Bundled Payments: Demonstration of Potential Savings from the Prometheus Model

1. Bundled Payments:Demonstration of Potential Savings from the Prometheus Model Stacey Eccleston, Division of Health Care Finance and Policy June 29, 2011

2. What are bundled payments? • A bundled payment is a method of reimbursing a provider, or group of providers, for the provision of multiple health care services associated with a defined episode of care under a single fee or payment. • Single fee is derived in a way to reward the delivery of high quality care while containing costs associated with care outside of agreed upon best practices. • Episodes of care can be either acute or chronic and include clinically related services, such as hospital admission, ambulatory care, pharmacy, and other clinical and professional services, over a definedperiod of time with a clear beginning and ending (acute conditions) or annually (chronic conditions). • Bundled payment models are designed to contain costs and improve quality for a defined episode of care by encouraging efficient delivery of services and better coordination of care.

3. Common themes in existing bundled payment methodologies • Various methodologies cite multiple common goals: Achieve better coordinated and higher quality care at lower total costs • Better quality and lower costs are achieved by creating incentives to reduce adverse events • Providers are explicitly or implicitly rewarded for quality • Bonus payment for meeting certain quality thresholds • Reducing readmissions and adverse events allows for provider to retain more money • Bundles can be designed prospectively where provider groups receive full payment in advance or retrospectively where claims are paid FFS and costs for the bundled service are reconciled against a total cost target • May be easier to implement in fully-integrated systems but can also work in less integrated systems • Various methodologies exist: here we use the publicly available Prometheus model to better understand potential savings 2

4. Prometheus payment model basics 3 • Prometheus Payments separate two types of risk • Probability Risk – payers assume full financial responsibility for costs of typical episodes and severity and complexity of an individual patient’s condition • Technical Risk – providers assume the risk for the costs of all potentially avoidable complications (PACs) • Basic Approach • Payment is determined as Evidenced-informed case rate (ECR) = average cost of typical care + severity adjustment + margin + potentially avoidable complication (PAC) allowance (flat fee + proportional allowance) • PAC is any and all services and related costs that are outside of what is determined to be “typical care”. • ECR is paid to all providers providing the care episode, regardless of whether PACs are involved; rewards providers for quality performance - those with PACs lose money • System cost savings then are achieved through reduced payment for PACs (non/reduced payment for services outside of “typical care”) • Actual formulae and arrangements can be negotiated between payer and provider

5. Calculating the Evidence-Informed Case Rate (ECR) sums 4 factors • The base cost associated with typical care for covered services Typical care is determined based on commonly accepted clinical practice guidelines • Severity adjustment based on the actual acuity of the patient • Factoring in a margin (e.g. 10% of severity-adjusted costs) • Calculating a PAC allowance (used to cover potential complications, included regardless of whether a PAC occurs) • For each ECR, the PAC allowance comes from the PAC pool, which is funded by 50% of total PAC costs (chronic conditions) or added burden of PACs(acute conditions, inpatient and outpatient procedures). • Providers are also eligible for bonuses from the PAC pool if theirperformance meets a set quality threshold. ECR = base cost + severity adjustment + margin + PAC allowance 4

6. Creating the ECR for pneumonia Based on 2009 MA specific claims for pneumonia (severity neutral) • Average cost of typical care: $6,072 • Severity adjustment for Patient A: $ 0 (average severity) • the severity-adjusted cost of typical care: $6,072 • Margin: $607 (10% of severity-adjusted cost of typical care) • PAC allowance: • Flat fee portion: $578 (25% of PAC pool) • Proportional rate: 29% (75% of PAC pool as a rate overseverity-adjusted typical care cost) => PAC allowance for Patient A: $578 + $6,072*29%= $2,339 • Total ECR for Patient A (severity-adjusted base rate + PAC allowance + margin):$6,072 + $607 + $2,339 = $9,018 * The numbers are derived from applying Prometheus model to 2009 claims data as submitted to DHCFP by 3 large carriers 5

7. Payment is the same; providers will gain or lose depending on actual expenses • Example: Patient A treated for pneumonia by provider A, B, or C (ECR: $9,018): Provider B is average across 2009 data $8,832 over ECR $3,898 over ECR $2,018 under ECR * The numbers are derived from applying Prometheus model to 2009 claims data as submitted to DHCFP by 3 large carriers

8. Episodes covered by Prometheus model

9. Potential savings from bundled payments for 7 conditions (based on Prometheus payment model) • All 7 Conditions: Average Savings=$499 per episode; Total Savings=$26M • Without Colonoscopy: Average Savings=$4,506 per episode: Total Savings=$25M Source: 2009 enrollment and claims data from three payers submitted to DHCFP; total savings for chronic conditions likely to be significant due to disease prevalence

10. Proportion of spending on PACs varies by condition and between MA and all states Source: 2009 data from three Massachusetts payers; 2008-2010 data for payers in all states

11. Savings from bundled payment model result from reduced payments associated with PACs • PACs = Services (and associated costs) that are notdefined as “typical care” • PACs for each condition are categorized into 3 areas: • Index condition related PACs • PACs due to co-morbid conditions • PACs suggesting patient safety issues • Each of the 3 categories are segmented into3 different service areas: • Services during index inpatient stays • Outpatient facility and professional services • Readmission inpatient stays 10

12. PACs for pneumonia: source of and treatment location related to complication Numbers may not sum due to roundingBased on 2009 claims data submitted to DHCFP 11

13. PACs related to pneumonia: top reasons The most frequent service types related to complications of pneumonia across all settings Based on 2009 claims data submitted to DHCFP 12

14. For more information: www.mass.gov/dhcfp