Health Care Payment in Transition: A California Perspective Prepared for California HealthCare Foundation by Shelley Oberlin, MBA, MHA, MS Physiology Senior Manager Scott Tackett, MHA, MPH Manager Philip Macdonald, PhD Senior Manager Stacey Stanton, BS Biomedical Engineering Analyst Kurt Salmon January 2012 About the Authors Kurt Salmon is a global management consultancy. In health care, it provides management advisory services in facility planning, operations, strategy, finance, and information technology to nonprofit hospital systems, community hospitals, academic medical centers, children’s hospitals, and physician group practices. For more information, visit www.kurtsalmon.org. Acknowledgment The authors wish to extend a special thanks to George Lee, consultant at Kurt Salmon, for additional fact finding and editorial review. About the Foundation The California HealthCare Foundation works as a catalyst to fulfill the promise of better health care for all Californians. We support ideas and innovations that improve quality, increase efficiency, and lower the costs of care. For more information, visit us online at www.chcf.org. ©2012 California HealthCare Foundation Contents 2 I. Executive Summary Key Findings 4 II. Introduction 6 III. Current Payment System Historical Context Current Payment Methods 1 4 IV. Emerging Payment Models Value-Based Payment Modifiers Payment Adjustments Funds Flow Arrangements 1 8 V. California’s Course to the Future: Major Themes New Models Will Evolve Incrementally Future Payment Systems Will Be Pluralistic Large Purchasers Will Drive Reform 2 2 VI. Transitional Implications and Strategies Greater Collaboration Service Line Consolidation More Robust Analytics around a Common Patient Identifier Aligned Incentives for Value and Effectiveness Impact on Cost of Doing Business 2 8 VII. Conclusion 2 9 Appendices A: Fictional Case Study B: Advisory Group Participants and Interviewees C: Glossary of Terms 3 7 Endnotes I. Executive Summary Many believe that the entrenched T he U nited S tates spends more per capita and a higher percentage of its gross domestic product (GDP) on health care quality and cost challenges of the than any other country. Yet other developed countries outperform US health care system are largely the US on measures of quality, efficiency, and access. Many believe that the entrenched quality and cost challenges of the US health care due to how health care services system are largely due to how health care services are paid. In the are paid. US, current payment models do not provide incentives that reward value (improved quality and services at a lower cost); instead, they provide incentives for higher volumes, often leading to overutilization of services and high costs. To actualize a health care system that not only decreases spending, but better aligns costs with outcomes, there is an urgent need for payment reform. As California has historically introduced innovative payment models that promote greater efficiency and lower costs, many are interested in how the California market will respond and transition to emerging payment approaches. This report presents the findings of a review conducted to better understand current payment models and those likely to emerge in California and the rest of the nation. Interviews were conducted and multiple meetings held with an Advisory Group comprised of known health care leaders in California and other areas of the country. Using information gathered from these interviews and meetings, this report: (1) provides an overview of and historical context for the current payment landscape in California, (2) highlights new payment models under consideration or that appear to be the most likely to advance in California (and perhaps nationwide) over the coming years, (3) discusses dominant themes regarding California’s evolution towards future payment models, and (4) discusses implications and strategies key stakeholders (providers, patients, purchasers, and policymakers) should consider during a new payment method transition period. This report is meant to be a primer on payment models in California, providing basic information for a wide set of interested parties across the care continuum ranging from board members to administrators to policymakers. 2 | C alifornia H ealth C are F oundation Key Findings Finally, the report identifies and discusses a number The Advisory Group identified seven of the most of considerations and strategies that stakeholders common current payment models in California, and should take into account as they transition to nine emerging payment models that have already future payment models. These include: (1) greater been implemented, are undergoing experimentation, collaboration, (2) service line consolidation, or are likely to advance in California. The nine (3) robust analytics around a common patient emerging models were further grouped by similar identifier, (4) incentives that align value and characteristics into three payment approaches: effectiveness, and (5) impact of the cost of doing (1) value-based payment modifiers (e.g., pay-for- business. performance programs), (2) payment adjustments While all of these considerations are (e.g., payment reductions for cases involving interconnected, they will likely vary for each readmissions or hospital-acquired conditions), and stakeholder. By taking a proactive approach to (3) funds flow arrangements (e.g., global or bundled payment reform, stakeholders will be more likely to payments). successfully develop a transitional payment strategy Through discussions with the Advisory Group that is closely aligned with their vision, goals, culture, around the differences between the emerging and capabilities. payment models and approaches, and the likelihood of key stakeholders’ abilities to implement them, three major themes regarding payment reform in California surfaced and are discussed in detail in this report. These include: 1. The transition to future payment models will be evolutionary, not revolutionary. 2. Any future payment system will remain pluralistic; there is no “one-size-fits-all” approach. 3. Large employers and purchasers of health care are likely to have a dominant role in driving payment reform. Health Care Payment in Transition: A California Perspective | 3 II. Introduction This report provides stakeholders, Today ’s health care payment system is in transition , both in California and nationwide. Spurred by market and economic especially in California, information factors — and now by imminent health reform mandates — new about the historical context of payment approaches are emerging while traditional ones still exist. During this transitional period, there are many decisions to be made payment systems, analysis of by health care stakeholders including providers, public and private emerging models, and insight on payers, purchasers, and policymakers. The actions that are taken in the short term to change and improve the payment system are likely how the landscape is most likely to have long-lasting effects. California, which has often taken the lead to evolve. in modeling innovations in health care delivery and payment, will be carefully observed in its choice of options moving forward. This report provides stakeholders, especially in California, information about the historical context of payment systems, analysis of emerging models, and insight on how the landscape is most likely to evolve. It also discusses implications and strategies that stakeholders should consider during a transition period. Throughout the report, emphasis is given to clarifying details of existing and evolving payment systems, simplifying technicalities, and reducing confusion, in order to create a common understanding of the subject matter for those who are not involved in the payment system on a daily basis. The information contained within this report was generated from both primary and secondary research. Primary research included individual interviews and three group meetings with the members of an Advisory Group made up of a broad array of California health care leaders (see Appendix B for Advisory Group members). Secondary research consisted of a detailed review of publicly available sources. In addition, a case study was developed to illustrate the differences between the current payment system and one emerging payment model — in this instance, a bundled payment model. The case study is presented in Appendix A. The urgency of health system reform, and payment reform in particular, is demonstrated in statistics from a variety of sources. Health care spending in the US is among the highest in the world. In 2009, expenditures reached $2.5 trillion and accounted for 17.6% of the GDP.1 At the same time, the US continued to underperform on 4 | C alifornia H ealth C are F oundation quality, access, efficiency, equity, and overall health status of the population compared to other developed countries.2 Among other states, California has a mixed record. It spent $167 billion on health care in 2009 and, compared to other states, ranked favorably on some common health indicators including mortality rates, smoking, and obesity. Still, it ranked 22nd in avoidable hospital use and costs.3, 4 Health care cost and quality problems have received considerable attention from the public and private sectors in the last decade. In the 2000s, organizations such as The Leapfrog Group (a coalition of large employers) formed to improve and influence quality and affordability in health care.5 Payers began to offer financial incentives through pay-for-performance programs to influence quality and costs for their members.6 In 2007, the Institute for Healthcare Improvement launched the Triple Aim initiative to help organizations improve care quality and population health while lowering costs; some 50 organizations in eight countries now take part in that initiative.7 Most notably, in March 2010, the Patient Protection and Affordable Care Act (ACA) was signed into law, instituting changes in the health care delivery model focused on improving access and quality of care while lowering costs.8 Although many of these and related initiatives emphasize improved clinical effectiveness, outcomes, and value demonstration, most agree that the cost and quality conundrum cannot be resolved without changes in how we pay for health care. Health Care Payment in Transition: A California Perspective | 5 III. Current Payment System T he US health care payment system large purchasers of health care such as CalPERS includes an overwhelming array of coverage options and Safeway are proactively altering the current and payment methodologies. Depending on a payment system through the use of reference pricing, person’s age, income level, employment status, and an approach that uses benefit plan design to limit medical condition, coverage may be provided by employer exposure to highly variable prices. Medicare Parts A, B, C, and D; Medicaid (Medi-Cal For these and other new payment approaches in California); the Veterans Health Administration; to be effective, the new models must overcome TRICARE; the Children’s Health Insurance Plan; the challenges with the existing payment methods, the Federal Employees Health Benefits programs; provide incentives that reward value, and be private insurance companies; self-insured employers; politically acceptable and practical to implement. For other state-based plans such as CalPERS and Healthy perspective, it is useful to consider the evolution of Families; and, for those without coverage, self pay. payment methods in the nation and in California, Payment methodologies for each type of coverage most notably from the middle of the twentieth vary. Providers can receive payments from purchasers century and forward — a period that saw increases of care ranging from fee-for-service (FFS, a separate in coverage for Americans and increasingly higher payment for each service) to capitation (typically a expenditures. flat rate per member per month). They also receive payments from patients with varying levels of copays, Historical Context deductibles, and co-insurance. To add further to Figure 1 shows a timeline of developments in the the complexity, payments are distributed separately health care payment system within California and to multiple providers. The result is an elaborate, nationally since the early 1900s.9 (See page 7.) disjointed payment system that is continuously Public and private health insurance concepts changing, making it almost impossible for patients had several introductions throughout the twentieth and providers to understand. century. Between 1940 and 1960, growth in private To reduce the complexity of the payment system insurance was driven largely by federal policy and provide more value for every health care dollar, allowing employer contributions to employee health policy discussions have focused a great deal health plans to be tax-exempt. Recognizing a gap of attention on finding equitable and appropriate in health coverage for the elderly, disabled, and payment methods. There are also several initiatives indigent populations, federal and state governments and demonstration projects that test new payment established Medicare and Medicaid (Medi-Cal in methodologies. These include the Centers for California) in the mid-1960s. Medicare and Medicaid Services (CMS) Bundled These early insurance plans by private and public Payment Initiative and the Integrated Healthcare sources were mostly indemnity-based (fee-for- Association (IHA) Bundled Episode Payment and service). Coverage was wide and mostly unrestricted; Gainsharing Demonstration project. In California, payment to providers was paid on charges. In 6 | C alifornia H ealth C are F oundation Figure 1. Major Milestones in the Health Care Payment System 1971 Medi-Cal coverage via capitated “prepaid health plans” authorized in Governor Reagan’s reform package. 1929 1975 Ross-Loos Clinic, first prepaid group practice of physicians, opens in Knox-Keene Health Care Service Plan Act enacted. Los Angeles to provide medical care for workers in city’s water department. 1973–1980 1937 IPAs & HMOs spring up, many originating with county medical Blue Cross hospital insurance established. societies, others as arms of more traditional insurers. 1938 Blue Shield physician insurance established. 1982 1993 California legislation enables State expands county-based Medi-Cal managed care. 1945 preferred provider contracting, Kaiser offers its workers in the launching PPO product trend. 1997 dam, steel, and ship-building Children’s Health Insurance Program established. industries the Permanente Health Plan. 1985 1999 HMO enrollment reaches California’s Patient Bill of Rights enacted. 1962 1983–1990 6.2 million, 23% of population. CalPERS allowed to provide PPOs go from covering zero in 1980 to a 2010 health insurance benefits to third of California’s population by 1987. • Commercial enrollment is State of California employees. dominated by managed care: 1960–1980 53% HMOs, 24% PPOs, Indemnity insurance dominates, except for 1985 –2005 and 23% self-insured plans. Kaiser, which covers about 5% of the Consolidation of population in 1960 and 14% by 1980. health plans. • Health care reform: federal Affordable Care Act enacted. California 1930 1940 1950 1960 1970 1980 1990 2000 2010 National 1929 1965 2010 Blue Cross covered Mid-to-late 1940s Johnson Administration 1979 The Affordable Care Act enacted. teachers’ medical After World War II, establishes Medicare HMO Act amendments remove barriers to 2007 expenses in Texas, the concept of health and Medicaid. for-profit HMO operation. CMS DRG system modifies the in the first recorded insurance spread nationally. 1973 groups to MS-DRGs to better example of a third 1959 Federal Health Maintenance Organization Act enacted. classify patient complexity. party payer (TPP). Federal Employees 1970 2003 Health Benefits Act President Nixon endorses HMOs. Medicare Part D established. 1900 enacted. 1992–2002 • AMA becomes increasingly influential; Expansion of Medicare’s fee-for-service payment models. physician membership increases 875%. 1950 Medicare physician fee schedule, prospective payment • Railroad companies lead the way for covering • Healthcare expenditures are 4.5% of GNP. system, and hybrids introduced. medical expenses of employees. • Insurance is purchased by those who can afford it. 1990 1910 • Federal Security Agency proposes enactment of Expansion of managed care American Association for Labor legislature hosts health insurance for Social Security beneficiaries. payment systems. the first conference for “social insurance.” 1940 1980s • First pre-paid group healthcare group established. • Medicare implements DRG payment system. 1920 General Motors covers medical expenses for • Employers begin offering insurance to entice new hires. • Capitation models become more popular, while pure fee-for-service 180,000 employees; Americans emphasize becomes less favorable among Medicare and insurance companies. • President Truman attempts to pass first national health costs of medical care. program; denounced by AMA. 1930–1933 • Depression raises awareness of need for coverage of unemployed and elderly populations. • Social Security Act passed; health insurance was not included. • Blue Cross covers medical expenses of members in select states. • Commission on the Cost of Medical Services recommended national health insurance but was disregarded. California, there were FFS and capitated plans. With more health insurance available, “moral Capitation as a payment mechanism was not new hazard” offsets resulted in increased utilization.11 And to California — Kaiser Permanente’s origins include with more services consumed, FFS payment models a capitated arrangement dating back to 1933.10 contributed to a faster-than-anticipated growth in Capitation was paid based on a contracted rate for expenditures as a percent of GDP. each member covered, i.e., per member per month, In the early 1970s, the federal government and was distributed to physicians, hospitals, and looked to innovative payment models being used other health care providers regardless of the number in California — specifically, capitated plans such or nature of services provided. as health maintenance organizations (HMOs) — Health Care Payment in Transition: A California Perspective | 7 to help slow private sector expenses. The lower- of health reform legislation in 2010, the health care cost payment structures of HMOs increased the industry is once again tasked with transforming the popularity of managed care programs across the US payment system to stem the growth of health care in the late 1970s and 1980s. During the mid-1980s, costs while enhancing quality and access. Medicare also tried to control costs by implementing a diagnosis-related group (DRG) payment system Current Payment Methods which established a set payment for an acute hospital To better appreciate the payment reform models now inpatient stay based on diagnosis. Subsequent public under consideration, it is important to understand payment schedules were put in place for other first the basic elements and challenges of current delivery settings such as nursing homes, long term payment methods. While there are a variety of care hospitals, and ambulatory care settings. methods to pay for medical services, this report While several of these payment methods were focuses on the seven most common current methods: helpful in controlling costs, there was concern that 1. Patient-directed restrictions on coverage options and utilization came at the expense of providing appropriate care. In the 2. Capitation late 1980s and early 1990s, attempts were made 3. Prospective payment to better align delivery with payment systems. A significant development was the creation of preferred 4. Hybrid (resulting from a blend of multiple provider organization (PPO) insurance plans as an payment methods) alternative to HMOs. These plans, while allowing 5. Fee-schedule more choice, provided incentives for the consumer to control their costs via copayment formulas. For 6. Charge-based, and example, copayments would be higher if care was 7. Cost-based. provided out of a plan’s established network. In an attempt to adopt private sector payment Each payment method has multiple payment innovation, Medicare in the late 1990s and early types with varying degrees of individual payment 2000s initiated several managed care programs, with percentages and financial risk for all parties involved. the current program called Medicare Advantage. Typically, parties are defined as follows: the patient Medicare Advantage allows private health plans (first party), the provider of care (second party), to coordinate care received by beneficiaries while and the payer (third party). Figure 2 illustrates the reducing costs through prevention measures and seven current payment methods, their common limits on utilization of services. payment types, and where they are positioned on Today, even with various payment methods put the continuum of financial risk. (See page 9.) A in place by the public and private sectors, health care description of each payment type can be found in expenditures as a percent of GDP are still increasing. Appendix C, Glossary of Terms. Details around the The current payment system includes multiple mechanics of the payment types and formulas have reimbursement methods, many with misaligned been well documented elsewhere and are not part of incentives that do not reward providers for improving this report.12 performance or managing costs. With the passage 8 | C alifornia H ealth C are F oundation Figure 2. Current Payment Methods and Payment Types HIGH PROVIDER RISK Continuum of Financial Risk HIGH PAYER RISK Current Payment Patient- Prospective Fee Charge- Cost- Directed Capitation Payment Hybrid Schedule Based Based Methods Payment Full Partial MS-DRG Medicare Percentage Cost plus Types Copay ASCs capitation capitation (IPPS) physician of charge percentage Facility Medicare- Shared APCs vs. adjusted Cost plus Deductible DMEPOS risk (OPPS) non-facility payment per diem Out-of- Re- Medicare LTCH Carve-out pocket insurance clinical lab Partial SNF capitation Case rate/ composite Per diems bundling Stop loss Note: Acronyms are defined in Table 1 on page 11, and in Appendix C, Glossary of Terms. It should be noted providers (hospitals and Also of note, the continuum of financial physicians) are often paid through multiple payment risk is illustrated in the broadest sense. First, the methods with payment types and formulas varying terms “providers” and “payers” are used generally, by payer. For instance, a hospital may receive recognizing there are multiple payers, including payments from 40 different payers which could be private, commercial, and government payers. generated from 100 separate contracts. For CMS Similarly, providers can include hospitals (including payments, further adjustments are made to factor for-profit and nonprofit hospitals, county-organized in differences in wages, patient acuity, geography, health systems, academic medical centers, etc.), teaching-related costs (such as graduate medical skilled nursing facilities (SNFs), long term care education and indirect medical education), and (LTC) facilities, home health agencies, physicians uncompensated care (as with disproportionate share (including independent physicians, primary care hospitals), to name a few. For an illustration of the physicians, physician groups, independent practice current payment system for traditional Medicare, associations (IPAs), foundations, multispecialty please see the case study in Appendix A documenting groups, single-specialty groups, etc.), and other a 90-day episode of care for a patient with congestive health professionals such as nurse practitioners. heart failure (CHF). Health Care Payment in Transition: A California Perspective | 9 Specific payers and providers might be positioned incentives for care coordination or case management. differently in terms of financial risk. In this environment, health care providers are not In addition, the continuum reflects differences responsible for, nor are they necessarily aware of, the in financial risk between providers and payers. For services provided by other providers such as primary cost-based or charge-based contracts, risk is placed care physicians, specialists, hospitalists, labs, or on the payer because there are few utilization or cost imaging providers. controls. On the other hand, for capitated contracts In contrast, capitation gives provider the provider is at financial risk, not the payer. Access, organizations a financial incentive to limit health quality, and costs are constants for providers to care utilization and/or prevent high-cost procedures. consider while managing a pre-determined fee to Physicians in this setting are often viewed as being manage insured lives for a set period of time. less productive than FFS providers, and in some The differences among the payment methods, cases, are thought to limit the scope of services they including their positions on the continuum of provide or under-treat patients.15 In a capitated financial risk, can be characterized by units of environment, hospitals, physicians, and other payment, time orientation, and other elements of caregivers often try to set a minimum patient financial risk.13 These are discussed further below. enrollment (covered lives) to ensure the volumes necessary to remain financially sustainable. Units of Payment There are two main units of payment: fee-for-service Time Orientation and capitation. Fee-for-service is analogous to paying Time orientation refers to whether the payment a-la-carte for each medical service, while capitation method determines the total billed amount for is like a one-time cover charge for unlimited access services before (prospective) or after (retrospective) to a buffet of medical services within a given length the services are provided. Prospective payment of time. Most capitated contracts are based on a flat methods are predetermined based on average resource rate per member per month (PMPM) and are often use, and factor in estimated treatment time, disease adjusted for age, sex, and geographic location (urban or condition, plus some adjustments for local versus rural).14 market dynamics. Since these are averages, there is The difference between the two units of payment uncertainty whether a payment will cover the cost of often spurs debate and criticism around appropriate an individual episode of care. As such, prospective treatment protocols and utilization of services. payment methodologies generally protect payers from When utilizing FFS, physicians and other health financial risk, shifting the responsibility of managing professionals have financial incentives to perform resource consumption and costs to the providers. more billable services for their patients, leading Retrospective payments have the opposite effect. some observers to believe these providers over- Based on a FFS unit of payment, they support greater utilize health care resources (such as by ordering choice of service for both the patient and provider, unnecessary tests and procedures) and/or don’t but include limited incentives to control costs. spend enough time with patients (such as by trying This tendency drove Congress in 1983 to mandate to see more patients per day to increase billable the creation of a prospective payment system for charges). In addition, FFS payment does not provide Medicare beneficiaries.16 10 | C alifornia H ealth C are F oundation Patient Health Risk and Provider the costs varies by payment model. In recent years, Performance Risk providers and payers have tried to spread financial Additional elements of financial risk include patient risk among the various parties through the use of health risk and provider performance risk. Patient hybrid payment methods. health risk can lead to insurer or provider losses Table 1 describes the seven most common when patients are sicker and require more medical payment methods currently used in California, services than average patients. Provider performance including typical providers that use these methods, risk reflects whether or not the provider is efficient units of payment, time orientation, and where each in delivering care. If the provider is inefficient, this method stands regarding exposure to patient health usually results in higher costs. Who is liable for risk and provider efficiency. Table 1. Overview of Seven Current Payment Methods Financial Risk Due to: Typically Used to Uni t of Time Patien t P rovide r Pay For: Payment Orientation Health Performance Cost-Based Payers agree to Inpatient care delivered Fee-for- Retrospective: Payers bear risk Payers bear risk of pay a percentage in critical access service Costs are of patient health provider performance of reported costs hospitals, Federally (payment per settled after as sicker patients as they agree to pay incurred in providing Qualified Health Centers, episode of they are need more providers a percentage care (i.e. Medicare or other providers care). incurred. services, and each of their self-reported pays critical access practicing in rural and service will need costs. This means that hospitals at 101% socioeconomically to be paid for. low-performing providers of self-reported challenged geographies. who are inefficient and reasonable costs). incur higher costs still get their costs reimbursed within the episode of care. Charge-Based Payers reimburse Universal, widely used Fee-for- Retrospective: Same as Payers bear risk. providers based on a method that includes service Provider bills cost-based; payers Low-performing providers percentage of billed technical and professional (payment per accordingly bear risk of patient who incur higher costs charges. fees for acute inpatient each service after services health as sicker can charge higher and outpatient services, rendered). are rendered. patients need prices to cover costs. skilled nursing facilities, more services, Providers can also perform and procedures, and each service more services, and and durable medical will need to be although some may be equipment. paid for. unnecessary, they will be paid for by the payer. Health Care Payment in Transition: A California Perspective | 11 Financial Risk Due to: Typically Used to Unit o f Time Patient Provi der Pay For: Payment Orientation Health Performance Fee Schedule Payment System Payers predetermine Physician outpatient Fee-for- Prospective: Same as Payers bear less risk than a fixed price services and some service Payments are cost-based; payers cost- and charge-based for specific inpatient hospital (payment based on a bear risk of patient models as they pay a fixed services including services such as labs. per each predetermined health as sicker price for each service, professional fees service fee schedule. patients need even if the provider and other resources rendered). more services, delivers the service such as supplies. and each service inefficiently. Providers will need to be have an incentive to paid for. perform more services, and although some may be unnecessary, they will be paid by the payer. Hybrid Payments are Implemented as a Fee-for- Prospective/ Similar to that of Performance risk is determined methodology for CMS service retrospective. the prospective variable depending using both fixed to reimburse ambulatory (payment payment system on which piece of the and variable surgical centers or other per episode (below). payment is fixed and reimbursement procedural services. of care). which piece is variable. methods For example, sometimes simultaneously (e.g., the technical fees (hospital a payer uses both a fees) are per diem, while fee schedule and a the professional fees are prospective payment fee schedules. system to determine the fee for the services delivered). Prospective Payment System (PPS) Each medical Inpatient hospital Fee-for- Prospective: Risk is mitigated Providers get a fixed service or inpatient services centered around service Payments are on the payer payment per episode so episode is assigned an acute care episode. (payment based on a side because the they have an incentive to a predetermined per episode predetermined severity of the be efficient in the delivery Typically set by CMS with relative weight of care). payment rates. patient’s illness of care for each episode. private payers negotiating based on variables can be categorized a fixed payment rate per that affect cost, under this system. unit of weight. such as diagnosis, However, the severity, expected CMS uses separate payer will still be resource utilization, payment systems based at risk if the health and geographic on care setting: of the patient variation. 1. Inpatient (IPPS) warrants multiple, distinct episodes. 2. utpatient (OPPS) O Provider risk 3. killed nursing S partially offset by facilities (RUGs: patient severity of resource utilization illness index. groups) 4. ong term care (PPS) L 12 | C alifornia H ealth C are F oundation Financial Risk Due to: Typically Used to Uni t of Time Patien t P rovide r Pay For: Payment Orientation Health Performance Capitation Providers are paid a All providers (typically Capitation Prospective: Provider bears Providers are at risk for flat rate per capita primary care and OB (typically a Payments are risk for patient’s their own efficiency. for a set period of providers), inpatient per-member made as a overall health. time, independent of and outpatient. per-month lump sum at Provider is paid service utilization. (PMPM) the beginning a fixed fee over fee for the or end of the a specified time purchase month. period regardless of agreed of amount of medical medical services services). utilized. Payers bear no risk for patient health unless it is a partial capitation agreement. Patient-Directed The patient pays Each inpatient and Exists in Retrospective: Patient bears risk Providers are generally a portion or all of outpatient encounter. FFS and The bill for his/her own more at risk for direct the medical bill capitation in increases as health. The more patient payments as out-of-pocket. the form of the patient medical services a they are responsible for copays or incurs new patient needs, the collection. This is often coinsurance, services. more he/she will captured as bad debt or or when pay out-of-pocket. charity care on physician Prospective: patient does and hospital financial The beneficiary not have any statements, and while typically knows insurance the risk is higher for the amount and must providers than payers, this of copays and pay the is typically a smaller dollar deductibles in entire amount compared to the advance. medical bill potential loss of a contract out of his/her from one of the other six own pocket. payment methods. Health Care Payment in Transition: A California Perspective | 13 IV. Emerging Payment Models S imilar to the large number of current nationwide, many stakeholders are watching carefully payment methods, there are several emerging to see how California will respond to payment payment models that either have been implemented, reform. are undergoing experimentation, or are proposed The Advisory Group identified nine payment for consideration.17, 18 Since payment methods from models that are already in progress or most likely to California can be considered the historical basis advance in California. Table 2 lists the nine emerging for many of today’s coverage and payment models payment models, including a description of each.19 Table 2. Nine Emerging Payment Models Advancing or Likely to Advance in California Global payment A single payment is made for all services rendered. Like capitation, it uses a per-member per-month rate, but includes a performance and risk payment adjustment. Groups of providers are now able to be rewarded for improved quality and efficiency, and due to improved data analysis, payers can adjust the payment to better align it with severity of the patient population being treated.20 Shared savings and Providers are able to share in the cost savings achieved for managing the care of a population over risk for a population a specific period of time, provided they meet quality and cost benchmarks. Participation in CMS’s shared savings model can be through the development of an accountable care organization (ACO) beginning in 2012.21 See Glossary of Terms in Appendix C for the definition of an ACO. Bundled payments A single payment is made to cover all costs associated with an episode of care for a particular condition. While the payment may cover multiple providers in various care settings, the difference from global payment and shared savings is that the payment is for a specific condition or procedure rather than total care delivered over a specified time period. Hospital / physician Hospitals and physicians are able to share the cost savings achieved through collaborative efforts gainsharing resulting in improved quality and efficiency. Gainsharing is not profit-sharing. It is a team-based approach to improve performance through the involvement of others. If performance targets are met, providers share the financial gain. Payment adjustment Payment rates are adjusted (typically reduced as a penalty) for high rates of readmission and for readmission potentially avoidable readmissions. Payment adjustment Payment rates are adjusted (typically reduced or eliminated as a penalty) for hospitals with high rates for hospital-acquired of hospital-acquired conditions (HACs). CMS includes 10 categories of HACs such as falls and trauma, conditions manifestations of poor glycemic control, and surgical-site infections after select surgeries. HACs and never events overlap, but not all HACs are never events.22 Payment adjustment No payment is received for never events or outcomes that are unambiguous, preventable, and for never events serious. CMS currently recognizes 28 diseases or conditions as never events, including surgery on wrong body part, foreign object left in patient after surgery, and death/disability associated with use of contaminated drugs.23 Pay-for-performance Hospital and physicians receive differential payments (rewards or penalties) for meeting or missing performance benchmarks. Other value-based Providers are financially rewarded for behavioral changes that lead to greater value. Two examples payments include shared decisionmaking and care coordination (see Glossary of Terms in Appendix C). 14 | C alifornia H ealth C are F oundation While each payment model listed above is Value-Based Payment Modifiers distinct, many share common characteristics Value-based payment modifiers typically target around their methodologies, overarching goals, physicians, physician groups, and hospitals, and offer and incentives for change. Given these similarities, a financial bonus for improving performance. There the nine payment models were further categorized is minimal risk to providers as modifications are according to three broad payment approaches: value- primarily associated with positive financial rewards. based payment modifiers, payment adjustments, The presumption is that as performance improves, and funds flow arrangements (payments requiring the cost of care will either decrease or better align changes to the flow of funds between organizations). with the delivery of care and associated outcomes. Each of these broad approaches is discussed in more This payment approach is not necessarily new to the detail below. Table 3 summarizes the similarities and industry as physician performance profiling (PPP) differences in the payment models based on their and pay-for-performance (P4P) programs have been payment approach. in practice for several years. Table 3. Categorization of Nine Payment Models by Payment Approach Va l ue-Ba sed Fun ds Flow Payment Modifiers Payment Adjustments Arrangements Emerging payment • Pay-for-performance (P4P) • Avoidable hospital readmissions • Global payments model • Shared decisionmaking /  • Hospital-acquired conditions • Shared savings and risk care coordination • Never events • Bundled payments • Hospital / physician gainsharing Methodology • Performance-based incentive • Reduction in pay or no pay • Typically, a single payment to payment on top of existing • Decline in avoidable hospital one provider organization (a payment models readmission may result in convener) that is responsible bonus pay for distributing the funds to all other providers along the care continuum Overarching goal • Primary: Improved quality and • Primary: Improved safety and • Primary: Cost containment by efficiency quality offsetting incentives of FFS • Secondary: Cost containment • Secondary: Cost containment • Secondary: Coordinated, due to reductions for avoidable high-quality care care Impetus for change • Incremental income (incentive) • Payment reductions (penalty) • Combination: Financial loss if (incentive or penalty) • Potential bonus payment actual cost of care exceeds set for reducing avoidable amount (penalty); financial gain readmissions (incentive) if actual cost is less than the set amount (incentive) Envisioned changes • Improvements in performance • Greater collaboration and • Greater accountability among in behavior of the measures coordination among key providers for quality, outcomes, delivery system • decisionmakers and cost of care for a Greater collaboration and coordination among key • Standardization of processes population decisionmakers • Greater transparency and • Greater coordination of care reporting for an episode and across the continuum Health Care Payment in Transition: A California Perspective | 15 Recognizing the need to accelerate incentives wrong-site surgery that should never occur), and for cost containment, organizations such as the readmissions continues to grow; many contend Integrated Healthcare Association (IHA) are that not all of these are preventable. The result is modifying their existing P4P programs to focus on widespread concern that a flat denial of payment for value — directly aligning quality with costs and such events may not be the best method to encourage rewarding for greater physician accountability.24 collaboration and foster a culture focused on value.26 Other value-based payment approaches include shared decisionmaking and care coordination. Both Funds Flow Arrangements of these models use decision tools and processes to In funds flow arrangements, there is typically one reward physicians and caregivers for collaborating entity that receives the payment. This entity bears with patients and other providers in identifying the financial risk and acts as a facilitator (or “convener”) best course of treatment.25 for all providers involved in the episode of care, Overall, value-based payment modifiers require serving to remove the administrative burden from the no major structural changes to the current payment payer. The convener is responsible for distributing system and are often considered easier to implement funds to entities providing services across the compared to payment adjustments and funds flow care continuum. Across the US, many believe the arrangements. convener will likely be a hospital, health system, or integrated delivery network, as these organizations Payment Adjustments often have the most resources (e.g., human capital, Payment adjustments are similar to value-based robust information technology systems, and finance payment modifiers in that they require minimal departments) and the greatest access to capital. structural changes to current payment methods. Funds flow arrangements are the most complex They differ in that they are designed to penalize payment approach, but are likely to achieve the rather than reward provider performance. The most effective overall outcomes. These arrangements payment adjustment often reduces or eliminates provide incentives for greater collaboration and care pay, which shifts the financial risk from payers to coordination among providers with the primary goal providers for avoidable outcomes. In some cases, of minimizing unnecessary costs. a financial incentive is available for decreasing For most payment models under this unnecessary readmissions. The primary goal of these arrangement, providers (hospital, physicians, or payment models is to reduce medical errors and other caregivers) must agree to manage the care of associated costs, resulting in a safer, higher quality a patient (or a patient population) across the care care environment. continuum (preventative, outpatient, inpatient acute, Over the last decade, many physicians and and post-acute care). Accountability may be for all hospitals have begun incorporating tools and medical services over a period of time (as with global processes such as evidence-based care guidelines, payments and shared savings and risk arrangements), standardized care processes, and standardized facility or for a single episode of care (as with bundled designs to improve patient safety. However, the payment arrangements). (For an example of a list of hospital-acquired conditions, never events bundled payment arrangement, see the case study in (particularly egregious medical errors such as Appendix A.) These three payment models — global 16 | C alifornia H ealth C are F oundation payments, shared savings and risk, and bundled payments — are likely to involve multiple providers across multiple organizations, thus requiring a greater degree of collaboration compared to another funds flow arrangement, hospital/physician gainsharing, which may involve just a single hospital or health system and independent physicians or physician groups. In some instances, providers are awarded a bonus for meeting a cost target and improving quality and efficiency.27 In California, large independent physician associations (IPAs) are aligning directly with payers to assume the accountability of care for a population.28 In this environment, an alternative arrangement could develop where IPAs assume the role of the convener. The challenge is that physicians and hospitals are independent organizations, and under California’s corporate practice of medicine statutes they must maintain that separation; therefore, they must collaborate effectively in order to deliver high- quality, cost-effective care. Health Care Payment in Transition: A California Perspective | 17 V. California’s Course to the Future: Major Themes T he pressing need to control health with various partnership and alignment models, care costs — particularly in the wake of the ACA and in some cases, is credited with promoting — is a powerful incentive for change in the health greater efficiency in the delivery of care. In 2009, care payment system. While the emerging payment for example, the ratio of patient days per 1,000 models discussed in this report do not solve all population for Medicare FFS beneficiaries was problems with the current payment system, most 1,834 nationally and 1,592 in California. This ratio agree they are a step in the right direction. Currently, was even lower for California Medicare Advantage nothing precludes health care service providers from patients, at 1,203 days per 1,000 population.32 While adopting any of the emerging payment models quality data is inconclusive, a 2002 meta-analysis of or approaches, either solely or in combination, to 79 studies from 1997 to 2001 showed that quality uniquely position or advance their organizations. of care was roughly comparable between HMO and However, for a new payment model to be FFS plans.33 successful, stakeholders (hospitals, physicians and With these factors as a foundation, the Advisory other caregivers, patients, and payers) must build Group discussed the likelihood that stakeholders trusting relationships and incorporate multiple in California will be able to make a successful alignment models that promote greater collaboration transition to new payment models. Three major and care coordination. All who wish to participate themes emerged from this discussion on California’s must commit to identifying and implementing trajectory to payment reform: evidence-based guidelines, finding and addressing the 1. The transition to future payment models will sources of excess cost (e.g., unnecessary or redundant be evolutionary, not revolutionary. testing, avoidable readmissions, medical errors, lack of coordinated care, etc.), and maintaining or 2. Any future payment system will remain improving quality of care.29 It remains to be seen how pluralistic; there is no “one-size-fits-all” health care providers in California will manage these approach. challenges in adopting new payment models. 3. Large employers and purchasers of health care California is often thought to have a unique services are likely to have a more dominant health care environment compared to other states. role in driving payment reform. There are several factors contributing to this, including, but not limited to: a higher presence of These themes are discussed in more detail below. managed care (HMO penetration of 42% in 2010, compared to 22% in the US); more physicians in New Models Will Evolve Incrementally medical groups or IPAs; and a ban on corporate Transforming the health care payment system will practice of medicine which prevents hospitals from take significant time and planning. New payment employing physicians.30, 31 This environment has models will need first to overcome challenges resulted in more than 20 years of experimentation embedded in the current payment system including 18 | C alifornia H ealth C are F oundation lack of aligned incentives, administrative burdens must remain financially viable to serve as a resource with multiple contracts, and lack of transparency to the communities they serve. In addition, there are around the costs of care. In addition, emerging significant regional and local market variations that payment models must align with the goals outlined must be considered (e.g., urban vs. rural locations, in the ACA: decreased spending, increased coverage, health systems vs. independent hospitals, large improved quality of care, and a healthier population. physician groups vs. independent physicians). To achieve these goals, hospitals, physicians, Some national and California-specific examples of and other health care professionals will need to the variety of payment models currently emerging are be accountable for the care they provide and to included in Table 4 on page 20. collaborate with other providers and organizations. To improve the likelihood of positive changes in Large Purchasers Will Drive Reform provider behavior, emerging payment models must Employer-sponsored coverage is the leading source offer financial and non-financial incentives for all of health care coverage in the US and California. As providers to improve the delivery system. salaries, wages, and benefits are among the largest Given the hurdles that payment reform must expenses for most employers, fluctuations in overall overcome, it will likely occur over both the short health care costs directly impact their ability to and long term. In the short term, the focus will be generate positive margins. From 2002 to 2010, on understanding how to transition today’s payment premiums in California increased by approximately models to ones that emphasize performance and 134%, resulting in 28% of firms reducing benefits value. In the long term, payment models should or increasing cost sharing among their employees.34 promote greater collaboration and care coordination While the rate of employer health care costs are across the continuum of care. Ideally, this continuum projected to slow to 1997 levels in 2012, many spans wellness and prevention, primary and specialty companies expect an increase in health benefit costs ambulatory care, acute/tertiary care, SNF/nursing ranging from 5.4% to 7%.35 home care, and end-of-life care. With premium growth rates higher than inflation and wage earnings, many employers are not able to Future Payment Systems Will Be absorb the costs and are faced with discontinuing Pluralistic coverage or incorporating other cost-cutting measures While standardization should help mitigate some such as increasing employee cost sharing, or shifting of the challenges of the current payment system, towards consumer-directed health plans (CDHPs). variations in payment methods will likely remain. Large purchasers, including government and large This is due, in part, to the competing interests of employers, will likely be the drivers of reform since multiple stakeholders. For example, patients want they have the resources and the market leverage to choice at a low cost; employers want to remain stimulate the development of more effective payment profitable with lower premiums, while also offering systems. competitive benefits to employees; insurers want Historically, employers faced consumer backlash lower prices and risk while securing a profit; in the 1990s when the market shifted towards a physicians and other health care professionals want managed care environment. Two decades later, compensation that reflects their value; and hospitals as costs continue to rise, many employers and Health Care Payment in Transition: A California Perspective | 19 Table 4. Emerging Payment Models in the United States and California United States California • ACA requires CMS to establish a shared-savings • The Integrated Healthcare Association (IHA), program to facilitate coordination and cooperation an organization that aligns key stakeholders to among providers to improve the quality of care improve health care services, is implementing and reduce unnecessary costs for FFS Medicare a Bundled Episode Payment and Gainsharing beneficiaries.36 Demonstration to test the feasibility of bundled • In August 2011, CMS introduced four different payments. IHA plans to expand the episodes, bundled/episode-based payment models focused which originally focused on total hip and knee on acute and post-acute care.37 replacements, to 10 acute conditions and procedures.39 • Cigna (a commercial insurer) is offering patient- • IHA is also well known for its Pay for centered collaborative accountable care initiatives that reward physicians for results rather than Performance (P4P) program that was initiated volume.38 in 2002. The success of the program, which measures performance on the dimensions of clinical quality, coordinated diabetes care, patient experience, IT-enabled systems, and appropriate resource use, has laid the foundation for transitioning to a value-based incentive program, which will reward for high-quality and efficient resource use.40 • Insurers are showing a growing interest in expanding into other elements of health care delivery. For example, in 2011 UnitedHealth Group’s Optum business initiated a purchase for the operations of a southern California physician group, Monarch HealthCare. The goal was to better align patients, providers, and payers in a more transparent process that focuses on increased quality and affordability of care. • By 2015, Blue Shield of California hopes to have 20 ACOs throughout California focused on controlling costs while optimizing patient care. Three ACOs have already been developed. The ACO with California Public Employees’ Retirement System (CalPERS), Catholic Healthcare West, and Hill Physicians has already achieved $15.5 million in savings in 2010. Two separate ACOs with the San Francisco Health Service System have already committed to achieving savings of $10 to $15 million per year.41, 42 • With a target date of July 2012, the state will shift from a cost-based, per-diem payment rate to a PPS DRG payment system for FFS Medi-Cal beneficiaries. The goal is to change the payment method to one that promotes improved utilization of inpatient resources.43 20 | C alifornia H ealth C are F oundation purchasers of health care are adopting a more Net Blue & Gold HMO network in an effort to proactive approach by developing strategies and lower costs. Also, as mentioned previously, CalPERS tools to help manage costs, with some focused on and Safeway are both utilizing reference pricing quality. For example, the University of California (described in Reference Pricing) to drive down the (UC) aligned with Health Net to develop the Health cost of some medical procedures. Reference Pricing Reference pricing is similar to a bundled payment. facilities. If Safeway employees choose a higher-cost Essentially, purchasers identify a reference price as a provider, they are responsible for paying the difference maximum, reasonable price for a particular procedure. between what the provider charges and the reference Beneficiaries can choose from a variety of providers price.46 to perform the procedure, but if the actual cost is higher than the reference price, then the beneficiary is Many employers are experimenting with ways to responsible for covering the difference. For example, manage or decrease health care expenditures, but it is CalPERS found that it was paying between $15,000 difficult for any one employer to have sufficient leverage and $100,000 for hip and knee replacements. After to reshape the approach to health care payment in the assessing the costs for several hospitals, CalPERS marketplace. Organizations such as the Pacific Business chose 46 hospitals that were able to perform hip and Group on Health (PBGH) and, more recently, Catalyst for knee replacements for $30,000 or less, establishing Payment Reform (CPR) are beginning to help.47 Both of the reference price. CalPERS then established a value these organizations are assisting employers and other purchasing benefit design program in collaboration with purchasers in not only understanding health care costs Anthem Blue Cross that allows beneficiaries to assess and utilization, but also how to transition to a payment the costs of joint replacement procedures for a number system focused on value. By forming partnerships, of hospitals in California.44 Beneficiaries still have a purchasers are able to develop tools for more informed choice, with the understanding that they are responsible decisionmaking, signal to providers when costs are for covering costs in excess of $30,000.45 Similarly, unreasonable, and create opportunities for insurers, Safeway set a reference price of $1,500 for a routine providers, and patients to collaborate. colonoscopy. The company also offers a transparency tool for employees to research the costs of specific Health Care Payment in Transition: A California Perspective | 21 VI. Transitional Implications and Strategies As d i sc u ss e d a b o v e , m u lt i p l e purposes, Figure 3 assumes a funds flow type of stakeholders are involved in both the delivery and arrangement (e.g., global payment or bundled payment of health care services. Figure 3 illustrates payment) for future payments that may result in one the various stakeholders, including their interactions payment to all care continuum providers. in the current payment environment (dotted As each stakeholder is unique — relative to lines) and their interactions as emerging payment culture, leadership team, strategic goals, partnerships approaches are advanced (solid lines). The future with other stakeholders, human resources and payment system will likely be a blend of current IT capabilities, and financial strength — the and emerging models, suggesting minimal changes implications of transitioning to payment approaches to how stakeholders interact today. For illustrative will vary. However, there are five overarching Figure 3. Stakeholder Payment System Interactions Today and in the Future ST AKEH OL DER Governmental S T AK E HOL DE R Payer Patient Payment Options FUTURE PAYMENT Payment Options prospective, self pay, copay, fee schedule, deductible bundled STA KEHOL DE R S T AK E HOL DE R Patient Care Physicians Facilities Negotiated rates Intermediary and carrier Medicare typically the foundation • Ancillary Insurance • Ancillary benefit Medicare Ambulatory • Clinic visits Advantage/ • Hospital outpatient • Procedures supplement (Medigap) • Hospital inpatient • Consultations Acute (ancillaries included) • Procedures • Home health • Consultations Post-acute • Rehab • Outpatient visits • SNF Negotiated rates S T AK E HOL DE R STAKEH OL DER Insurer Medicare typically the foundation Employer Payment Options % of monthly premium Payment Options fee-for-service, Negotiated rates self-insured, capitation, hybrid % of monthly premium fully insured 22 | C alifornia H ealth C are F oundation implications stakeholders should consider as they ◾◾ Establish new governance or leadership models make the transition: (1) greater collaboration, (2), to lead collaborative efforts. Organizations — service line consolidation (housing specific services particularly independent hospitals and physicians, such as oncology or cardiac care in a centralized and those that lack strong physician/hospital location), (3) robust analytics, (4) aligned incentives partnerships — need visible leadership teams to for value and effectiveness, and (5) impact on the help navigate and guide all stakeholders through cost of doing business. Details on each consideration the transition. This will be most critical for and subsequent strategies follow. those pursuing a funds flow payment approach (including global payment, shared savings and Greater Collaboration risk, and bundled payment arrangements). First, Trying to improve the quality, safety, and efficiency hospitals, physicians, and payers must define of health care requires a higher level of clinical and agree to the population(s) being cared for. integration than exists today, and may necessitate Second, the new leadership team will need to new care delivery models involving multiple define specific targets for improved quality specialties across care settings (outpatient, inpatient, and lower costs, and be able to negotiate these and post-acute). Decisions cannot be made metrics when contracting with payers. Finally, as independently if the desired outcome is greater care physicians are able to have privileges at several coordination and accountability. hospitals, the hospital(s) and physicians involved in the collaborative effort will need to clearly Strategies for fostering greater collaboration include: outline criteria for other health professionals to participate in a new payment environment. ◾◾ Develop a stronger network. Whether the stakeholder is a hospital, health system, ◾◾ Identify champions for change (especially independent physician, or physician group, all physicians). Transitioning from individual will need to develop or expand their existing decisionmaking to a collaborative teamwork networks to strengthen relationships with environment will not be easy or always well- other care continuum providers. In addition, received. Identifying champions, particularly in as the focus of care transitions from a patient the physician community, will be critical to gain to a population, the network should also buy-in. include community members, purchasers, and ◾◾ Focus on the patient and quick wins. Changing policymakers. Potential vehicles to enable the from a culture of competition to collaboration creation of a stronger and more formal network among hospitals, physicians, and payers will include ACOs, regional health improvement require more than just a physician champion. collaboratives (RHICs), IPAs, foundations, and These entities will need to identify ways to organizations such as the Pacific Business Group quickly generate demonstrable successes to keep on Health and Catalyst for Payment Reform that the momentum going. For example, hospitals directly align with employers and purchasers of and physicians could begin with co-developing health care. evidence-based guidelines around specific care processes before moving to tougher decisions Health Care Payment in Transition: A California Perspective | 23 involving contract negotiations, funds flow a large number of patients; (2) services where arrangements, risk-sharing, etc. there is evidence of overutilization or inefficiency involving relatively large amounts of spending; Service Line Consolidation (3) changes in care that have been proven to As the pressure increases to demonstrate value, not reduce overutilization or inefficiency, that are all hospitals or physicians will be be successful. relatively simple or low-cost to implement; and Consolidating service lines to bring a range of (4) services or conditions where there is strong coordinated and integrated resources to address a clinical leadership in the community.49 common, high-volume clinical challenge such as ◾◾ Pursue small-scale experiments. Providers that congestive heart failure or total joint replacement can are not tightly aligned with other care continuum help to provide excellent care at a reasonable price. providers should experiment with payment Providers that have the resources and efficiencies to changes on a smaller scale. Examples include demonstrate better quality and service at a lower cost CalPERS’ “total hips and joints focus,” Safeway’s are likely to be at an advantage and increase market routine colonoscopies, or IHA’s bundled payment share. Those unable to demonstrate value are at demonstration on knee and hip replacement risk of not only losing volumes but also becoming procedures. financially unsustainable. Potentially negative effects of service line consolidation — particularly ◾◾ Monitor access and value. As hospitals, by large, integrated systems of providers — include physicians, and other health professionals either market consolidation which may result in reduced begin or continue to experiment with new competition and increased prices.48 payment approaches, policymakers must continue to track and report on progress to ensure all Strategies for managing service line consolidation stakeholders are advancing value — including include: improvements to the delivery of care and how it is paid for. ◾◾ Focus on market strength and efficiency. Payers, hospitals, and physicians in a particular market should agree to focus on high-volume More Robust Analytics around a Common services or patient conditions that are likely to Patient Identifier demonstrate better outcomes at a lower cost. The need for health information technology (IT) For example, hospitals and physicians may want has been well recognized, but health IT has not initially to participate in Medicare demonstration been widely implemented because of high costs. In projects, as Medicare beneficiaries are among 2009, with funding from the American Recovery the highest users of medical services and chronic and Reinvestment Act and the need to comply with disease management for conditions such as heart meaningful use requirements, many providers have disease, stroke, cancer, diabetes, and chronic been investing in IT systems. Typically, large health respiratory diseases. Alternatively, Harold Miller, systems and physician groups have well-established in his article, “Transitioning to Accountable Care” quality improvement, utilization management, and offers four criteria to help providers identify these health IT systems; however, several of these systems services and conditions: (1) conditions that affect do not link business data with clinical data. Nor do 24 | C alifornia H ealth C are F oundation they provide data in real time, making it difficult for providers should consider when implementing a physicians and other caregivers to understand the risk adjustment model.50 overall health of the patient and adjust treatment ◾◾ Specificity of the model to the population to decisions accordingly. Furthermore, a single patient which it is being applied. is likely to have different identification numbers from every organization (such as the physician ◾◾ Transparency of the mechanics and results of clinic, hospital, and/or post-acute care setting) that the model. provided treatment. Multiple patient identifiers ◾◾ Access to data of sufficient quality (including combined with inconclusive data leads to inefficiency clinical utilization and financial information). (duplication of tests is just one example) and a lack of ◾◾ Software with multiple functions (e.g., care coordination. facilitates payments to providers and plans and/or streamlines case management trending Strategic IT considerations for transitioning to new and assessment). payment approaches include: ◾◾ Reliability of the model across settings, over ◾◾ Continue investment in IT systems and time or with imperfect data (e.g., ability of the infrastructure. Real-time communication, model to be replicated for different data sets interoperability, and results should be and populations). emphasized. Health care organizations’ analytical platforms should include warehouses for ◾◾ Dedicate decision-support personnel to business and clinical data with sophisticated analyze, interpret, and report progress (or lack analytic tools. Migrating to a single, integrated thereof ). Many believe that part of the reason IT platform will also help the development payment system changes have proceeded so slowly and reporting of metrics necessary for greater is because there is a lack of understanding around accountability and transparency. The use of what needs to be changed and/or how these health information exchanges will be critical changes should be implemented. to ensure communication between providers, patients, purchasers, and payers. Aligned Incentives for Value and Effectiveness ◾◾ Use risk management and adjustment tools. The current payment system does not reward for Managing the risk of a patient population will value or clinical effectiveness. Strategies for aligning be a new business for many health care providers incentives to better promote value and effectiveness including hospitals, physicians, and post-acute include: care professionals. A risk adjustment tool allows providers to group multiple patients in a ◾◾ Create incentives that are superior to the clinically meaningful way. The grouping not only current payment methods for at least a allows providers to assess care management and significant number of providers. For example, outcomes measures, but also determines the risk without health reform, fiscal realities are likely to of the population for the purpose of adjusting drive continued payment cuts for most hospitals payment rates. The following is a subset of criteria and physicians resulting in even greater scrutiny Health Care Payment in Transition: A California Perspective | 25 of individual decisions. In this instance, payment Impact on Cost of Doing Business reform is likely to be more attractive than the Implementing new payment approaches comes with status quo. a cost, regardless of the payment model. There are costs associated with IT implementation, full-time ◾◾ Ensure incentives are aligned with changes equivalents (FTEs) to serve as dedicated resources to in the delivery system. As cost containment manage change, and, in some instances, discounted measures are put in place, it will be important payment rates. In addition, administrative burdens for hospitals and physicians also to maintain or are not eliminated, but shift from payers to providers. improve quality and outcomes. Incentives should Whether there is a value-based bonus, a reduction include financial and non-financial rewards that in pay, or a combination of the two, providers are are motivating to all stakeholders (e.g., physicians, now tasked with determining how to distribute those hospitals, payers, purchasers, and patients). For funds across multiple care continuum entities. example, payments can be designed explicitly At the same time, transitioning to new systems to improve quality by rebalancing payments to does not happen instantaneously. Organizations must encourage physicians to adhere to evidence-based learn to manage both current payment methods and guidelines. emerging models during the transition. For some ◾◾ Ensure flexibility. Stakeholders must recognize organizations, small changes to the existing payment that the development of aligned incentives will be structure can result in significant implications for a continuous process requiring experimentation their bottom line. For example, many hospitals rely and modification over time. For example, on bonds to build or maintain new infrastructure. initial payments using diagnosis-related groups Minor changes to one contract can disrupt their (DRGs) for inpatient acute care were modified revenue stream, which subsequently could lead to to Medicare severity (MS) DRGs to factor lower overall bond ratings. As a result, some hospitals in severity of illness. Similar refinements and are taking a more conservative approach to payment modifications with any emerging payment system reform, experimenting with payment models are to be expected. focused on lowering costs or improving value rather than making large-scale changes. As organizations ◾◾ Clearly define value and clinical effectiveness. transition to new payment models, they will need to As each organization will vary, it will be critical balance their aspirations for payment reform with to create a baseline reflecting where hospitals what they realistically can afford to do. and physicians are currently positioned, outline expectations and goals for the future, Strategies for organizations to remain financially and continue to monitor and track progress at sustainable as they transition to new payment models reasonable time intervals. include: ◾◾ Develop a contracting strategy. Hospitals, physicians, and other health care professionals will need a strategy for managing payment contracts. This should include an understanding of what the contract covers, criteria for who is 26 | C alifornia H ealth C are F oundation able to participate, and benchmark comparisons to assess if the contracts represent market realities. To ensure buy-in among most care continuum providers, the contracting strategy should be developed and revised through a committee or leadership team that includes hospital administrators, clinicians, payers, and in some cases, purchasers. ◾◾ Focus efforts on building strong, trusting relationships among all stakeholders, but particularly between hospitals and physicians. Trust will be essential to create an equitable risk model. Since hospitals in California are not able to employ physicians (due to corporate practice of medicine statutes), other forms of hospital/ physician integration should be considered to demonstrate commitment to the relationship. With the IHA bundled payments demonstration, hospitals and physician organizations that had high levels of trust were able to overcome the political hurdles and initiate the payment pilot more quickly than others. ◾◾ Prioritize the implementation of new payment approaches. Organizations should begin with models that are easy to implement. For some, the focus may be on value-based payment modifiers or payment adjustments rather than models requiring funds flow arrangements. It is unrealistic to think small hospitals and independent physicians will take on significant financial risk. These organizations should consider aggregating into groups or clusters — either virtually or physically — to help ease the transition. Health Care Payment in Transition: A California Perspective | 27 VII. Conclusion The need to both reduce the complexity Each of the emerging models discussed in this of the current payment system and demonstrate report varies in impact and ease of implementation. greater value is driving the health care industry to Providers will need to consider how transitioning develop new models and modified approaches to to new payment models will impact their costs of paying for health care services. As California has business, and how to balance strategic investments historically been the birthplace of innovations that in adopting new payment models with maintaining promote greater efficiency and lower costs, many are margins. In some cases, focusing on a proven interested in how the California market will respond approach — such as bundling high volume total joint to the challenges of payment reform. services — may generate the momentum needed to make the transition to all-encompassing payment In evaluating the likely course of California’s models (e.g., funds flow arrangements). By taking transition to a new payment system, a number of a proactive approach and creating a transitional themes have emerged: payment strategy, organizations have the opportunity to develop a plan that aligns with their vision, goals, ◾◾ New models will evolve incrementally. In the culture, and capabilities — and one that is politically short term, the focus will be on understanding acceptable, financially feasible, and complies with how to transition today’s payment models to changes in the legal and regulatory landscape. those that emphasize performance and value. In the longer term, payment models should enhance value by promoting greater collaboration and care coordination across the continuum of care. ◾◾ Future payment systems will be pluralistic. While standardization of payment systems should help mitigate some of the challenges of the current payment system, variations in payment methods will likely remain. ◾◾ Large purchasers will drive reform. With premium growth rates higher than inflation, many employers and governmental purchasers are not able to absorb the costs. Large purchasers, including government and large employers, will likely be the drivers of reform since they have the resources and the market leverage to stimulate the development of more effective payment systems. 28 | C alifornia H ealth C are F oundation Appendix A: Fictional Case Study This fictional case study was created to provide an post-operation recovery could be closely monitored. example of how the current payment system works She stayed at the hospital for two days before being and to illustrate an emerging payment model. discharged. After discharge, she followed a typical The current payment methods illustrated include rehabilitation regimen. prospective payment systems and fee schedule Figure A1 illustrates Mrs. Smith’s total episode systems for a traditional Medicare fee-for-service of care including the total number of days for the beneficiary. A bundled episode payment is used to episode, all provider encounters, and the respective illustrate the emerging payment model. codes and charges per encounter for a traditional Jane Smith is a 68-year-old Medicare beneficiary Medicare fee-for-service beneficiary. (See page 30.) who was diagnosed with congestive heart failure Ms. Smith’s total episode of care covered a (CHF) two years ago. She has been routinely 90-day period. During those 90 days, she had monitored by her general cardiologist since her 11 physician encounters with multiple EKGs, diagnosis. stress tests, and a chest X-ray; one hospital stay During her last routine visit, the general that included the defibrillator implant procedure, cardiologist noticed Ms. Smith’s condition was labs, pharmaceuticals, and monitoring; and getting worse and referred her to a heart failure 24 rehabilitation encounters. specialist. Upon her initial evaluation, the specialist Based on current CMS payment rates for recommended a full work-up including a stress test medical services performed in a metropolitan region to better assess her heart’s structural and arrhythmia of California, Ms. Smith generated $121,684 in characteristics, including cardiac output. Ms. Smith medical service charges. Medicare paid $59,774 went to the cardiologist’s outpatient facility for and Ms. Smith paid $2,071 out-of-pocket, totaling these tests, and the test results were delivered to the $61,845. The difference of $59,839 was written off, specialist for interpretation. Her test results showed as the billed charges reflect a total amount before any she would likely need cardiac resynchronization contracts, discounts, allowances, or plan adjustments therapy: a treatment involving the implantation of a are applied. The total monies from Medicare and defibrillator device. Ms. Smith were paid to five separate physicians, one Because the implantation of a defibrillator hospital, and one rehab facility. and follow-up care is typically carried out by an Table A1 shows a summary of encounters, electrophysiology (EP) cardiologist, Ms. Smith was invoices, and payments by provider. (See page 30.) referred to an EP for a consult office visit. Once the In this example, there were three main payment EP cardiologist confirmed the need for a defibrillator methods used throughout this one episode of care. and reviewed the clinical evidence, potential Payments made to the hospital were based on a outcomes, and risks associated with such a procedure prospective payment system under Medicare Part with Ms. Smith, she elected to have the procedure. A’s inpatient prospective payment system (IPPS). The implantation was performed in the hospital’s Payments made to the individual physicians such cardiac catheterization facility. After the procedure as the general cardiologist, heart failure specialist, Ms. Smith was admitted to the hospital where her and EP cardiologist followed a different fee schedule Health Care Payment in Transition: A California Perspective | 29 Figure A1. Ms. Smith’s 90-day CHF Episode of Care (Current Medicare Payment Method) Routine Care & Chronic Disease Management Acute Care Services Post-Discharge & Prevention Management Day +14: EP Cardiologist Day –30: General Cardiologist Day 0: EP Cardiologist Office visit: 93282 Office visit: 99213 Procedure: 33249, 71090-26 EKG: 93268 Total charges / Medicare rate: $160 / $79.92 Total charges / Medicare rate: $1,690 / $845 Total charges / Medicare rate: $265 / $133.12 Payments (Medicare / patient): $63.94 / $15.98 Payments (Medicare / patient): $676 / $169 Payments (Medicare / patient): $53.22 / $13.31 Day 0: Anesthesiologist Day +45: Heart Failure Cardiologist Day –15: Heart Failure Cardiologist Office visit: 99213 Procedure: 00534 Office visit: 99213 Stress test: 93017 Total charges / Medicare rate: $827 / $413.63 Stress test: 93017 Total charges / Medicare rate: $756 / $378.92 Payments (Medicare / patient): $330.90 / $82.73 Total charges / Medicare rate: $755 / $378.92 Payments (Medicare / patient): $303.14 / $75.78 Payments (Medicare / patient): $303.14 / $75.78 Day +4: Radiologist Day +55: EP Cardiologist Day –7: EP Cardiologist Chest X-Ray: 71010 Office visit: 93282 Office visit: 99213 Total charges / Medicare rate: $90 / $45 EKG: 93268 EKG: 93268 Payments (Medicare / patient): $36 / $9 Total charges / Medicare rate: $265 / $133.12 Total charges / Medicare rate: $295 / $146.51 Payments (Medicare / patient): $53.22 / $13.31 Payments (Medicare / patient): $117.21 / $29.30 Day +4: EP Cardiologist Follow-up visit: 93641-26 Day +60: General Cardiologist Total charges / Medicare rate: $645 / $323.46 Office visit: 99213 Payments (Medicare / patient): $258.77 / $64.69 Total charges / Medicare rate: $160 / $79.92 Payments (Medicare / patient): $63.94 / $15.98 Physician Services -30 days +60 days Facility Patient Care Services Hospital Acute Care Episode Day 0–4: EP Device Implant for Heart Failure Rehabilitation Episode Admitting primary diagnosis & procedure: 427.5 6 weeks: Post-Discharge Cardiac Rehab Legend Procedure cath lab: 33249, 33225 Rehab visits: 97001, 97110 Device procurement: C1721 Total charges / Medicare rate: $3,740 / $1,870 = Physician encounter Labs: 86850, 36415, 80048, 80053, 83735, 84484 Payments (Medicare / patient): $1,496 / $374 Imaging: 71010 = Hospital acute care period Drugs: J0690, J7030, J7040, Q9967 Bed / Room / Board: Rev. 360 = Rehabilitation period Total charges / Medicare rate: $112,036 / $56,018.85 Payments (Medicare / patient): $54,886.85 / $1,132 Table A1. Summary of Ms. Smith’s 90-day CHF Episode of Care Di fferen ce M edi care Pat ient Tota l Between Pay ment Provider Encounters Charges Payment Payment Payment and Charges Physician 11 $5,908 $2,259 $565 $2,824 – $3,084 Hospital 1 $112,036 $56,019 $1,132 $57,151 – $54,885 Rehab 24 $3,740 $1,496 $374 $1,870 – $1,870 Total 36 $121,684 $59,774 $2,071 $61,845 – $59,839 30 | C alifornia H ealth C are F oundation arrangement under Medicare Part B’s Medicare same providers will also have to agree to take an Physician Fee Schedule. Payment for the outpatient overall discount on their combined services delivered rehabilitation facility fell under the outpatient throughout a given episode. In the recent CMS prospective payment system (OPPS). bundled payment initiatives, discount percentages With the passage of ACA, Medicare and other for Medicare FFS beneficiaries can range from 0% payers are looking to introduce new payment models to 3% depending on the type of model employed.51 that will encourage provider groups to collaborate Adhering to a lower cost target and the potential and be more accountable for managing the care of a shared savings provides the incentives for providers population. One such payment method is bundled to collaborate, coordinate care, reduce unnecessary payment. This model allows physicians and hospitals utilization, and improve efficiency with the overall to work together in reducing costs throughout goal of providing more value for the delivery of an episode of care, much like the 90-day episode medical care. experienced by Ms. Smith. Providers who choose to Figure A2 illustrates a bundled payment group together to adopt a bundled payment model arrangement for Ms. Smith’s 90-day CHF episode. will be allowed to retain any cost savings. These Figure A2. Ms. Smith’s 90-day CHF Episode of Care (Emerging Bundled Payment Model) Routine Care & Chronic Acute Care Post-Discharge & Prevention Management Disease Management Services Rehabilitation Episode Hospital Acute Care Episode 6 weeks: Post-discharge cardiac rehab Day 0–4: EP device implant for heart failure – 30 days +60 days Hospital Physician services Rehab remainder Distribution according to funds flow Legend agreements = Physician encounter = Hospital acute care period = Rehabilitation period $59,999 Bundled payment to = Funds flow arrangement “convener” (hospital) Health Care Payment in Transition: A California Perspective | 31 Under a bundled payment model, Medicare makes one payment for Ms. Smith’s 90-day episode Payment Methodology Variables For illustrative purposes, the current payment methods (discounted at 3%) to the hospital. The hospital, in in this example were kept relatively simple. In reality this case, acts as the convener, bringing together all there are many more elements factored into the providers that were involved in the episode of care. payment methodology. These elements include, but While it appears as through a bundled payment are not limited to: the level of charity care; teaching is simpler compared to the current payment system, status; whether the physician owns any equipment at the facility or hospital; employment of the provider this is not necessarily the case for all stakeholders. (although not applicable to California given the For Medicare (the payer) there are several advantages: corporate practice of medicine laws); and other (1) decreased spending by 3% (a net decrease of contingencies that could affect how overall payment $1,855), (2) reduced administrative burden by is calculated and distributed among the caregivers. Variables such as these could warrant technical fees decreasing the total number of payments from for equipment as well as other types of payments. 13 to 1, and (3) by shifting the accountability to In addition, the case study subject is a patient the providers, Medicare also shifts the financial insured by one payer: Medicare. Most providers risk of managing the patient’s care to the providers. (hospitals, physicians, post-acute care facilities, Conversely, the hospital, serving as the convener, skilled nursing facilities, etc.) receive payments not only is the bearer of financial risk, but is also from multiple payers for one patient in one single case with each payer employing multiple payment responsible for the care being delivered without methods with varying formula adjustments. Given the having the authority to mandate how that care will complexity that already exists with one payer, having be delivered. several payers simultaneously creates significant complexity with accompanying administrative burdens for organizations. In 2008, administrative costs (e.g., procedures for filing claims, resetting prices, complying with federal and state regulations, and marketing) were estimated to be 7% of health expenditures in the US, which is roughly translated to be about $161 billion.52 32 | C alifornia H ealth C are F oundation Appendix B: Advisory Group Participants and Interviewees (listed alphabetically) Advisory Group Participants Deborah E. Stebbins Richard Culbertson, MHA, MDiv, PhD Chief Executive Officer Professor, Tulane University City of Alameda Health Care District Former Chairman, Aurora Health Betsy L. Thompson, MD, DrPH Suzanne F. Delbanco, PhD Chief Medical Officer Executive Director Center for Medicare & Medicaid Services, Region IX Catalyst for Payment Reform Tom Williams, DrPH, MBA Emma Dolan, MPP, MPH Executive Director Policy Analyst Integrated Healthcare Association Integrated Healthcare Association Murray Ross, PhD Emma Hoo VP, Kaiser Foundation Health Plan Director of Value Based Purchasing Director, Kaiser Permanente Institute for Health Policy Pacific Business Group on Health Larry Wilson, MBA Karen Jones Former SVP for Finance and Strategy VP, Finance Kaiser Permanente Cottage Health System Benjamin Katz Interviewees VP, Network Management Northern California Suzanne F. Delbanco, PhD CIGNA HealthCare of California Executive Director Catalyst for Payment Reform David V. Kraus, JD, MPH Chief Contracting Officer Weslie Kary University of California, San Diego Program Director Integrated Healthcare Association David O’Neill, JD, MPH Senior Program Officer David V. Kraus, JD, MPH California HealthCare Foundation Chief Contracting Officer University of California, San Diego Carrie Owen Plietz, MHA and FACHE Chief Executive Officer Richard Soohoo Sutter Medical Center, Sacramento Chief Financial Officer Sutter Medical Center, Sacramento Maribeth Shannon, MS Program Director Wells Shoemaker, MD California HealthCare Foundation Medical Director California Association of Physician Groups Wells Shoemaker, MD Medical Director Tom Williams, DrPH, MBA California Association of Physician Groups Executive Director Integrated Healthcare Association Note: While all Advisory Group participants helped inform the direction and content included in this report, not all agreed with all findings. Health Care Payment in Transition: A California Perspective |33 Appendix C: Glossary of Terms Paymen t Ty p e Definition Accountable care Voluntary groups of physicians, hospitals, and other health care providers that are willing to organizations (ACOs) assume responsibility for the care of a clearly defined population of Medicare beneficiaries attributed to them on the basis of patients’ use of primary care services. If an ACO succeeds in both delivering high-quality care or improving care and reducing the cost of that care below what would otherwise have been expected, it will share in the savings it achieves for Medicare.53 Ambulatory payment The method used by CMS (and others) to implement prospective payment for ambulatory classification (APC) procedures. Different ambulatory procedures are clustered into groups for purposes of payment. Payments may also be weighted to account for resource consumption and geography. Ambulatory surgical center Outpatient surgery may be performed at a hospital, physician’s office, or ambulatory surgery (ASC) center (ASC). Under the hybrid payment method, payments combine Medicare outpatient prospective payment system and Medicare physician fee schedule for procedures performed at an ASC. Carve-outs Services pre-selected to be reimbursed using a different payment system than the default negotiated system. Case rate/composite Providers (or a group of providers) agree to receive one fixed and predetermined payment amount bundling for all services provided within an episode of care (could include, for example, inpatient services, associated post-acute care and rehab, and durable medical equipment). Under composite bundling, the provider(s) may not bill for each service provided within an episode individually. Copayment (copay) A fixed fee that subscribers to a medical plan must pay for their use of specific medical services covered by the plan. Cost plus per diem “Per diem” represents each day that a given patient is provided access to a prescribed therapy. Cost plus per diem reimbursement is intended to compensate for costs plus a fair return (the excess of revenues over expenses needed to ensure continued access to the presecribed therapy). Cost plus percentage Payment method where a provider is reimbursed for all allowable expenses plus an additional amount for profit; the profit premium is usually calculated as a percentage of those expenses. Deductible Dollar amount set by insurer that the beneficiary is responsible for paying before the insurer covers any medical costs. Usually, the beneficiary has a yearly deductible to meet before costs are covered. Disproportionate share As defined by the US Department of Health and Human Services, DSH adjustment payments hospital (DSH) provide additional help to those hospitals that serve a significantly disproportionate number of low-income patients; eligible hospitals are referred to as DSH hospitals. States receive an annual DSH allotment to cover the costs of DSH hospitals that provide care to low-income patients that are not paid by other payers, such as Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), or other health insurance. This annual allotment is calculated by law and includes provisions to ensure that the DSH payments to individual DSH hospitals are not higher than these actual uncompensated costs.54 34 | C alifornia H ealth C are F oundation Paymen t Ty pe Definition Durable medical equipment DMEPOS uses Healthcare Common Procedure Coding System (HCPCS) to classify medical prosthetics, orthotics, equipment. This system accounts for different types of durable medical equipment as well as the and supply fee schedule condition (new or used) and payment method (purchase or rental). (DMEPOS) Full capitation A monthly arrangement where a third-party payer pays a contracted provider a predetermined amount based on the number of members covered by the payer. All financial risk is placed on the provider who will receive the same monthly payment regardless of the amount of services provided that month. Long term care hospital Under Medicare, acute care hospitals with an average length of stay of more than 25 days are (LTCH) prospective considered long term care hospitals. Such hospitals are paid by Medicare on a prospective payment system payment system using LTC-DRGs (long term care DRGs). Medicare-adjusted Payment adjustments employed by Medicare to account for uncontrollable cost variations payment associated with providing care (i.e. geography, case mix, etc.). Medicare clinical laboratory A fee schedule adopted by Medicare to reimburse clinical laboratories for rendered services. fee schedule (CLFS) Medicare physician fee Implemented by Medicare in 1992, it uses current procedural terminology (CPT) codes as its schedule (MPFS) classification system and defines payment rates using the Medicare resource-based relative value scale, which accounts for work experience, practice expense, and malpractice costs. Medicare severity System adopted by Medicare to categorize and prospectively price inpatient episodes of care diagnosis-related groups based on patient diagnosis and severity. Pricing is set based on the cost to treat an average case (MS-DRG) with the given diagnosis. MS-DRGs are used for inpatient prospective payment systems. Out-of-pocket Any portion of a bill a patient is responsible for after insurance. Usually includes copay and deductible. Could be the entire bill if patient is uninsured. Partial capitation Unlike full capitation which is a fixed monthly payment to cover the provision of all medical services, partial capitation covers specified services under a capitated model (fixed monthly fee) while non-specified services remain reimbursed under fee-for-service. Per diems A daily payment rate for costs incurred on a daily basis. Percent of charge A retrospective payment system in which payers contract with health care providers (i.e. hospitals, physicians) to reimburse a percentage of the billed charges for treatment. Premium Payment made by a beneficiary to insurance company to cover costs associated with his/her care. Premiums are calculated by the insurance company to account for risk associated with treating the beneficiary. Prospective payment A method of reimbursement in which Medicare payment is made based on a predetermined, system (PPS) fixed amount. The payment amount for a particular service is based on the classification system of that service (for example, diagnosis-related groups for inpatient hospital services). Health Care Payment in Transition: A California Perspective | 35 Paymen t Ty p e Definition Provider-based (facility) vs. Medicare reimburses different payment rates depending on whether services were provided free-standing (non-facility) in a provider-based or free-standing setting. Under a provider-based setting the hospital physician practices usually provides the resources, while the physician (contracted or not) provides the care. In a free-standing setting, usually a physician or physician group owns a practice that has no affiliation with a hospital. Re-insurance The transfer of part of the insurance risk to another insurer or insurers. Self-funded plans generally buy specific and/or aggregate stop-loss coverage to cover losses in excess of certain limits (also known as excess loss coverage). Shared risk Apportionment of chance of incurring financial loss by insurers, managed care organizations, and health care providers. Skilled nursing facility Developed in 1997 and implemented in 1998 to replace the cost-based system. The payments (SNF) are based on a per-diem rate and adjusted for case mix and geographic location. Stop loss Insurance policy purchased by self-insured or managed care payers to limit cost exposure. Some policies reimburse against individual cases that incur expenses beyond a certain dollar amount, while others insure against cost overruns from paying claims on behalf of all beneficiaries. Sources: Primary sources include the CMS website (www.cms.gov), TheFreeDictionary’s Medical dictionary (www.medical-dictionary.thefreedictionary.com), and the National Association of Health Underwriters Glossary of Terms (www.nahu.org). Other sources include: Anne Casto and Elizabeth Layman, Principles of Healthcare Reimbursement, American Health Information Management Association, 2006; Duane Abbey, HealthCare Payment Systems: An Introduction, Productivity Press, 2009; and Joanne Waters and L. Blount, Mastering the Reimbursement Process (4th Ed.), American Medical Association, 2007. 36 | C alifornia H ealth C are F oundation Endnotes 1. Centers for Medicare & Medicaid Services, “NHE Fact “Timeline: History of Health Reform in the U.S.,” Sheet: National Health Expenditure Data,” June 14, Kaiser Family Foundation (healthreform.kff.org). 2011 (www.cms.gov). 10. Contractors General Hospital in California, the first 2. Karen Davis, Cathy Schoen, and Kristof Stremikis, hospital of what is now Kaiser Permanente, was the “Mirror, Mirror on the Wall: How the Performance idea of Sidney Garfield, MD. The hospital’s intent of the U.S. Health Care System Compares was to treat sick and injured workers constructing the Internationally, 2010 Update,” The Commonwealth Los Angeles aqueduct. Financing care was difficult Fund, June 2010 (www.commonwealthfund.org). since not all workers had insurance, and insurance companies were not always timely with payments. 3. “Basic Facts About Health Care in California,” Harold Hatch, an insurance agent, petitioned California Health Care Reform section at CA.gov insurance companies to reimburse Contractors General (www.healthcare.ca.gov), accessed on September 15, a fixed, per-day amount for each covered worker. This 2011. prepayment method allowed the hospital to remain 4. California State Scorecard at the State Data Center, solvent. This model quickly became a financial success, a website maintained by The Commonwealth was the basis of the health maintenance organization Fund (www.commonwealthfund.org), accessed (HMO) payment structure, and continues to be used September 15, 2011. in California and other parts of the US today. 5. The Leapfrog Group website (www.leapfroggroup.org), 11. Moral hazard means that people with insurance accessed on September 15, 2011. may take greater risks than they would if they were uninsured because they know they are protected, with 6. Integrated Healthcare Association, “IHA Pay for the result that the insurer may get more claims than it Performance Report of Results for Measurement Year bargained for. 2009” (www.iha.org). 12. See, for example, the Payment System Fact Sheets 7. The Triple Aim initiative, a program of the Institute published by the Medicare Learning Network, which for Healthcare Improvement (www.iha.org), publishes official educational products from the simultaneously pursues three aims: improving Centers for Medicare and Medicaid (www.cms.gov). the experience of care, improving the health of populations, and reducing per capita costs of health 13. Anne Casto, Elizabeth Laymen, Principles of Healthcare care. Reimbursement, American Health Information Management Association, 2006. 8. Patient Protection and Affordable Care Act (Public Law 111-148), US Government Printing Office, 14. Alex Drossos, “Health Economics Analysis: Fee for March 23, 2010 (www.gpo.gov). Service vs. Capitation,” April 10, 2002 (www.alexdrossos.ca). 9. Timeline derived from the following sources: “Health Insurance in California: A Recent History,” California 15. Casto and Laymen, Principles of Healthcare HealthCare Foundation, (www.chcf.org); “Healthcare Reimbursement. Timeline,” online timeline part of a website to accompany PBS broadcast show, “Healthcare Crisis: Who’s At Risk?” (www.pbs.org/healthcarecrisis); Health Care Payment in Transition: A California Perspective | 37 16. A prospective payment system (PPS) is a method 27. Casto and Laymen, Principles of Healthcare of reimbursement in which Medicare payment is Reimbursement. made based on a predetermined, fixed amount. The 28. Anna Wilde Mathews, “UnitedHealth Buys California payment amount for a particular service is based on Group of 2,300 Doctors,” The Wall Street Journal, the classification system of that service (for example, September 1, 2011 (online.wsj.com). diagnosis-related groups for inpatient hospital services). 29. Robert Kelley, “Where can $700 billion in waste 17. Harold Miller, Transitioning to Accountable Care: be cut annually from the U.S. healthcare system?” Incremental Payment Reforms to Support Higher Quality, Thomson Reuters White Paper, October 2009 More Affordable Health Care, Center for Healthcare (www.factsforhealthcare.com); The Economist blog, Quality and Payment Reform, January 2011 “US health-care spending: Waste measurements,” (www.chqpr.org). June 17, 2011 (www.economist.com). 18. Eric Schneider, Peter Hussey, and Christopher Schnyer, 30. Kaiser Family Foundation, Statehealthfacts.org, Payment Reform: Analysis of Models and Performance July 2010 (www.statehealthfacts.org). Measurement Implications, RAND Corporation, 2011 (www.rand.org). 31. Robin Gillies, Steve Shortell, Larry Casalino, Jamie Robinson, and Tom Rundall, “How Different 19. Ibid. Is California? A Comparison Of U.S. Physician 20. Leslie Kane, “Physician Payment Reform: What Organizations,” Health Affairs, October 15, 2003 It Could Mean to Doctors: Are Global Payments (www.healthaffairs.org). Just Gussied-up Capitation?” Medscape News Today, 32. Kaiser Family Foundation, “Discharges and Total Days August 18, 2010 (www.medscape.com). of Care for Medicare Beneficiaries Discharged from 21. Centers for Medicare & Medicaid Services, “Shared Short-Stay Hospitals, 2009,” Statehealthfacts.org, Savings Program,” overview page at website July 2010 (www.statehealthfacts.org). (www.cms.gov), accessed May 17, 2011. 33. America’s Health Insurance Plans, Center for 22. Centers for Medicare & Medicaid Services, “State Policy and Research, Working Paper: Comparisons Medicaid Director Letter #08-004,” July 31, 2008. of Utilization in Two Large Multi-State Medicare (www.cms.gov). Advantage HMOs and Medicare Fee-for-Service in the Same Service Areas, December 2009 23. Ibid. (www.ahipresearch.org). 24. Doug Desjardins, “State Quality-of-Care Program to 34. California HealthCare Foundation, California Health Focus on Reducing Costs. New cost-control effort Care Almanac: California Employer Health Benefits to launch in 2013,” California Healthfax, October 3, Survey, December 2010 (www.chcf.org). 2011. 35 Mercer, “Latest survey finds health benefit cost 25. Casto and Laymen, Principles of Healthcare growth for 2012 likely to be the lowest in 15 years,” Reimbursement. September 21, 2011 (www.mercer.com). 26. John Gever, “‘Never Events’ Not Always Preventable,” 36. Centers for Medicare & Medicaid Services, “Shared MedPage Today, February 15, 2010 Savings Program,” overview page at website (www.medpagetoday.com). (www.cms.gov), accessed May 17, 2011. 38 | C alifornia H ealth C are F oundation 37. Centers for Medicare & Medicaid Services, “Bundled 48. William Vogt and Robert Town, How Has Hospital Payments for Care Improvement Initiative: Fact Consolidation Affected the Price and Quality of Hospital Sheet,” August 23, 2011 (www.innovations.cms.gov). Care? Robert Wood Johnson Foundation, February 2006 (www.rwjf.org); Paul Ginsburg, Wide Variation 38. Chris Anderson, “CIGNA says ACO pilots show lower in Hospital and Physician Payment Rates Evidence of costs, better quality of care,” Healthcare Finance News, Provider Market Power, Center for Studying Health March 24, 2011 (www.healthcarefinancenews.com). System Change, November 2010 (hschange.org). 39. Integrated Healthcare Association, “IHA Bundled 49. Miller, Transitioning to Accountable Care: Incremental Episode Payment and Gainsharing Demonstration Payment Reforms to Support Higher Quality, More Project Description,” March 14, 2011 (www.iha.org). Affordable Health Care. 40. Integrated Healthcare Association, “IHA Pay for 50. Ross Winkelman and Sayed Mehmud, A Comparative Performance Report of Results for Measurement Year Analysis of Claims-Based Tools for Health Risk 2009” (www.iha.org). Assessment, Society of Actuaries, April 20, 2007 41. Blue Shield of California, “Accountable Care (www.soa.org). Organization,” information page at website 51. Max Reynolds, “Medicare Bundled Payment Program: (www.blueshieldca.com), accessed September 15, 2011. Meaningful Risk and Limited Reward,” Healthcare 42. Chris Rauber, “Blue Shield, San Francisco, major Financial Management Association, October 3, 2011 providers start accountable care initiatives,” (www.hfma.org). San Francisco Business Times, March 2, 2011 52. American Medical Association, “Administrative costs (www.bizjournals.com/sanfrancisco). of health care coverage,” 2010 (www.ama-assn.org); 43. California Department of Healthcare Services, Eric Kimbuende, Usha Ranji, Janet Lundy, and Alina “Medi-Cal DRG Project: Frequently Asked Salganicoff, “U.S. Health Care Costs,” Henry J. Kaiser Questions,” July 27, 2011 (www.dhcs.ca.gov). Family Foundation, March 2010 (www.kaiseredu.org). 44. David Lansky, “The Employer Response to Today’s 53. Donald Berwick, “Making Good on ACOs’ Promise Health Care Crisis: Next Generation Purchasing — The Final Rule for the Medicare Shared Savings Strategies,” presentation to The 7th Annual American Program,” The New England Journal of Medicine, Health Care Congress, December 8, 2010 October, 10 2011 (www.nejm.org). (www.pbgh.org). 54. Department of Health and Human Services, 45. Julie Appleby, “Companies Steering Workers To “Disproportionate Share Hospital (DSH),” Lower Priced Medical Care,” Kaiser Health News, information page at website (www.hhs.gov), September 22, 2011 (www.kaiserhealthnews.org). accessed September 15, 2011. 46. Ibid. 47. Pacific Business Group on Health website: www.pbgh.org. Catalyst for Payment Reform website: www.catalyzepaymentreform.org. Health Care Payment in Transition: A California Perspective | 39 1438 Webster Street, Suite 400 Oakland, CA 94612 tel: 510.238.1040 fax: 510.238.1388 www.chcf.org