Michael J. Kalison went for a walk in the woods, literally and figuratively, after a federal court decided in June 1992 to pull the plug on New Jersey's DRG-based rate-setting system.
Kalison had helped design the state's diagnosis-based methodology, which Medicare later adopted as its model. A federal appeals panel subsequently overturned the ruling. By then, New Jersey's 14-year-old payment system already had begun moving toward negotiated rates.
The senior partner of the Liberty Corner, N.J.-based law firm of Kalison & McBride pondered the demise of a payment scheme once considered revolutionary. "In a flash" he came up with a new one, this time for physician payment. With the help of his DRG design colleagues, Richard Averill and James Vertrees, Kalison refined the idea and in 1995 launched New Haven, Conn.-based Applied Medical Software to develop and customize the system for risk-bearing organizations.
Now the 50-year-old healthcare attorney is ready to begin testing his model, which uses money to encourage and reward efficient physician behavior. He sees it as "the second revolution" in provider compensation.
Kalison thinks he can improve on traditional managed-care methods for paying physicians. The goals are to match the "correct" amount of money to the amount of care a patient requires, build on inherent financial incentives to promote efficient behavior and reward physicians who perform well.
"This is much better than capitation," he said, "because it matches revenue with the medical issue."
Existing fee-for-service and capitation arrangements, in his view, fall short of those goals. Essentially, he believes systems based on fee-for-service and capitation are out of sync with the needs of today's integrated delivery systems and managed-care organizations.
For example, under a discounted fee-for-service system, specialists are asked "to act against their economic self-interest" by not generating additional tests, procedures and admissions that would pump up their income. To keep physician utilization in check, stringent oversight measures are imposed, and that can breed ill will.
Subcapitation also is flawed, Kalison said, because it carries the risk that providers may be paid too little or too much. And because a "finite panel" of physicians must be identified in advance, some providers get locked out.
Primary-care physicians, the designated "gatekeepers" of the delivery system, are responsible for controlling costs and policing specialists' behavior. But once a patient is referred to a specialist, the gatekeeper has little control over specialists' testing and admitting decisions.
Managed care has assumed that the responsible physician is the primary-care physician, Kalison said. That may be true in some cases, but a lot of times the responsible physician will be the specialist, he said.
His system scraps the gatekeeper and substitutes a new set of payment rules built around the specialist or primary-care physician who has prime responsibility for a patient's care once a decision to admit is made-the so-called "responsible physician." Not surprisingly, the fledgling payment system also builds upon case-mix-adjusted medical and surgical DRGs.
"We're using financial incentives to get (physicians) to do the right thing," he said.
Say, for example, a patient needs coronary bypass surgery. Kalison's system prospectively establishes a budget for the DRG at each level of severity. The responsible physician gets the largest cut, which is based on the patient's discharge diagnosis. Payment for any services provided by consulting or hospital-based physicians is apportioned from the budget.
The database used to establish the physician budgets for each DRG consists of physician claims (HCFA 1500s) that were matched to hospital claims (UB 92s) and priced using Medicare's resource-based relative value scale.
Under the system, physicians' utilization can be measured against case-mix standards. So any surpluses left over at year-end resulting from reduced utilization by specialists may be allocated based on actual performance and any other factors a managed-care plan, integrated delivery system or group practice may choose to include.
"All we're suggesting is that payment by the case is more precise in terms of matching the financial resources to the medical problem than either subcapitation or fee-for-service," Kalison said.
Kalison also believes the system will save money because it neutralizes incentives to overutilize resources and the need for heavy utilization review. "What it does do is put out of business a lot of bureaucrats who call physicians and say, `Don't do this.'*"
Hackensack (N.J.) University Medical Center, Cooper Hospital-University Medical Center in Camden, N.J., and Suburban Hospital in Bethesda, Md., have agreed to test the system to make sure it's budget neutral. Meanwhile, Kalison is talking to HMOs that may want to serve as pilot sites, and he hopes to test it with a multispecialty group practice as well.
Hackensack, which is preparing to accept capitation, sees this as a way of fine-tuning payments. "If this works the way we are hoping it will work, we'll be able to make more money on the contracts," said John P. Ferguson, the hospital's president and chief executive officer.
It also provides a way to "more objectively measure the quality outcomes of our patients," said Peter J. DeMauro, M.D., chairman and president of Hackensack's management service organization, called North Jersey Medical Management Services. Until now, there hasn't been a system to determine who the responsible physician is and what to do about the physician who, for example, gets all the patients who have diabetes with three co-morbidities, he said.
Jack Owen, who retired from his post as executive vice president of the American Hospital Association in 1989, said Kalison's approach is "interesting" and "makes a lot of sense." But Owen, who has read Kalison's white papers detailing the system, wonders whether doctors will like it. He sees the potential for fighting over who should be the responsible physician.
"From a logical standpoint, it should work without any trouble. But from a political standpoint, that's where you run into trouble," he said. It'll be tough in situations where doctors don't like managed care to begin with, he added.
"The basic question is whether the country wants financial incentives involved in any way in physician decisions," Kalison acknowledged. "So it comes down to, do you want regulation or do you want managed care?"
Although the system remains untested, he confidently predicts it will become the standard for physician reimbursement in at-risk arrangements. "This is the obvious way to do it," he said. We shall see.