Understanding the Road to Payment Reform in Health Care

1. Understanding the Road to Payment Reform in Health Care Michael Bailit January 11, 2013

2. Questions I Plan to Address This Morning • Why payment reform, and why does it matter to employers? • What are the approaches being implemented? • Who is utilizing them nationally and in Minnesota? • What is the evidence that they benefit employers?

3. Health Expenditures Have Dramatically Increased and Continue to Rise National Health Expenditures Per Capita 1960-2009 Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; NHE summary including share of GDP, CY 1960-2009; file nhegdp09.zip).

4. MDH Projections for MN Health Care Spending Total Health Care Spending  Health Care Spending excluding Medicare and long-term care

5. Premiums and Worker’s Contributions to Them Have Dramatically Outpaced Earnings and Inflation Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2010. Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), 1999-2010; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, 1999-2010 (April to April).

6. More Spending Does Not Equal Better Care Health Care Spending Per Capita (2008)3 WHO Ranking on Health System Performance (2000)4 France Italy San Marino… 18. United Kingdom… 36. Costa Rica 37. United States 38. Slovenia OECD Health Data 2010; The World Health report 2000 statistical annex, Annex Table 1 www.who.int/whr/2000/annex/en/index.html

7. Need to Improve Health Care Quality • Tens of thousands of Americans die each year from medical errorsand hundreds of thousands suffer nonfatal injuries that a high-quality health care system would largely prevent.* • In Minnesota**: • 9% of patients with depression have experienced substantial improvement (i.e., PHQ-9 score at six months decreased by at least 50% from their initial PHQ-9 score) • 24% of children with asthma receive optimal care • 37% of adults with diabetes receive optimal care • 40% of adults receive optimal vascular care * To Err Is Human: Building a Safer Health System. Linda T.Kohn, Janet M.Corrigan, and Molla S.Donaldson, eds. Washington, D.C: National Academy Press, 2000. ** Minnesota Community Measurement (2011). 2011 Health Care Quality Report. Retrieved from http://mncm.org/site/upload/files/Book_6_21_2012.pdf

8. Many Drivers of Growing Costs in Health Care Fee-for- Service Payment Model Increase in Chronic Diseases Duplicative/ Unnecessary Care Other Factors Consumer Demand Direct-to- Consumer Advertising Defensive Medicine Fraud • Lifestyle & • Behaviors Lack of Provider Coordination • Abuse End-of-Life Care • Service Volume Drives Revenue VOLUME • Belief That More is Better • Aging Population Patients are Insulated from Cost of Care Lack of Evidence -Based Care Practice Variation Growing Costs Provider Consolidation Low/ No Reimbursement Rates for Medicare, Medicaid and Uninsured Consumers’ Preference for Brand Name Providers & Services PRICE Pharmaceuticals Lack of Price-Based Competition Diagnostics (imaging, etc.) Global Companies Increase US Prices to Compensate for Low Prices in Other Countries Insurer Consolidation Preference for Care in High Cost Settings (e.g., ER, specialty care) Personalized Medicine Drug Exclusivity Policies Costs (e.g., RN salaries) Technological Advances Lack of Competition Provider Costs/ Cost-Shifting Consumer Preferences

9. Today’s Focus: Problems Caused by Fee-for-Service Payment Fee-for- Service Payment Model Increase in Chronic Diseases Duplicative/ Unnecessary Care Other Factors Consumer Demand Direct-to- Consumer Advertising Defensive Medicine Fraud • Lifestyle & • Behaviors Lack of Provider Coordination • Abuse End-of-Life Care • Service Volume Drives Revenue VOLUME • Belief That More is Better • Aging Population Patients are Removed from Cost of Care Lack of Evidence -Based Care Practice Variation Growing Costs Provider Consolidation Low/ No Reimbursement Rates for Medicare, Medicaid and Uninsured Consumers’ Preference for Brand Name Providers & Services PRICE Pharmaceuticals Lack of Price-Based Competition Diagnostics (imaging, etc.) Global Companies Increase US Prices to Compensate for Low Prices in Other Countries Insurer Consolidation Preference for Care in High Cost Settings (e.g., ER, specialty care) Personalized Medicine Drug Exclusivity Policies Costs (e.g., RN salaries) Technological Advances Lack of Competition Provider Costs/ Cost-Shifting Consumer Preferences

10. Why is this relevant to employers? • You– employers, consumers and public payers - are paying the bills when your health plan gives providers a reward for doing more – and doing more of what is most profitable. • Employers have been absent from health plan-provider reform discussions despite the fact that they are discussing how to spend your money. • Absent employer action, health plans will pay providers in the fashion in which providers prefer to be paid. • Changes in payment that will truly remove the incentive for inflation need to start with employers.

11. What is Fee-for-Service Payment? • It is the dominant payment model in the U.S. health care system – and has been for decades. • Fee-for-service (FFS) payment offers providers a specific amount of compensation in exchange for providing a patient with a specific service. • FFS payment is inherently inflationary.

12. FFS: Getting What You Pay For “Fee-For-Service” pays for volume, so that is exactly what we get: LOTS OF VOLUME (visits, tests, procedures, duplication of services) • More Payment to Providers Very Expensive Health Care • More Care Provided • Payment to Providers • Care Provided

13. FFS: not only rewarding volume, but rewarding volume of highly priced services • FFS payment provides a financial incentive to: • Provide more of those services which are paid most handsomely – e.g., cardiology, orthopedics • Introduce new services that generate higher fees than longer-standing services • FFS payment provides a financial disincentive to: • Deliver services that generate comparatively lower remuneration – e.g., primary care, psychiatry • Provide services for which there is no FFS compensation – e.g., patient outreach, care coordination, treatment plan development, e-visits, web visits

14. FFS: No Financial Incentive for Quality • Physicians get paid the same amount for one patient regardless of whether they provide excellent care or terrible care Providers may actually be paid more for poor quality due to the need for “rework.”

15. Reference Pricing • Referencing pricing is a benefit design strategy to address variation in prices across providers. • It can be effective in creating an incentive for consumers to shift care to lower priced-providers – and an incentive for high-priced providers to lower their prices. • While it is a strategy that addresses price variation, it does not eliminate the pay-for-volume characteristic of FFS payment, nor its underlying inflationary tendencies.

16. Payment Reform: Moving Beyond FFS • Fee for Service • (FFS) • Medical Home • (PCMH) • Total Cost of Care • (TCOC) • Payment Reform means moving away from FFS and towards other ways of paying that financially incentivize provision of high quality, efficient care. The options are neither mutually exclusive nor sequential. Goal: High Quality/ Low Cost Care • Pay-for- Performance • (P4P) • Bundled Payment • (Bundles)

17. Pay-for-Performance • The Center for Medicare and Medicaid Services (CMS) defines P4P as: “the use of payment methods and other incentives to encourage quality improvement and patient-focused high value care” • There are different types of P4P, but generally it: • offers providers financial bonuses for strong performance on specific quality measures • continues to use FFS as the underlying mechanism of payment • TCOC • FFS • PCMH • Bundles • P4P

18. Pros and Cons of Pay-for-Performance Payment • Pros: • creates a “business case” for providers to pursue quality on specific aspects of care • some reviews of the literature have found that P4P programs targeting providers have a positive impact on quality* • Cons: • evidence of clinical effectiveness and cost savings is limited • careful design and implementation are necessary pre-requisites for success • Is unable to neutralize the inflationary force of FFS payment • TCOC • FFS • PCMH • Bundles • P4P * Christianson JB, Leatherman S, and Sutherland K. “Lessons from Evaluations of Purchaser Pay-for-Performance: A Review of the Evidence” Medical Care Research and Review, December 2008;65(6) supplement:5S-35S. www.ncbi.nlm.nih.gov/pubmed/19015377. and Petersen LA, Woodard LD, Urech T, Daw C and Sookanan S. “Does Pay-for-Performance Improve the Quality of Health Care?” Annals of Internal Medicine, August 15, 2006;145(4):265-272. www.annals.org/content/145/4/265.abstract.

19. Example of Employer Successin Minnesota: BTE • Minnesota BTE implemented by The Action Group in 2006. • 11 private and public purchasers, covering 900K lives, pay performance rewards for Optimal Diabetes Care, Optimal Vascular Care and Depression Remission at Six Months. • Advised by multi-stakeholder Guiding Coalition • Goals: Improve the quality of care for patients; raise purchaser and consumer awareness about variation in quality; and spark provider competition based on quality outcomes • In Minnesota BTE produced diabetes scores that improved 400% over the first 5 years: • 6% receiving diabetes optimal care in 2004 to 37% in 2012 • smaller improvements in vascular care and depression • TCOC • FFS • PCMH • Bundles • P4P

20. What is a Medical Home? • A patient-centered medical home (“medical home”) is a primary care practice in which the patient, a primary care clinician and a partnering care team work together to develop and implement a plan of care to support patient goals for health and function. • In Minnesota, medical homes are often referred to as “health care homes.” • TCOC • FFS • PCMH • Bundles • P4P

21. Medical Home Payment • Insurance companies and/or employers pay qualifying primary care practices a certain amount of money for each patient every month to support enhanced outreach, communication, coordination and care management. • In Minnesota this payment is referred to as a “care management fee.” • Some medical home projects offer practices the opportunity to share in savings if the practice is able to reduce costs. Under these programs medical homes are required to meet certain performance expectations to qualify for savings payment distribution. Such arrangements do not appear to be in place in MN. • TCOC • FFS • PCMH • Bundles • P4P

22. Example of Employer Success: Hill Air Force Base • In 2009, the Air Force, Army and Navy began working together to implement a tri-service medical home project to transform care at all primary care practices throughout the Department of Defense (DOD). • Results of the project at Hill Air Force Base in Utah: • improved blood sugar control for 77% of patients with diabetes • 98% symptom control for patients with asthma. • saved approximately $300,000 per year in diabetes care. • according to Col. Donald Hickman, “Health care costs go up 8 to 15% per year nationwide and we have managed to drive down our network care costs about 4.5% over the last two fiscal years.” • additionally, patients reported 95% satisfaction with the program • TCOC • FFS • PCMH • Bundles • P4P

23. Example of Private Employer Action with Medical Home • Three Cleveland-area employers led by Progressive Insurance agreed to fund nurse care coordinators to support care of their employees and dependents served by the Lake Health system beginning in 2013 if the practices were NCQA-recognized medical homes. • The parties have agreed that in the future they will implement a shared savings arrangement whereby Lake Health will be able to share some of the savings that its PCMH practices, augmented with employer-funded care coordinators, are expected to generate.* * Telephone interview with Tim Kowalski, MD, Progressive Insurance, November 8, 2012. • TCOC • FFS • PCMH • Bundles • P4P

24. Progressive Insurance “Together, we can reward value over volume, quality outcomes over treatment of incidents and provide optimal vitality for our employees and our communities.” Tim Kowalski, M.D.

25. Medical Home in Minnesota • Development sparked by 2008 state legislation. • MDH had certified 214 health care homes and 2213 clinicians serving 2.4 million people as of 12-27-12. • The MN DHS offers care coordination payments of $10 to $60 a month for each patient with a chronic condition who is enrolled in a state health program. The payment varies based on patient complexity. • Some plans are also supporting health care homes. • No evaluation results of quality or cost impact yet but…"On average, health care home clinics have significantly better performance scores for diabetes and cardiovascular disease than non-health care home clinics." – Leif Solberg, MD, HealthPartners Research Foundation • TCOC • FFS • PCMH • Bundles • P4P

26. Pros/Cons of Medical Homes • Pros: • additional payments support care management and other patient support functions that are not typically reimbursed under FFS • shared savings models encourage the practice to reduce costs • performance measures ensure the practice maintains or improves quality of care • many insurer and provider self-reported positive ROI findings • Cons: • Incentive limited to the primary care practice (model does not alter payment for specialist, inpatient or residential care) • Limited evidence of ROI in the peer-reviewed literature • Does not address FFS volume incentive • TCOC • FFS • PCMH • Bundles • P4P

27. What is a Bundled Payment? • Bundled payments offer reimbursement for all of the services needed by specific patient for a particular condition or treatment. Creates incentive for provider coordination of efforts. • Primary goal: reduce costs by reducing cost variation, including through reduction in avoidable complications • Generally includes payments for all of the providers and the care settings that may be required, but does not include services that are unrelated. Essentially provides a “warranty.” • Example: hip replacement surgery bundle • Include: the surgery, pre and post-operative appointments, rehabilitation and the treatment of any complications associated with the procedure. • TCOC • FFS • PCMH • Bundles • P4P

28. Examples of Bundled Payment Success: CMS Acute Care Episode (ACE) Project at Baptist Health* • Implemented bundles of physician and hospital services related to 28 cardiac and nine orthopedic services. • saved more than $2,000 per case • saved a total of $4.3 million Medicare Heart Bypass Center Project • Medicare offered participating hospitals a single price for all inpatient services related to heart bypass surgery. • Over the first 27 months of the demonstration program, project saved more than $17 million at four participating hospitals. • From 1990-1993, the total cost per case fell in three out of the four hospitals • TCOC • FFS • PCMH • Bundles • P4P * The Health Industry Forum. “Episode Payment: Private Innovation and Opportunities for Medicare” Conference Report, Brandeis University, May 17, 2011, Washington, DC, available at http://healthforum.brandeis.edu/meetings/materials/2011-17-may/Final%20cr5-17-11.pdf.

29. Employers Exploring Bundled Payments • Employers are now beginning to experiment with bundled payment arrangements • Example: Employers’ Coalition on Health (ECOH) in Rockford, IL* • In 2011 ECOH began a three-stage “glide path” towards the implementation of their bundled payment program • While no results are available, they anticipate seeing significant savings over time for their employer members. • TCOC • FFS • PCMH • Bundles • P4P * Burns ME, Bailit MH. And Painter M. “Bundled Payment Across the U.S. Today: Status of Implementations and Operational Findings” Health Care Incentives Improvement Institute, Newtown, CT, May 2012.

30. Bundled Payments in MN • While 2008 state legislation tried to advance bundled payments (“baskets of care”), there was not much traction among providers and payers. • Services within 7 baskets were identified by multi-stakeholder committees. • Progress stalled when it came to the question about how to implement. • MNBTE systems of excellence project exploring bundled payment initially for spine surgery • We were unable to identify any active bundled payment activity in Minnesota, although… • providers have brought proposals to payers to do so • some Minnesota providers may have applied to participate in the forthcoming Medicare bundled payment demonstration. • TCOC • FFS • PCMH • Bundles • P4P

31. Pros/Cons of Bundled Payments • Pros: • provide a strong incentive to reduce costs – including both volume and price • provide an incentive to improve quality and reduce costly complications associated with the procedures • strong evidence of success at reducing costs in the Medicare population • Cons: • impact limited to specific procedures/ treatment of specific conditions • does not provide an incentive to reduce the volume of procedures (only the costs associated with each procedure) • administratively challenging to administer • TCOC • FFS • PCMH • Bundles • P4P

32. What is Total Cost of Care (TCOC) Payment? • Sometimes called “global payment”, “population-based payment” or “capitation.” • Under TCOC payment a provider entity agrees to accept responsibility for the health care for a group of patients in exchange for a set amount of money. • Goal: align the financial incentives of the providers with the interests of the patients and the payers so that everyone wins if patients are healthy and costs are held down. • TCOC • FFS • PCMH • Bundles • P4P

33. Two Types of TCOC Payment Arrangements • Shared savings (“upside-only”): • If the provider effectively manages cost and performs well on quality of care targets, then the provider may keep a portion of the savings generated. • Shared risk (“two-sided”): • Exactly the same as above on the upside. • However, if the provider delivers inefficient, high-cost care, it will be held responsible for a portion of the additional costs incurred. • There are usually caps to limit downside exposure. Also, stop loss or reinsurance requirements protect providers. • TCOC • FFS • PCMH • Bundles • P4P

34. Aligning Incentives Around Value Historical Contract Aligned Incentive Contract TCOC FFS PCMH Quality $TBD based on performance to cost of care target Savings are shared Total Cost of Care Provider At Risk Quality Provider At Risk Fee for Service Guaranteed Increase $ pool based on outcomes improvement Bundles P4P Fee for Service Guaranteed Increase Annual increase is ceiling for cost of care target Year 1 Year 2 Year 3 Year 1 Eppel J. “The Role of Payment Reform in the Transformation of the HealthCare System” BCBSMN, November 29, 2012.

35. How does TCOC contracting work? • Two methods of administration: a) health plan pays PMPM budget monthly, or b) plan pays FFS and then reconcile against a budget target after the contract year has ended and claims have been paid. • If PMPM method, self-funded employers see savings in lower PMPM rate and/or end-of-year settlement • If FFS method, self-funded employers see savings in lower claims spend, but may need to share some in end of year settlement • If provider takes downside risk and exceeds budget, will owe that amount back through withhold or reduction in future payments. • Plan and provider decide upon quality targets which are used to adjust payments. • TCOC • FFS • PCMH • Bundles • P4P

36. Quality Improvement: BCBSMN TCOC measures • TCOC • FFS • PCMH • Bundles • P4P Eppel J. “The Role of Payment Reform in the Transformation of the HealthCare System” BCBSMN, November 29, 2012. 36

37. Example of Employer Success with TCOC: CalPERS • In 2010, the California Public Employees’ Retirement System (CalPERS) launched a TCOC pilot program in collaboration with Blue Shield of California and Catholic Healthcare West & Hill Physicians Group (CHW/Hill). • Blue Shield agreed to pay CHW/Hill a set amount to provide care to 41,500 CalPERS employees and dependents. • Impressive results: • by the end of the first year, the pilot had exceeded all expectations—saving more than $20 million in costs (preventing a rate hike). • over the first three years of the project, CalPERS has seen $32 million in aggregate savings. • meaningful reduction in utilization • 15% reduction in inpatient readmissions • 15% reduction in inpatient days, • 13% reduction in surgeries. • TCOC • FFS • PCMH • Bundles • P4P

38. Example of Private Employer Action with TCOC Payment • Intel has worked directly with the Presbyterian Health System in Albuquerque to create the “Connected Care” program, a narrow network benefit that offers care through a Patient-Centered Medical Home model. • Starting in January 2013, in exchange for caring for 10,000 of Intel’s employees and their families, Presbyterian agreed to put a certain percentage of its revenue at risk. • If Presbyterian performs well, it receives the at-risk amount back. If Presbyterian performs even better, it will receive additional performance payments.* * Telephone interview with James Dickey, Intel Corporation, December 7, 2012. • TCOC • FFS • PCMH • Bundles • P4P

39. Intel Corporation and Payment Reform “It’s time for the employer market to step up.” James Dickey Intel Corporation

40. TCOC Payment in Minnesota • BHCAG’s ChoicePlus was an early TCOC payment model in Minnesota in the 1990s. • Within the commercial market, health plans report between 1/3 and 2/3 of covered lives or spending associated with Total Cost of Care contracts, with higher percentages in the Twin Cities region than elsewhere in the state. • Medicare ACO pilots in place and MN DHS testing too. • Most Total Cost of Care contracting arrangements appear to be “upside-only” for provider organizations, although there are also shared risk arrangements. • Has it had an impact on trend? • It’s hard to know, since the economic downturn has had such a dramatic impact on care-seeking behavior. • TCOC • FFS • PCMH • Bundles • P4P

41. TCOC Payment in Minnesota • Some have expressed concern that too many MN TCOC arrangements are upside only and that the underlying FFS is still the primary economic driver for providers. • “True payment reform cannot be achieved by adding new layers of bonuses and penalties on top of what is still funda-mentally a fee-for-service payment system.”* • Some have also expressed concern that market consolidation could temper the impact of TCOC contracting – large providers agree to TCOC but demand high budgets and large annual increases. * Miller HD. “Ten Barriers to Payment Reform and How to Overcome Them” Center for Healthcare Quality and payment Reform”, December 2012. • TCOC • FFS • PCMH • Bundles • P4P

42. Pros/Cons of TCOC Payment • Pros: • financially incentivizes providers to improve quality, keep patients healthy, reduce volume of care and keep costs down • systems approach to payment reform that can remove the inflationary effects of FFS • Cons: • TCOC will only succeed if providers can change the delivery of care and better coordinate care. This is not easy. • TCOC payment requires that individual provider pay incentives are also adjusted and aligned. This is essential. • shared savings may not create the required “burning platform” for real change in care delivery • providers must avoid excessive risk assumption • TCOC • FFS • PCMH • Bundles • P4P

43. In Conclusion • The current fee-for-service payment system incentivizes high-cost, low quality care. • Payment reform means paying for care in ways that incentivize improvements in quality and reductions in cost. • Payment reform is not an end. It is a means to spark fundamental changes in health care system function.

44. In Your Words “The only way employers will have any influence is if they come together. We shouldn’t just sit back and pay whatever they tell us to pay.” Minnesota employer

45. Follow-up Questions Michael Bailit mbailit@bailit-health.com www.bailit-health.com