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WIN-WIN-WIN APPROACHESTO ACCOUNTABLE CARE

How Cardiologists Can Lead the Wayto Higher-Quality, More Affordable

Health Care

Harold D. MillerPresident and CEO

Center for Healthcare Quality and Payment Reform

2014 CARDIOVASCULAR SUMMIT

A Short Quiz

QUESTION #1:In which U.S. industries

are the key employees told that at the end of the year, they can expect to receive

a 25% pay cutregardless of how well

they’ve performed?

A Short Quiz

are the key employees told that at the end of the year, they can expect to receive

a 25% pay cutregardless of how well

they’ve performed?

ANSWER:Health Care

Medicare SGR Is a Big Problem,

But So Is Lack of Annual Updates

PhysicianPractice Costs

PhysicianPaymentIncreases

If SGR CutIs Made

23% EffectiveReduction

A Short Quiz

are businessesonly able to sell

their products and servicesthrough an intermediary who demands large discounts andincreases prices by 18-25%?

A Short Quiz

are businessesonly able to sell

their products and servicesthrough an intermediary who demands large discounts andincreases prices by 18-25%?

ANSWER:Health Care

A Short Quiz

can one set of employeesonly get a raise if other

employees take a pay cut,even when the business is

performing well?

A Short Quiz

can one set of employeesonly get a raise if other

employees take a pay cut,even when the business is

performing well?

ANSWER:Health Care

The SGR Also Pits Physicians

Against Each Other

PCP Fees

Specialty

PCP Fees

Specialty

Physician Payments Capped by the Sustainable Growth Rate

A Short Quiz

QUESTION #4:In which U.S. industries does government policyfavor large businessesover small businesses?

A Short Quiz

QUESTION #4:In which U.S. industries does government policyfavor large businessesover small businesses?

ANSWER:Health Care

Unlike Physicians, Hospitals

Have Received Pay Increases

Physicians

Hospitals

Inflation

A Short Quiz

QUESTION #5:Who is to blame forthe way physicians

are paid andmicromanaged?

A Short Quiz

QUESTION #5:Who is to blame forthe way physicians

are paid andmicromanaged?

ANSWER:Physicians

The Blame Rests With Physicians

• Physicians haven’t defined solutions to control healthcare costs without rationing

• Physicians are seen as the drivers of higher costs

• Physicians haven’t defined payment models that will support lower-cost, higher-quality care and maintain financial viability for physician practices

• Physicians aren’t organized to manage and deliver high-value population health care to purchasers and patients

Three Paths to the Future:

Which Door Will You Choose?

FUTURE #1

FUTURE #2

FUTURE #3

What Purchasers & Patients Want:

High-Quality Care at Lower Cost

Quality

Savings

TODAY TOMORROW

Quality

Savings

TODAY TOMORROW

Where Will The Savings Come From?

Quality

Savings

TODAY TOMORROW

Where Will The Savings Come From?

It Depends on Who’s the Last in Line

In Getting Paid

Door #1:

Continuation of the Status Quo

Quality

TraditionalInsuranceCompany/

Savings

TODAY TOMORROW

Who’s First in Line?

Health Plans

Quality

Health PlanAdmin Cost

& Profit

Savings

TODAY TOMORROW

Who’s Last in Line?

Physicians

Quality

& Profit

HospitalPayments

PhysicianPayments

Savings

TODAY TOMORROW

Where Will Savings Come From?

Quality

& Profit

HospitalPayments

PhysicianPayments

Savings

TODAY TOMORROW

Will Health Plans Voluntarily

Reduce Their Fees/Profits?

Quality

& Profit

HospitalPayments

PhysicianPayments

Health PlanAdm/Profit

HospitalPayments

PhysicianPayments

Savings

Will Health Plans Voluntarily

Reduce Their Fees/Profits?

Quality

& Profit

HospitalPayments

PhysicianPayments

HospitalPayments

PhysicianPayments

Savings

Likely

Can Health Plans Cut Payments

to the Big Hospital in Town?

Quality

& Profit

HospitalPayments

PhysicianPayments

HospitalPayments

PhysicianPayments

& Profit

HospitalPayments

PhysicianPayments

Savings

Can Health Plans Cut Payments

to the Big Hospital in Town?

Quality

& Profit

HospitalPayments

PhysicianPayments

HospitalPayments

PhysicianPayments

& Profit

HospitalPayments

PhysicianPayments

Savings

Likely

Or Will Payers Continue Cutting

(or Not Increasing) Doctor Pay?

Quality

& Profit

HospitalPayments

PhysicianPayments

HospitalPayments

PhysicianPayments

& Profit

HospitalPayments

PhysicianPayments

& Profit

HospitalPayments

PhysicianPayments

Savings

Not Just Lower Fees, But

Interference in Physician Decisions

Quality

& Profit

HospitalPayments

PhysicianPayments

& Profit

HospitalPayments

PhysicianPayments

Savings

• Lower Fees

(“Discounts”)

• Prior Authorization

• Step Therapy

• Utilization Review

• Disease Mgt Vendors

#1 in Spending = Heart Conditions,

So Where Will the Focus Likely Be?

Quality

Savings

Will Employment by Hospitals

Protect Physicians?

Quality

& Profit

HealthSystem

Payments

PhysicianSalaries

SavingsHealth PlanAdmin Cost

& Profit

HospitalPayments

PhysicianPayments

When Health Systems Get Less,

Where Will They Make the Cuts?

Quality

& Profit

HealthSystem

Payments

PhysicianSalaries

Savings

& Profit

HealthSystem

Payments

PhysicianSalaries

& Profit

HospitalPayments

PhysicianPayments

Health Systems Want to Ensure

They Don’t Get Cut by Payers…

Quality

& Profit

HealthSystem

Payments

PhysicianSalaries

Savings

& Profit

HealthSystem

Payments

PhysicianSalaries

& Profit

HospitalPayments

PhysicianPayments

HealthSystem w/InsuranceCompany

Door #2:

Hospital-Owned Health Plans

Quality

HospitalPayments

PhysicianPayments

Savings

Health PlanAdmin/Prof.

If Hospitals Are Now First In Line,

Where Will Savings Come From?

Quality

HospitalPayments

PhysicianPayments

Savings

Maybe Health Plan Expenses

Can Be Reduced…

Quality

HospitalPayments

PhysicianPayments

Savings

HospitalPayments

PhysicianPayments

…But Hospital Will Still Need the

Health Plan to Watch the Docs

Quality

HospitalPayments

PhysicianPayments

Savings

HospitalPayments

PhysicianPayments

So Physicians Will Likely Still Be

Subject to Cuts and Interference

Quality

HospitalPayments

PhysicianPayments

Savings

HospitalPayments

PhysicianPayments

HospitalPayments

PhysicianPayments

What’s Behind Door #3?

Quality

Savings

Physician-Led Health

Plans &Contracting

Physician Leadership to

Control Both Cost & Quality

Quality

CostHospital

Payments

PhysicianPayments

& Profit

Savings

Plans &Contracting

Physicians Can Watch Themselves,

They Don’t Need Health Plans…

Quality

CostHospital

Payments

PhysicianPayments

& Profit

HospitalPayments

PhysicianPayments

Savings

Plans &Contracting

Better Care of Patients Will Reduce

Avoidable Hospitalizations…

Quality

CostHospital

Payments

PhysicianPayments

& Profit

HospitalPayments

PhysicianPayments

Savings

Hospital

Payments

PhysicianPayments

Savings

Plans &Contracting

…Allowing Better Pay for Doctors

AND More Savings for Purchasers

Quality

CostHospital

Payments

PhysicianPayments

& Profit

HospitalPayments

PhysicianPayments

Savings

Hospital

Payments

PhysicianPayments

Savings

Hospital

Payments

PhysicianPayments

Savings

Plans &Contracting

Door #3 = A Physician-Led

Healthcare Future

Quality

HospitalPayments

PhysicianPayments

& Profit

Savings

Hospital

Payments

PhysicianPayments

• Significant savingsfor purchasers and patients

• Better pay for physicians

• Less spending on health planoverhead

• Less interference in physician-patient relationship

• Less spending on avoidableexpensive, risky procedures

• Better health and quality of life for patients

High Quality Health Plans

Run By Physician Groups

Three Paths to the Future:

Which Door Will You Choose?

HEALTH PLAN-LED

HEALTHCARE

HOSPITAL-LED

HEALTHCARE

PHYSICIAN-LED

HEALTHCARE

If Physicians Choose Door #3,

What Will They Need to Succeed?

PHYSICIAN-LED

HEALTHCARE

Since Heart Care is #1 in Spending,

Cardiology Leadership is Essential

Current

Purchaser

& Patient

Spending

Quality

Savings

How Can a Cardiology Practice

Lower Costs & Improve Quality?

Your Real Cardiology Business

is More Than Your Salary…

Cardiologist Salary

…And More Than Your Total

Practice Costs..

Cardiologist SalaryPractice Expenses

…It’s the Tests You Order, Even If

Someone Else Does Them

Tests and Imaging

…It’s the Procedures You Do,

And Where You Do Them

Outpatient Procedures

Inpatient Procedures

Tests and Imaging

…And the Unplanned Admissions

of Your Patients…

and Admissions of

Chronic Disease

Patients

Tests and Imaging

…The Post-Acute Care Costs

After Hospital Stays…

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Tests and Imaging

…The Unplanned Readmissions

and Repeat Procedures…

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Tests and Imaging

Readmissions

…And the Number and Types of

Medications You Prescribe

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

That Adds Up to a LOT of Money:

>$10,000/patient/yr in Medicare

Cardiologist Services $324

Other Physician Svcs $880

Inpatient Hospital Stays

& ER$4,255

Lab Tests & Imaging$1,416

Outpatient Procedures$1,431

Post-Acute Care$1,205

All Other Services$1,157

TOTAL AVERAGE COSTPER PATIENT (w/o Rx):

$10,667

Medicare Patients Whose CareWas Directed by a Cardiologist

in 4 Midwest States, 2010

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

Source:

Medicare

Reports

Only 3% of the Money Is

Going to the Cardiologist

& ER$4,255

$10,667

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

$100,000 Revenuefor Cardiologist

But What the Cardiologist Does

Determines Most of the Other 97%

& ER$4,255

$10,667

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

$3,200,000

in Total

Non-Pharmacy

Medicare

Expenditures

Prescribed,

Ordered,

Influenced by

Cardiologist

Can Cardiologists Earn More AND

Give Medicare Savings?

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

$3,200,000

in Total

Non-Pharmacy

Medicare

Expenditures

Prescribed,

Ordered,

Influenced by

Cardiologist

3% Savings for Medicare

10% Increase in Cardiologist Revenue

Yes: All You Need is a Small

Reduction in All the Other Costs

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

$3,200,000

in Total

Non-Pharmacy

Medicare

Expenditures

Prescribed,

Ordered,

Influenced by

Cardiologist

3% Savings for Medicare

10% Increase in Cardiologist Revenue

3.4% Reductionin Total

Non-PharmacyMedicare

Expenditures

Only Cardiologists Can

Reduce Costs Without Rationing

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

• Fewer unnecessary tests• Use of lower-cost tests• Use of lower cost testing facilities

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

• Fewer unnecessary procedures• Use of lower-cost procedures• Reducing the cost of procedures• Use of lower-cost facilities

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

• Fewer unnecessary procedures• Reducing the cost of procedures• More procedures in outpatient settings• Fewer ER visits for chronic disease• Fewer admissions for chronic disease• Z• Fewer unnecessary procedures• Use of lower-cost procedures• Reducing the cost of procedures• Use of lower-cost facilities

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

• Less use of expensive inpatient rehab• More in-home services

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

• Better post-discharge care management• Fewer complications from procedures

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

• Use of lower-cost medications• Avoiding unnecessary medications

• Better post-discharge care management• Fewer complications from procedures

and Admissions of

Chronic Disease

Patients

Post-Acute Care

Medications

Tests and Imaging

Readmissions

Cardiologists Agree That Many

Tests/Procedures Are Overused

Utilization Rates Vary

Dramatically Across Regions

FFS Barriers for Physicians in

Reducing Healthcare Spending• What if Cardiologists Reduced Unnecessary Imaging and Used

Lower-Cost Imaging Tests for Patients with Stable Angina?– Medicare and commercial payers would get a lot of savings– Cardiologists would get less revenue– Congress/CMS would still freeze or cut physicians’ payments

• What if Cardiologists Increased the Use of Medication Therapy and Reduced the Number of PCIs for Patients with Stable Angina?– Medicare and commercial payers would get a lot of savings– Cardiologists would get a lot less revenue– Hospitals would get a lot less revenue– Congress/CMS would still freeze or cut physicians’ payments

• What if Cardiologists Improved Care Management of CHF Patients and Reduced Hospital Admissions and Readmissions?– Medicare and commercial payers would get a lot of savings– Cardiologists wouldn’t be paid for the expanded care management services– Hospitals would get a lot less revenue– Congress/CMS would still freeze or cut physicians’ payments

Physicians Don’t Need Incentives,

They Need Fewer Barriers

FFS•No payment for services that will benefit patients

•Lower revenues from reducing avoidable costs

Most “Payment Reforms”

Don’t Fix The Problems with FFS

FFS•No payment for services that will benefit patients

•Lower revenues from reducing avoidable costs

Shared Savings

Fortunately, There Are Good

Alternatives to Fee for Service

BUILDING

BLOCKS HOW IT WORKS

Bundled

Payment

Single payment to 2+

providers who are now

paid separately (e.g.,

hospital+physician)

BUILDING

BLOCKS HOW IT WORKS

Bundled

Payment

hospital+physician)

Warrantied

Payment

Higher payment for

quality care, no extra

payment for correcting

preventable errors and

complications

BUILDING

BLOCKS HOW IT WORKS

Bundled

Payment

hospital+physician)

Warrantied

Payment

Higher payment for

complications

Condition-

Payment

Payment based on the

patient’s condition,

rather than on the

procedure used

Accountable Payment Models

Allow Win-Win-Win Approaches

BUILDING

BLOCKS HOW IT WORKS

HOW PHYSICIANS

AND HOSPITALS

CAN BENEFIT

HOW PAYERS

CAN BENEFIT

Bundled

Payment

hospital+physician)

Higher payment for

physicians if they

reduce costs paid by

hospitals

Physician and hospital

offer a lower total price

to Medicare or health

plan than today

Warrantied

Payment

Higher payment for

complications

Higher payment for

physicians and

hospitals with low

rates of infections

and complications

Medicare or health

plan no longer pays

more for high rates of

infections or

complications

Condition-

Payment

Payment based on the

patient’s condition,

rather than on the

procedure used

No loss of payment

for physicians and

hospitals using fewer

tests and procedures

Medicare or health

plan no longer pays

more for unnecessary

procedures

Example: Diagnosis/Treatment of

Chest Pain/Stable Angina

Patientwith

StableAngina

FFS Rewards

More and Higher-Cost Testing…

MoreExpensive

Testing MEDICARE/

HEALTH

LessExpensive

Testing

Patientwith

StableAngina

Payment

Higher

Payment

…and FFS Rewards More and

Higher-Cost Procedures

MoreExpensive

Testing

MEDICARE/

HEALTH

LessExpensive

Testing

Patientwith

StableAngina

MedicalManagement Lower

Payment

Higher

Payment

Instead, Pay to Manage the

Patient’s Condition…

MoreExpensive

Testing

MEDICARE/

HEALTH

LessExpensive

Testing

Patientwith

StableAngina

MedicalManagement

Condition-Based Payment

Single

Payment

…And Enable More Cost-Effective

Care Without Loss of Revenue

MoreExpensive

Testing

MEDICARE/

HEALTH

LessExpensive

Testing

Patientwith

StableAngina

MedicalManagement

Single

Payment

Payment Would Be Risk-Adjusted

Based on Patient Conditions

MoreExpensive

TestingPCI

MedicalManagement

MEDICARE/

HEALTH

LessExpensive

Testing

Patientwith

StableAngina

MedicalManagement

High Risk of AMI

Low Risk of AMI

LessExpensive

Testing

MoreExpensive

Testing

Payment

Higher

Payment

ACC Appropriate Use Criteria

Enable Effective Risk Adjustment

MoreExpensive

TestingPCI

MedicalManagement

MEDICARE/

HEALTH

LessExpensive

Testing

Patientwith

StableAngina

MedicalManagement

High Risk of AMI

Low Risk of AMI

LessExpensive

Testing

MoreExpensive

Testing

ACCAUCVia

Payment

Higher

Payment

ACC SMARTCare Project Is An

Opportunity to Implement This

MoreExpensive

TestingPCI

MedicalManagement

MEDICARE/

HEALTH

PaymentLess

ExpensiveTesting

Higher

Payment

Patientwith

StableAngina

MedicalManagement

High Risk of AMI

Low Risk of AMI

LessExpensive

Testing

MoreExpensive

Testing

ACCAUCVia

SMARTCare

Reality Is More Complex,

But the Same Principles Still Apply

Appropriate Use w/o Pmt Reform

= Financial Losses for Physicians

MoreExpensive

Testing

MEDICARE/

HEALTH

LessExpensive

Testing

Patientwith

StableAngina

MedicalManagement Lower

Payment

Higher

Payment

ACCAUCVia

Doesn’t Lower Utilization

and Lower Spending

Have to Result in Losses for

Physicians and Hospitals?

Example: Reducing

Avoidable ProceduresTODAY

$/Patient # Pts Total $

Physician Svcs

Evaluations $150 300 $45,000

Procedures $850 200 $170,000

Subtotal $215,000

Hospital Pmt $11,000 200 $2,200,000

Total Pmt/Cost $2,415,000

Optional Procedurefor a Condition

• Physician evaluates 300 patients/year

• Physician performsprocedure on 2/3 ofevaluated patients

• Up to 10% of proceduresmay be avoidablethrough patient choiceor alternative treatment

Most of the Money Today

Is NOT Going to the PhysicianTODAY

Physician Svcs

Evaluations $150 300 $45,000

Procedures $850 200 $170,000

Subtotal $215,000

Hospital Pmt $11,000 200 $2,200,000

Physician Payment is

9% of Total Spending

Typical Health Plan Approach:

Prior Auth/Utilization ControlsTODAY w/ UTILIZATION CTRL

$/Patient # Pts Total $ $/Patient # Pts Total $ Chg

Physician Svcs

Evaluations $150 300 $45,000 $150 300 $45,000

Procedures $850 200 $170,000 $850 180 $153,000

Subtotal $215,000 $198,000

Hospital Pmt $11,000 200 $2,200,000 $11,000 180 $1,980,000

Total Pmt/Cost $2,415,000 $2,178,000 -10%

Under FFS, Payer Wins,

Physicians and Hospitals LoseTODAY w/ UTILIZATION CTRL

Physician Svcs

Evaluations $150 300 $45,000 $150 300 $45,000

Procedures $850 200 $170,000 $850 180 $153,000

Subtotal $215,000 $198,000 -8%

Hospital Pmt $11,000 200 $2,200,000 $11,000 180 $1,980,000 -10%

Total Pmt/Cost $2,415,000 $2,178,000 -10%

Is There a Better Way?

TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 ? ? ?

Procedures $850 200 $170,000 ? ? ?

Subtotal $215,000 ?

Hospital Pmt $11,000 200 $2,200,000 ? ? ?

Total Pmt/Cost $2,415,000 ? ? ?

A Better Way: Pay for Care of the

Condition, Not for the ProcedureTODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000

Procedures $850 200 $170,000

Subtotal $215,000

Hospital Pmt $11,000 200 $2,200,000

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

Physicians Can Maintain Practice

Revenue With Fewer ProceduresTODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt $11,000 200 $2,200,000

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

Flexible Payment for Condition

Allows Patient-Centered CareTODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt $11,000 200 $2,200,000

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

Payment for Condition Management• Physician can engage in shared decision making process with patients• Physician can determine if procedure is needed with no impact on revenue

Win for Physician, Win for Payer,

But Where Do Savings Come From?TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt $11,000 200 $2,200,000 ?

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

Do Hospitals Have to Lose In Order

for Physicians To Win?TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt $11,000 200 $2,200,000 180 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

Physician Wins

Payer Wins

Hospital Loses

What Should Matter to Hospitals is

Margin, Not Revenues (Volume)

Hospital Costs Are Not

Proportional to Utilization

$800$820$840$860$880$900$920$940$960$980$1,000

#Patients

Cost & Revenue Changes With Fewer Patients

20% reduction in volume

7% reduction

in cost

Reductions in Utilization Reduce

Revenues More Than Costs

$800$820$840$860$880$900$920$940$960$980$1,000

#Patients

Revenues

20% reduction in volume

7% reduction

in cost

20% reduction

in revenue

Causing Negative Margins

for Hospitals

$800$820$840$860$880$900$920$940$960$980$1,000

#Patients

Revenues

Payers Will Be

Underpaying For

Care If

Admissions

and Procedures

are Reduced

But Spending Can Be Reduced

Without Bankrupting Hospitals

$800$820$840$860$880$900$920$940$960$980$1,000

#Patients

Revenues

Payers Can

Still Save $

Without Causing

Negative Margins

for Hospital

Adequacy of Payment Depends On

Fixed/Variable Costs & MarginsTODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000

Variable Costs $3,300 30% $660,000

Margin $550 5% $110,000

Subtotal $11,000 200 $2,200,000 180 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

Now, if the Number of Procedures

is Reduced…TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000

Variable Costs $3,300 30% $660,000

Margin $550 5% $110,000

Subtotal $11,000 200 $2,200,000 180 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

…Fixed Costs Will Remain the

Same (in the Short Run)…TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000 $1,430,000 -0%

Variable Costs $3,300 30% $660,000

Margin $550 5% $110,000

Subtotal $11,000 200 $2,200,000 180 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

…Variable Costs Will Go Down in

Proportion to Procedures…TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000 $1,430,000 -0%

Variable Costs $3,300 30% $660,000 $3,300 $594,000 -10%

Margin $550 5% $110,000

Subtotal $11,000 200 $2,200,000 180 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

What’s Left for Margin From the

Hospital’s Share of Revenue?TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000 $1,430,000 -0%

Variable Costs $3,300 30% $660,000 $594,000 -10%

Margin $550 5% $110,000

Subtotal $11,000 200 $2,200,000 180 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

The Hospital Is Making More Money

With Less Revenue!TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000 $1,430,000 -0%

Variable Costs $3,300 30% $660,000 $594,000 -10%

Margin $550 5% $110,000 $113,000 +3%

Subtotal $11,000 200 $2,200,000 180 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

I.e., Win-Win-Win for

Physician, Hospital, and PayerTODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000 -0%

Variable Costs $3,300 30% $660,000 -10%

Margin $550 5% $110,000 $113,000 +3%

Subtotal $11,000 200 $2,200,000 180 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

Physician Wins

Payer Wins

Hospital Wins

What Happens If You Can Reduce

Avoidable Procedures Even More?TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180 160

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000

Variable Costs $3,300 30% $660,000

Margin $550 5% $110,000

Subtotal $11,000 200 $2,200,000 180 160 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

The Budget Is the Same, Because

It’s Not Based on # of ProceduresTODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 160

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000

Variable Costs $3,300 30% $660,000

Margin $550 5% $110,000

Subtotal $11,000 200 $2,200,000 160 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

The Hospital’s Margin Improves

With Reduced Variable CostsTODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 160

Subtotal $215,000 $222,000 +3%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000 $1,430,000 -0%

Variable Costs $3,300 30% $660,000 $528,000 -20%

Margin $550 5% $110,000 $179,000 +63%

Subtotal $11,000 200 $2,200,000 160 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000 $7,809 300 $2,359,000 -2%

Who Ever Heard of Giving a

Hospital a Budget?

If The Physician Can Reduce the

Hospital’s Costs Per Procedure….TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000

Procedures $850 200 $170,000

Subtotal $215,000

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000 $1,430,000

Variable Costs $3,300 30% $660,000 $2,000 $360,000 -46%

Margin $550 5% $110,000

Subtotal $11,000 200 $2,200,000 180 $2,137,000 -3%

Total Pmt/Cost $8,050 300 $2,415,000

Everyone Can Win Even More

TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $276,000 +28%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000 $1,430,000

Variable Costs $3,300 30% $660,000 $2,000 $360,000

Margin $550 5% $110,000 $121,000 +10%

Subtotal $11,000 200 $2,200,000 180 $1,911,000 -13%

Total Pmt/Cost $8,050 300 $2,415,000 $7,290 300 $2,187,000 -9%

$2,200 Variation in Average Cost of

Drug-Eluting Stents in CA Hospitals

Source: Coronary Angioplasty with Drug Eluting Stents: Device Costs, Hospital

Costs, and Insurance Payments, Emma L. Dolan and James C. Robinson

Berkeley Center for Health Technology, September 2010

$16,000 Variation in Avg Costs of

Defibrillators Across CA Hospitals

Source: Pacemaker and Implantable Cardioverter-Defibrillator Implant Procedures in California Hospitals,

James C. Robinson and Emma L. Dolan, Berkeley Center for Health Technology, 2010

Not Just Devices: Other Savings

Opportunities From Bundling• Better scheduling of scarce resources (e.g., surgery suites) to

reduce both underutilization & overtime

• Coordination among multiple physicians and departments to

avoid duplication and conflicts in scheduling

• Standardization of equipment and supplies to facilitate bulk

purchasing

• Less wastage of expensive supplies

• Reduced length of stay

• Etc.

Total Hospital Margins Depend on

High-Margin Services

Profit

Commercial Rates Make Up for

Losses on Other Patients

Profit

Starting With the Earlier Example

TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $276,000 +28%

Hospital Pmt

Fixed Costs $7,150 65% $1,430,000 $1,430,000

Variable Costs $3,300 30% $660,000 $360,000

Margin $550 5% $110,000 $121,000 +10%

Subtotal $11,000 200 $2,200,000 180 $1,911,000 -13%

Total Pmt/Cost $8,050 300 $2,415,000 $7,290 300 $2,187,000 -9%

What if This is a VERY High

Margin Procedure for the Hospital?TODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $276,000 +28%

Hospital Pmt

Fixed Costs $7,150 48% $1,430,000

Variable Costs $3,300 22% $660,000

Margin $4,550 30% $910,000

Subtotal $15,000 200 $3,000,000

Total Pmt/Cost $10,716 300 $3,215,000

Cover Fixed Costs, Reduce Variable

Costs, and Preserve/Improve MarginTODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 $350 300 $105,000

Procedures $850 200 $170,000 $950 180 $171,000

Subtotal $215,000 $276,000 +28%

Hospital Pmt

Fixed Costs $7,150 48% $1,430,000 $1,430,000 0%

Variable Costs $3,300 22% $660,000 $2,000 $360,000 -45%

Margin $4,550 30% $910,000 $955,500 +5%

Subtotal $15,000 200 $3,000,000 180 $2,745,500 -8%

Total Pmt/Cost $10,716 300 $3,215,000

Smaller % Savings on Higher Price

= Bigger $ SavingsTODAY TOMORROW

Physician Svcs

Evaluations $150 300 $45,000 300

Procedures $850 200 $170,000 180

Subtotal $215,000 $276,000 +28%

Hospital Pmt

Fixed Costs $7,150 48% $1,430,000 $1,430,000

Variable Costs $3,300 22% $660,000 $2,000 $360,000

Margin $4,550 30% $910,000 $955,500 +5%

Subtotal $15,000 200 $3,000,000 180 $2,745,500 -8%

Total Pmt/Cost $10,716 300 $3,215,000 $10,072 300 $3,021,500 -6%

Physician Wins

Payer Wins

Hospital Wins

How Does Condition-Based

Payment Work in Chronic Disease?

FFS Doesn’t Pay for Care Mgt,

But Pays for ER Visits & Admits

CareManagement

ER Visits/Hospital

Admissions

AvoidExacerbations

MEDICARE/

HEALTH

PatientwithCHF

Rewards Better Care Mgt

CareManagement

ER Visits/Hospital

Admissions

AvoidExacerbations

MEDICARE/

HEALTH

PLANSingle

Payment

PatientwithCHF

Should Be Risk-Adjusted

MoreExtensive

CareManagement

ER Visits/Hospital

Admissions

AvoidExacerbations

MEDICARE/

HEALTH

Payment

LessExtensiveCare Mgt

Higher

Payment

PatientwithCHF

ER Visits/Hospital Adm.

AvoidExacerbations

Higher Risk Patients

Lower Risk Patients

Win-Win-Win in

Chronic Disease Management, TooTODAY TOMORROW

Physician Svcs

Office Visits $70 2000 $140,000 $100 1000 $100,000 +42%

Phone Calls $50 2000 $100,000

RN Care Mgr $80,000

Subtotal $140,000 $280,000 +100%

Hospital Pmt

Fixed Costs $6,000 60% $1,500,000 $1,500,000 -0%

Variable Costs $3,700 37% $925,000 $3,700 $647,500 -30%

Margin $300 3% $75,000 $82,500 +10%

Subtotal $10,000 250 $2,500,000 175 $2,230,000 -11%

Total Pmt/Cost $5,280 500 $2,640,000 500 $2,510,000 -5%

Physician Wins

Payer Wins

Hospital Wins

See Example

in the

Online Appendix

How Do You Develop

Win-Win-Win Solutions?

How Do You Develop

Win-Win-Win Solutions?1. Defining the Change in Care Delivery

– How can care be redesigned to improve quality and reduce costs?

How Do You Develop

2. Analyzing Expected Costs and Savings– What will there be less of, and how much does that save?– What will there be more of, and how much does that cost?– Will the savings offset the costs on average?

How Do You Develop

3. Designing a Payment Model That Supports Change– Flexibility to change the way care is delivered– Accountability for costs and quality/outcomes related to care– Adequate payment to cover lowest-achievable costs– Protection for the provider from insurance risk

How Do You Develop

4. Designing an Appropriate Internal Compensation System– Changing payment to the provider organization does not

automatically change compensation to physicians and hospitals

How Do You Develop

4. Designing an Appropriate Internal Compensation System– Changing payment to the provider organization does not

automatically change compensation to physicians and hospitals

5. Getting Payers to Use the Payment Model

Major Barrier: Gaining Support

from a Critical Mass of Payers

Health Plan

Provider

Health Plan Health Plan

Patient Patient Patient

Provider is only compensated for changed practices

for the subset of patients covered by participating payers

Better

Payment

System

Current

Payment

System Current

Payment

System

For Most Employees, the Employer

is the Insurer, Not a Health Plan

Source:

Employer

Health

Benefits

2012 Annual

Survey.

The Kaiser

Family

Foundation

and Health

Research

Educational

60% inSelf-

FundedPlans

For Self-Funded Employers, The

Health Plan is Just a Pass Through

Self-Funded

PurchasersProviders

ASOHealth Plan(No Risk)

Provider Claims

Purchaser Payment

Little Incentive for Health Plans to

Support Payment Reforms

True Payment Reform Means:• Health plan incurs the costs of

implementing new payment models• Purchaser gains all the savings from

reduced utilization and spending(because all claims are passed through)

Self-Funded

PurchasersProviders

ASOHealth Plan(No Risk)

Provider Claims

Purchaser Payment

A Better Approach:

Purchaser/Provider Partnerships

Self-Funded

Purchasers

ProvidersWilling to ManageCosts

Better Payment and Benefit Structure

Lower Cost, Higher Quality Care

Provider “wins” if:

• Patients stay healthy and need less care

• Purchaser pays provider adequately tomanage care efficiently

Purchasers and Patients “win” if:

• Providers reduce purchasers’ costs

• Patients stay healthy and have lower cost-sharing

Health Plan Implements Changes

Purchasers/Providers Agree On

Self-Funded

Purchasers

ProvidersWilling toManageCosts

ASOHealth Plan(No Risk) Implementation

Better Payment and Benefit Structure

Lower Cost, Higher Quality Care

What About Employers/ Individuals

With Traditional Health Insurance?

FullyInsured

Purchasers(No Risk)

Providers

HealthInsurance

Plan(Risk)

Health Insurance Increasingly

Makes the Patient the Purchaser

FullyInsured

Purchasers(No Risk)

Providers

HealthInsurance

Plan(Risk)

Memberswith High

Deductibles

Premium

Out-of-Pocket

Paymentsfor

Many Testsand

Procedures

Payments for Highest-Cost

Procedures and Sickest Patients

So It’s the Patient Who Has to

Pay for Value, Not the Health Plan

Providers

Memberswith High

Deductibles

BetterPayment

HigherQuality

FullyInsured

Purchasers(No Risk)

HealthInsurance

Plan(Risk)

Premium

Reference Pricing Does Same for

Higher-Priced Procedures

FullyInsured

Purchasers(No Risk)

Highest-Value

Providers

HealthInsurance

Plan(Risk)

Memberswith Cost

Sharing

Premium Reference Pricing

Lowest-Value

Providers

LowCost-

Sharing

HighCost-

Sharing

How Do You Create a Direct Contracting Relationship

With a Purchaser?

The Purchaser Wants Lower

Spending Without Rationing

NOTE:Graph Is notdrawnto scale

PurchaserSpending

TOMORROW

PurchaserSpending

TotalHealthcareSpending

forthe

Purchaser’sPatients

LowerHealthcareSpendingWithout

Rationing

PurchaserSavings

A Proposal to Improve Heart Care

Spending Will Be of Great Interest...

PurchaserSpending

TOMORROW

HeartConditions

Avoidable $Avoidable $

HeartConditions

PurchaserSpending

forthe

Rationing

PurchaserSavings

But Purchasers Prefer to Control

All/Most Spending, Not Just Some

PurchaserSpending

TOMORROW

HeartConditions

Avoidable $Pregnancy

Avoidable $

Diabetes

Avoidable $

HeartConditions

DiabetesAvoidable $

Avoidable $

Pregnancy

Bones/Joints

Avoidable $

Bones/Joints

Avoidable $

OtherAvoidable $

Avoidable $

PurchaserSpending

forthe

Rationing

PurchaserSavings

That’s Why There’s Interest in

Accountable Care Organizations

PurchaserSpending

TOMORROW

HeartConditions

Avoidable $Pregnancy

Avoidable $

Diabetes

Avoidable $

HeartConditions

DiabetesAvoidable $

Avoidable $

Pregnancy

Bones/Joints

Avoidable $

Bones/Joints

Avoidable $

OtherAvoidable $

Avoidable $

PurchaserSpending

forthe

Rationing

PurchaserSavings

How Does Cardiology

Fit Into

Accountable Care Organizations?

Goal of the ACO: Improve Value in

All Aspects of Patient Care

Disease

Diabetes

Back Pain

PATIENTS

Pregnancy

Each Patient Should Choose &

Use a Primary Care Practice…

Disease

Diabetes

Back Pain

PATIENTS

Pregnancy

Primary Care

Practice

MEDICARE/HEALTH PLAN

…Which Takes Accountability for

What PCPs Can Control/Influence

Disease

Diabetes

Back Pain

PATIENTS

Pregnancy

Primary Care

Practice

AccountableMedical

Home Accountability for:• Avoidable ER Visits

•Avoidable Hospitalizations

•Unnecessary Tests

•Unnecessary Referrals

…With a Medical Neighborhood

to Consult With on Complex Cases

Disease

Diabetes

Back Pain

PATIENTS

Pregnancy

Primary Care

Practice

AccountableMedical

Endocrinology,

Cardiology,

Psychiatry

AccountableMedicalNeighborhood

Accountability for:

•Unnecessary Referrals

•Co-Managed Outcomes

..And Specialists Accountable for

the Conditions They Manage

Disease

Diabetes

Back Pain

PATIENTS

Pregnancy

Primary Care

Practice

Orthopedic

OB/GYN

Cardiology

GroupHeart Episode/Condition Pmt

Back Episode/Condition Pmt

PregnancyManagement Pmt

AccountableMedical

Endocrinology,

Cardiology,

Psychiatry

Accountability for:

•Unnecessary Procedures

•Infections, Complications

That’s Building the ACO

from the Bottom Up

Disease

Diabetes

Back Pain

PATIENTS

Pregnancy

Primary Care

Practice

Orthopedic

OB/GYN

Cardiology

AccountableMedical

Endocrinology,

Cardiology,

Psychiatry

Accountable PaymentModels

Shared SavingsPayment

Primary

Orthopedics OB/GYNCardiology

Most ACOs Today

Aren’t Truly Reinventing Care

Disease

Diabetes

Back Pain

PATIENTS

Pregnancy

Fee-for-ServicePayment

Expensive IT Systems

Psych.,

Endoc.

Nurse Care Managers

A True ACO Can Take a Global

Payment And Make It Work

Disease

Diabetes

Back Pain

PATIENTS

Pregnancy

Primary Care

Practice

Orthopedic

OB/GYN

Cardiology

AccountableMedical

Endocrinology,

Cardiology,

Psychiatry

Risk-AdjustedGlobal Payment

Example: BCBS MA

Alternative Quality Contract• Single payment for all costs of care for a population of patients

– Adjusted up/down annually based on severity of patient conditions

– Initial payment set based on past expenditures, not arbitrary estimates

– Provides flexibility to pay for new/different services

– Bonus paid for high quality care

• Five-year contract – Savings for payer achieved by controlling increases in costs

– Allows provider to reap returns on investment in preventive care,

infrastructure

• Broad participation– 14 physician groups/health systems participating with over 400,000

patients, including one primary care IPA with 72 physicians

• Positive two year results– Higher ambulatory care quality than non-AQC practices, better patient

outcomes, lower readmission rates and ER utilization, lower costshttp://www.bluecrossma.com/visitor/about-us/making-quality-health-care-affordable.html

You Don’t Need To Be Part of a

Hospital to Manage Global Payment

• Small Primary Care Practices Managing Global Payments– Physician Health Partners (PHP) in Denver, CO is a management services

organization that supports four separate IPAs (median size: 3 MDs/practice).

PHP accepts capitated risk-based contracts on behalf of the IPAs with both

Medicare and commercial HMOs. www.phpmcs.com

• Independent PCPs & Specialists Managing Global Payments– Northwest Physicians Network (NPN) in Tacoma, WA is an IPA with 109 PCPs

and 345 specialists in 165 practices (average size: 2.4 MDs/practice).

NPN accepts full or partial risk capitation contracts, operates its own Medicare

Advantage plan, and does third party administration for self-insured

businesses. www.npnwa.net

• Joint Contracting by MDs & Hospitals for Global Payments– The Mount Auburn Cambridge IPA (MACIPA) and Mount Auburn Hospital

jointly contract with three major Boston-area health plans for full-risk capitation.

The IPA is independent of the hospital; they coordinate care with each other

without any formal legal structure. www.macipa.com

Physicians Need Protections From

Insurance Risk • Two Major Types of Risk

– Insurance Risk: Whether patients will have a health condition• The payer/purchaser pays for this today, and should continue to do so

– Performance Risk: How much it costs to treat that health condition• The payer/purchaser pays for this today, but the provider can control it

• How Do You Separate Insurance & Performance Risk?

– Risk/severity adjustment of payment

– Risk corridors in case costs were mis-estimated

– Outlier payments for unusually expensive patients

– Risk exclusions for some patient populations or situations where costs

can’t reasonably be controlled by the physician or hospital

How Many Patients

Do You Need to

(Successfully)

Manage Total Risk?

Companies With <1,000 Workers

Take Total Healthcare Cost Risk

Sources:

Employer

Health

Benefits

2012 Annual

Survey.

The Kaiser

Family

Foundation

and Health

Research

Educational

Trust;

State-Level

Trends in

Employer-

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