Payment Reform, Competition,

and Integration

Sept 12, 2011

Health Care Markets

Payers– Public

– Private

Providers– Hospitals

– Doctors

– Post acute/ long term care providers

– Manufactures

Payment Reform

Payment Reform

Level of prices

– Price sends signals to firms and consumers

– Signal to consumers are distorted by

insurance

– Mispricing can lead to inefficiencies

“Unit” of pricing

– How broad are service categories

– Unit of pricing is typically a unit meaningful to

consumers

Fee-For-Service

Very micro product definitions

Services do not span providers

Medicare physician fee schedule:

– 10 office visit codes: 5 levels of complexity x new vs

established patients

– About 175 codes for CT

Body part

With or without dye

Accompanying test

– Adjustments for where procedure is performed

In “facility” or not

Medicare inpatient fee schedule

– Bundled by admission type (DRG)

FFS Distortions

High prices:

– Encourage over use and over investment

– Transfers funds from payers to providers

Low prices:

– Create access and potentially quality

problems

– Discourage product innovation

– (May encourage process innovation)

FFS Distortions (cont.)

Conflicting incentives

– No incentive for population health/ chronic

disease management

– Profits rise with increased use

Readmissions

Bundled Payment

Definition

– An aggregated payment, across services and providers

Motivation

– Improves incentives to coordinate care

– Control spending (combines price and quantity)

– Definition of a “unit of service” approximates what patients care about

Types of Bundled Payment

Global payment

– Pay for all care for a defined time period

Episode

– Pay for all care associated with an episode

Hip fracture

Heart disease

Diabetes

Bundled Payment Issues

Who controls the bundled payment

– New organization forms are needed: ACOs

– Who is residual claimant?

Scope

– What services are included?

– How to define an episode?

Risk transfer

– reinsurance

Rate setting (and updating)

Protecting quality

– Combine with P4P

Example: Episode Based Payment

Prometheus

– Privately developed episode payment system

– Payment takes the form of an evidence informed case

rate (ECR)

– Payment rates set for selected episodes

AMI, Hip replacement, diabetes, asthma, etc.

30% of spending

– ECR based on estimates of cost of high valued care

Adjusted for risk, „unavoidable‟ complication rates

– Quality bonus paid based on performance score

Source: http://www.rwjf.org/files/research/prometheusmodeljune09.pdf

Example: Global Payment

AQC (BCBS MA)– Risk adjusted global payment (capitation)

– Paid to primary care physician‟s group

– Updates set contractually for 5 years

– Bonus based on performance score

ACOs– Integrated provider groups

– Risk adjusted „comprehensive‟ targets set actuarially

– Providers „share‟ any savings below target

Bundled Payment Success

Organizational ability to manage care and

risk

Comprehensiveness

Discipline in setting rates and updates

Political sustainability

– Concordance with patient incentives

Integration

Concerns with a Fragmented,

System

Information flows

– Hard to coordinate care across settings

– Concerns about discharge planning

Types of Integration

Vertical

– Hospitals combine with physicians

– PCPs join with specialists

Horizontal

– Providers of same type combine

Big hospital systems

Multispecialty group practices

Integration Concerns

Diseconomies of scale

– Motivating workers

– Monitoring performance

– Innovating

Competition

Competition(Among providers)

Basic Theory

Prices convey signals to producers and

consumers

Competing firms drive prices to marginal

cost

Competition spurs innovation

Competition forces providers to be

customer (patient) centric

Search by consumers is crucial

Market Based Prices

Insurance distorts demand signal

Providers may have market power

Prices in the US higher than abroad– Angioplasty almost 2.5 times more expensive

– Normal delivery 83% greater

– Scanning and imaging consistently higher

Measurement is challenging, quality is

unobservable, costs hard to measure

Too many specialists

Source: International Federation of Health Plans 2010

Mechanisms to Control Prices

Regulation

Competitive bidding

– Durable medical equipment

– Medicare Part D

HSAs

Least costly alternative rules

Tiered Networks

Integration and Competition

Integration could exacerbate price

distortion

– Fewer providers (worry most about horizontal

integration)

Integration facilitates bundled payment

Bundled payment may facilitate search

Will Competing Insurers Control

Price (or use)?Positives

– Innovative

– Must respond to consumers

Natural check against poor access and quality

Negatives

– Lack the market power of the government

Concerns with Competition

Disparities

Willingness to accept restrictions on

provider choice

Cognitive impairment/ general information

problem

Short time for decision

Summary

FFS pricing is complex and leads to

several distortions with potential for abuse

Moving away from FFS requires

integration among providers

– Integration may have other benefits as well

But integration raises concerns about

competition and price

– Bundled payment may improve search