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In Focus: Searching for a Better Way to Pay Providers

By Sarah Klein

The U.S. health care system is the most expensive in the world, yet it often achieves less than its industrialized peers. The result is less-than-optimal care for patients and a financial burden for U.S. companies that are competing with businesses in countries with efficient and effective systems. The financial strain falls on families, too, as medical costs absorb a higher percentage of their incomes.

Most health care experts pin a large part of the blame on the dominant fee-for-service payment system, which rewards physicians and hospitals for high volume and expensive care without regard to outcomes. The payment methodology also fails to reward preventive care, coordination among clinicians, and close management of patients with chronic conditions—the very services that could help contain spiraling health care costs.

Recent efforts to mitigate those effects have focused on pay-for-performance programs, which generally pay a bonus to providers when they meet or exceed certain measures of quality. Yet, these programs may be limited in their ability to promote efficiency and care coordination because the bonuses are made within the fee-for-service payment structure.

Many of the public and private sector groups advocating for fundamental payment reform beyond pay-for-performance say a more aggressive approach is necessary to tackle the most serious deficiencies in the current system. The mechanisms they propose to encourage more efficient care vary considerably. Some depend on risk-sharing techniques to drive collaboration among providers, while others rely on increased public reporting of cost and outcomes to improve performance. Another recommends reorganizing the delivery of care around diseases and conditions to improve accountability and quality. Despite their differences, these payment proposals share the same premise: that increased collaboration among physicians, hospitals, and ancillary service providers will improve efficiency and quality of care, and in turn, lower health care costs.

Extended Hospital Staff Model
One proposal for increasing providers' accountability for their performance is the extended hospital staff model developed by Elliott Fisher, M.D., M.P.H., a Dartmouth Medical School professor whose work established that higher spending in the Medicare program is associated with the overuse of supply-sensitive services, such as specialist physician services, and not correlated with quality. His model calls for organizing physicians and hospitals nationwide into 5,000 virtual (or real) groups, known as "accountable care organizations," and publicly reporting their outcomes and costs to allow for comparisons.

Physicians would be assigned to a hospital based on their direct and indirect referral patterns, and would be judged together with the hospital on quality and cost measures. The public reporting of these results and the shared responsibility for outcomes, capacity utilization, and cost would compel independent physicians and hospitals to work together to reduce excess utilization and cost, Fisher argues.

Financial incentives would follow and could be structured in a variety of ways, including shared savings or pay-for-performance bonuses, among other means, Fisher says.

Such a system would produce the large sample sizes necessary for statistical analysis, as well as a means of longitudinal measurement, and ease the reporting burden on the government by focusing the accountable care organizations around 5,000 hospitals, rather than 500,000 physicians.

But the model faces significant challenges. As Fisher himself notes, physician practices are characterized by a culture of autonomy and are likely to resist the notion of shared responsibility. Another challenge is the lack of refined quality measures across providers.

Prometheus Payment Model
Another means of increasing provider collaboration and accountability is the Prometheus Payment model, which encourages efficiency by instituting global payments for treating specific conditions and diseases, such as depression and colon cancer. A team of health care researchers and professionals would develop a single, risk-adjusted payment for a condition based on the resources needed to provide care and establish measures of performance for providing that care.

The goal of this episode-of-care payment model is to encourage physicians and hospitals to work collaboratively, while following the best available clinical evidence. The payment system also focuses provider attention on financial efficiency, since profits would be derived from cost savings, rather than revenue increases.

Today, "everyone thinks about revenue. No one thinks about profit," says François de Brantes, M.S., M.B.A., national coordinator for Prometheus Payment, which has developed 10 evidence-informed case rates for prevalent conditions that require coordination among multiple providers and have wide variations in treatment. The organization plans to test the payment system in four markets over the next three years, while it develops 50 to 60 additional case rates.

However, creating and using episode-of-care payments may be a challenge for insurers and providers alike. These payments require massive claims databases to produce and most institutions are ill-equipped to handle the algorithms necessary to manage global payments.

Experts have expressed skepticism about providers' ability to share risk and divide payments equitably. "I don't think it will be ready for prime time any time soon," says Robert Berenson, M.D., a senior fellow at the Urban Institute and former director in charge of Medicare payment policy at the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services, or CMS).

James Reynolds, president of Reynolds & Co., a health care consulting firm, says a lack of comprehensive data and experience with such a model are significant obstacles. "The episode-of-care is a wonderful concept, but it is kind of utopian," he says.

(Despite the challenges of setting all-inclusive prices, at least one health system has done so for coronary artery bypass surgery. Geisinger Health System in Pennsylvania has offered to charge insurers a set price for the surgical procedure, including follow-up care for 90 days, thus creating an incentive for Geisinger hospitals and physicians to follow treatment guidelines and to avoid unnecessary complications.)

Other Models
Michael Porter, M.B.A., Ph.D., and Elizabeth Teisberg, M.S., Ph.D., the authors of Redefining Health Care: Creating Value-based Competition on Results, have put forward another proposal. Porter, a professor at Harvard Business School, and Teisberg, an associate professor at the University of Virginia's Darden Graduate School of Business, advocate reorganizing medical care around specific conditions and reporting risk-adjusted outcomes for those conditions as a means of orienting the system away from competition on price and toward competition on value to patients. If value were judged by outcomes per dollar spent, efficiency and innovation would improve and costs would decline as they have in other industries, they say. Medical practices would be organized around conditions, rather than specialties, which would encourage depth of practice rather than breadth. Even primary care practices would be segmented into practices that specialize in diagnoses and those that specialize in early-stage treatment. The Porter/Teisberg model also anticipates that reimbursement will be structured around episode-of-care payments.

Such a model is predicated on the notion that physicians will be financially rewarded for making these adjustments. "The problem is that if the payment system doesn't respond to that, they get hurt," says Harold Miller, strategic initiatives consultant for the Pittsburgh Regional Health Initiative, a coalition of hospitals, insurers, employers, and clinicians in Southwestern Pennsylvania. Payment and reorganization "have to proceed together."

CMS has been experimenting with other means of encouraging collaboration between physicians and hospitals, including a gainsharing program that enables physicians and hospitals to share the savings from improved operational performance without violating the federal anti-kickback statute. The Physician Hospital Collaboration Demonstration, which will last three years, allows hospitals to share savings from quality and efficiency initiatives, provided payments do not exceed 25 percent of physician income for those services.

Such programs must be carefully crafted, Reynolds says. Research he performed for the Leapfrog Group and the Robert Wood Johnson Foundation shows that combined pay-for-performance and gainsharing programs are not always in providers' best interest. "A hospital may end up being worse off than it was before," Reynolds says. To ensure participation, such programs have to be structured so that everyone benefits from them. This is possible if rewards are recurring, rather than made as one-time payments, he says.

CMS' Physician Group Practice Demonstration, a three-year program that began in April 2005, seeks to encourage better management of patients with chronic, high-cost conditions by providing bonuses for overall savings and quality improvement. Last week, CMS announced that, after one year, all 10 of the participating practices have improved diabetes care for their patients. So far, bonuses have been awarded to two of the sites: Marshfield Clinic and University of Michigan Faculty Group Practice; as savings accumulate in the remaining years of the program, additional bonuses may be awarded.

A similar program has been initiated by Blue Cross and Blue Shield of Michigan. The insurer has agreed to share the savings from initiatives the physician groups identify to improve the quality and reduce the cost of health care services. Thirty-four physician groups, representing roughly 30 percent of the state's doctors, are participating in the program and setting goals from a defined set of initiatives, as opposed to meeting insurer-directed outcomes requirements.

Such programs require a long-term vision but produce sizeable results, says David Share, M.D., M.P.H., the insurer's senior associate medical director of health care quality, including increases in rates of generic drug prescribing, which the insurer has accomplished. "They are not arguing with us about metrics, which is what happens when you are judging them."

Moving Forward
Determining a course for payment reform will require the same sort of cooperation among insurers, providers, and employers in order to work. Everyone needs to sit down at the table, decide on goals, and structure a payment system that supports those goals, Miller says. "Payment is a means to an end and not an end in itself."

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