Bundled Pricing at Boston Children’s Hospital George McMillan Fleming Center for Healthcare Management 2 nd Annual Case Competition

Agenda Competitive Pressures Facing BCH Bundled Pricing and Quality Improvement Pros and Cons of Bundled Pricing Costing for Accurate Bundled Pricing Physician Pay for Performance New Value Proposition Moving Forward

Porter’s 5 Forces and Hospitals Suppliers include healthcare equipment companies, pharmaceutical companies, and physician organizations. Industry Competitors MODERATE Threat of New Entrants LOW Bargaining Power of Buyers MODERATE Threat of Substitutes LOW Bargaining Power of Suppliers MODERATE New entrants face barriers to entry such as substantial capital expenditures and government regulations. Rivalry among competitors Buyers include government insurance companies, commercial insurance companies, and patients. Substitutes include alternative medicine, exercise, and stand-alone urgent care clinics.

Health Care Industry Changes Industry Competitors HIGH Threat of New Entrants LOW Bargainin g Power of Buyers HIGH Threat of Substitut es LOW Bargainin g Power of Suppliers HIGH Hospitals are footing the bill for the 2.3% federal medical device tax. Source: “Device Makers Add Fees to Cover Health Tax,” Wall Street Journal, January 26, 2013 Payers have successfully negotiated discounts of 5-20% from hospitals. Source: “Health Law Pricing Begins to Take Shape,” Wall Street Journal, February 28, 2013

New Health Plan Demands Recent consolidations in health insurance Health reform will give plans new members Images from

New Patient Demands The rise of consumer-driven health care Consumer-Driven Health Care Image from

What BCH Must Do to Compete Bundled Pricing of Services Accurate Costing Models Quality Improvement Efforts

Pros and Cons of Bundled Pricing Shift risk away from health plans to BCH –More attractive for health plans –Greater chance of cost overruns Reap benefits of streamlining care –No penalty for cutting CPT codes –Less overutilization Set industry standard early in the game

Accurate Costing → Accurate Pricing Price Markup Cost s

Different Costing Schemes FactorsRCCRVUTDABC Calculation Mechanism Cost of procedure = RCC rate * procedure charge Cost of Resource = Total Dept. Cost/Total Dept. RVUs x RVUs for event Complex allocation based on Time taken by every resource Arbitrary numbers/assumptions used in calculation RCC rateRVUNone (very objective process) Does it take into account the difference in resource utilization patterns for different ? NoYes Ease of implementation Easy Difficult Process MappingNo Yes

Benefits of TDABC Better exclusion of research costs More objective allocation of overhead Treats excess capacity costs as separate Process mapping of treatments

Process Mapping: Key to TDABC Image from

TDABC Example: Plastic/Oral Surgery

TDABC Example: Cast Room

Improving Patient Quality Effects of process mapping –Exposes inefficiencies –Exposes deviations from clinical guidelines Alignment of incentives with bundled pricing Physician buy-in with pay for performance

Physician Pay for Performance Continue current payment arrangements –Physician services provided by BCH Physicians –Health insurance vs. BCH as payer Add pay for performance –Up to 5% of base pay StructureProcessOutcome

P4P Metrics StructureProcessOutcome Physicians on callFollow clinical guidelines Reduce length of stay Reduce readmissions Reduce hospital-acquired infections High patient satisfaction scores Coordinate care

BCH’s Value Proposition Patients Payers Quality Value

Next Steps Process mapping of other departments Compare TDABC costs with current charges –Use information to develop prices Meet with BCH Physicians – Get buy- in –Collaborate to develop P4P metrics

References Boston Children’s Hospital. (December 2012). “Brand Style Guide.” Accessed April 1, Kaplan, RS & ME Porter. (September 2011). “How to Solve the Cost Crisis in Health Care.” Harvard Business Review. Accessed April 1, Melnick, G, VY Wu, & YC Shen. (September 2011). “The Increased Concentration of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices.” Health Affairs 9: Accessed April 1, Rosenthal, MB & RA Dudley. (February 21, 2007). “Pay-for-Performance: Will the Latest Payment Trend Improve Care?” JAMA 297(7): Accessed March 31, Weaver, C. (January 25, 2013). “ Device Makers Add Fees to Cover Health Tax.” Wall Street Journal. Accessed April 2, Matthews, AW & J Kamp. (February 28, 2013). “Health Law Pricing Begins to Take Shape.” Wall Street Journal. Accessed April 2, Graphics: health-plans/ acquisition

Bundled Pricing at Boston Children’s Hospital George McMillan Fleming Center for Healthcare Management 2 nd Annual Case Competition