September 2013

1. September 2013 Arkansas Payment Transformation Initiatives Discussion for 2013 IM Symposium

2. “The Big Picture and Changing Times” There are major health care challenges facing Arkansas. Health outcomes in Arkansas are poor, with the state at or near bottom of all states on national health indicators. The fragmented health care system is hard for patients to navigate, and the system does not promote team-based care. 2

3. The status quo is unsustainable Health care spending is growing at an unsustainable rate. Insurance premiums have doubled for Arkansas employers and families in the past ten years. Providing benefits to over 250,000 uninsured Arkansans will create enormous pressure on the health care financing and delivery system. It will also create substantial budget shortfalls for the State of Arkansas and Medicaid. It could call for additional taxes to be levied and stress on our local economy. This is a trend which is not isolated to Arkansas – over 45 states are being faced with significant budget deficits which are leading to reducing benefits, slashing provider payments, restricting enrollment, and moving toward a more managed environment. 3

4. What are they saying? Beebe asks U.S. help to fill Medicaid gaps Gov. Mike Beebe has asked the federal government for a wide-ranging Medicaid deal that would allow Arkansas to access federal funds to help plug the $4.6 billion program’s estimated $138 million deficit, quicken its payment overhaul and pave the way to expanding its rolls by up to 250,000 people. LITTLE ROCK — The Arkansas Department of Human Services is preparing for “significant” cuts in services to fill a shortfall of at least $100 million in the state’s Medicaid program. Department Director John Selig said Tuesday that the Medicaid shortfall will be smaller than the nearly $200 million gap between its funding request and Gov. Mike Beebe’s recommendation for next year. . Source: AP Press release Nov 14 2012 & Ark Democrat-Gazette Nov 15 2012 4

5. What have employers told us? …what new solutions are you working on to improve quality of care and simultaneously reduce cost? …we have been increasing employee premiums and can only push the envelope so far…. …cost are driven by inefficiencies in the system and over use of testing and surgical procedures..What can we do??? 5

6. Arkansas Blue Cross Blue Shield and many self-funded groups face many of the same challenges that Medicaid does. • Transition to payment system that rewards value and patient health outcomes by aligning financial incentives • Reduce payment levels for all providers regardlessof their quality of care or efficiency in managing costs • Pass growing costs on to consumers through higherpremiums, deductibles and copayments (private payers),or higher taxes (Medicaid) • Intensify payer intervention in decisions through managed care or elimination of expensive services (e.g. through prior authorizations) based on restrictive guidelines • Eliminate coverage of expensive services or eligibility 6

7. What are the alternative solutions? • Develop a program to more effectively use the existing health care dollars and reducing cost related to duplicated tests, unnecessary procedures, and poor coordination of services. • Transition from fee for service or volume based treatment • Create a new payment system that rewards high-quality, patient-centered, efficient care. 7

8. Arkansas PaymentImprovement Initiative (APII) Governor Beebe and Arkansas Medicaid invited Arkansas Blue Cross Blue Shield to the table to collaborate in transforming the way we pay for medical services. • The current system pays for volume —the more I do, the more I get paid • The current system does not include incentives forproviders treating the same patient to work together • The result is that there is significant variation in cost and quality in the system, some of which cannot be justified 8

9. Our vision to improve care for Arkansas is a comprehensive,patient-centered delivery system… • Improve the health of the population • Enhance the patient experience of care • Enable patients to take an active role in their care For patients Objectives For providers • Reward providers for high-quality, efficient care • Reduce or control the cost of care How care is delivered • Population-based care • Medical homes • Health homes • Episode-based care • Acute, procedures ordefined conditions Four aspects of broader program • Results-based payment and reporting • Health care workforce development • Health information technology (HIT) adoption • Expanded access for health care services Focus today 9

10. How does it work? • The Orthopedic Surgeon is considered the quarterback for this episode. • Decision Making Authority • Influence related to other ancillary provider • Does have economic relevance in regards to the total cost Hip Replacement 10

11. How does APII enhance healthcare in Arkansas? To create coordinated, team-based care for all services related to the episode. Develop accountability by identifying a provider “quarterback” or Principal Accountable Provider (PAP) for all services across the episode. This provider has influence related to patient care and has economic relevance. Create incentives for high-quality, cost-effective care which is rewarded beyond current reimbursement, based on the PAP’s average cost and total quality of care 11

12. From a conceptual model to real world application Review claims from the Performance period to identify a ‘Principal Accountable Provider’ (PAP) for each episode 4 1 Patients seek care and select providers as they do today Providers submit claims as they do today Payers reimburse for all services as they do today Calculate incentive payments based on outcomes after performance period, typically 12 months long (retrospective reimbursement) 5 Payers calculate average cost per episode for each PAP Compare average costs to predetermined ‘’commendable’ and ‘acceptable’ levels 2 Based on results, providers will Share savings: Ifaverage costs below commendable levels and quality targets are met Pay part of excess cost: if average costs are above acceptable level See no change in pay: if average costs are between commendable and acceptable levels. 6 3 12

13. Examples of episode cost variation Cost for an uncomplicated hip/knee replacement (general acute care hospital – highest-volume provider) in Little Rock $18,911 in Jonesboro $22,014 in NW Arkansas $21,864 in Ft. Smith $24,114 in Russellville $22,695 in El Dorado $28,247 13

14. Aligned incentives In APII, the Principle Accountable Provider (PAP) is in a position to share savings or excess cost for the entire episode • For hip/knee it is the orthopedic surgeon • For perinatal it is the obstetrician The outcome of the risk/reward settlement is basedon the total episode payment • Thus there is an incentive to look at referral patterns for the best cost and quality Quality is a critical component of the episode • Need to ensure we are not incenting “underuse” of care • Encourages evidence-based medicine and practices • Identifies and improves secondary outcomes not directly tied to the primary procedure (reduced readmits, higher patient compliance) 14

15. … Payers assess their historic provider average cost for an episode; then selects thresholds to promote high-quality, guideline-based and cost-effective care Year 1: preparatory period – where we are today Year 1: distributionof PAP’s costs high 85th Percentile Acceptable COST 50th Percentile Commendable Gain sharing limit low Individual providers, in order from highest to lowest average cost 16

16. Selected thresholds applied to provider performance in the following year… even though we expect that cost effectiveness will have improved Year 2: performance period Year 1: distributionof provider costs Year 2: distributionof provider costs high Acceptable COST Commendable Gain sharing limit low Individual providers, in order from highest to lowest average cost 17

17. No change PAPs that meet quality standards and have average costs belowthe commendable threshold will share in savings up to a limit Year 2: performance period Shared savings Shared costs high Acceptable COST Commendable Gain sharing limit low Individual providers, in order from highest to lowest average cost 18

18. Impact of methodology Providers who have episode costs below the averagewill share savings Rewards high-performing providers Could move volumes of care Sends a message that all could attain shared savings Represents a decision point for some providers who need to work to improve or possibly cease providing certain services 20

19. Retrospective Episode-Based Payment (REBP) Prospective Bundled Payment Bonus payments tied to quality measures Bonus payments tied to efficiency measures Patient-centered medical homes (PCMH) Accountable Care Organizations (ACO) Global capitation The Arkansas Model integrates multiple payment methodologies to align accountability of different parts of the health care value chain  Arkansas model Basis of payment Example approaches  Total health, quality of healthcare, and total cost of a population of patients over time Population-based Episode-based  Achieving a specific patient objective at including all associated upstream and downstream care and cost Discrete service and related incentives for activities correlated with favorable outcomes or lower costs Fee-for-service including “pay for performance” SOURCE: McKinsey Center for U.S. Health System Reform

20. Anecdotal Information • Rational discussions about facility competitive standing based on current reimbursement levels and requests for increases • Conversations between “virtual teammates” in an episode about how to create efficiencies • Providers who were very resistant to having their cost/quality profiles shared are now asking us to “fix the black box problem”

21. Some Interesting Things Have Happened Along the Way • Comprehensive Primary Care Initiative • Wal-Mart Financial Support • State Innovation Model Grant • Anticipated Alignment of Medicare in Episodic Reporting • Expansion of Medicaid via the “Private Option” • This may be replicable in other rural markets

22. Lessons learned along the way • “Flood the zone” • The power of “inevitability” • Transparency as enabler rather than threat to providers • Pragmatic approach to multi-payor alignment • Tension between fairness, simplicity, and scalability

23. Why does theArkansas Payment Improvement Initiative matter to Arkansas Stakeholders? 25

24. Wal-Mart implements innovative care delivery model BENTONVILLE, AR – As it looks to both reduce out-of-pocket costs for employees, while also lowering its total healthcare costs, global retailer Wal-Mart announced last month a new program that will pay 100 percent of the costs for certain spine and cardiac surgeries plus travel expenses at six selected healthcare systems across the country. ….What is also driving the Wal-Mart program is the documented wide variations in both cost and quality for common medical procedures from region to region and even hospital to hospital. As the largest private employer in the country, Wal-Mart also has the purchasing clout to negotiate bundled payments for care episodes as a way to address these significant cost variations. “I think what you are seeing is the beginning of what healthcare in this country is transitioning to. Whether it is employers or insurers, they are searching out the greatest value for the lives that they cover,” said Steve Sibbitt, chief medical officer for Wal-Mart Centers of Excellence partner, Scott & White. Source: November 2012 Healthcare Finance News www.healthcarefinancenews.com 26

25. Several stakeholders have publicly voiced their support for Arkansas’ healthcare transformation Randy Zook, President and CEO of Arkansas State Chamber of Commerce “The value of our healthcare expenditures is lacking, the costs are unsustainable, and the fragmented system of care demands major change… We applaud your initiative to overhaul the healthcare payment system and move from a fee-for-service reimbursement model that has resulted in a fragmented and inefficient system to one that aligns payments with desired outcomes.” Maria Reynolds-Diaz AARP, Arkansas State Director “The Arkansas Health Care Payment Improvement Initiative is well aligned with our work toward a more efficient health care system that improves quality outcomes. We will support consumer awareness of new models and benefits that meet these goals. AARP Arkansas supports the initiatives’ push for coordinated care that is better and easier to navigate for patients.” Sally Welborn Walmart, Senior Vice President of Global Benefits “Part of Walmart’s mission is to create opportunities so people can live better… We recognize that our associates and communities that we serve cannot live better if the health care they need is not available or affordable. Therefore, we have been active in the national health care reform dialog for years… Thus, we support the effort you are leading to align payments with needed changes.” Source: www.paymentinitiative.org/referenceMaterials/Documents/APII%20overview.pdf 27

26. Comments or Questions 28