When Mount Auburn Hospital entered into the Alternative Quality Contract (AQC) with Blue Cross and Blue Shield of Massachusetts (BCBSMA), the 210-bed Harvard teaching hospital was looking for a breakthrough of sorts.

"We saw this as a strategic imperative, as an opportunity to advance our extensive quality agenda and be a model for others," says Jeanette Clough, president and CEO of the Cambridge, Mass. hospital. "We really think it's the right thing to do, to get paid primarily for improving our quality of care."

The hospital entered into the AQC contract with affiliated Mount Auburn Cambridge Independent Practice Association (IPA), a group of about 400 primary care physicians and specialists.

Sharing Payment

The AQC is not about bundled payment per se, says Clough. It's a capitated, population-based, five-year contract with a performance-based incentive payment. "With most plans, we receive a modest pay-for-performance quality bonus," she says. "The AQC contract gives us tremendous incentive and encouragement to move forward toward improved patient care."

Under the AQC contract, the hospital and IPA share two types of payment:

A fixed per-member-per-month global payment to provide care-including primary, specialty, acute, and subacute care-to 24,000+ members of the BCBSMA HMO. The per-member-per-month payment is adjusted for age, sex, and health status and by a modest cost-of-living adjustment each year of the five-year term.

Performance incentives paid from a pool of quality dollars available for achieving certain performance targets on 60 inpatient and outpatient process and outcome measures related to quality, effectiveness, and patient satisfaction.

Know Your Costs

Clough admits that it was a little scary, entering into a contract in which so much of the income is going to depend on quality. "Theoretically, it's great, but we certainly didn't want to walk into anything that we thought we weren't going to be able to achieve."

What gave them confidence was the fact that Mount Auburn has had so much experience with capitated contracts. As a result, hospital leaders know what their costs are. Among the tools they use to assess capitated budgets is the diagnostic cost group score, which quantifies illness severity, says Clough. "This helps us identify a member's relative illness burden."

"We know what it takes to manage a population of a certain age, we know all the component parts of a reasonable budget. This is the biggest challenge in this kind of contract, and if hospitals try to move forward without that knowledge, they're not going to do it right," she cautions. "They're going to skimp like they did the last time that managed care and capitation came around, and they're going to have some rocky years trying to figure it out." 


This article is excerpted from a case study series about bundled payment in the Fall 2010 issue of HFMA's Strategic Financial Planning.

Subscribers to Strategic Financial Planning can access a longer version of this Mount Auburn case study, and a second case study about Baptist Health System's experience in Medicare's Acute Care Episode demonstration.

Publication Date: Tuesday, September 21, 2010