David A. Sparrow

You don't really have a true pay-for-performance program if it doesn't say so on the bottom line

David A. Sparrow

The vast majority of entities that have implemented pay-for-performance initiatives have chosen to focus almost exclusively on improving the quality of care rather than on reducing its cost. While it is obviously important to address quality, why should this be at the expense of addressing the equally important issue of cost? Why shouldn't pay-for-performance initiatives do both?

One obvious area where pay-for-performance can be used to contain health care costs involves service or length-of-stay-related increases in hospital costs. Physician practice patterns have a significant effect on such costs.

Payers can establish an effective, efficiency-based pay-for-performance system by using case-mix-specific cost-per-stay benchmarks and then providing incentive payments above and beyond traditional fee-for-service payments to physicians who are able to push costs-per-stay below benchmark levels.

Because pay to physicians is typically only a tenth of the total cost of a hospital stay, reductions in hospital costs can easily fund generous physician incentive payments, while still significantly reducing overall payer costs. This is a true win/win scenario.

Example of incentive to physicians
Average hospital daily payment $2,000
Average physician daily fee-for-service payment $200
Health plan savings associated with one day reduction in length-of-stay ($2,000 + $200) = $2,200
Increase in physician payments if half of savings are shared with physician [($2,000 + $200) / 2] − $200 = $900
Savings retained by the health plan [($2,000 + $200) / 2] = $1,100

For such a system to work, incentive payments should be based solely on cost savings that are under the control of physicians (e.g., reductions in unnecessary services or lengths of stay) and not on cost savings that are beyond the control of physicians (e.g., changes in hospital prices, changes in patient case mix, or random variations in hospital costs). Proper application of case-mix measurement tools and statistical significance tests are crucial to identifying such cost savings.

Incentive payments also should be based on net payer savings (i.e., cost decreases offset by cost increases) in order to ensure that the pay-for-performance plan at least does no harm to the budget if it is not successful in reducing the payer's overall hospital costs.

It is also critically important that physicians be educated on how to calculate incentive payments and that they be given continuous feedback on progress toward reducing hospital costs and earning incentive payments.

Finally, it is important that the pay-for-performance plan address potentially negative effects on the quality of patient care (e.g., premature patient discharging).

Easy to implement

Such an efficiency-based pay-for-performance system can be implemented easily with existing software applied to the insurer's historic and current physician and hospital claims databases. A mere two percent reduction in hospital costs would earn individual physicians thousands of dollars in additional annual income while collectively reducing a payer's annual hospital expenses by millions.

David Sparrow is president and CEO of Incentive Payment Systems, a health care software company based in Hartford, Conn. that specializes in incentive payment systems.

Managed Care’s Top Ten Articles of 2016

There’s a lot more going on in health care than mergers (Aetna-Humana, Anthem-Cigna) creating huge players. Hundreds of insurers operate in 50 different states. Self-insured employers, ACA public exchanges, Medicare Advantage, and Medicaid managed care plans crowd an increasingly complex market.

Major health care players are determined to make health information exchanges (HIEs) work. The push toward value-based payment alone almost guarantees that HIEs will be tweaked, poked, prodded, and overhauled until they deliver on their promise. The goal: straight talk from and among tech systems.

They bring a different mindset. They’re willing to work in teams and focus on the sort of evidence-based medicine that can guide health care’s transformation into a system based on value. One question: How well will this new generation of data-driven MDs deal with patients?

The surge of new MS treatments have been for the relapsing-remitting form of the disease. There’s hope for sufferers of a different form of MS. By homing in on CD20-positive B cells, ocrelizumab is able to knock them out and other aberrant B cells circulating in the bloodstream.

A flood of tests have insurers ramping up prior authorization and utilization review. Information overload is a problem. As doctors struggle to keep up, health plans need to get ahead of the development of the technology in order to successfully manage genetic testing appropriately.

Having the data is one thing. Knowing how to use it is another. Applying its computational power to the data, a company called RowdMap puts providers into high-, medium-, and low-value buckets compared with peers in their markets, using specific benchmarks to show why outliers differ from the norm.
Competition among manufacturers, industry consolidation, and capitalization on me-too drugs are cranking up generic and branded drug prices. This increase has compelled PBMs, health plan sponsors, and retail pharmacies to find novel ways to turn a profit, often at the expense of the consumer.
The development of recombinant DNA and other technologies has added a new dimension to care. These medications have revolutionized the treatment of rheumatoid arthritis and many of the other 80 or so autoimmune diseases. But they can be budget busters and have a tricky side effect profile.

Shelley Slade
Vogel, Slade & Goldstein

Hub programs have emerged as a profitable new line of business in the sales and distribution side of the pharmaceutical industry that has got more than its fair share of wheeling and dealing. But they spell trouble if they spark collusion, threaten patients, or waste federal dollars.

More companies are self-insuring—and it’s not just large employers that are striking out on their own. The percentage of employers who fully self-insure increased by 44% in 1999 to 63% in 2015. Self-insurance may give employers more control over benefit packages, and stop-loss protects them against uncapped liability.