Tag Archives: Cost Control

Accountable Care Organization (ACO) Final Payment Rules Released, Now the Real Work Begins

The final rule for Medicare Shared Savings Program (MSSP), the payment engine for Accountable Care Organizations (ACOs), were released on October 20, 2011 with an editorial published by Berwick in the New Journal of Medicine (NEJM).  What is evident is that the Center for Medicare and Medicaid Services (CMS) did listen to the complaints and issues raised regarding the proposed rules.  Changes were made to create more flexible options and reduce barriers to broader participation.  Major changes include providing more timely, information to ACOs at the outset of the performance year through preliminary prospective alignment of beneficiaries; reducing the total number of quality measures by about half; allowing start-up ACOs to choose a “savings only” track without financial risk during their initial contract period; sharing savings with successful ACOs on a “first dollar” basis when the ACO achieves meaningful savings for the Medicare program; and creating a pathway for full participation of federally qualified health centers and rural health clinics.  Also, the Center for Medicare and Medicaid Innovation announced an advanced payment initiative that will allow small physician practices and rural community hospitals to receive up-front access to needed capital to enable the transition to an ACO model.

This more palatable model and options should encourage more organizations to sign up.  However, now the real work begins.  The ACO model is expected to be the framework for transforming the healthcare industry to a value-based payment model.  It is important to understand that the underlying fundamental change is that of shifting performance risk from the payers, including the government, to providers.  There are two types of medical care risks: (1) insurance risk which is the risk that someone will have some relatively unforeseeable medical issue like an auto accident or develop cancer that would lead to high medical costs and (2) performance risk which is the risk that a provider will provide inefficient and low quality care for a particular condition.  Insurance risk is addressed in the underwriting process that considers various risk factors and predictive models to assign risk levels and charge premiums accordingly.  As we have no perfect models, this is an inherent probabilistic exercise due to the uncertainty in determining insurance risk.  Members of a high risk category may never have an incident while those in a low risk categories may have a catastrophic incident.  Most insurance, such as auto and home insurance, is designed to insure against these kinds of catastrophic risks.

Due to the rising costs of healthcare, medical insurance evolved over time to attempt to also address performance risk.  Healthcare costs began to rise dramatically in the 1960’s and 1970’s and it became evident that there was significant variation in the costs and quality of care for the same conditions depending on provider and geography.  Insurance companies began to try to manage performance risk to address the opportunity to reduce costs that this variation represented.  This lead to the development of Health Maintenance Organizations (HMOs) and Managed Care Organizations (MCOs) of the 1980’s.  These organizations began to invest in medical directors, nurses and and expanded infrastructure to evaluate and manage the “appropriateness” of care being provided to their members.  They used very crude tools such as contracting provisions, benefit design and utilization review and, early on and temporarily, were very effective in decreasing the costs of care.  Despite the early success, the fact that one organizations’ costs are another’s income lead to battle lines being drawn.  HMO’s and MCOs were making significant profits at the expense of providers.  This conflict pitted providers vs insurance companies and set-up the “managed care backlash” of the late 1990’s and early 2000’s, as patients and politicians sided with the more highly trusted providers.

Now, the absolute level and rate of rise of healthcare costs are threatening to bankrupt the US and the “can” cannot be kicked any further down the road.  The opportunity is that the ACO model will appropriately shift risk to providers and, for the first time, align the incentives of payers and providers.  There is evidence that the changing reimbursement environment is driving more partnerships between providers and payers, such as the partnership between Aetna and Banner Health.  There is opportunity for alignment because each share in the savings IF performance risk is managed better than expected.  This will be an extremely complex undertaking.  Nevertheless, there is not really a better alternative on the table.  The real work will be for providers to make the transition to become more like insurance companies with an increased, laser focus on managing performance risk.  This makes sense because most of the decisions that drive costs are made by doctors on the delivery side.  This will require new skills, infrastructure, processes and analytics for providers.  Most importantly this will involve a shift in culture and thinking from focusing on the importance of volume to the importance of value.  In particular, for hospitals this will require new partnerships and realigned thinking since the greatest costs to the system are for inpatient care.  This will also require a cultural shift from visit-based care to enrollment-based care.  Providers are used to being reactive and waiting until the patient generates a visit to provide care.  Since patients with chronic disease can generate up to 75% of costs, managing performance risk MUST involve better managing patients with chronic conditions.   These patients require proactive outreach, behavioral modification coaching and on-going monitoring to decrease costs and improve quality.  This approach to care called Population Health Management (PHM) should begin as soon as the patient enrolls in a system of care.  Again, this requires a dramatic shift in culture, people, process and technology.  It will be interesting to see which organizations will successfully navigate this transformation and become a leader in the new model of value-based care delivery.  Now the real work begins.


To Bend the Cost Curve You Must Change How Doctors Are Paid

The heated debate over the healthcare crisis and what to do about it has reached a fever pitch. We now have a bill passed from the House though contentious issues remain and the Senate and reconciliation prospects still represent a daunting challenge. The question is how do we fix the American system of care where we pay more than any other country in the world and yet get mediocre quality. Despite the high costs, only 55% of patients receive the care that guidelines say they should. Its like we are paying for a Rolls-Royce that runs only half the time. Care is so expensive that, unlike other industrialized countries, we don’t insure all of our citizens. Part of the healthcare reform puzzle is figuring out how we can pay the insurance costs for an additional 46 million people when the costs of care for those covered is bankrupting companies, individuals and the government. To make matters worse, like a ticking time bomb, cost increases are out-pacing GDP growth every year. How can our businesses be competitive when every year healthcare costs are eating up more and more of their profits? Healthcare costs are a part of the reason for the failure of the automakers. As a country, we now spend more on healthcare than we spend on food. If this situation continues, at some point we will spend all of our money on healthcare. It will crowd out spending on every other good. That scenario would be an economically disastrous and untenable position. This, of course, cannot happen. There will be a breaking point where the government and employers simply will not be able to foot the bill anymore. We are reaching that point now. The early symptoms are that small employers are eliminating the health benefit and larger employers are shifting more and more costs to the employee. If we don’t solve the cost issue, it doesn’t matter who pays the bills, whether it is the government or employers or individuals, they will not be able to afford it.  Most Americans say they are happy with their healthcare. That is because those with private or government insurance are shielded from the full cost of their care. They are paying a small percentage of the full cost and therefore are feeling the pressure on their bank accounts that business are experiencing. Nevertheless, when someone has a catastrophic illness, especially with the increased cost sharing, it still can cause bankruptcy. In this recession, the average American is even more vulnerable to this outcome. In the debate about the public option and death panels, we are missing the root issue. The cost of healthcare is simply the math of price vs volume of services. It doesn’t matter who pays for care, the price is too high. The Health Affairs September/October 2009 issue is focused on “Bending the Curve” of healthcare costs.  This is a very good issue with some of the best thinking on the topic aggregated into one publication. Every one involved in reform should read this issue. One of the most important articles clearly defines what the root issues are that are driving our dysfunctional system. “Market Failure And The Failure Of Discourse: Facing Up To The Power Of Sellers” by Bruce C. Vladeck and Thomas Rice describes the fact that the fundamental problem is the lack of power by purchasers which allows the “sellers” of healthcare services (providers and pharmaceutical companies) to control price. This, in addition to other related structural factors, is why healthcare does not operate like a typical market. Normal market forces are not in play and the power and control of the sellers is one reason. Remember that one person’s cost is another person’s income.  In the US healthcare sellers will resist any effort to reduce their income which just happens to be healthcare costs.  In just about every other country in the world, through various means, purchasers of healthcare have acquired greater leverage. This purchasing leverage is used to control the price of healthcare services and pharmaceuticals and thereby overall costs. This is only one mechanism but it is a fundamentally important and powerful mechanism to control healthcare costs. In other words, we must pay doctors, hospitals and pharmaceutical companies differently if we really want to control costs and improve quality. This is a politically risky proposition due to the power of these groups but, as also noted in the Health Affairs issue, we are seeing promising approaches and experiments popping up throughout the country.

There are only three ways to decrease the underlying cost of healthcare: (1) decrease demand (2) decrease utilization and/or (3) improve efficiency of delivering services (typically through innovation as in other industries) and thereby reduce prices. In healthcare, of course, you must accomplish this while maintaining or improving quality. There are no other options. In other industries due to price pressure, there is an industry motivation to innovate and continually bring to market less costly products and services. In truly competitive markets, there are incentives to fundamentally and continually reduce production costs and innovate to create margins at lower prices and gain market share.  Healthcare is fundamentally difference for two at least reasons. First, clinicians have specialized knowledge that makes it difficult for consumers to judge the quality and reasonableness of their recommendations. In addition when you are dealing with the risk of your or a family member’s health, it is difficult to question the motives or recommendations of your doctor. You can more easily say to a salesperson I don’t need that extra memory on my computer than to say to your doctor I really don’t need that angiogram to see if my heart vessels are clear. When you are not directly paying for or paying a significant proportion of the cost of the procedure as well, why not get the test and gain some reassurance of your health? Secondly, the healthcare reimbursement model is based on Fee-For-Service (FFS) with pricing that is somewhat arbitrary and not necessarily directly related to costs. In the FFS model providers are rewarded for volume of services, not the quality of those services nor the outcomes. In theory, as consumers we should be buying health and longevity for our healthcare dollars. In the US, we are getting a bad bargain for the price we pay. When you combine the FFS model with the specialized knowledge of clinicians, you realize that clinicians can create their own demand apart from the true clinical needs of the patient. Chest pain that could be easily ruled as being dangerous by history, exam, EKG and blood tests could also be extended to include an expensive but unnecessary angiogram. When the price of that angiogram is set by the sellers and not based on competition, as Vladeck and Rice describe, then you get the situation we have in the US.

Therefore in terms of true solutions and not cost shifting, you can attack demand, utilization and/or prices. By changing how physicians are paid you can attack all three issues simultaneously. By shifting from FFS to a global payment model you can address several issues. You can address consumer driven demand by prevention, self-management and healthier lifestyles. However, provider driven demand or “supply driven” demand as described by Wennberg, can be reduced by a global payment method. There are several variations but the principle of paying a set amount for a category of services or episode care reduces the perverse incentive to do more just for the sake of making more. As long as there are controls and monitors for quality and service, then you balance the opposite incentive to do less to make more money. Inappropriate utilization also decreases in this model. If you also have competition at this level, then you begin to move to a more rational market environment. The model also makes it easier to define competition on pricing and can lead to innovative methods of delivering care. This should be where competition occurs. Costs are driven by decisions at the care delivery level and therefore, this is where competition should occur as described by Michael Porter , not at the health plan level.  When you compete at this level you get the kind of innovation that is occurring at Kaiser Permanente, Mayo Clinic and Geisinger. We will see a test of this model in Massachusetts as they test a global payment model. Thus far, the current passed bill and other proposals only weakly impact and acknowledge the importance of this mechanism to control costs. However, the evolution and acceptance of a new model of provider payment will be critical for true transformation of our healthcare system.