple times, even though it would save you time and money to get everything done in one visit.
• If you’re angry because your doctor spends more time during your short visit typing on the computer than listening to you, blame your health insurance, not the doctor. Medicare and many health plans now reduce physicians’ pay if they don’t enter detailed data about you in an electronic health record.
• If you have trouble getting your PCP to answer the phone or respond to an email when you have a question or health problem, don’t blame the doctor, blame your health insurance. Medicare and most health plans won’t pay doctors for phone calls or emails with patients, they only pay for office visits. The more time a doctor spends on the phone, the less time he or she has to see patients in the office, but the only way anybody in the physician practice can get paid is if the doctor (or a nurse practitioner or physician assistant) sees enough patients in the office every day.
Some health plans are beginning to change the way they pay primary care physicians so the physicians can better customize care to what their patients really need. These “patient-centered medical home” programs are a step in the right direction, but most of them have been too small to make a significant difference. That’s starting to change, but not nearly fast enough. Fewer doctors are going into primary care because of their frustrations with the way they’re paid, so it’s going to be harder and harder for people to find good primary care physicians if health plans don’t start paying PCPs in better ways.
From time to time, you’ll have a health problem that requires help from a specialist. But which of the dozens of subspecialties is the right one? If you need multiple specialists, will they all coordinate what they do so you don’t receive conflicting medications or duplicative tests?
In a true “network,” your PCP would help you find the right specialists and work with them to ensure all of your care is coordinated. But once again, the way doctors are paid gets in the way. For example, in many cases, the specialist could advise you and your PCP over the phone about what to do, rather than making you wait for weeks or months until you can get an appointment to see the specialist in person. But Medicare and most health plans don’t pay specialists for giving advice over the telephone or by email, they only pay for office visits and procedures. As a result, many specialists can’t see new patients quickly because their calendars are filled with office visits from patients they don’t really need to see in person. Specialists also don’t get paid for time they spend talking with other specialists or with PCPs to coordinate care, so it’s no wonder that patients can find themselves falling between the cracks.
Some health plans are beginning to pay differently for the specialists in the “medical neighborhood” as well as for the primary care “medical home.” In one pilot project, paying for email consultations with specialists resulted in dramatic reductions in the delays seriously ill patients experienced in getting appointments with specialists, because the specialists were able to successfully address other patients’ problems quickly through an email exchange with their PCP.
If you do need hospital care, you obviously want to make sure there are high-quality hospitals in your health plan’s network that can take care of you. Unfortunately, the hospitals in our region don’t publish information about the quality of the care they provide, so it’s impossible to know whether one network’s hospitals are better than another’s. Although you hear a lot of advertising about how certain hospitals are the “best” at one thing or another, most of those rankings aren’t based on actual outcomes for specific procedures. The limited data available suggest that for common hospital procedures, most of the hospitals in the Pittsburgh Region deliver care of similar quality, and many of the independent community hospitals do it at a much lower cost. For more complex conditions, the best hospital for you may not be in the Pittsburgh Region at all. Some national employers, such as Walmart and Lowes, are now paying not only medical costs but travel expenses so their employees can go to hospitals such as the Cleveland Clinic and Johns Hopkins that have committed to provide high quality care at an affordable cost.
So before you decide which health plan to use, first choose a primary care practice that is committed to high-quality, patient-centered care. Ask the PCP which health plans pay to support high-quality care, and ask which plans pay specialists so they can work as a team with your PCP. If you choose a health plan that supports truly coordinated, high-quality primary and specialty care, you’ll be healthier, you’ll spend less, and you may never need to worry about which hospitals are in the network.
(A version of this post appeared as the Regional Insights column in the Sunday, November 3, 2013 edition of the Pittsburgh Post-Gazette.)
Most of the literature on payment reform has focused on how to change the method of payment, but there has been relatively little attention to how to set an appropriate payment amount (i.e., the price). Regardless of how good the payment method is, if the payment amount is too low, providers will be unable to deliver quality care, and if the payment amount is too high, there will be no savings for purchasers/payers and little incentive for providers to reduce costs.
A major barrier to setting good prices in new payment systems is the difficulty providers have in getting good data on the utilization and costs of services that they do not deliver themselves. For example, in order for a physician to accept an episode of care payment for the type of treatment he or she delivers, the physician needs to know about all of the services that those types of patients have been receiving from the hospital, other physicians, and post-acute care providers, how much all of those providers are being paid, the frequency with which adverse events occur, and the extent to which any of those elements can be changed. Different prices will be needed for patients with different types of health conditions, and the impacts of risk adjustment and risk limits will need to be determined. The payer will need to have matching data so it can be sure the total episode price is lower than the average amount being paid today. (Similar data are needed under shared savings programs so that the provider can determine whether bonuses will cover its costs and whether it will be at risk for paying a share of cost increases.)
Electronic Health Records (EHRs), even if they are linked to Health Information Exchanges (HIEs), do not have enough information to fill this need. The only truly comprehensive information about all of the healthcare costs associated with an episode of care or with a group of patients, particularly the prices being paid for the services delivered, comes from claims data maintained by payers. Consequently, providers would be more willing and better able to participate in new payment models if they could get access to claims data from health plans, Medicare, and other payers.
Even if providers have access to claims data, however, most would not have the analytic capacity to assemble and analyze large claims databases, particularly if the data come from multiple payers. Also, there would be privacy concerns about giving providers patient-identifiable data in order to combine multiple claims records for the same patients.
The best solution is for all payers to contribute their data to a multi-payer database managed by a multi-stakeholder Regional Health Improvement Collaborative that can help providers analyze the data while protecting patient privacy. For example, the Maine Health Management Coalition and the Oregon Health Care Quality Corporation are combining and analyzing claims data from multiple employers and health plans to help healthcare providers in their states successfully participate in new payment models.
Some health plans are providing Regional Health Improvement Collaboratives with data on the services that patients received, but not the amount that was paid for those services. Although these limited data sets are helpful for analyzing opportunities for reducing unnecessary utilization of services, they are inadequate for designing new payment systems and for helping providers redesign care under those new payment systems. In order to determine whether a different way of delivering care is affordable under a new payment model, both the provider and the payer need to know whether the cost of the new care delivery approach will be lower than the existing approach, and this can only be determined accurately if information is available on the payment levels for all of the involved services. Health plans need to release claims data files to Regional Health Improvement Collaboratives that include “allowed amounts” (i.e., the prices paid for services) in order to accelerate the implementation of new payment systems. Employers and other purchasers need to demand the release of this data from their health plans, and if necessary, switch to health plans that will agree to release the data.
To date, one of the biggest gaps in the ability to create all-payer databases and help providers use them to redesign care and payment has been the inability to obtain Medicare claims data. Fortunately, this is finally changing: in November, 2012, the Centers for Medicare and Medicaid Services began giving access to Medicare claims data to organizations that meet legislative and regulatory standards as “Qualified Entities;” the first four such Qualified Entities are all multi-stakeholder Regional Health Improvement Collaboratives – the Oregon Health Care Quality Corporation, the Maine Health Management Coalition, the Kansas City Quality Improvement Consortium, and The Health Collaborative in Cincinnati. However, changes in the authorizing legislation for this program are needed so that the Medicare claims data can be used for analyzing opportunities to reduce costs, not just to produce publicly-reported quality measures.
(For additional details on this and other barriers to payment reform, download CHQPR’s report Ten Barriers to Payment Reform and How to Overcome Them.)
Changing the way Medicare and health plans pay provider organizations is necessary but not sufficient to support higher-value healthcare delivery. The compensation system for the individual physicians and other healthcare professionals who work in those organizations also has to change. Most physician compensation systems today, even for physicians who are “on salary,” are based on fee-for-service, i.e., the physician gets paid in part or in whole based on the number of visits they have or the number of procedures they perform. If this compensation structure continues when the provider organization begins being paid under a new payment model, the physician will be penalized for reducing unnecessary visits and procedures even though the provider organization would be rewarded, and the physician will be rewarded for higher volume even if it hurts the provider organization’s bottom line. It is difficult to imagine that Accountable Care Organizations can be successful if all of their member providers are still being based using fee-for-service.
Clearly, if payment systems are changed to reward value rather than volume, the compensation of individual physicians and other providers will also need to be changed to align with the structure of the new payment system, rather than with fee-for-service payment. Rather than primarily basing compensation on “productivity,” physicians will need to be compensated based on factors such as quality, teamwork, and overall cost-effectiveness that will determine the provider organization’s success under the new payment system.
However, it is difficult for a provider organization to change its physician compensation system if only a subset of its payers have implemented payment reforms. The factors that determine financial success under fee-for-service are, by definition, different from the factors that will determine success under new payment models, but if physicians are going to change the way they practice, they will do that for all of their patients, not just those covered by a particular payer. If the majority of patients are not covered by reformed payment systems, the provider organization will be penalized for changing its compensation system, but if it doesn’t change its compensation system, its ability to succeed financially in caring for patients covered under the new payment system will be limited. In short, trying to manage patient care under multiple payment systems can create a serious Catch-22 for physicians and their practices.
Aligning physician compensation with new payment systems can also be challenging because of federal and state laws designed to prevent fraudulent or abusive conduct under current payment systems. For example, the federal Civil Monetary Penalty statute imposes financial penalties on hospitals that make payments to physicians as an inducement to reduce or limit services to Medicare or Medicaid beneficiaries. The law has been interpreted by the Office of Inspector General at the U.S. Department of Health and Human Services as prohibiting such payments even if the services being reduced are not medically necessary or appropriate. Consequently, gain-sharing programs designed to share savings with physicians when unnecessary services are eliminated could make a hospital liable for civil money penalties, as well as putting it in violation of the federal Anti-Kickback statute and the Stark law.
Congress has recognized that changes in fraud and abuse statutes will be needed in conjunction with new payment models. The federal Affordable Care Act authorizes the Secretary of Health and Human Services to waive these statutes in conjunction with the Medicare Shared Savings Program and projects undertaken by the Center for Medicare and Medicaid Innovation. However, providers may be reluctant to revamp their compensation systems based on these kinds of temporary waivers. Permanent changes to the fraud and abuse statutes are needed if payment reforms are to be successful. In states that have enacted statutes similar to the federal laws, state legislatures will also need to make comparable changes.
(For additional details on this and other barriers to payment reform, download CHQPR’s report Ten Barriers to Payment Reform and How to Overcome Them.)
Two recent reports highlighted the growing consolidation of both health plans and hospitals across the country:
Which is the bigger problem — too few health plans or too few hospitals?
In a typical economic market, the more sellers of a particular product or service there are, the lower prices will be, because the sellers will compete on price in order to attract customers. This has led many people to believe that the way to get lower health insurance premiums is to have more health insurance companies competing to sell insurance in a state or region.
However, it’s not quite as simple as that, because health insurance companies are not only sellers of insurance, they’re also the buyers of our healthcare services. They negotiate with hospitals and physicians to set the prices paid for the services individuals and employers receive when they buy a health insurance policy. The more that health plans have to pay for hospital care, the more a health insurance plan will cost. And simple economic theory tells us that, all else being equal, bigger health insurance plans have more clout to negotiate lower prices for healthcare services than smaller plans do.
Most people experience this every day in retail. Consumers don’t buy goods directly from manufacturers; they buy them from retail stores. Does having more retail stores result in higher or lower prices for consumers? Big retailers like Walmart or Target can usually buy products from manufacturers for a lower price than smaller retail stores can, and so they can sell the products to consumers for less. If there were only one big retailer, consumers would probably see higher prices, because the monopoly retailer could keep the price discounts for itself in the form of higher profits. But conversely, if there were only small retailers, prices for consumers would probably also be higher, because those retailers couldn’t negotiate large price discounts from manufacturers.
What consumers pay depends not just on the number and size of retailers, but on how much competition there is among manufacturers of the product. For example, if there were only one company that manufactured televisions, it wouldn’t matter how many TV retailers there were or how big they were, because a monopoly television manufacturer could set the price as high as it wanted, and both the retailer and consumer would have to pay more to get a TV.
Just like retailers, health insurance companies sit in between the producers of healthcare services –hospitals and physicians – and the ultimate consumers of those services, i.e., patients. The more health plans there are, the smaller each of them will be, and that means they’ll have to pay higher prices to health providers, particularly big hospital systems. It also likely means the health plans will have higher administrative costs as a percentage of healthcare costs, since smaller health plans will have fewer economies of scale. Both of those things will push insurance premiums up. The only thing that competition among the health plans will reduce is their profits.
On balance, having more health plans will be more likely to increase premiums than to reduce them. Under the federal Affordable Care Act, health plans can only retain 15-20% of their premium revenues for administrative costs and profits; the remaining 80-85% must be spent on health care services and quality improvement activities. Even if greater competition among health plans resulted in, say, a 25% reduction in their administrative costs and profits, that would reduce premiums by at most 5% (i.e., 25% of the maximum 20% of premium that can be spent on non-medical expenses), whereas if bigger health plans could negotiate a 10% larger discount on the prices paid to healthcare providers, that could reduce premiums by 8% or more (10% of the minimum 80% of premium that’s devoted to medical expenses).
In fact, research indicates that having more health plans increases the prices paid for healthcare. For example, a 2010 study by Carnegie Mellon Professor Martin Gaynor and colleagues found that having five health insurers in a region instead of four would increase hospital prices by 7%, and a 2011 study by University of Southern California Professor Glenn Melnick and his colleagues found that hospital prices in markets with more health plan competition were 13% higher than in markets with a small number of large health plans.
It’s important to note that what counts is not the total size of the health insurance company, but how many people it insures in the local region, i.e., its local market share. When large national insurance companies enter a market, they may offer lower premiums than existing health plans, but it’s probably not because they’re getting lower prices from hospitals; it’s more likely that they’re just setting their prices below their costs in order to build their business, and paying for those discounts by charging higher premiums in other regions.
Unfortunately, although bigger health plans may be able to pay lower prices for healthcare services, fewer health plans also means less competition among health plans, and so consumers and employers may be less likely to receive the benefits of any lower prices the health plans pay providers. In addition, bigger health plans can also unintentionally encourage the creation of large, monopoly health systems. Since big health plans can demand bigger price discounts from smaller hospitals and physician practices than from large systems, small providers may be forced to either go out of business or merge with the large systems. This is a problem because of the growing evidence nationally that high healthcare costs are being caused by the high prices demanded by large, consolidated health systems. For example, research by University of California Professor James Robinson found that in markets where there were fewer hospital systems, prices were 13%-25% higher for a range of cardiac and orthopedic procedures.
The solution to high healthcare costs isn’t to change the number or size of health plans. The solution is to completely change the way we pay for health care:
What we need from health plans is for them to implement new payment systems and benefit designs that support effective competition by providers and more value-based choice by patients. Instead of trying to get more health plans in a state or region or asking them to compete on the size of discounts they can extract from providers, employers should be choosing the health plans that will support a rapid transition to higher-quality, lower cost healthcare.
Many providers have been reluctant to accept episode-of-care payments and global payments because of concerns about their ability to manage significant financial risk. Patient advocates may also oppose payment reforms that create financial risk for providers because of a fear that if providers take on responsibility for controlling costs, they will stint on services that patients need or avoid patients with significant health problems.
Although this barrier has typically been framed in terms of how much risk providers can take, the real issue is what type of risk providers can and should take. If episode payments and global payments are structured in ways that give providers accountability for costs they can successfully manage, then providers will be more willing to accept them; conversely, if a payment system demands that providers take accountability for costs they cannot control, then the providers will either be unwilling to accept the payment system or, if they do, they could risk financial problems, which is what happened to many providers under capitation contracts during the 1990s.
There are two key ways to structure payments so that they give providers only the types of financial risk they can manage:
There are several ways to structure payment systems to give providers accountability for the costs they can control, without putting them at risk for costs they cannot control:
A common way to protect providers from insurance risk is to make higher payments for those patients who have more health conditions or more serious health problems, i.e., to “risk-adjust” payments. For example, in the Blue Cross Blue Shield of Massachusetts Alternative Quality Contract, provider organizations receive a budget based on the number of patients they care for, but the budget is increased if the patients have more health problems, so the providers are accepting only performance risk, not insurance risk.
Some payers have raised concerns about using risk adjustment as part of a payment system because a patient’s risk score tends to increase as soon as they become part of a risk-adjusted payment system, and this can cause overall spending to increase rather than decrease. This happens because, under fee-for-service payment, the diagnosis codes used for risk adjustment are only recorded when a related claim for treatment is filed; as a result, many health conditions are not recorded in health plans’ claims data systems (particularly if patients have recently changed health plans). However, under a risk-adjusted payment system, the provider has an incentive to do complete coding of diagnoses, not just to ensure accurate payment, but to ensure that all of the patient’s health conditions are being managed in a comprehensive and coordinated way. Rather than eliminating risk adjustment entirely to avoid this artificial increase in risk scores (which could thereby discourage providers from taking on sicker patients), risk adjustment systems should be modified so that both the baseline risk score and current risk score are changed when a patient’s pre-existing condition is identified and documented. Broader use of electronic health records will help to address this problem by enabling risk adjustment to be based on complete clinical data on the patient’s past and current patient health conditions, not just on data recorded to support recent claims for payment to a particular health plan.
Current risk adjustment systems also need to be improved so they do not penalize providers for keeping their patients well. A patient’s risk score is typically based on the health problems that a patient has today, not on how those problems have changed as a result of the health provider’s care. So, for example, if a physician helps a patient lose weight or stop smoking, the patient’s risk score would decrease, and as a result, under a risk-adjusted payment system, the physician would receive a lower payment than if the patient had remained unhealthy, thereby penalizing the physician for a successful health improvement effort. Improved risk adjustment systems that capture such changes over time will be needed, particularly if more providers and payers sign multi-year contracts to manage healthcare cost and quality.
At best, risk adjustment is only a partial solution; no formula could ever be 100% accurate in predicting legitimate variations in costs, simply because of the myriad factors that can affect patient costs and outcomes. To adequately protect both providers and patients, risk adjustment should be supplemented with risk limits, such as:
In some cases, it is clear that certain kinds of costs cannot reasonably be controlled by a provider, and rather than using risk adjustment formulas or other complex calculations to adjust for this, these costs (or the situations that lead to them) should simply be excluded from accountability altogether. For example, the costs associated with patients who are seriously injured in accidents could simply be excluded entirely from a global payment model for a small group of physicians, and be paid for separately on an episode-of-care basis or under traditional fee-for-service.
In other cases, as noted earlier, a provider may be able to control certain aspects of a patient’s healthcare costs but not others. Healthcare providers are far more likely to be willing to accept responsibility for the utilization and cost of services they deliver or prescribe themselves than services chosen by other providers. (For example, primary care providers can influence the rate at which their patients go to an emergency room, but not the number of tests that are ordered once the patient arrives; emergency room physicians can influence the number of tests ordered in the emergency room, but not how many patients come to the emergency room for conditions that could have been treated by their primary care provider.) To address this, payment to physicians in a particular specialty can be designed to only include the costs of the services that these physicians can control or significantly influence, while excluding the costs of other services. (The payer would continue to pay for the excluded services on either a fee-for-service basis or through separate payment reforms designed for the other specialties). In some cases, one provider may be willing to take accountability for whether a patient uses a particular service delivered by another provider, but not for the price of that service, particularly if the provider of the service is in a position to negotiate high prices or increases in prices; this can be addressed by making the accountable provider responsible for the utilization of the services, but excluding accountability for increases in the price of the services.
Providers will also be better able to accept accountability for controlling costs if their patients are supporting their efforts. If a provider does not know until after the fact who their patients are, or if the patients’ insurance benefits do not give them the ability and incentive to help the provider change their care in ways that will improve quality and lower cost, then the provider may be unable to control some of the key factors that are driving increases in costs. If the patients’ benefit structure cannot be changed to support a provider’s ability to control certain aspects of cost, then all or part of those costs could be excluded from accountability under the payment model. (For example, if some patients spend part of the year living in another part of the country, but their health insurance will pay for them to receive elective procedures while they are away, the designated provider in their home community might only be expected to control costs of care during the time the patient is actually resident in the local community, rather than all of the costs incurred by those patients during the entire year.)
It is impossible for anyone to predict exactly what will happen when payers and providers move to completely different payment models. New drugs, new medical devices, and new ways of delivering care are being developed at a rapid pace, and these can either help or hurt providers’ ability to control costs and improve quality. It is not surprising that there are typically long delays in negotiating payment reform contracts, since both payers and providers will try to anticipate all possible contingencies and incorporate provisions covering them in the contracts.
This problem will be exacerbated with multi-year contracts. Multi-year contracts between payers and providers provide a better opportunity for providers to make changes in care delivery that take time to implement and to reap returns on investments in preventive care and infrastructure, and they give payers greater ability to control the trend in healthcare costs (for example, the Alternative Quality Contract developed by Massachusetts Blue Cross Blue Shield is a five-year contract that was designed to slow the growth in spending rather than achieve immediate savings). However, the longer the contract, the greater the potential for unexpected events to occur, the greater the difficulty of building appropriate protections into a contract to deal with those unexpected events, and the greater the reluctance providers and payers will have to sign.
A solution to this is simply to acknowledge that unexpected events may occur and to provide for opportunities to make adjustments in the contract to deal with them. Of course, the party which is disadvantaged by the unexpected event will be more interested in making an adjustment than the party which benefits from it, so the contract could provide for having a neutral arbitrator resolve any disagreements.
(For additional details on this and other barriers to payment reform, download CHQPR’s report Ten Barriers to Payment Reform and How to Overcome Them.)
Even though the serious problems with fee-for-service payment have been widely acknowledged, many “payment reforms” do not change fee-for-service payment at all, but merely add new forms of pay-for-performance bonuses or penalties on top of it. Trying to fix a broken system merely by adding a new layer of incentives can be problematic for physicians, hospitals, and other healthcare providers, so it is not surprising that to date, acceptance of these types of payment changes has been slow, and where they have been implemented, the impacts on cost and quality have often been relatively small.
The most common payment change being implemented by Medicare and many commercial health plans today is “shared savings.” Under the shared savings approach, Medicare or the health plan pays providers using exactly the same fees as they receive today for their services, and then pays a bonus (or imposes a financial penalty) on the providers if the total cost of services for their patients is less than (or greater than) the amount that would otherwise have been expected.
The fact that shared savings programs do not actually change the underlying fee-for-service system creates significant challenges for providers. For example:
Having two or more providers participating in a shared savings arrangement creates a version of the prisoner’s dilemma: if provider #1 makes a good faith effort to reduce unnecessary services but provider #2 does not, provider #2 would “win” by maintaining its own fee revenues while also potentially receiving part of the savings generated by provider #1. If provider #2 increases its volume of services, it would receive more revenue and also thwart the opportunity for provider #1 to receive any shared savings to offset the revenue it lost.
The shared savings model is biased against hospitals which do not employ physicians, since under the most common shared savings approach, all savings are credited to the organizations where the patients’ primary care physicians work, even if the savings are generated through improved care or reduced utilization in the hospital. Forcing hospitals to solve that problem by acquiring physician practices may simply lead to higher prices, not lower costs.
Another serious problem with the shared savings model is that once the shared savings contract between the payer and provider ends, any shared savings bonuses will also typically end; providers will still be in the same fee-for-service system they had before, but they will now have lower revenues if they have reduced the volume of fee-based services in order to obtain shared savings payments, and they may also be receiving lower fee levels for individual services if payment cuts are being made through other policies, such as the federal Sustainable Growth Rate formula. In order to obtain continued shared savings payments in the future, a physician or hospital would have to find new sources of savings. Providers may be unwilling to significantly change the way they deliver care or invest in better ways of delivering care if they can only reap the benefits of savings for a few years.
Some payers have made modifications to the payment system to try and address some of these problems, but in general, the modifications have not changed the underlying fee-for-service payment system in any fundamental way. For example:
True payment reform cannot be achieved by adding new layers of bonuses and penalties on top of what is still fundamentally a fee-for-service payment system. Moreover, to be successful, a new payment system needs to be more attractive for providers than fee-for-service payment, not less, while still reducing costs for payers and improving quality for patients.
For most types of patients and health conditions, fee-for-service payment must be replaced entirely with a new payment system that gives providers (a) greater flexibility to deliver the best combination of services for the patient, and (b) the accountability to ensure the combined cost of those services is less than the payment amount (along with the ability to retain any additional savings generated indefinitely).
Examples of such better payment systems include:
Where these approaches have been used, both providers and payers have benefited. For example, in the Medicare Acute Care Episode (ACE) Demonstration, which “bundles” physician and hospital payments (i.e., it makes a single payment to both providers, rather than separate payments to each), Medicare has saved money, physicians have received higher payments, hospitals have been able to reduce their costs and improve their operating margins, and patients have received better care. The positive results from this program led the CMS Innovation Center to create its Bundled Payments Initiative, which will both allow additional providers to participate in the bundling approach used in the ACE Demonstration and allow providers to accept full episode payments for a variety of conditions. This win-win-win approach – lower spending for payers, better care for patients, and better margins for providers – is only feasible with the types of significant payment reforms described above, not with minor tweaks to the fee-for-service payment system.
Some payers have begun implementing these kinds of true payment reforms. For example, in addition to the CMS Bundled Payments Initiative, the Integrated Healthcare Association in California has created episode payment definitions for a number of different procedures that are being implemented by several different health plans and providers, and the Health Care Incentives Improvement Institute is implementing episode payments with providers and payers in several different markets. Blue Cross Blue Shield of Massachusetts has implemented the Alternative Quality Contract, which gives a group of providers a risk-adjusted global budget to cover all of the costs of care for a population of patients. In Medicare’s Pioneer ACO program, providers will move from shared savings to partial or full global payments in the third year.
However, much faster progress is needed in more parts of the country. All payers need to make episode and global payments available to providers for as many types of patients and conditions as possible, as soon as possible. To be successful, though, these payment systems need to be structured appropriately to give providers accountability only for the costs they can control, and they need to be accompanied by appropriate benefit designs. If payment reforms are designed properly, there will be no need to mandate them; many providers will voluntarily accept a payment system that gives them the flexibility to deliver the best care to their patients and rewards them for high-quality care at an affordable cost without putting them at risk for costs they cannot control.
In all of the many discussions about how to control healthcare costs, there’s one topic that you almost never hear about: maternity care.
Maternal and newborn care together represent the largest single category of hospital expenditures for most commercial health plans and state Medicaid programs. That means that if there are ways to reduce maternity care costs, insurance premiums for employers could be reduced and Medicaid coverage could be more affordable for taxpayers.
Nobody wants to cut spending on maternity care if it’s going to harm mothers or babies, but there is at least one aspect of maternity care that’s not only expensive but bad for both mothers and babies, and that’s the high rate of Cesarean sections. One-third of the 4 million babies born in the U.S are delivered by C-section rather than vaginal delivery. That’s a 50% increase in the past decade. In some states, the C-Section rate went up by 70 or 80%.
How much do all those C-sections cost?
A lot. If the rate of C-sections were reduced back down to 15% (the rate recommended by the World Health Organization), it would save about $5 billion, based on data in a new report released today called The Cost of Having a Baby in the United States. For commercially insured patients, the report shows that the average cost of a birth by C-section was $27, 866 in 2010, compared to $18,329 for a vaginal delivery. Medicaid programs paid nearly $4,000 more for C-sections than for vaginal births.
The report also shows that there is significant variation in costs for each type of delivery both within states and across states, which means there are additional opportunities for savings. The average payment by commercial insurers for a vaginal birth (not including newborn care) was $10,318 in Louisiana and $11,692 in Illinois, but payments were nearly 50% higher in California ($15,259) and Massachusetts ($16,888). The average payment for a c-section was $13,943 in Louisiana and $15,602 in Illinois, but $20,620 in Massachusetts and $21,307 in California. There is also significant variation in costs for births even within individual states. For example, although the average maternal cost for vaginal birth in Massachusetts was $16,888, 25% of vaginal births cost more than $19,000 and 25% cost less than $13,000. (Although the study was not designed to determine the causes of this variation, other studies have shown that variation is due to different prices charged by different hospitals and clinicians as well as different needs of women and babies.)
Other findings in the report include:
There are many examples of physicians, midwives, hospitals, and birth centers around the country that are reducing maternity care costs in ways that improve quality and outcomes for both mothers and babies, a win-win for both payers and patients. However, a major barrier to changes in care delivery is the current healthcare payment system. Instead of being on what achieves the best outcomes for mothers and babies, payments today are based on what specific procedures were used. Fortunately, there are better ways to pay for maternity care, such as paying a single amount for a delivery (regardless of the method used). More information on payment reform and delivery redesign opportunities in maternity care are available from CHQPR’s website, and comprehensive information on how to improve maternity care is available from Childbirth Connection’s Transforming Maternity Care website.
Improving maternity care should be a priority for every state and region in the country. It will both save money and improve outcomes for hundreds of thousands of mothers and babies every year. What bigger win-win opportunity could there be?« Older Posts — Newer Posts »
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