HCFA Administrator Bruce Vladeck has a simple analogy for a new experiment in which Medicare will pay hospitals and physicians a combined fee.
"It's paying the full dinner price rather than a la carte," Vladeck told reporters in announcing the demonstration. "The soup and salad are no extra charge."
But that description belies a more complex interaction of financial and management incentives. Participants and supporters believe these new incentives will spur hospitals and physicians to trim Medicare inpatient services.
The bundling of payments for the first time would put physicians at risk for high-cost hospital patients. Hospitals have had to bear that risk for 13 years under the prospective payment system.
If broadened to other hospitals across the country, it could change the relationship between physicians and many hospitals that want to treat high-cost Medicare patients more efficiently.
Over the next 12 months, HCFA will begin combining the Medicare physician and hospital fee-for-service payments for inpatient services in the physician-hospital organizations at five hospitals and one three-hospital system in New Jersey, New York and Pennsylvania (See chart).
Those states were chosen for their relatively high medical costs and low Medicare managed-care penetration.
The payments will be based on hospital diagnosis-related groups. Average historical physician fees per DRG will be rolled into the payment calculation. The final fees that the PHOs receive will reflect a 5% discount in the total the hospital and physicians had been receiving, Vladeck said.
The hospitals and physicians must determine for themselves who gets what share of the payments. There was no estimate of the dollar volume of services affected, but the experiment requires the physicians involved to account for 85% of the hospitals' Medicare referrals.
The three- to six-year project will give PHOs an opportunity to demonstrate they can be cost-saving alternatives to traditional HMOs.
That may be especially important because as much as three-quarters of the Medicare population still will be receiving care on a fee-for-service basis in 2002, the year when recently enacted budget legislation aims to eliminate the federal deficit.
The project will demonstrate a notion that has been around at least as long as prospective payment for hospitals. When prospective payment was imposed on hospitals in 1984, HCFA could not incorporate physician payments in the hospital rates because the government did not have standardized payment for physicians' services.
HCFA standardized physician payments when it implemented the physician fee schedule in 1992.
But with differing payment methods for inpatient services, the economic incentives for hospitals and the physicians who treat hospital patients are different.
For instance, the single fee paid to hospitals under prospective payment gives them an incentive to shorten lengths of stay. But shorter lengths of stay mean that admitting physicians lose out on fees for some hospital visits.
By the same token, specialists with largely hospital-based practices have an incentive to provide more expensive, technological services to hospital patients because they receive a fee for each service. But for hospitals, "that turns the case from an economically viable one to a loser,' Vladeck said.
Although such measures as utilization guidelines, case management and clinical protocols are used in many hospitals, physicians don't always take part in their development or implementation for Medicare beneficiaries because of their conflicting financial incentives.
"That level of collaboration can't happen unless the doctors are sitting at the table looking at the data," said Tom Shedlock, president of the Chester County PHO. "This generates the opportunity for them to want to sit and talk."
It also gets the physicians to work more as a team because of potential financial losses. "Instead of the family practitioner doing his own thing, the pulmonologist doing his own thing and the cardiologist doing his own thing, as a team we can look at (a case) and say, `Can we do it better?'*" said Robert Parsons, D.O., secretary of the Chester County PHO.
The question of whether hospitals can become more efficient providers is one that also will affect their fates in an ever more cost-conscious healthcare marketplace, added James Bentley, the American Hospital Association's senior vice president for policy. "I think we'll see physicians in those medical staffs begin to learn more about managing care," Bentley said.
The American Medical Association, however, raised concerns about physician reimbursement under bundled-payment, especially since hospitals' Medicare reductions will be much bigger in coming years.
"What kind of partnership do we have here? Is it a shared partnership or is one party dominant?" said Richard Deem, the AMA's vice president of federal affairs.
Congress earlier this year targeted excessive physician inpatient services for scrutiny. Lawmakers passed legislation requiring HCFA to notify hospital medical staffs when those doctors are providing an abnormally high volume of Medicare inpatient services (Aug. 25, p. 52). The aim was to prod high-volume medical staffs and the hospitals in which they practice into collaborating for more efficient medicine. But if the bundling pilot project is successful "the issue of the so-called high-cost medical staffs will go away," Vladeck said.