The U.S. healthcare industry is in the midst of a historic shift impacting purchasers and providers alike. Unprecedented economic conditions have magnified the need for quality and cost savings for employers to remain competitive in a global economy; the implementation of Patient Protection and Affordable Care Act provisions is under way; and we are soon approaching the uncertainty of a presidential election.
In search of model behavior
New payment approaches seek to address flawed fee-for-service system
All of this is occurring while the trend of rising health benefit costs continues to spike. According to the results of Modern Healthcare's Healthcare Purchasing Power Survey, total health spending increased an average of 8.2% from 2010 to 2011. In addition, a recent report from Aon Hewitt found that health benefit plan costs rose 7.5% to an average of $9,792 per employee in 2011 and are projected to grow another 7% to an average of $10,475 per employee in 2012.
I think we can all agree that this is unsustainable. But what can we do to right this ship?
There are many contributing factors to these high and escalating costs and inconsistent quality. The National Business Coalition on Health, along with its 54-purchaser-led business and health coalition members and other like-minded organizations, argue that the current fee-for-service system by which physicians are paid is a major contributor to the problem. New healthcare payment and delivery options are needed to change the status quo.
Fee-for-service is a piecework payment system. Physicians and other healthcare providers are rewarded for delivering more services, and more expensive services. What's missing is the financial reward for healthy patient outcomes, care coordination and efficiency.
According to an article in the September issue of the Harvard Business Review, Harvard professors Robert Kaplan and Michael Porter make the case that we are using the wrong pricing model. Instead of focusing on the reasons why costs are going up (i.e. growing incidence of obesity and chronic disease), we need to measure exactly what we're paying for. The authors maintain that by analyzing costs of an episode of medical care, providers could squeeze significant inefficiencies from current care processes.
While the authors make interesting observations and valuable suggestions, various methods of payment reform have been under way for some time, including pay-for-performance and supplemental payments to support practice transformation for efforts such as the medical home. Most recently though, the bundled payment model—also known as an “episode-of-care payment”—has generated significant momentum and excitement.
The bundled payment model entails payment of a single price for all of the services needed by a patient for an entire episode of care. The episode of care can be oriented around an inpatient surgical procedure and incorporate post-discharge services, including home health and rehabilitation. The payment is made for all services that the patient is anticipated to use (including physician, hospital, other professional services, equipment and facilities). If the incurred costs exceed the payment, the participating providers are financially at risk for the difference.
- The Center for Medicare & Medicaid Innovation's Bundled Payment for Care Improvement initiative is gaining strength as a result of the Affordable Care Act, which is providing a number of new tools and resources to help improve healthcare and lower costs for all Americans. This bundled-payment model will bring together physicians, hospitals, post-acute providers and others as partners to redesign Medicare payments and improve coordination of care.
The initiative is seeking applicants for four broadly defined models of care, three of which would involve a retrospective bundled-payment arrangement, with a target price (target payment amount) for a defined episode of care.
- The Health Care Incentives Improvement Institute, an NBCH partner organization, has been a pioneer in developing an episode-of-care model called Prometheus Payment. Most recently however, the institute is supporting providers and other applicants by offering episode-of-care analysis freeware and making available benchmark episode prices based on its analysis of Medicare data to help potential applicants for the innovation center's bundled-payment initiative compare results and estimate their episode prices.
The various payment models are not mutually exclusive and can often be found being applied in combination with one another. For example, bundled payment can be combined with pay for performance. It can also be applied to payment for chronic conditions such as diabetes, in which case the payment is made in anticipation of all services to be received for treatment of that condition over the course of a defined time period (i.e. calendar year).
There is still much work to be done to determine which models work best, under what circumstances, and using what implementation method. What is clear is that fee-for-service is not sustainable. While there must be caution taken when pursuing new payment models, particularly with respect to unanticipated consequences, change is clearly called for.
Payment reform and delivery system reform are inextricably linked. Purchasers want to change payment systems to provide economic incentives for changes in care delivery that will deliver higher value.
Value-based purchasing is a critical component of reform. It's a strategy used by employers, and most recently the federal government, to use their market power as a force to promote quality and value of healthcare services. The overarching goal of value-based purchasing is a healthcare system built on value with a clear return for every dollar spent.
We can no longer afford to operate under the premise that provider payments and the end results are not related. Once we begin to measure and pay correctly for care, the outcomes of better healthcare and better health will result.
Andrew Webber is president and CEO of the National Business Coalition on Health, Washington.
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