In 2011, facing a $2 billion cut in Medicaid funding, the state of Oregon embarked on an effort to change the way health care is delivered by creating incentives to develop better, smarter care. 

To qualify for continued federal funding, Oregon’s Medicaid program must grow at a rate that is 2 percent slower than the rest of the country and generate $11 billion in savings over the next decade. A key element of Oregon’s healthcare system transformation is the establishment of coordinated care organizations (CCOs) throughout that state to coordinate all aspects of care for Medicaid patients, from where the services are delivered to how the bills are paid. 

In a recent conversation with hfm, Oregon Gov. John Kitzhaber said that the nation’s financial model in health care is “measuring the money running though the system—not necessarily the health that’s being produced” and called on healthcare finance leaders to change that paradigm.

Q. What impelled you to launch an effort to bring about transformational change within the Medicaid program on a state level?

A. During my previous terms in office, we did a lot of work on benefit design and how to allocate resources, such as the Medicaid program, to deliver the greatest health benefit. When I came back in office for a third term as governor in 2010, it was clear the Medicaid budget was one of the fastest-growing parts of our general fund budget, and it was squeezing out the ability to invest in education and a host of other things. 

When the money from the stimulus bill that Congress passed in 2009 ran out, there was a rather precipitous funding cliff in the Medicaid program in states throughout the country. In Oregon, we were looking at a 40 percent cut in provider rates if we continued to cover everyone who was eligible. That motivated us to redesign the delivery model to see if we could get more value for the dollars we were spending, which led to a remarkable bipartisan effort to design the new delivery model that eventually turned into our CCOs.

Q. How would you assess the CCOs’ progress to date? What challenges are you working to overcome?

A. There are 15 CCOs in Oregon, which launched in August and September 2012. More than 94 percent of our Medicaid beneficiaries are enrolled in a CCO, but a few rural areas are still getting up and running.  

The challenges vary. For example, the largest CCO, called Health Share, covers the whole Portland metropolitan area, where about 40 percent of the Medicaid population lives. A number of institutions have joined together to create Health Share, including Oregon Health & Science University, the Providence system, Kaiser, and Legacy, which provides a lot of charity care. So it’s a complicated arrangement. The organizations are trying to develop a way to share services. In rural areas, the challenge is to develop a robust system of telemedicine that will allow rural hospitals to make connections with urban hospitals and help with diagnostic imaging reading and specialty consults

Across the board, though, the attitude toward the CCOs has changed dramatically. When we first started, people were wringing their hands and worrying about how they could possibly make this work. Every month, we have a learning collaborative where we bring the entire leadership of the CCOs together. 

Don Berwick [former administrator of the Center for Medicare & Medicaid Services and founding CEO of the Institute for Healthcare Improvement] has helped facilitate three of those conversations. Now the CCO participants are actually very excited. They’re discovering capacities they didn’t have and community partners they didn’t know, and they’re having conversations they’d never had before. One of the physicians involved in the South Coast CCO said he was terrified and excited at the same time. He was terrified about having to create something that had never been built before—but he was really excited because he had the opportunity to build something that had never been built before. So we have moved from a lot of anxiety to a deep and very constructive engagement.

Q. The CCOs are designed to promote local accountability for health and budget and allow for local flexibility. What are the advantages and disadvantages of this local approach, as opposed to creating a single statewide organization?

A. There’s a tremendous benefit just in acknowledging the fact that health care ultimately is a local transaction between a provider and an individual. Most of the things that drive health outcomes occur in the home and in the community, so this approach has the advantage of local buy-in and ownership.

In Oregon, we have seen how engaging people at the community level can yield remarkable and powerful results. About 20 years ago, the state created groups called watershed councils to engage systems at the local level in improving the health of their stretch of the river, if you will. Through these groups, we have seen environmentalists and timber industry people working together for the benefit of the places they share. This approach builds community. 

With CCOs, we’re seeing exactly the same thing. Originally, the CCOs were perceived as medical entities, but they have evolved to go beyond that—for example, to engage with folks who are trying to reduce childhood obesity. We recognize that the only way to manage a budget that grows at a fixed rate is to address the chronic disease burdens at the front end, which are a loss leader in our country’s healthcare system. The CCO structure creates a capacity that is larger than the sum of its parts. Again, the focus is not just on financing medical care, but also on keeping the community healthy—in this case, the community of Medicaid recipients

Q. How receptive have hospitals been to the CCOs? 

A. Hospitals have been very receptive. Again, each CCO is different. In some areas, the CCOs include only one hospital. In Portland, the CCO includes hospitals that have traditionally competed with each other, but they all recognize that the low-hanging fruit is identifying and managing the 20 percent of the population that drive 80 percent of the cost—those who have chronic conditions and are bouncing in and out of the hospital. Developing some kind of community care worker network to help manage these individuals’ conditions on a daily basis and keep them out of the hospital is of great interest to most of the CCOs, as is reducing other unnecessary utilization.

Q. To compare CCO performance, Oregon has identified principles for selecting metrics for financial incentives and monitoring progress [as shown in the sidebar above right]. Many providers find that there are too many metrics and too little time. What advice would you give those who are trying to winnow down the metrics? 

A. I agree—there is a plethora of metrics out there. The first step is trying to narrow that list to a reasonable set that covers the critical aspects of the Triple Aim. So if you’re trying to reduce per capita cost growth rate, improve population health, and enhance the patient experience in terms of clinical outcomes, patient satisfaction, and patient safety, you need to identify metrics that directly relate to those goals. Then, you begin to narrow that list down around the larger macro goals you’re trying to achieve and set meaningful performance goals around those metrics. 

As a care purchaser, we also give some thought to aligning with the metrics that other purchasers are using. As a care model is proven effective and we begin to see that model used on the exchange in the private market, then aligning metrics with other purchasers will become even more important.

Q. As published in the New England Journal of Medicine in May, the 2008 Medicaid coverage expansion in Oregon has not generated significant improvements in measured physical health outcomes, but it did yield other benefits. In your view, what are the key takeaway messages from the study results?

A. First, we should remember that the study is based on just two years of data. Overall, I think there were two key messages. First, there are many significant benefits that come from having health insurance, such as better access and higher utilization of preventive services and screening services, which are important for maintaining long-term health and reducing cost.  Second, health insurance coverage clearly provides financial stability for families. One of the most interesting results is a significant drop in depression. The inability to pay medical bills is the second leading cause of personal bankruptcy in this country. This stress is an underlying factor in developing cardiovascular disease. So there are a lot of good reasons to expand insurance coverage.

It’s no surprise that there weren’t any significant physical health improvements in the first two years. We have an acute care system that is trying to deal with what is essentially a chronic care problem in this country. People need insurance coverage so they have access to health care, but they also need access to a different care model—one that is focused on prevention, wellness, and community-based management of chronic conditions, not a system that rewards fragmented care, volume, and hospitalizations. People need access to community-based management of care. 

Q. In talking about what makes CCOs different, you have cited the example of a 92-year-old woman with congestive heart failure who needs an air conditioner at home to avoid a flare-up of her condition that would require hospitalization. Who pays for that air conditioner?

A. One of the key elements of our Medicaid waiver, and our agreement with the federal government, is that we had to have flexibility in how we use our dollars. So we can pay for that air conditioner and we can count it as a medical expense rather than just an administrative expense. To achieve our population health goals, we need that flexibility to spend money on things that aren’t traditionally considered healthcare expenses but have everything to do with keeping an individual healthy—like an air conditioner for a patient who is living with heart failure. Some CCOs are visiting the homes of kids who have asthma and trying to identify triggers in the home. They can make an up-front investment in a home that could keep a child from popping into the emergency room or being hospitalized four times a year. We would save a lot of money and the child would be a lot healthier. 

Overall, we’re  trying to create a different set of incentives that don’t pay for the consequences of disease, but rather for the determinants of health. We want the end results to become part of the Medicaid waiver, gradually shifting payment away from rewarding volume to rewarding quality and outcomes. One big part of the solution to rising healthcare costs is the way care is organized and delivered; the other part is the way financial incentives are aligned.

Q. Given that access to insurance coverage is necessary but not sufficient to improve health, what changes are needed at the system level to improve health and reduce unnecessary spending?

A. The business model that underlies our current healthcare system is based on the assumption that government and private employers will continue to fund a medical inflation rate that is growing faster than revenues and faster than the Consumer Price Index, no questions asked—even though the relationship between those expenditures and actual health is growing increasingly tenuous. Essentially, what we in Oregon are saying is, “Look, let’s figure out what we want the healthcare system to do.” 

Health care has no intrinsic value outside of its relationship to a health outcome, except as an economic commodity.  So we need to change the paradigm from viewing health care as an economic commodity to viewing it as one suite of things that actually impact peoples’ lifetime health status. Then, let’s organize the healthcare delivery system and the financial incentives around that viewpoint. That really represents both a new business model and a new care model. 

In Oregon, we are prototyping a new healthcare delivery model that can grow at a fixed per capita rate, with appropriate risk adjustments, and improve health outcomes. Assuming we can continue to operate within our budget and our metrics demonstrate that we are making progress in terms of population health, our long-term goal is to scale up this care model, to offer it as a high-quality, low-cost option on our insurance exchange and make it available to public employees and small businesses. In other words, we hope to move this care model into the private market as well as the Medicaid market.

Q. What would you like healthcare finance leaders to learn from the healthcare transformation in Oregon?

A. I don’t have a financial background, but the long and the short of it is this: We have to develop a new accounting system. When we were discussing the new care model in Oregon, one of the hospital CFOs said, “Well, we just can’t make this pencil out.” The reason they couldn’t do it is because they were measuring it under the assumptions of the old system, which is centered around getting full reimbursement for everything you do. You have to change your assumptions. If your whole financial model is based on having a certain rate of payment growth every year, or keeping a certain percentage of ICU beds full, then you are measuring the money running through the system—not necessarily the health that’s being produced. 

It’s like the gross domestic product [GDP], which simply measures all the money moving through the economy. The Deepwater Horizon oil spill counts toward the GDP. The war in Iraq has been great for the GDP. For GDP purposes, air pollution is great, car wrecks are great, and heart attacks are great. There is a disconnect between the GDP as a measurement of economic activity and the well-being of society. The health of our financial system is measured by the dollars flowing through the system, not on whether people are healthy.

So my question for healthcare finance professionals is, What would a new set of financial metrics  and a new accounting system that is designed to make some distinctions look like? 

As an example, consider the Genuine Progress Indicator [GPI], which Maryland has developed at the state level. The GPI is an alternative to the GDP that does not count an increase in air pollution emissions as a positive, but it does count stay-at-home moms, volunteering in your community,and taking care of your elderly parents as positives. 

So that is a challenge finance leaders should think about, because we’re really going to need new metrics. Taking a famous quote by the writer Thomas Pynchon as a point of departure, “If you keep asking the wrong questions, you don’t have to worry about the answers.”a So we need to be asking, “How do we measure the health outputs in a new financial model for the healthcare system?” I know that finance leaders can be extraordinarily helpful and visionary in helping us think through this. 

sidebar 1

About John Kitzhaber

Gov. John Kitzhaber practiced emergency medicine in Roseburg, Ore., from 1974 to 1988. Kitzhaber’s interest in healthcare public policy was among the factors that led him to seek public service. He first won election to the Oregon Legislature in 1978, serving one term in the Oregon House of Representatives. In 1980, he was elected to the Oregon State Senate and served three terms, including eight years as Senate president. Kitzhaber considers bringing lawmakers and interest groups together to enact the Oregon Health Plan, the state’s Medicaid program, to be his most memorable achievement as a lawmaker. 

After serving two terms as governor, from 1994 to 2002, Kitzhaber continued his work on improving access to cost-effective health care, becoming one of the nation's most respected voices on healthcare reform. Concerned about the impact of the fiscal crisis on Oregonians, and seeing the opportunity through that crisis to create systemic change, Kitzhaber ran for governor again in 2010 and won election to a third term. His agenda during his third term has been focused on transforming Oregon’s system of health care along with improving the state’s public education system and strengthening the economy. Kitzhaber received his medical degree from the University of Oregon Medical School (now Oregon Health & Science University) and his bachelor’s degree from Dartmouth College.

sidebar 2

Principles for Metrics Selection in Oregon

  • Transformative potential
  • Consumer engagement
  • Relevance
  • Consistency with existing state and national quality measures, with room for innovation when needed
  • Attainability
  • Accuracy
  • Feasibility of measurement
  • Reasonable accountability
  • Range and diversity of measures


a. “If they can get you asking the wrong questions, they don't have to worry about answers.” Gravity’s Rainbow.


Publication Date: Thursday, August 01, 2013

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