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Jim Knutson knows the value that Aircraft Gear Corp. receives for its health care dollars is often difficult to pin down. "We are seeing cases where we pay a lot of money and don't see the benefit," says Knutson, risk manger and human resources director for the family-owned aircraft part manufacturer in Rockford, Ill., located just outside of Chicago. "And then we see cases where miracles are being performed and [providers] probably aren't getting paid enough for it."

A business coalition the firm belongs to found, for example, that claims for anterior cruciate ligament repairs ranged from $17,000 to $75,000. Anyone studying the Dartmouth Atlas knows that variation isn't isolated to Rockford.

"There has to be a better way," Knutson says.

It's a common complaint. Across the country, consumers, businesses and insurers are demanding more value from the health care system—and are experimenting with ways to make that happen. Pay for reporting has already gained a foothold, and momentum appears to be building for a pay-for-performance model, rewarding providers not just for reporting on certain standards of care, but for meeting or exceeding minimum benchmarks. Punitive measures—such as withholding reimbursement for so-called never events—have also gained traction.

But many health care experts say such approaches can never spur meaningful changes because they are rooted in the traditional fee-for-service reimbursement model. Real change will only occur when insurers, including Medicare, stop paying on a per-procedure basis and instead pay hospitals, physicians and other providers a single, or bundled, payment.

"This is the next frontier," says Knutson, whose company is part of an employer-sponsored bundling project with providers in Northern Illinois. "When we look at how we buy everything else in business, or when we buy a car, we don't buy the components. The appeal to buying an episode of care is intuitive. As health care purchasers, we need to focus on what we are buying; we need to buy the outcome."

Providers are beginning to share that point of view.

"People see that one of the best ways to provide higher quality care and more efficient use of resources is to have better coordination across hospitals, physicians and post-acute care providers," says Don May, vice president of policy, American Hospital Association. Bundled payments are one way to encourage such integration, he says.

Gaining Momentum

Medicare tried a bundled payment project for cardiac bypass surgery from 1991 to 1996, which included seven sites in seven cities. The program saved more than $50 million. A separate demonstration project tested bundled payments for cataract removal surgery in outpatient settings. It was tested at four sites in three cities between 1993 and 1996, saving Medicare $500,000. Despite those promising results, no broader action was taken.

Among the many complicating factors was disenchantment among the providers who offered Medicare-discounted rates but never saw a rise in volume. They also worried that the government would designate some providers as higher quality than others, according to the Medicare Payment Advisory Commission's June 2008 report to Congress.

In that same report, MedPAC strongly urged Congress to instruct CMS to launch a voluntary pilot program testing bundled payment. "The status quo is unacceptable," MedPAC declared. "The current payment system is fueling many of the troublesome aspects of our health care system: Beneficiaries' care is often uncoordinated and health care costs are increasing to an extent that strains many beneficiaries' ability to pay their health care bills, the nation's ability to finance Medicare, and the ability of a large segment of the non-Medicare population to afford health insurance."

The concept of bundled payments has also gotten a boost from the push for health reform. Speaking at the American Medical Association's annual meeting in July, President Obama said he wants Medicare to pay providers for "how you treat the overall disease," not for every visit and treatment. Pending reform legislation would require CMS to conduct a pilot project and to potentially implement bundling on a broad scale if it proves successful.

State governments are taking note as well. In Massachusetts, the Special Commission on the Health Care Payment System in July called for abolishing the fee-for-service system in favor of bundled payments.

Aces Wild

Experiments in bundled payments, also known as global payments, are taking place in various forms across the country. Pennsylvania-based Geisinger Health System's Provencare program focuses on eight conditions. In Minnesota, Fairview Health Services is working with Target, 3M and other employers to develop what it calls "care packages" around specific medical conditions such as diabetes, asthma and childbirth.

More widely watched though, is Medicare's Acute Care Episode Demonstration, commonly referred to as ACE. Five sites were selected in January in Colorado, New Mexico, Oklahoma and Texas, but things didn't get off the ground until the summer. The demonstration covers nine orthopedic and 28 cardiovascular services.

The goal, says Cynthia Mason, a project manager with CMS' Medicare Demonstration Group, is to see if, by providing common incentives between hospitals and physicians, Medicare can improve quality, increase efficiency and reduce costs.

In ACE, hospitals and physicians must come together in a physician-hospital organization. CMS developed site-specific rates by looking at Part A and Part B payments in the selected locations. A single prospective payment for an inpatient stay is made to the hospital, which is responsible for divvying up the money among participating physicians. Under the fixed-fee arrangement, most providers will see a pay cut of about 5 percent from their typical reimbursement. The hope is that by better aligning financial interests and improving quality, the groups will come in under budget and be able to share in the savings.

An interesting added twist: Beneficiaries are eligible for a piece of the pie. Medicare will share up to 50 percent of its savings with beneficiaries getting a procedure done at a participating hospital. Checks range from $250 to $1,157, with higher payments going for more complicated cases. CMS wants to see if the bonus is enough to drive patients to high-quality, cost-efficient providers. As of late October, Medicare had paid 200 beneficiaries a total of $75,000, according to CMS.

That feature was one of the main attractions for Baptist Health System in San Antonio, says Michael Zucker, chief development officer at the five-hospital system.

"Given how competitive our market is, we thought we could achieve a couple of things: Collaborate with our physicians and offer a competitive price in hopes of being able to shift some of the market in the South Texas region," he says.

But there are limitations. Foremost, ACE only involves inpatient stays. Post-acute providers are not included and it does not take into account readmissions. Mason says CMS is considering ways to incorporate both, but has set no time frame for a decision. Further, the program is limited to acute conditions; chronic illness is not part of the equation at the moment.

The Prometheus Way

The bundling project that Aircraft Gear participates in takes a different approach and doesn't have the same restrictions. The episode-based payment was developed by Prometheus Payment Inc., with a $6.4 million grant from the Robert Wood Johnson Foundation. In addition to the Rockford, Ill., area, it is being tested with employers and providers in Minnesota.

For an acute condition, such as pneumonia, the Prometheus program looks 30 days out from the inpatient visit. For something like a hip replacement, it looks 180 days out. There is no requirement to form a physician-hospital organization. And, unlike ACE, Prometheus has a chronic conditions formula. A year-long episode payment for a chronic illness is triggered by an outpatient visit.

Moreover, Prometheus is not a prospective payment. A price is based on clinical guidelines and all providers in a patient's care, both inpatient and outpatient, bill the employers directly.

"We have an accounting engine," says Francois De Brantes, national coordinator for Prometheus. "We'll bundle the claims. At the end of the year, if [all of the providers] are cumulatively below the budget, [they'll] keep the difference."

Docs on Board

Getting physicians to participate in bundling is not easy, Zucker acknowledges. They are naturally skeptical of a gainsharing program that puts the hospital at the center of the financial arrangement. Baptist held a series of town hall meetings and other conversations and eventually specialists came on board.

A key hurdle was identifying cost reductions. Early on, the main targets at Baptist were implants and devices. Prior to entering the demonstration, Baptist had six major vendors for medical devices, with varying costs. Zucker wanted to get that number down, but he knew convincing physicians would be tough given their loyalty to certain products. "When we first did our modeling, we figured we could get six-, maybe seven-figure savings by driving down prices," Zucker says.

As part of the demonstration, the surgeons now had some "skin in the game," he says. They were eligible for gainsharing of up to 25 percent of their Part B reimbursement. A group of orthopedic surgeons came together and evaluated the vendors and products, and four vendors have now agreed to negotiate price points. Zucker says that could not have happened without a collaborative relationship between the hospital and physicians.

"For the first time, the hospitals have opened up their books and shown us the prices," says David Fox, M.D., a private practice orthopedic surgeon who is participating in the Baptist demonstration.

Quality Matters

Skeptics of bundling are concerned about its impact on quality of care. "You've aligned incentives for doctors and hospitals to be more efficient," says Robert Berenson, M.D., a fellow at the Urban Institute and a former Medicare official. "But you haven't done anything to ensure that the care is appropriate."

Even proponents like MedPAC are leery about that. It cautioned that providers could seek "to profit by furnishing inappropriately low levels of service, which could compromise quality."

ACE participants must collect data on 22 quality measures, but that does not impact payment at this point. Nonetheless, CMS will keep a very close eye on the quality indicators, Mason says.

Baptist has made meeting certain quality measures a condition for physicians to receive a bonus payment. Between July and October, Baptist paid out $90,000 in bonus money to physicians.

Prometheus is built around clinical care guidelines, and payments hinge on meeting certain quality measures, says De Brantes, adding that the system is risk adjusting, which he says should prevent providers from cherry-picking healthier patients.

One of the more daunting challenges for hospitals is data collection, says Rich Walsh, executive vice president and chief operating officer of SwedishAmerican Health System in Rockford, Ill. Often, Swedish doesn't have direct access to the information that's required in Prometheus. For instance, if a woman goes to her gynecologist for a pap smear, and Swedish doesn't have a relationship with that doctor, the health system doesn't get credit in the scoring.

"In one of our clinics, we ran out of flu shots," Walsh notes. "So doctors were sending patients to Walgreens and we had to remind Walgreens that they needed to send us proof that the patient got the shot."

Another complication is ensuring that patients comply with their treatment plan. "What if a patient doesn't do a thing to control their blood pressure? That's why this is so difficult," Walsh says.

Understanding those infrastructure problems is an important lesson as policymakers consider more demonstrations, says the AHA's May, adding that there may be different approaches for different types of institutions—urban or rural—or for conditions.

Whatever the roadmap, Walsh says it is important to stay focused on the ultimate goal—reducing the number of hospital and ED visits by proactively managing patients. Providers mastering that will put themselves at a competitive advantage, he says, because patients and payers will demand that kind of care.

Matthew Weinstock is senior editor of Hospitals & Health Networks.

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