May 23rd Episode-Based Payments Slides

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Implementing retrospective episode-based payments in a multi-payer environment

May 23, 2014 Presentation Document

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McKinsey & Company | 1

Introduction to McKinsey and our experience

Introduction to McKinsey

Experience in payment innovation

▪ World’s leading management consulting firm, with >9,000 professionals in 102 offices worldwide

▪ Serve clients from strategy through implementation

▪ Not political organization in any way

▪ Serve six states directly and have had discussions and workshops in ~10 additional states to design and launch new payment models including episode based payment, Patient Centered Medical Homes, Accountable Care Organizations, Health Homes

▪ Experience designing and launching new payment models in private sector as well

▪ Significant direct investment in proprietary

capabilities including data management, advanced analytics, clinical (e.g., 150+ clinicians), statistics, actuarial, Medicaid member research, etc.



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Contents

▪ Refresher on the mechanics of retrospective episodes

▪ The case for retrospective episodes

▪ Select lessons learned



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The episode model is designed to reward coordinated, team-based, high-quality care for specific conditions or procedures

A provider “quarterback”, the Principal Accountable Provider (PAP), is designated as accountable for all pre-specified services across the episode (PAP is provider in best position to influence quality and cost of care)

Accountability

Coordinated, team-based care for all services related to a specific condition, procedure, or disability (e.g., pregnancy episode includes delivery as well as pre- and post-natal care for the mother)

The goal

High-quality, cost-efficient care is rewarded beyond current reimbursement, based on the PAP’s average cost and total quality of care across each episode

Incentives



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What is an episode? Hip & Knee Example. Services included

in the episode

Self-referral

Initial assess-ment by surgeon ▪Necessity of

procedure ▪Physical exam ▪Diagnostic

imaging

Referral by PCP

Preadmission work ▪Pre-work (e.g.,

blood, ECG) ▪Consultation

as necessary

Surgery (inpatient) ▪Procedure ▪ Implant ▪Post-op stay

IP recovery/ rehab ▪SNF/ IP rehab

No IP rehab ▪Physical

therapy ▪Home health

Readmission/ avoidable complication ▪DVT/ PEs ▪Revisions ▪ Infections ▪Hemorrhages

Surgery (outpatient) ▪Procedure ▪ Implant

Referral by other orthopod

0-90 days before surgery 30 -180 days after surgery Procedure

Sources of value

Ensure optimal recovery / rehab treatment

D

Minimize readmissions and complications

E

Tertiary sources of value: ▪ Reduce implant costs ▪ Optimize inpatient

length of stay

C

Reduce unnecessary or duplicate imaging/services

A

Use more cost efficient facilities

B



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McKinsey & Company | 5 5 5

Patients seek care and select providers as they do today

Providers submit claims as they do today

Payers reimburse for all services as they do today

1 2 3 Patients and providers continue to deliver care as they do today

Retrospective episode model mechanics for patients & providers

Calculate incentive payments based on outcomes after close of 12 month performance period

▪ PAPs may: ▪ Share savings: if

average costs below commendable levels and quality targets are met

▪ Pay part of excess cost: if average costs are above acceptable level

▪ See no change in pay: if average costs are between commendable and acceptable levels

Review claims from the performance period to identify a ‘Principal Accountable Provider’ (PAP) for each episode

4 5 6 Payers calculate average cost per episode for each PAP

Compare average costs to predetermined ‘commendable’ and ‘acceptable’ levels



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Each payer assesses historic provider average costs for each episode

Provider cost distribution Average episode cost per provider1

Average cost/episode $

Principal Accountable Provider

ILLUSTRATIVE

1 Each vertical bar represents the average cost for a provider, sorted from highest to lowest average cost

Cost per episode

Individual episodes for a single provider

Providers are sorted from highest to lowest average cost

Avg. cost per episode

Individual episodes for a single provider

Cost per episode

Avg. cost per episode



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Retrospective threshold model rewards providers for delivering cost-efficient, high-quality care

1 Each vertical bar represents the average cost for a provider, sorted from highest to lowest average cost

7 Provider cost distribution Average episode cost per provider1

Acceptable

Gain sharing limit

Commendable

Principal Accountable Provider

Average cost/episode $

Risk sharing Gain sharing Eligible for gain sharing based on cost, didn’t pass quality metrics

No change

Pay portion of excess costs

_ + No change in payment to providers

Eligible for incentive payment

Gain sharing Risk sharing

ILLUSTRATIVE



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McKinsey & Company |

Transparency and feedback is crucial to making payment reform work

Providers will receive several reports from payers:

▪ Summary – Overview: Total number of episodes

(included and excluded) – Risk adjusted average cost of care

compared to other providers – Quality and utilization metrics summary – Risk adjustment summary – Gain sharing and risk sharing eligibility

▪ Performance summary – Individual PAP cost distribution – Inputs to gain/risk sharing calculation

▪ Quality detail – Detailed benchmarks for quality metrics

across all providers ▪ Cost detail

– Breakdown of episode cost by care category

▪ Episode detail – Cost detail by care category for each

included episode – List of excluded episodes

Sample provider report

ILLUSTRATIVE



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Contents






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Case for Retrospective Episode Based Payment

▪ Directly targets large, clear sources of value around unjustified variation in provider performance

▪ Potentially applicable to as much as 50-70% of healthcare spending

▪ Growing evidence it can be implemented at scale quickly at reasonable investment for payors and providers

▪ Potential to offer true win-win for payor and accountable provider

▪ Evidence it can and does motivate provider behavior change, potentially more quickly than other payment models

▪ Growing competitive requirement, but with opportunity for competitive advantage



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Potential for improvement: Sources of value

Primary prevention and early detection

Choice of tests, treatment, and setting of care

Efficient and effective delivery of each clinical encounter

Care coordination and treatment adherence

▪Behavioral health risks (e.g., smoking, poor diet, sedentary lifestyle, etc.) ▪Delayed detection

contributing to increased severity and preventable complications

▪Overuse or misuse of diagnostics ▪Use of medically

unnecessary care ▪Use of higher-cost

setting of care where not indicated

▪Medical errors ▪Clinicians practicing

below top of license ▪High fixed costs due

to excess capacity ▪High fixed costs due

to sub-scale ▪Use of branded

drugs instead of generic equivalents ▪Use of medical

devices ill-matched to patient needs

▪Poor treatment compliance ▪Missed follow-up

care leading to preventable complications ▪ Ineffective

transitions of care ▪Misaligned treatment

guidance among providers

Root causes of inefficiency, poor clinical outcomes and patient experiences

Pop’n based approaches Episodes and

pop’n based approaches

Addressed by payment model :

Episodes



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189% 192% 368%

Difference in cost between the 10th and 90th percentile providers

Average cost per episode varies significantly across providers

Distribution in average total cost per episode, by provider

Each bar represents the average total cost per episode for 3-5 providers with similar costs (performing surgeons for a cholecystectomy, delivering providers for a birth, and facilities for an acute asthma exacerbation). Total costs include all relevant professional, facility, and other inpatient and outpatient claims. Patients with meaningful co-morbidities or risk factors are excluded or risk-adjusted. Outlier (high cost) episodes were also removed.

Cholecystectomy Gallbladder removal plus 90 days

U.S. State A

Pregnancy/delivery Prenatal care through 2 mo. post birth

U.S. State B

Acute asthma exacerbation Hospital visit plus 1 mo. post discharge

U.S. State C

▪ % of cases done in inpatient setting varies from 0% to 20%

▪ >400% variation in hospital length of stay

▪ >500% variation in imaging and diagnostic costs

▪ C-section rate varies from 20% to 70%

▪ Rate of admission from the ER varies from 0% to 100%

▪ >400% variation in rate of repeat visit to ER or hospital (within 30 days of discharge)



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Perinatal care, practice pattern variation PRELIMINARY

SOURCE: TennCare, trigger dates during 2012

1 Excludes unknown providers (3914 episodes) 2 Excludes 139 episodes with over 20 ultrasounds an episode 3 No other exclusions applied (except unknown providers (3914 episodes) were removed) 4 Ultrasounds claims were counted if they were performed on different days

Average C-section rate per quarterback – Quarterback C-section rate distribution: Perinatal

n = 33,606 episodes, 488 quarterbacks1

High-volume quarterback Low-volume quarterback

Distribution of ultrasounds – Variation in ultrasounds per episode: Perinatal

n = 33,467 episodes2, 488 quarterbacks3

4747871101281692443183815165457429151,3321,9192,776

4,2435,757

6,692

4,681

1,818

0

2,000

4,000

6,000

8,000

# of ultrasounds/episode Count

Count of episodes4

20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

020406080

100

Quarterbacks



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Contents






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McKinsey & Company |

New payment models must meet 8 requirements to drive cost-reducing innovations

Significant

Supportive

Sustainable

Striving but practical

Synch with consumers

re-Set expectations and align payment

at Scale

Stable

Champion innovation with information, insights, and infrastructure

Ensure that providers that adapt thrive financially

Design the new approach so that it is effective in current regulatory, legal, and industry structures

Clarify long-term vision and make a long-term commitment to providers

Align payment with benefits, network design, and consumer engagement

Maximize the proportion of provider revenue and earnings that are subject to outcomes-based payment

Ensure that a critical mass of providers transition to outcomes-based reimbursement

Create clear roles for Component Providers, Healers, and Partners; pay through a mix of enhanced fee-for-service, episode-based, and population-based payments



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Ingredients for state-led large-scale improvements to healthcare systems

Clear and repeated “case for change” ▪ Healthcare cost growth and “waste” hurt economic growth ▪ Stakeholders, irrespective of all politics or role, increasingly

agree that “paying for outcomes” is positive and required ▪ States have opportunity to lead the innovation

1

Executive leadership ▪ Power of inevitability (i.e., not debating “if”, but “how”) ▪ State as “convener” and “leader” vs. “prescriber” ▪ Active leadership/involvement of Governor, Medicaid Director,

agency heads, and ultimately CEOs of large stakeholders

2

Stakeholder engagement ▪ Appreciation for sensitivity around payment models ▪ Everyone needs potential to benefit ▪ Power of objective facts and open dialogue ▪ Seeking and incorporating stakeholder feedback

3

▪ Several states have made significant progress in last 3-5 years

▪ Dozens of private sector initiatives

▪ Multiple global examples

▪ Many more failures than successes

Evidence



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Payment Innovation showing positive impact in Medicaid

Provider engagement and growing acceptance

Changes in provider behavior

Performance improvement

▪ Thousands of clinicians and administrators engaged in design process

▪ Provider assessment of performance - both cost and quality

▪ Growing support/acceptance from many (but not all) larger hospitals/health systems and special needs providers

▪ Examples of “at scale” contracting and/or enrollment in programs

▪ Deeper understanding of economic implications of clinical decisions within control

▪ Explicit acknowledgement of changes in treatment patterns

▪ Investments in care coordination and infrastructure

▪ Greater openness to sharing performance risk

▪ Improvements quality (e.g., reduction in antibiotic use, alignment with guidelines)

▪ Reduction in episode specific costs

▪ Mitigation of overall trend



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Early signs of success from Arkansas episodes

Taking the Payment Improvement Initiative to heart (Apr 2014) Cardiologist David Rutlen and UAMS team make changes in the best way to care for their patient “The approach was to see "what exactly do we need to know to take care of the patient?" Rutlen said. The result was a "sea change," impacting not just its Medicaid patients but all heart patients seen at the medical center.” Better health care, lower cost. (Apr 2014) Arkansas's Payment Improvement Initiative shows it can be done “…since the PII began to provide doctors with information on their peers' costs and outcomes in the treatment of upper respiratory infection, the prescribing of antibiotics to treat a common cold has fallen more than 10 percent. The number of doctors that prescribed two courses of antibiotics has fallen by 40 to 50 percent, Golden said.”

SOURCE: http://www.arktimes.com/arkansas/taking-the-payment-improvement-initiative-to-heart/Content?oid=3257813 http://www.arktimes.com/arkansas/better-health-care-lower-cost/Content?oid=3257807

http://www.arktimes.com/arkansas/taking-the-payment-improvement-initiative-to-heart/Content?oid=3257813

http://www.arktimes.com/arkansas/better-health-care-lower-cost/Content?oid=3257807

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May 23rd Episode-Based Payments Slides

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