Value Based Payment Models June 10, 2014

1. Value Based Payment ModelsJune 10, 2014

2. It’s not realistic to tell hospitals and doctors that they must improve quality if by doing so they are likely to lose money. Karen Davis President Commonwealth Fund 2

3. Alternative Payment Models Nationalized Healthcare Capitation Shared Risk Bundled Payments Shared Savings Pay for Performance Fee for Service Salaried Employment 3

4. Alternative Payment Models Moderate Integration Full Integration Limited Integration Provider Financial Risk Payer Financial Risk 4

5. Fee-For-Service 5

6. Alternative Payment Models Moderate Integration Full Integration Limited Integration Provider Financial Risk Payer Financial Risk 6

7. Pay for Performance Methodology An arrangement in which providers are rewarded or penalized based on meeting pre-established benchmarks for: • clinical quality • patient satisfaction • appropriateness of services They generally follow a “blended” payment approach with claims continuing to be paid on a fee-for-service basis along with a PMPM “care management fee” plus performance-based bonus payments. Clinical Requirements • track compliance with performance process and outcomes measures • moderate attention to patient experience and satisfaction • limited level of clinical integration and care coordination • limited cost management Results to Date Results to date have been mixed; moderate improvement in quality but no significant decrease in hospital, ED or ambulatory care utilization and no reduction in total cost of care delivered. 7

8. Alternative Payment Models Moderate Integration Full Integration Limited Integration Provider Financial Risk Payer Financial Risk 8

9. Bundled Payments Methodology A single, risk-adjusted payment based on the expected costs for a clinically defined episode or bundle of related services for a given patient. The payment does not depend upon the number of services actually provided. Payment may include bonuses for achieving specified financial and quality targets. Scope of services included in a defined bundle can be very narrow or quite extensive. Episodes can cover varying periods of time and include single or multiple healthcare providers of different types. If costs differ from the payment, providers keep the savings or bear overruns. Financial risk is limited to a subset of patient’s costs rather than their total medical spending Clinical Requirements • monitor and track financial and quality performance measures • establish and enforce provider adherence to agreed-upon clinical protocols • measure and report patient care costs and outcomes • apply episode groupers to patients with multiple chronic and related health problems. • identify and bill for “outlier” risk payments • receive and distribute the bundled payment among the participating providers Results to Date Relatively little evidence available on impact on quality (clinical process measures); generally positive impact on costs. 9

10. Treatment of Stage III Colorectal Cancer

11. Alternative Payment Models Moderate Integration Full Integration Limited Integration Provider Financial Risk Payer Financial Risk 11

12. Shared Savings – Shared Risk Methodology SS-SR focuses on population health as opposed to individual acute care. A group of providers agrees to take responsibility for the quality and cost performance of a defined population for a specified period of time. It requires a significant degree of clinical integration and involves greater provider risk: • allows providers to keep a meaningful share of the savings if they are able to limit gross expenditures for a defined patient population. • payouts conditioned upon meeting quality targets, but amounts are determined by cost savings • can either be “one-sided” (shared savings only) or two-sided (shared risk). Custom is to start as SS only, then evolve to SR as capabilities improve. • creates incentives for providers to avoid inappropriate episodes of care, and to prevent episodes from occurring in the first place. ACOs are the common means of implementing SS-SR. The accountable care organization shifts away from the provider-centric worldview, where care is organized around physician specialization, to one where the care delivery process is built around the needs of the patient. ACOs can be either be carve-outs or cover the full range of care. In carve-outs (e.g., cardiology), everybody who is a driver of cost has to be included in the ACO. Virtually all ACOs begin as carve-outs. Results to Date The evidence is currently insufficient to draw meaningful conclusions about the impact of ACOs on cost and quality. 12

13. SS-SR Model Envisions Integrated Care Patients 13

14. ACO Key Processes and Functions 14

15. Alternative Payment Models Moderate Integration Full Integration Limited Integration Provider Financial Risk Payer Financial Risk 15

16. Capitation Methodology Providers elect to take on full financial risk and accountability for a defined population. • provides incentives to keep patients healthy (prevent onset of disease as opposed to treating disease progression or acute episodes of care) • requires provider organization to be clinically integrated; will not work under an open-network PPO plan, which has become the most popular form of insurance Capitation exposes providers to insurance risk. • average cost of treating patients depends in part on the severity of the health problems their patient population develops, over which providers have only limited control • professional services (partial) capitation—as opposed to global capitation—can reduce insurance risk, but also encourages shifts in the site of care 16

17. Medicine is Changing From a craft-basedpractice Individual physicians, workingalone handcraft a customized solutionfor eachpatient based on: • a coreethical commitment tothepatientand • extensive personalknowledgegainedfrom trainingandexperience Toa profession-based practice Groups of peers, treating similar patients in a shared setting, plan coordinated care delivery processes (e.g., standing order sets) which individual clinicians adapt to specific patient needs. The expectation is that it will: • be less expensive—a facility can staff, train, supply and organize to a single core process • be less complex, which means fewer mistakes and dropped handoffs, less conflict • have better patient outcomes 17

18. Evolution of the Medical Delivery Model 18

19. Value-Based PurchasingWhat Could Possibly Go Wrong? • Rational economic actors won’t bear risk for free. • Patient attribution conflicts with patient choice • Consolidated providers exercise monopoly power. • Multiple independent payers results in multiple payment methodologies and uncoordinated performance criteria. • Deeply entrenched interests strongly resist income transfer to other healthcare system participants. 19

20. The Road Ahead