Pay for Performance in Health Care: Provider Perspective Jeff Levin-Scherz, MD MBA FACP Assistant Professor Harvard School of Public Health February 4, 2009 Slide 1

Summary: Provider Goals in Health Care Finance Get paid for “value” delivered –Get paid enough to account for the opportunity cost of being a clinician! Be held accountable for what providers control Incentives aligned with patient needs Minimize non-value-added work Health plan does not perform medical management Simple finances with prompt reliable payment Full risk adjustment (at least theoretically) Slide 2

My Prescription to Lower Health Care Inflation Step One: Pay for bundles of services – not individual components Step Two: Isolate and eliminate variation Step Three: Enforce a high level of transparency for health care quality and value Step Four: Increase consumer responsibility for preference-sensitive care, and reengage government for supply-sensitive care Step Five: Pay more for better care, and pay less (or nothing) for worse care Step Six: Calorie restriction Step Seven: Yacht repo men! From Harvard School of Public Health HPM 235, Managing Health Care Costs, 12/08 Final Class Summary

Agenda Slide 4

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Medical Inflation Persistently Outpaces Overall Inflation and Worker Earnings Slide 6 Source: KFF/HRET Survey of Employer Sponsored Health Benefits,

Underuse: U.S. Adults Receive Half of Recommended Care, and Quality Varies Significantly by Medical Condition 7 Percent of recommended care received Source: E. McGlynn et al., "The Quality of Health Care Delivered to Adults in the United States,"The New England Journal of Medicine (June 26, 2003): 2635–2645.

Composite Diabetes Screening Measure 8 Four Measures: HbAIC, LDL, Eye Exam Renal Screen

Quality Is Not Proportional To Cost 9 Katherine Baicker and Amitabh Chandra Medicare Spending, The Physician Workforce, And Beneficiaries’ Quality Of Care Health Affairs Web Exclusive, April 7, 2004

10 Source: Boston Municipal Research Bureau, 11/06 “Boston’s health insurance spending increased by 92% over the past six years [while] all other operating spending excluding health insurance increased by 18%”

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Slide 12 Initially published in 1992

Fragmentation of Physician Practices In the US Slide 13 Source:

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Levers Overarching payment methodology Claims administration Prior Authorization Restrictions on choice Slide 15

Slide 16 “There are many mechanisms for paying physicians; some are good and some are bad. The three worst are fee-for- service, capitation, and salary” James Robinson, PhD Milbank Quarterly, 2001

Correlation between perceived loss or gain and actual loss or gain 17 Gains Losses Perceived Losses Perceived Gains Prospect Theory Prospect Theory, Kahneman and Tversky, Econometria 1979

Slide 18 Behavioral Economics Principles Losses valued more than gains Certainty valued more than chance Context matters Percent difference valued more than than actual dollar value Endowment Effect: We like what we already have We are unrealistically optimistic We prefer patterns and meaning over randomness Memorable anecdote valued more than just numbers

“There is nothing more difficult to carry out…than to initiate a new order of things. For the reformer has enemies in all whose who profit by the old order, and only lukewarm defenders in all those who would profit by the new order” Machiavelli The Prince 1513 Quoted in Emmanuel, HealthCare, Guaranteed, 2008

Loss Aversion: Fee For Service Vs. Capitation Gains Losses Perceived Losses Perceived Gains Incrementa l FFS Payment Increment al Cap Payment

Loss Aversion: Fee For Service Vs. Capitation Gains Losses Perceived Losses Perceived Gains FFS Denial OR Capitation Resource Utilized

Loss Aversion: Value-Added Tax vs. Payroll Deduction Gains Losses Perceived Losses Perceived Gains VAT Baggage fee vs. fuel surcharge?

Withhold vs Bonus Scenario One: $90 initial payment with $5 bonus Scenario Two: $100 payment with $10 withhold, half of which is returned

Loss Aversion: Scenario 1 Bonus vs. Withhold Gains Losses Perceived Losses Perceived Gains Bonus Payment + = This assumes that bonus is bundled into regular payment, which lowers its emotional impact

Loss Aversion: Scenario 1 (version b) Bonus vs. Withhold Gains Losses Perceived Losses Perceived Gains Bonus Payment + = Bonus, if paid separately, more likely to look like a new small payment rather than an increment atop a large initial payment.

Loss Aversion:Scenario 2 Bonus vs. Withhold Gains Losses Perceived Losses Perceived Gains - =

Incentives: Lessons from Prospect Theory Daniel Kahneman awarded Nobel Prize for Economics in 2002 Explains what was previously considered economically irrational behavior More perceived value ascribed to –Losses (compared to gains) MDs dislike risk of a $100 loss more than they like potential for a $100 gain –Percent difference (than actual dollar value) People will drive two miles to save $1 on gallon of milk, but not to save $1 on television set 27

Behavioral Economics: Heuristics That Help Explain Apparently “Irrational” Decisions Anchoring –Start with a known comparison and adjust from there Population of Milwaukee Availability –How readily an example comes to mind Airplane crash Representativeness –Underestimate randomness “Hot Hand” or “Cancer Cluster” Slide 28 Thaler and Sunstein Nudge Yale U Press, 2008 New Haven p 23

Prospect Theory: Implications for P4P Multiple smaller incentive pools create more “bang for buck” than single larger pool Steep portion of curve -- Sum of two gains (or losses) have greater perceived value than single equivalent gain (or loss) Threat of loss of withhold creates more unhappiness – but more action – than offer of a bonus Sum of gain (e.g., $1,000) and smaller loss (e.g., $750) has less perceived value than total ($250) 29

Considerations for P4P Arrangements Encourage providing the right care in the first place rather than only identifying and remedying “defective” care Provide adequate incentives to increase primary care Match provider incentives with patient benefits Slide 30 Considerations for Contract Financing Provide adequate reimbursement to sustain the delivery system Don’t overpay for overutilized procedures Don’t underpay for underutilized procedures

Treating a Diabetic Current Approach Slide 31 OV: Diabetes OV: UnrelatedOV: Preventive OV: Diabetes Registry Shows Defect Phone Intervention Process Measures Achieved by 12/31 OV: Unrelated Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Future Approach OV: Diabetes OV: UnrelatedOV: Preventive OV: Diabetes OV: Unrelated Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec All process and outcome measures addressed regularly. Patients have access to their own lab values and report card throughout the year.

Slide Ford Crown Victoria1990 Toyota Camry

Pay for Performance: Design Elements from the Provider Perspective Payment Methodology –Fee for service vs. capitation –Exclusions from “global” budget –Annual “inflation” rate Pay for Performance Methodology –Many measures vs. few measures –Process measures vs. outcome measures –Claims measures vs. EMR measures –Bonus vs. withhold Slide 33

Case Study: Destruction of Value Slide 34 Note that billing process yields costs to payer of $97 and yield to providers of $91. This $6 provides no value to patients Numbers for illustrative purposes only $0 $20 $40 $60 $80 $100 $120 Billed Adjud Costs Savings Appeals Pay Billed Bill Costs Receipts Appeal Cost Appeal Pay $ 100 $104 $94 $97 $100 $97 $90 $88 $91

Gardisil ™ Case Study Cost per vaccine $120/dose; $360/recipient For 325,000 delivery system, there are about 8400 females ages Delivering this vaccine at a rate of 100% would cost over $3m in year one Delivering this vaccine at a rate of 50% could increase the entire practice’s “bottom line” by 6% Slide 35 (1) Source: US Census Bureau demographic estimates, Massachusetts, 2008 Numbers are illustrative only

EMR Data vs. Claims Data Slide 36

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Jeff’s Provider Wish List FROM Mostly fee for service Payers and Providers each make huge investments in promoting or denying payments Long claims delays Health care delivery at both health plan and provider network Variable quality Confused, disheartened patients Slide 38 TO Capitation for services often overutilized; fee for service for underutilized services Plans and providers together create operational efficiencies Instant adjudication Health care delivery in provider network only Reliable high quality Engaged patients

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Payer and Provider Point of View Slide 40 ProvidersPayersPatients Overall CostsHighLow Cost per UnitHigh Low (FFS) Agnostic (Cap) Depends on Financial Exposure Units Delivered High (FFS) Low (Capitation) Low (FFS) Agnostic (Cap) Ambivalent QualityHigh for All Differentiated High by Plan High for ME Administrative Processes Hate “hassles” Hassles can save money No hassles for ME or MY physician Disrupt Relationships No NO

Summary: Provider Goals in Health Care Finance Get paid for “value” delivered –Get paid enough to account for the opportunity cost of being a clinician! Be held accountable for what providers control Incentives aligned with patient needs Minimize non-value-added work Health plan does not perform medical management Simple finances with prompt reliable payment Full risk adjustment (at least theoretically) Slide 41

My Prescription to Lower Health Care Inflation Step One: Pay for bundles of services – not individual components Step Two: Isolate and eliminate variation Step Three: Enforce a high level of transparency for health care quality and value Step Four: Increase consumer responsibility for preference-sensitive care, and reengage government for supply-sensitive care Step Five: Pay more for better care, and pay less (or nothing) for worse care Step Six: Calorie restriction Step Seven: Yacht repo men! From Harvard School of Public Health HPM 235, Managing Health Care Costs, 12/08 Final Class Summary