Does Guaranteed Payment Guarantee Benefit?

Karen Minich-Pourshadi, for HealthLeaders Magazine , February 4, 2010
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A new payment model could mean lower costs and higher quality.

It goes by many names: bundling, bundled payment, episode-based payment, ProvenCare, payer contract guarantees, warranties. But whatever healthcare leaders decide to call it, it may be the future of payment programs. Bundling is being touted by some as a solution to what ails the current fee-for-service system, and two of the largest health systems are taking these programs to heart.

Bundled payment may just be the perfect payment methodology. It has the potential to save hospitals and insurance providers thousands of dollars per episode of care and, as if the financial rewards weren't reason enough to pique hospital leaders' attention, it also provides better quality of care for the patient.

Under such a system of payment, doctors, hospitals, and other health providers receive a set fee for treating all aspects of an episode of care, such as for a hip replacement or chronic disease care. If the patient is readmitted within an agreed-upon time, then the cost of the services provided to the patient are absorbed by the facility—which is where this methodology earned its other nicknames of guarantee or warranty program.

Proponents of this method say it encourages health providers to eliminate unnecessary care and improve quality to get and keep patients healthy. If this rings familiar to you, it's because this payment methodology is similar to what Medicare is looking at with the Acute Care Episode (ACE) Demonstration, currently being tested in fives states, which encompasses nine orthopedic and 28 cardiovascular services.

Hillcrest Medical Center, a 691-licensed-bed hospital in Tulsa, OK, is part of the ACE experiment testing bundled payment in cardiology and orthopedic services, and its CEO believes the program is promising.

"We saw this as the future of healthcare . . . and that other payers may eventually go down the path of bundling. We thought we would be a good place to pilot this program," says Hillcrest CEO Steve Dobbs.

After Medicare accepted Hillcrest's application to join the pilot program, it took the facility 100 days to get the infrastructure in place and to create the marketing outreach information. As of May 2009, the pilot was operational.

"The idea is you are trying to lower your operational costs while you try to increase your volume with your advertising. A lot of our savings come from negotiations with vendors for devices," he says. CMS also offers patients an incentive for receiving care at Hillcrest, and, for the first year, the hospital is allowed to offer its orthopedic surgeons, cardiovascular surgeons, and cardiologists a financial incentive based on the quality of care.

"My personal speculation is if bundling works at our hospital, we may go to the [private] payer and offer it ourselves," says Dobbs.

Dobbs' optimism is shared by other thought leaders, too. RAND Corporation researchers examined using bundled payments for six chronic conditions and four acute conditions or procedures requiring hospitalization, and speculated that national healthcare spending could be reduced by 5.4% between 2010 and 2019. This assumes providers can achieve a reduction of 25% to 50% in costs of complications through more collaborative follow-up care that prevents errors and avoidable readmissions. Further, the Congressional Budget Office estimates that with bundling in Medicare and Medicaid alone, savings would amount to $19 billion from 2010 to 2019.

"If our optimistic estimates prove true, then healthcare spending can be slowed substantially," says Peter Hussey, PhD, a policy researcher at RAND Corporation, a nonprofit research organization, and lead author of a study analyzing this type of payment methodology, the results of which were reported in the New England Journal of Medicine.

Will it work with other payers?
Medicare is not the only group interested in this type of payment. Two leading healthcare organizations, Geisinger Health System and Intermountain Healthcare, are applying bundling practices and determining the best approach to use with third-party payers. Although third-party payer contracts vary, Geisinger estimates that using this type of bundled approach saves payers on average $2,000 per episode of care.

"We need to change the fundamental way we're paying for healthcare. Our system can't reward hospitals for the complications resulting from not following guidelines," says David Friel, vice president of third-party contracting for the $2.1 billion Danville, PA-based Geisinger Health System. With all the attention on the rising cost of healthcare, Friel speculates the he can't see how "we can avoid changing this in the future."

For the past four years, Geisinger Health System has modeled a warranty program called ProvenCare. Taking an evidence-based approach, it has closely tracked thousands of procedures and continuously adjusted them to advance patient care. The facility was ideally positioned to test this type of model: With more than 800 employed physicians, its own insurance plan, and an EMR in place, Geisinger had all the pieces needed. It established two teams: a reimbursement insurance team and a clinical team. Then, it piloted the program first with elective coronary artery bypass surgery and, after seeing positive results, began rolling it out to other areas, including perinatal, diabetes, angioplasty, hip replacement surgery, bariatric surgery, and cataract surgery.

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