Deaconess Hospital in Cincinnati had hoped package pricing would bring more patients through its doors. Instead, the trendy marketing strategy brought disappointment.
In 1993 Deaconess, an independent 250-bed hospital, and its doctors established package prices for four cardiac procedures. Then they pitched the prices to more than 50 employers. At first, the companies' benefits managers licked their chops, hospital administrators said.
The package prices were 30% to 40% less than the companies' mean costs for services such as open-heart surgery, which averages $40,000. Even better, package prices offered payers predictability; the charge would be the same for each case, except in instances of extreme complications.
But when it came to signing exclusive contracts, the employers in that traditional market chickened out, said Tom Laine, the hospital's vice president in charge of operations. He said Deaconess signed contracts with three employers, but none offers financial incentives to steer patients to Deaconess.
"Package pricing hasn't increased volume. It just hasn't taken off like we thought it would," Laine said. The hospital does 300 heart surgeries a year, most paid by Medicare.
Many similar providers fail at package pricing-even while the strategy has surged nationwide in the last three years. Inadequate billing systems and deficient patient steerage block the way. Often, providers try to roll out package pricing before the local payers are ready.
Joane Goodroe, an Atlanta consultant whose two firms assemble and administer package-pricing deals, estimates that package pricing occurs in 15% of U.S. markets and will exist in the majority in a couple of years.
Moving too fast.One problem is
providers that rush it to market. "I see it going on everywhere in the country, people trying to get package pricing together because they see it in other markets and they think it's coming their way," Goodroe said.
Fifty-three percent of cardiovascular-care providers offered package pricing in 1994, compared with 8% in 1992, according to respondents of a survey by KPMG Peat Marwick and Medtronic.
More than half the 103 tertiary hospitals that responded to a 1993 survey by the employee benefits consulting firm of Segal Co. said they offer at least one service at a package price. The 53 providers packaged a total of 140 procedures, including neurosurgery, orthopedic surgery, obstetrics, oncology, psychiatry, burn treatment and chemical dependency/substance abuse.
Payers generally like package pricing because it simplifies billing, facilitates comparisons among providers, often lops 20% off discounted fee-for-service charges and shifts financial risk to providers.
For providers, package deals can boost volume and thus lower per-case costs. In the end, some providers hope package pricing will eliminate low-volume providers that can't demonstrate quality.
For cardiac services and transplants, package pricing is almost the norm.
"Our sense is that we've been able to maintain market share because of the (package-pricing) program," said Charles Edmonds, a consultant and former executive vice president and chief operating officer of the Texas Heart Institute in Houston, which in 1985 was among the first to offer package pricing.
On the other hand, he said, "there's just a lot more competition out there. My sense is it has a lot of advantages. It is not a panacea."
HMO penetration key.
In many markets, though, package pricing isn't yet out of the box. Package pricing requires some local penetration by managed care, namely HMOs. Experts say it's usually a mistake to market a package price to PPOs because they can't steer patients. Point-of-service plans, which have some steerage, are better.
"When you sign up for an HMO you know you're going to be steered," Goodroe said. "I do have a couple of PPO contracts, but they're added on as an extra" for companies that have HMO contracts with the same providers.
Emory Clinic in Atlanta, which started package pricing in mid-1993 for transplant and heart operations, won't offer a package price without steerage. "Why should I give you my best deal for a small number of cases?" said Michael Bernardino, M.D., associate clinic director for managed care.
PPOs pose other problems. Many use the same patient cards for all employers, so a provider can't tell whether a patient is eligible for a package price. Eventually that will be fixed, Goodroe said, but now it's "a very, very hard problem to conquer."
But even in areas with high HMO penetration, marketing package deals can be difficult. The California Heart Network, a statewide affiliation of seven hospitals with 250 physicians, signed contracts with four PPOs since its founding in 1991.
The network touts its criteria for quality, volume, outcomes and lengths of stay, but PPOs fail to steer patients to it, said Dan Hanzlik, the network's executive director.
"What we are asking the PPOs to do is, in essence, change the way they do their business. We're asking them to become more restrictive instead of more expansive in (numbers of) providers," he said.
HMOs, on the other hand, prefer vertically integrated systems that provide all services, Hanzlik said. He holds out hope that HMOs or capitated primary-care medical groups will carve out more business to specialized providers with demonstrable quality.
In the meantime, the California Heart Network will spend 1995 marketing its quality message to self-directed Medicare recipients. It's also marketing to employers and patients on quality as well as price, hoping they eventually will pressure HMOs and PPOs to sign, Hanzlik said.
Another dilemma is computer systems that won't accept a package price. Package pricing is supposed to simplify claims by consolidating charges from the hospital, surgeons, radiologists, consultants and labs. But right now, most payers' claims systems are designed to accommodate multiple charges for every episode of care.
It took three years for one national carrier to tailor its system to accept a package price from the Texas Heart Institute, Edmonds said. He said the insurer's software demanded an automatic 10% discount on billed charges, which started a game to work around the system. "Most of the large HMO carriers are set up to pay claims by CPT (current procedural terminology) codes. They all have to work through that in some fashion."
That takes time, as managed-care companies and third-party administrators in each market weigh the financial incentives of package pricing against the expense of revamping claims systems.
"What we're finding is the market is receptive to the package-pricing concept. However, the one thing that has slowed things down is that not everyone's system is equipped for package pricing," said Erik Dasback, vice president for research and development at the Atlanta-based National Cardiovascular Network. Formed in March 1993, the network markets package rates established by providers in 34 cities.
The network also waited nearly half a year for the U.S. Justice Department to grant antitrust clearance. Regulators decided the network falls within a physician network "safety zone" and was unlikely to hurt competition because it would not contract with more than 20% of surgeons with active admitting privileges in a given market.
Antitrust is also an issue for local and regional networks, which have
become popular delivery mechanisms for package pricing.
Physicians in the Cardiology Alliance of Georgia, a corporation of 12 Atlanta-area medical groups, can work for the same price because they are part of the same legal entity, said Goodroe, who manages the alliance. However, she said, alliance prices vary according to the hospital used; hospitals cannot agree to charge one price because that could be price-fixing.
Hospitals and physicians also must negotiate how to split the pie. At the Texas Heart Institute, physicians contract directly with payers for the entire package, then contract with hospitals. In other cases, hospitals receive the payment and in turn pay doctors.
In either case, package pricing allows physicians and hospitals to align incentives, making it good preparation for capitation. "It is an excellent teacher as managed care continues to move in the direction of looking to the provider to take on more and more risk," Edmonds said.
One long-term question is whether capitation will complement package pricing or replace it. The answer is likely to vary from market to market.
"Right now everyone's looking at capitation being the financing mechanism. However, more and more people will find capitition won't work in end-stage tertiary care," Dasback said. "Capitation works very well when you have complete control over the gatekeepers, but once you go beyond that and you refer to specialists it makes more sense to work in a package-price-type vehicle."
The future of package pricing could also hinge on Medicare. A Medicare package-pricing demonstration project for heart bypass surgery began at four cardiac centers in 1991. It has been extended to three other heart centers and to cataract surgery.
So far, HCFA claims great success, but it could take years for Congress to extend package pricing systemwide. The agency estimated package pricing saved $28 million (15% off usual Medicare rates) for the first 6,000 procedures. A preliminary report on the demonstration program last year found that patient lengths of stay declined up to 20%, hospital-physician communication improved, patient satisfaction increased and quality persisted.
A HCFA spokesman said the federal government won't decide whether to expand the concept until after a final report is released on the project, probably in early 1997.
"I see the commercial sector moving very fast now" toward package pricing, said Goodroe, who ran the Medicare demonstration at St. Joseph's Hospital of Atlanta. "If Medicare moves it will have a large effect on physicians and hospitals."
Flying for lower prices.
Another question is how far employers will send patients for care. Dallas Medical Resources, an employer-initiated alliance of nine Dallas-area hospitals, sells an array of procedures at fixed rates determined by an employer's past payment experience. It draws patients from across the country.
Many other providers have contracted with insurers and employers willing to fly beneficiaries and their families long distances for inexpensive package deals.
But some observers believe the appeal of long-distance travel is limited. "At this point healthcare is still a local transaction. Patients like to stay in their own areas," said Rick Mace, vice president of Florida Hospital Medical Center in Orlando. His hospital received fewer than 50 referrals in its first year of membership in the National Cardiovascular Network.
Allan Fine, vice president and director of the Center for Managed Care Integration Strategies at Quorum Health Resources in Chicago, agrees. He said package pricing will not necessarily remove care from local communities.
"There will be greater pressure on all providers of all sizes to offer demonstrable, cost-efficient products.
If the perception is patients are going to be flying all over the country for care, I don't think it's going to happen in large proportion, but it's going to happen in some cases," Fine said.
Some providers hope employers and managed-care companies will come to reward quality by carving out certain services to quality providers. But to do that, employers and patients must be educated to use outcomes and clinical data and patient-satisfaction rates, rather than marketing terms such as "center of excellence," said Hanzlik of the California Heart Network.
"Over the last five years what we've continually done is compete with each other on the basis of cost alone," he said.
In the long term, package pricing could further concentrate procedures at high-volume institutions. In Cincinnati, Deaconess Hospital failed to win a spot in a statewide package-priced cardiac network formed by Community Mutual, a Cincinnati-based Blue Cross affiliate-even though Deaconess was ranked among the top five heart programs in the state by the plan.
A Community Mutual official said it is easier for physicians and plan members to use other good providers in the market that are already part of the Community Mutual provider network.
Lamented Laine: "The dilemma is the quality, low-volume provider is not allowed to play in the game."