How to Structure Sound Shared Savings Programs: Get Physicians Involved

Hospitals and health systems around the country are examining shared savings programs and implementing strategies to cut costs where possible while maintaining high quality care. In many situations supply costs are "low-hanging fruit" for shared savings programs and proactive implant companies are now partnering with providers to really make an impact.

This is especially true in orthopedics, where hip and knee implants are among the costliest supplies. Over the years surgeons have formed relationships with their device company representatives and prefer to only use that company's device. Many hospital materials managers have also experienced device companies upselling "new technology" that includes a slight advance over the previous standard or new study to substantiate differences.

Hospital administrators often bend to the surgeon's will — especially if that surgeon has the option to take cases elsewhere — and ask materials managers to provide preference items regardless of the cost. Now, however, with a renewed focus on the cost of care, purchasing less expensive commoditized implants is an opportunity for significant savings.

"Unless there is an incentive for the surgeons to align with the hospital, they won't make these changes," says Jason Baty, a distributor at Wright Medical Technology. "All of the other costs are baked into these episodes and driving up the cost of care. If you look at it in a cumulative way, you'll see the physicians are most qualified to tell us where we are wasting money. We'll see where quality goes up and costs go down."

Culture change
Hospitals were weary of these types of incentive-based alignment with surgeons in the 1990s and early 2000s as a result of fines from the Office of the Inspector General. However, in 2005 the government took another look at the macro situation and realized quality of care issues and high costs could be tackled meaningfully if the surgeons and hospital administrators were able to work together.

"They loosened the implications and backed off their position on arrangements to share these savings," says Mr. Baty. "That's really when the change started happening. The OIG recognized that alignment could lead to impropriety or dastardly deeds, but its how hospitals and physicians will be able to create change."

Now, the U.S. government is even encouraging shared savings with the Medicare bundled payment programs. Organizations across the country are developing different ways for physicians and hospitals to align for shared savings that improve quality and decrease the cost of care.

"A business strategy designed to increase profitability by motivating employees to share in the gain are becoming more popular," says Vice President and Lead Partner of Implant Partners Steve Lamb. "Some people are still living in the past, but now the OIG has reconsidered and put safeguards in place so if you know the rules, they'll endorse your program."

Gain sharing program rules the Centers for Medicare and Medicaid Innovation set forth include:

•    Bonuses cannot exceed 50 percent of the providers' non-discounted Medicare fee schedule payment rates; the maximum provider payment is 150 percent of standard fee schedule rates.
•    Eligible providers must meet minimum quality thresholds and actively engage in improvement efforts.
•    Gain sharing models cannot encourage providers to reduce or limit medically necessary care.
•    Bonuses must be based on demonstrated cost savings and cannot reflect the value of participating physicians' referrals.

Taking the plunge
The first step to shared savings programs is to gain acceptance of physician leadership. Hospital administrators can work with the physician leaders to develop a beneficial program and decide whether they'll be able to carry it through.

"After you gain their buy-in, it's time to get the group together to build alignment," says Mr. Baty. "There are often multiple groups of clinicians to work with in successful shared savings programs."

Several organizations have services available to guide hospital administrators and physicians through a successful alignment and build infrastructure for each individual program. The government is looking for programs with these outcomes:

•    Shorter inpatient stays where appropriate
•    Fewer marginal but expensive diagnostic tests
•    More formulary compliance to drug therapy
•    Effective operating room use
•    Cost-effective critical care use
•    Reduced duplicated services

When everyone is onboard, it only takes around 120 days to implement an effective shared savings program. However, achieving physician buy-in can be a problem. Relationships with device representatives, or physicians who feel only one device works well in their hands, are a huge roadblock.

"The only way you can significantly impact physician preference items is to have physicians be part of the solution," says Mr. Lamb. "They should have ownership over the shared savings programs so they can take control of the spend."
Strong physician leadership may encourage doubtful physicians to participate. Additionally, already functionally integrated hospitals can structure gain sharing models that minimize hospital loses.

Physician buy-in
When physicians see the prices and cost-compare alongside quality data — and have skin in the game — they're more likely to consider making a switch. Device companies are also aware of cost pressures on providers and many are finding strategies to lower costs for hospitals and physicians. For example, Implant Partners offers hip and knee implants at prices 40 to 70 percent less than other commoditized implants on the market.

"You have to drive down the costs of implants, and the primary way of doing that is by implementing shared savings programs," says Mr. Lamb. "Physicians can still use a variety of vendors and products — we believe that's good for the healthcare system."

Hospitals serious about reducing supply chain costs are flocking toward shared savings, especially for Medicare services; commercial payers are also promoting shared savings programs through bundled payments and other initiatives. Successful programs also result in service consolidation to promote a continuum of care for the patient.

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