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As payers and providers experiment with new ways of paying for healthcare services, the importance of payment reform is becoming clearer. Indeed, payment reform could slow healthcare spending by $2 trillion by 2023, according to a report by the Commonwealth Fund Commission on a High Performance Health System (see the exhibit below). That amount of savings would help some of America’s most serious fiscal challenges melt away.
“Savings could be substantial for families, businesses, and government at all levels and would more than offset the costs of repealing scheduled Medicare cuts in physician fees,” according to the Commonwealth Fund report.
Dick Salmon, MD, PhD, is encouraged by the number of forward-thinking healthcare providers and payers that are getting involved in payment reform.
“I’m optimistic that, a decade from now, the majority of physicians and hospitals will be in incentive arrangements for the majority of their patients, which reward them for achieving the Triple Aim—better quality, better affordability, better patient experience,” says Salmon, national medical executive for performance measurement and improvement at Cigna. “As a result of that, we will be making progress towards a sustainable, high-quality, affordable healthcare system.”
But exactly which payment models are going to work is far from clear. Currently, there is no consensus on terminology—one person’s definition of accountable care is another’s medical home or bundled payment—let alone the mix of incentives and risks that yield the best results. What has become clear, however, is that collaboration and data sharing among payers and providers will be key on the road to new payment models.
Northwest Georgia Oncology Centers is in the third year of a payment reform pilot with the private insurer UnitedHealthcare, which requires participating physician practices to share and compare performance data. Bruce Gould, MD, medical director of the practice, says he has been shocked to see the variation in costs of different oncology practices treating patients for the same condition—and, for that matter, the costs themselves.
“I’ve been a practice manager for 15 years, and I have only learned about the costs of health care within the past year or two because of all the emphasis on payment reform,” he says. “This is the first time we have received very structured feedback in terms of what it costs to take care of patients, not only with chemotherapy, but also with hospital and radiologic services. That’s been a very eye-opening experience.”
The other solid finding from payment reform initiatives to date: The redesign of clinical care delivery to reduce costs and improve quality, as required under value-oriented payment arrangements, is not easy.
In the UnitedHealthcare pilot, for example, all the participating physicians committed to a single treatment regimen for a certain cancer situation. However, nearly half the patients received a different therapy during the first year of the program, says Lee M. Newcomer, MD, the insurer’s senior vice president-oncology. “That taught us that the operational work behind doing this, about being consistent, about trying to change a group of people who are working together usually as individuals and not as a team, is really, really hard work,” he says.
Starting in 2009, Hillcrest Medical Center in Tulsa, Okla., had a successful experience in the Centers for Medicare & Medicaid Services’ (CMS’s) Acute Care Episode (ACE) demonstration. That program sought to prove that, if hospital and physician charges for joint replacements and cardiac procedures were bundled together, providers would be encouraged to improve the coordination and quality of care, thereby reducing Medicare’s total cost for those patients.
Mission accomplished. CMS saved money during the three-year demonstration, which ended in 2012, and Hillcrest improved on quality metrics for the cardiac and orthopedic procedures in the initiative (see the exhibit below).
Based on the ACE success, Hillcrest opted to participate in Medicare’s new Bundled Payments for Care Improvement (BPCI) initiative. More than 450 organizations were chosen to participate in the BPCI, prompting CMS officials to laud the interest as “huge” and “historic.”
Participating in BPCI. “We feel like there’s going to be some type of bundled payment in our future,” says Nancy Harrison, director of the ACE Project for Ardent Health Services, which owns Hillcrest. “It may not be this exact same bundled payment model, but we are trying to work with this new payment approach now and work with our physicians to be ready.”
Hillcrest and four other Ardent facilities are among 192 hospitals that chose Model 2 from the four BPCI options. Model 2 is a retrospective bundled payment arrangement in which hospitals and physicians will accept a 2 percent discount from Medicare fee-for-service rates. The actual costs for hospital stays, physician services, and post-acute care will be reconciled against Medicare’s expected costs, and providers will share any savings with Medicare.
Participants can apply to participate for up to 48 episodes of care. Hillcrest was authorized to participate in 20 episodes, although Ardent expects to choose a smaller number.
In the BPCI Model 2, an episode of care includes the inpatient stay for certain medical or surgical conditions, such as a urinary tract infection or amputation, all related physician and ancillary services, and post-acute care for up to 90 days after hospital discharge. (See the Breakthrough Map for more information about the BPCI models and bundled payment.)
“Some of the factors that we’ll look at to determine which episodes we will bundle are patient outcomes, the physician role in those episodes, opportunities for standardization, and cost savings,” Harrison says. The performance period is tentatively scheduled to begin this coming July 1. Over the next few months, Ardent will be working with physicians to create care protocols and to improve care coordination with post-acute providers.
Hillcrest is participating in BPCI under the auspices of a private company that manages transitions from hospitals to post-acute care. The private company is what CMS calls the “convening organization” for Hillcrest’s participation, and it assumes the financial risk for all post-acute services and readmissions after discharge.
Creating value. In the ACE demonstration, Hillcrest participated in episodes of care for several cardiac and orthopedic procedures. The hospital improved on several quality measurements, including a lower readmission rate for patients in the program and shorter average lengths of stay. But the primary cost savings to the Medicare program came from reduced spending on orthopedic and cardiac implants.
Hillcrest saved, on average, 10 percent on cardiac implants in the ACE demonstration, totaling about $1 million in savings during the three-year project, because of device standardization and volume discounts from vendors. It also saved an average of 7 percent on orthopedic implants, adding up to $450,000 in savings over three years.
“It is important to note that we never force the physicians to choose a device, and we did not always choose the lowest-priced product,” Harrison says. “We accept proposals from various vendors, but we involve the physicians in the cost analysis. Through that process, we sought the best product for our patients.”
In the Medicare BCPI pilot, Harrison expects greater value as Hillcrest adds new episodes of care, but also because post-acute services are included. “Standardizing the care we provide as patients move to post-acute, and not just in the hospital, is more of a package of care,” she says.
Increasing volume. During the three years of the ACE demonstration, Hillcrest saw its overall cardiac and orthopedic surgery volumes increase between 25 percent and 40 percent, depending on the procedure. At the end of the demonstration, CMS agreed to extend Hillcrest’s bundled payment program for orthopedic procedures. In the fourth year—currently in progress—orthopedic surgery volume is projected to increase at a rate of 15 percent.
Harrison does not attribute that growth entirely to the bundled payment approach, but rather to the relationship with physicians that bundled payments require. “Our physicians are very well known and have a great reputation in that market,” she says. “That probably contributes to the increased volume.”
While the terms “bundled payment” and “episode of care” are sometimes used synonymously, that is not always appropriate. An ongoing pilot in five oncology practices only uses an episode of care payment strategy for physicians; there is no bundling with hospitals or other providers.
Improving cancer care value. UnitedHealthcare is one of many payers searching to improve the value of cancer care. New drugs, some of which cost $5,000 or more a month, may extend life only a few weeks; yet, current payment systems encourage their use. “Most new drug molecules are priced at $5,000 per month or more and, in many cases, the cost-effectiveness ratios far exceed commonly accepted thresholds. This trend is not sustainable,” wrote oncologist Thomas Smith, MD, and a co-author (Smith, T.J. and Hillner, B.E., “Bending the Cost Curve in Cancer Care,” New England Journal of Medicine, May 26, 2011, vol. 364, pp. 2060-2065).
The UnitedHealthcare pilot, which started in 2010, seeks to escape the “buy and bill” system that dominates cancer care payment today. In that system, oncology practices make the most of their income by buying chemotherapy agents and marking up the price when they bill payers after the drugs are administered. That system encourages oncologists to select the most expensive drugs and discourages the use of low-cost generics.
In UnitedHealthcare’s pilot, each oncology group chooses the treatment regimen it wishes to use (e.g., a certain drug at a certain dose, additional drugs for side effects) for each of 19 specific cancer scenarios (e.g., Stage 3 colon cancer). The physicians then commit to at least 85 percent compliance with the chosen therapy.
UnitedHealthcare calculates the profit that the practice would have received under the buy-and-bill system, adds on a small case management fee (generally between $40 and $200, depending on the episode), and arrives at a practice-specific episode payment for each of the 19 clinical episodes. A single episode fee that covers the entire course of treatment is paid to the oncologist as soon as the patient is registered with UnitedHealthcare. Other services are paid and billed for on a fee-for-service basis.
All the oncology practices in the pilot are required to meet annually to compare results on performance measures, including patients’ survival, relapse-free survival, hospitalizations for complications, and the total cost of care for an episode.
Holding physician pay steady. Northwest Georgia Oncology’s Gould is pleased with the results of the pilot, which is now in its third year. The payment system is designed to hold oncologists’ pay steady while decreasing overall costs through standardization and improved quality of care. Gould says that Northwest Georgia Oncology Centers is doing somewhat better with UnitedHealthcare’s payment pilot than originally anticipated.
UnitedHealthcare’s Newcomer is optimistic that, when the pilot ends, the insurer will find that it decreased its costs. In his view, the episode payment is proving itself to be worthy for situations in which care is delivered in episodic fashion: cancer care, joint replacement surgery, maybe some cardiac procedures. “It will be a tool in a big tool chest” of payment approaches in the future, he says.
Gould, meanwhile, sees the episode model as an evolutionary step on the way to something better. “I don’t see it as the final end of payment reform for cancer care,” he says. “Under this model, I could be a high utilizer of radiologic and hospital resources and still get the same episode of care payment that I’ve been getting,” Gould says. “We need to be controlling the cost not only of chemotherapy, but also hospital and radiologic utilization.”
Changing physician practices. Oncologists can increase their episode payments if they improve the value of the care they deliver. If patients’ survival time increases or the total cost of care decreases from one year to the next, UnitedHealthcare increases the episode payments.
Beyond that, the data-sharing requirement has great potential for improving the cost and quality of cancer care. When the five practices met to review first-year results, one of them had a much higher hospitalization rate than the other four. Practice leaders quickly pulled patient charts to look for clues and found that hospitalized patients were being readmitted before they had an outpatient visit.
“They changed their processes to guarantee a clinic visit within 48 hours, and, according to the manager, they immediately started seeing a drop-off in hospitalizations,” Newcomer says.
At that same meeting, Gould was intrigued by the apparent efficacy of a treatment regimen that his practice has not historically used. “That changed my thinking about what drug regimen we should be using as a practice, not only for UnitedHealthcare patients, but for all our patients,” he says. If the second-year comparison data verifies that thinking, then oncologists at Northwest Georgia Oncology Centers will change their protocol.
Payment reform pioneer Dartmouth-Hitchcock Health in Lebanon, N.H., was one of the 10 practices in CMS’s Physician Group Practice (PGP) Demonstration, which provided the early learnings for the agency’s current accountable care organization (ACO) program. Since then, Dartmouth-Hitchcock has participated in a variety of payment reform initiatives, including medical home initiatives, bundled payments, and ACOs, sponsored by both government and private payers.
To succeed in the shared-savings PGP, the medical practice developed chronic disease registries to support population and patient management, identified high-risk patients whose risk level could be addressed through interventions, and transformed nurses to work as patient advocates and care coordinators. The result: Dartmouth-Hitchcock achieved sufficient savings in three of the five years to earn $11 million in performance payouts from CMS. Equally importantly, it hit its quality benchmarks all five years.
Anticipating shared savings. “We said, ‘This feels good to the doctors. This is the way we want to practice anyway,’” says Barbara Walters, MD, executive medical director for Dartmouth-Hitchcock Medical Center. “So we decided to look for a commercial partner to see if this melding of population and patient point of view works in a commercial population as well.”
In 2008, Dartmouth-Hitchcock was the first organization to join Cigna’s Collaborative Accountable Care (CAC) initiative. Through this program, Cigna offers shared savings with a twist. Instead of calculating the shared savings at the end of the year, Cigna provides a care coordination payment at the beginning of the CAC arrangement that reflects a conservative estimate of the expected savings for the year ahead. If a practice hits its quality targets and reduces total medical costs by at least 2 percent relative to a comparison group, its care coordination payment increases for the next year.
Cigna currently has 58 CAC contracts with medical practices in 24 states and expects to have 100 around the country by the end of 2014.
Improving coordination. Cigna helps train the care coordinators and provides daily and monthly patient-specific reports to help them improve patient care. Duties include coordinating hospital discharges for patients at high risk of readmission, proactively working with patients likely to incur high medical costs, and patient education.
In 2010—the first year of the initiative— Dartmouth-Hitchcock posted per-patient-per-month costs that were $1.78 less than a comparison group. It also recorded an 81.1 percent compliance rate for five evidence-based standards of care, better than the previous year and better than its comparison group (Salmon, R., et al, “A Collaborative Accountable Care Model in Three Practices Showed Promising Early Results on Costs and Quality of Care,” Health Affairs, November 2012, vol. 31, no. 11, pp. 2379-2387).
Salmon, who is Cigna’s national medical executive, is encouraged by the positive trend. He considers the model to be “a first step toward population health and accountability for the Triple Aim.”
In addition to incrementally increasing value, the CAC is a payment reform model that works for insured populations that—unlike HMO members—do not have to sign up with a primary care provider who coordinates their care. The CAC model allows patients to receive care wherever they wish. In addition, it does not require providers to assume insurance risk for their patients, and it allows Cigna to collaborate with physicians to improve care delivery.
“We do that by providing claims data to the physicians and by providing training for their care coordinators and other activities,” he says. “This is a very active partnership where our goal is to help the healthcare professional be successful.”
The leaders involved in payment reform shared the following lessons from their experiences to date:
Different perspectives. Providers—and CMS—tend to have a long-term view. The patients they are responsible for now are likely to be the same several years from now. Thus, it is worthwhile to work on efficiency and quality initiatives that have a long horizon.
However, for-profit private payers answer to shareholders who demand quick results. “Their world is a year budget at a time,” Walters says. “For providers and private payers to get done what we need to do, we have to meet in the middle where we each get part of the way to where we want to go.”
Challenges of distributing money. In the ACE bundled payment demonstration, Hillcrest was responsible for distributing professional payments to its physician partners, which proved to be a time-consuming, cumbersome process. In the BPCI program, Hillcrest chose a model in which CMS pays the providers. “We really wanted to be out of that so we can focus more on standardization and operationalizing the bundled payment approach,” Harrison says.
New ways to track performance. UnitedHealthcare’s pilot with oncology practices has shown the power of combining a small amount of clinical data with an insurer’s medical claims data. “We have more than 60 measures now that help us understand the kind of care that cancer patients are getting, what it costs to deliver that care, and where there is potential for improvement,” Newcomer says. “The physicians’ involvement is simply giving us a single sheet of information when the patient is enrolled. We can do the rest on our side by combining it with the claims data, handling the analytic profiling, and so on.”
Why easy can be hard. An easy way to reduce costs quickly is to prescribe medications that are on the lowest-cost tier of a patient’s formulary, and insurers get frustrated that physicians do not seem to get that. “But in day-to-day practice, I don’t know what kind of insurance my patients have when I’m seeing them, and I don’t know what tiers their drugs are on,” Walters says.
The downside of raising fee-for-service rates. Most payment reforms are still rooted in fee-for-service payments. When a provider negotiates higher fee schedules, that raises the cost of a patient’s care. “The ACO is trying to be as efficient as it can and make the total cost of care less, but built into the total cost of care is this increased amount of money that my crack contracting team negotiated,” Walters says.
A related problem: new payment models often require comparing a provider’s performance with that of another group. However, if one provider has a more successful negotiating team than the other, comparing the total cost of care between the two organizations is flawed. “The commercial health plans haven’t figured out how to neutralize costs to perform actual comparisons,” Walters says.
Improvement’s ripple effect. Although the ACE demonstration involved only Medicare patients, the biggest financial benefit to Hillcrest came as a side effect of that program. “Our profitability really depends on our commercial lines of business,” Harrison says. “As our physicians worked to become more cost conscious and quality conscious for the ACE patients, our other patient populations benefitted at the same time.”
A common theme in payment reform initiatives is the imperative of good working relationships among hospital leaders, physicians, and payers.
In the ACE bundled payment program, Hillcrest found that involving physicians in decision making paid off in lowering the hospitals’ costs and improving the quality of care. Meanwhile, UnitedHealthcare found that gathering oncologists together to share and compare their performance data produces new knowledge. “If we are going to solve these cost and quality problems, we really have to collaborate. It’s a must,” Newcomer says.
Lola Butcher is a freelance writer and editor based in Missouri.
Interviewed for this article (in order of appearance):
Dick Salmon, MD, PhD, is national medical executive for performance measurement and improvement, Cigna, Bloomfield, Conn.
Bruce Gould, MD, is medical director, Northwest Georgia Oncology Centers, Marietta, Ga.
Lee Newcomer, MD, is senior vice president-oncology, UnitedHealthcare, Minnetonka, Minn.
Nancy Harrison is director, Acute Care Episode Project, for Ardent Health Services, Nashville, Tenn.
Barbara Walters, MD, is executive medical director, Dartmouth-Hitchcock Medical Center, Lebanon, N.H.
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With the proper process, tools, and feedback mechanisms in place, budgeting can be a valuable exercise for organizations while helping hold organizational leaders accountable. Having a proper monthly variance review process is one of the most critical factors in creating a more efficient and accurate budget. Monthly variance reporting puts parameters around what is to be expected during the upcoming budget entry process.
Cost Accounting: the Key to Cost Management and Profitability
Managing the cost of patient care is the top strategic priority of most hospital CFOs today. As healthcare shifts to more data-driven decision making, having clear visibility into key volume, cost and profitability measures across clinical service lines is becoming increasingly important for both long-range and tactical planning activities. In turn, the cost accounting function in healthcare provider organizations is becoming an increasingly important and strategic function. This whitepaper includes five strategies for efficient and accurate cost accounting and service line analytics and keys to overcoming the associated challenges.