Reimbursement Driving HealthCare Value, May 2014 Dublin, Ireland

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1 Reimbursement Driving HealthCare Value, May 2014 Dublin, Ireland Professor Bob Kaplan May 2014

2 All health care systems around the globe face a fundamental problem. How should governments, insurance companies and individuals use reimbursement to motivate provider organizations hospitals, physicians, clinics to deliver more to patients? 2

3 Three common reimbursement methods have evolved to reimburse health care providers. None motivates value creation in health care 1. Fee for service Diverse rates across providers, unrelated to outcomes achieved Cost shifting among multiple payors and massive crosssubsidization of services Providers rewarded even when performing unnecessary tests and procedures Providers underinvest in valueadded but unreimbursed processes 3. Global budgeting Encourages rationing and delay Discourages use of proven care processes that deliver superior outcomes 2. Capitation Providers bear insurance risk, which they can not control Pressure to expand to reach larger numbers of patients and offer broader service lines Incentive to ration services Incentive to target healthier populations 3

4 Bundled (episode-based) reimbursement aligns providers to value creation and delivery Fee for service Diverse rates across institutions, unrelated to outcomes achieved Cost shifting among multiple payors and massive crosssubsidization of services Providers rewarded even when performing unnecessary tests and procedures Providers underinvest in valueadded but unreimbursed processes Bundled reimbursement for medical conditions Global capitation Providers bear insurance risk Pressure to offer broader service lines Incentive to ration services Incentive to target healthier populations Global budgeting Encourages rationing Discourages use of proven care processes that deliver superior outcomes 4

5 What is value-based bundled reimbursement? A single payment that provides a positive margin above the costs incurred by efficient and effective providers for treating a patient with a specific medical condition across a full cycle of care. The payment is contingent upon achieving good patient outcomes, with both the payment and outcome targets riskstratified by the complexity of a provider group s patient population. Patient problem Assess appropriateness Assess risk Schedule OR Procedure Recovery MD encounter Possible need for procedure Shared decision making Preprocedure testing Tier 1,2 outcome measures Tier 3 outcome measures 5

6 What is bundled reimbursement (continued)? Time-based reimbursement for complete care of a chronic condition (e.g., diabetes, end stage renal disease) Time-based reimbursement for primary/preventive care for defined patient populations (healthy infants and children, healthy adults, frail elderly) 6

7 Bundled Payment Reimbursement Fosters integrated care delivery (Integrated Practice Units) for specific medical conditions Payment aligned with areas the provider can control Promotes provider accountability for the quality of care at the medical condition level Creates strong incentives to improve value and reduce avoidable complications Aligns reimbursement with value creation while allowing insurers, not providers, to assume the risks inherent in a patient population 7

8 If Bundled Payment Reimbursement is such an obviously good idea, why haven t we been using it for the past 50 years? Bundled Payment Outcomes Cost 8

9 Healthcare Financing in Sweden Healthcare spending is 9.2% of GDP Public sector accounts for ~90% of all health care spending County of Stockholm funded inpatient care through prospective global budgets based on expected patient volume by diagnosisrelated-group (DRG) Payment levels for specialty care varied substantially across counties and from provider to provider Extensive set of registries, by disease category Patients had complete freedom to choose a provider, but most sought care close to home Long wait lists for non-urgent care 9

10 Joint Replacement Surgeries in County of Stockholm Patients were on waiting lists for up to two years, and they were suffering and many were on sick leave. We would tell providers to do more procedures, we would offer more money. It was never enough. There was still waiting. Loss of work due to pain and disability Stockholm County had to pay out-of-county providers to supplement backlog in Stockholm Salaried physicians Hospitals reimbursed on prospective volume so little incentive to work harder, faster or smarter to eliminate the backlog No control over quality, outcomes and cost Health Authority Goals: o How to motivate providers to perform more replacements o Improve outcomes o Reduce complications and readmissions Joint replacement: high volume procedure, with a great deal of outcome data already available, and well-defined cycle of care 10

11 New bundled payment reimbursement Fixed fee to cover physician fees, all other personnel costs, occupancy in hospital, drugs, tests, other supplies o Outpatient rehab and additional inpatient rehab not included (would remain under the previous system) Cycle of care: Preop consultation, surgery, inpatient recovery, one follow-up visit Risk adjustment: Low risk surgeries (ASA 1 and 2, ~80% of all patients) would be reimbursed under the bundle. Surgeries on ASA 3 and 4 patients remained under the previous system Warranty or guarantee for two year cycle of care (extended to 5 years if complication within 2 years) Exclude care for non joint-replacement conditions; hip dislocation Prosthesis: Big debate about whether to include or not 11

12 Bundled Payment (continued) We had one rule in this process: we did not talk about reimbursement levels until the end. We wanted to focus first on what was needed to secure quality and to reduce complications, and only then talk about what it costs. Existing reimbursement for joint replacement had a 2:1 variation among Swedish providers Health Authority set an initial price based on average reimbursement across the country Only providers with surgeons performing at least 50 joint replacements in previous year were eligible for the Bundled Payment Many academic center hospitals objected to the low price and threatened not to perform surgeries under the bundled plan 12

13 Patients waiting time decreased and costs decreased. In one year, % of patients waiting at least 90 days for treatment declined from 33% to 13%. Average pre-operative sick leave decreased from 50 days (2008) to 39 days (2009) Surgery queue disappeared by 2011 Per-procedure cost for joint replacements had declined by 17% in 2011 compared to Payments for post-operative services declined from SEK 12.5 million (2008) to 3.5 million (2011) 13

14 Impact of Bundled Payments and Outcomes Measurement Adult Kidney Transplants, US Centers,

15 8 greater than expected graft survival (3.4%) 14 worse than expected graft survival (5.9%) 15

16 A Clinically-Driven Mechanism to Create a Bundled Payment for Rotator Cuff Repair Surgery 1. Select the medical condition and the covered cycle of care 2. Determine what services are included and those not included 3. Define and measure the patient outcomes for the medical condition 4. Determine the risk stratification; How can we cover at least 80% of the potential population? The other 20% remain on FFS initially. 5. Estimate provider costs over care cycle; improve processes 6. Commit to a guarantee 7. Develop stop loss/outlier provisions 8. Insurer and provider negotiate a price 16

17 Creating a Bundled Pricing Mechanism 1. Select the medical condition and the covered cycle of care 2. Determine what services are included and those not included 3. Define and measure the patient outcomes for the medical condition 4. Determine the risk stratification; who is covered under the bundle 5. Estimate provider costs over care cycle; improve processes 6. Commit to a guarantee 7. Develop stop loss/outlier provisions 8. Insurer and provider negotiate a price Insurer seeks a discount from current fee-for-service payments over the care cycle Provider seeks to maintain margins (not revenues) over current costs for delivering care over the cycle Holdbacks for guarantees, quality performance, litigation reserve 17

18 A Clinically-Driven Mechanism to Create a Bundled Payment 1. Select the medical condition and the covered cycle of care 2. Determine what services are included and those not included 3. Define and measure the patient outcomes for the medical condition 4. Determine the risk stratification; who is covered under the bundle, who remains on FFS 5. Estimate provider costs over care cycle; improve processes 6. Commit to a guarantee 7. Develop stop loss/outlier provisions 8. Insurer and provider negotiate a price 9. Report outcomes to Insurer (payor) and the public 10. Promote downstream process improvement, patient engagement and compliance 18

19 An Orthopedic Surgeon Teaches A Course to Physical Therapists About Treatment Post-Surgery 19

20 A Clinically-Driven Mechanism to Create a Bundled Payment 1. Select the medical condition and the covered cycle of care 2. Determine what services are included and those not included 3. Define and measure the patient outcomes for the medical condition 4. Determine the risk stratification; who is covered under the bundle, who remains on FFS 5. Estimate provider costs over care cycle; improve processes 6. Commit to a guarantee 7. Develop stop loss/outlier provisions 8. Insurer and provider negotiate a price 9. Report outcomes to Insurer (payor) and the public 10. Promote downstream process improvement, patient engagement and compliance 11. Divide bundled price among providers involved in the cycle of care 20

21 Competitive dynamics from bundled (episode-based) reimbursement. For each medical condition, set prices to cover the costs of all the resources required to deliver excellent outcomes for a full cycle of care assuming resources are used effectively and efficiently, including high capacity utilization. High quality and high volume providers maintain margin per episode, not necessarily revenues, while payers enjoy a discount from the sum of fee-for-service payments to fragmented, inefficient, and low-volume suppliers of medical care for that condition. Ineffective and inefficient providers, with resources operated at well below capacity, will experience diminished volumes of business, and prices that are below their costs of treating patients. Over time, they must exit the system for that medical condition which is what happens in every other industry. 21

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