Payment Reform: From Principles to Action

1. Payment Reform: From Principles to Action Randy Fuller Director, Thought Leadership Healthcare Financial Management Association April 22, 2010

2. Growing Uninsured Population 2

3. Exponential Growth in Expenditures 3

4. Looming Medicare Insolvency Medicare Cost and Non-Interest Income by Source as a Percentage of GDP Source: A Summary of the 2009 Annual Reports. Social Security and Medicare Boards of Trustees. http://www.ssa.gov/OACT/TRSUM/index.html 4

5. Premium Costs Put Coverage Out of Reach For Many Growth In Healthcare Insurance Costs Are Now Making Affordability Difficult for Individuals and Small Businesses Cumulative Changes in Health Insurance Premiums, Inflation, and Workers’ Earnings, 1999-2008 Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2000-2008. Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), 2000-2008; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, 2000-2008 (April to April).

6. Cost Impact: Raising Cost Structure of American Industry “..performance of the U.S. health care system have put America’s companies and workers at a significant competitive disadvantage in the global marketplace.” Business Roundtable March 2009 Business Roundtable: “New Study Shows Health Care Costs Put U.S. Workers at Significant Disadvantage Compared with Global Competitors”, March 2009

7. Cost Impact: Changing the Quality of Care

8. Cost to Quality Comparisons – Lower Value Source: OECD Health Data 2009, OECD (http://www.oecd.org/health/healthdata). 8

9. Provider Business Models Under Pressure

10. Capital and equity markets essential to healthcare provider operations and expansion Estimated $400 billion in tax exempt bonds outstanding, funds capital equipment, facilities and working capital $94 billion capital in publicly traded healthcare companies Debt and equity supported by cash flow of current business models GM and Chrysler bankruptcies involved only $52 billion in debt and $1.9 billion in equity The External View

11. Rating agencies closely examining quality, efficiency and management ability to plan and manage as keys to future success “An important component of Moody’s credit assessment is the effectiveness and credibility of governance and management. Management teams build credibility with investors and market participants with good disclosure practices and greater transparency concerning board interaction with management, competitive strategies, market challenges and opportunities.” Moody’s Not-for-Profit Hospitals: Greater Disclosure and Transparency Will Likely Build Market Confidence During Credit Crisis, May 2009 “Hospitals that publicly provide coherent information on quality, cost and patient satisfaction and use this information to create a competitive advantage will likely gain market share over time and be a contributing factor to a stronger bond rating.” Moody’s Not-for-Profit Hospitals: Greater Disclosure and Transparency Will Likely Build Market Confidence During Credit Crisis, May 2009 TheExternal View

12. Lower US Hospital Admissions and Shorter Stays Offset by Higher Costs Per Bed Day Higher Cost Per Bed Day Partly Driven by Higher Surgical Procedure Volume Low Hospital Occupancy Drives Higher Fixed Costs per Bed Day 10% Fewer Drugs Consumed in US Than in OECD Peer Countries US Spends Above-Expected on Medical Devices, Especially Implantable Cardiac and Orthopedic Devices High Staffing Ratios and Salaries Drive Above-Expected Nursing Costs in US Hospitals Drug Prices in US are 50% Higher for Comparable Products, Average Price Gap is Nearly 120% Due to Usage Patterns US conducts more diagnostics per capita than other OECD countries and reimburses more favorably Source: McKinsey Global Institute, “Accounting for the cost of US Healthcare: A New Look at Why Americans spend more” December 2008 Simple Cost Cutting Won’t Be Enough Care redesign across multiple stakeholders will be required to achieve access, quality and cost goals.

13. The effects of the recession will inevitably ease and the course of reform will ebb and flow, but health care remains on a burning platform Holding onto the status quo is not an option Know That the Platform Is Burning

14. Quality – reward quality, evidence-based care Alignment – align incentives among stakeholders Fairness/Sustainability – recognize appropriate costs for quality care Simplification – make processes simple, standard, and transparent Societal Benefit – make benefits provided explicit, and compensate for accordingly HFMA Five Reform Principles

15. The five reform principles support the nation’s health goals.

16. From Volume to Value • Currently an estimated 4% - 5% of total patient revenues are at risk based on quality outcomes— enough to wipe out margins • Financial leaders expect revenues at risk to reach 10% - 24% by 2015 • Quality and efficiency performance will likely become a competitive advantage with payers and consumers • Growing transparency on cost and quality

17. Coming to agreement on outcome/quality measures Cost and speed of transitioning to new system Fostering a sense of urgency to change Revenue shifts from one group of stakeholders to another Defining and apportioning of societal benefits Behavioral changes in how consumers and providers view and practice health care Stakeholder Concerns

18. Build strong physician integration Develop ability to manage risk Build capability of costing and pricing new bundles of services Demonstrate finance expertise in quality and process improvement Build Key Competencies to Prepare for Payment Reform

19. Build Strong Physician Integration

20. Clinical Leadership / Champion Compensation / Incentives Market awareness Goal Setting Data Sharing Engagement / Cultural Blending Technology Process Improvement We’ve Tried Integration Before.. Success is likely to lie in addressing and finding solutions in the following areas:

21. Develop Risk Management Abilities

22. Assess the organization’s exposure to the multitude of risks inherent in healthcare reform Payment risk – will payers continue to pay for portfolio of services? Execution risk – can the provider deliver care of high quality and efficiency? Market risk – will breadth of reform disrupt flow of patients to the organization? Develop comprehensive and realistic views on the organization’s strengths and weaknesses Match the strengths and weaknesses against the risk exposure and develop strategies to mitigate the risks Develop Risk Management Abilities

23. Move toward flexible pricing capabilities Gain an understanding of service costs Learn to reassemble costs in flexible packages that represent payment bundles or episodes Be prepared to price services based on outcomes Work toward tracking costs and utilization patterns across care settings and through longer periods Develop Pricing Capabilities

24. Exercise leadership in developing “dual goals” of increasing quality and reducing cost in process improvement Help shape portfolio of projects aimed at raising quality and reducing cost Leverage finance strengths to aid in process improvement and realize “dark green” dollar savings Systematic approach to analysis Longitudinal view Focus on dependability of data Sophistication in auditing Foster working relationship between finance and quality staff through cross training Demonstrate finance expertise in quality and process improvement

25. HFMA identified nearly 75 public and private demonstration projects across US Range from simple P4P bonuses to bundling to payment Address specific health issues such as diabetes, preventive care, cancer, cardiac conditions, asthma, hypertension, pediatrics, orthopedics and obstetrics/gynecology A survey of providers involved in projects finds little in the way of major change Physician / Hospital integration most common adaptation Concepts Being Tested

26. Global Capitation Requires Provider Change Source: “Global Capitation From Sharp Rees-Stealy’s Perspective”, March 10, 2010

27. Goal: Empower primary care physicians to take the lead in providing high-quality, efficient care—and share the financial rewards Strategy: Negotiated five-year alternative quality contract with Blues plan in which primary care physicians receive and distribute the total per-patient revenue from the insurerResults: As the end of the first contract year approaches, CEO expects a “win-win-win”—good for hospital, physicians, and patients Mount Auburn Hospital Success Story: Collaborating with Physicians and Payers

28. “By allowing the primary care physicians to control the dollars, and the physicians to be in charge of all the utilization, it takes the hospitals out of the role of cajoling the physicians to go along. . . This is almost like starting again.” Jeanette Clough President and CEO Mount Auburn Hospital Mount Auburn Hospital Success Story: Collaborating with Physicians and Payers

29. Goal: Achieve a clinical/financial win/win through quality improvement initiatives that have a positive effect on the bottom line Strategy: Use dashboards with clinical and cost metrics for the majority of high-volume surgical procedures and medical conditions Take a collaborative approach to negotiating pay-for-performance contracts with payers Spectrum Health Success Story: Managing Clinical and Financial Risks

30. Results: Actively driving down complication and mortality rates in high-volume conditions and procedures $23 million per year in revenue tied to pay-for-performance contracts with two managed care payers More than a dozen five-star quality ratings from HealthGrades System is well positioned for the changing payment landscape Spectrum Health Success Story: Managing Clinical and Financial Risks New goal: Reduce readmissions by 30%

31. “We hope to offset some of the revenue reduction with a more efficient model of care and through higher quality and reduced complications.” John Byrnes, MD Senior Vice President for System Quality Spectrum Health Hospital Group “Reductions in readmissions are indicative of better quality, which is what we are all about. But this is going to cost us money because we currently get paid for these admissions, or at least the vast majority of them.” Joseph J. Fifer, FHFMA, CPA Vice President, Finance, Spectrum Health Hospital Group Spectrum Health Success Story: Managing Clinical and Financial Risks

32. Goal: Improve outcomes for patients with diabetes Strategy: Use evidence-based guidelines to develop quality improvement programs for diabetes care Provide financial bonuses to physicians based on “The D5,” or the number of patients receiving optimal care for diabetes HealthPartners Success Story: Making a Commitment to Quality

33. HealthPartners Success Story: Making a Commitment to Quality

34. Results: The number of patients who received optimal diabetes care increased 129% over four years Improved diabetes care prevented 115 heart attacks 925 cases of eye disease 155 amputations HealthPartners Health Plan is saving $15 million per year on diabetes-related costs “Everyone is clear about what the rules of the game are, what the yardstick for success looks like, and what care optimally people should get. We still have quite a ways to go. But we are gaining momentum.” Andrea Walsh, Executive Vice President, HealthPartners HealthPartners Success Story: Making a Commitment to Quality