Healthcare is one of the largest industries in our country, and interestingly, is one of the only, along with perhaps education, that lacks transparent and comprehensible metrics to objectively measure the quality of its products and services. This fundamental deficiency frustrates American consumers who are accustomed to purchasing goods and services on the basis of value. The inability of healthcare providers to satisfactorily articulate their quality outcomes has resulted in price becoming the default purchasing metric for health insurance companies and HMOs. This is troublesome as price has no real meaning without a measure of quality, leaving employers and patients with little or no idea what value they are receiving for their healthcare dollars.
Physicians’ primary incentive is to deliver the highest quality patient care. Costs are secondary considerations, in spite of the fact physicians direct about 80 percent of all inpatient dollars and 100 percent of all dollars in their offices. Physicians are not indifferent to costs, but the disincentives for them to be cost efficient are numerous and significant. Patients want them to “spare no expense,” and Medicare and most insurance companies pay physicians on a modified fee-for-service basis that maximizes their revenues when they order and interpret more tests and treatments. Paradoxically, physicians’ greatest disincentives arise when they actually conserve the hospital or third party’s resources. The resulting financial rewards only accrue to either the insurance company or to the hospital, never to offset the physicians’ malpractice risk of not having ordered a test or treatment that he or she believed to be clinically indicated.
Unless physicians practice in an HMO or staff model clinic setting, there are few, if any, financial inducements for cost containment. In fact, these conflicting incentives have been partially responsible for decades of spiraling healthcare costs with the only financial winners being insurance companies and HMOs. Rewarding third-party payors for anything other than administering payments is a misallocation of precious resources and a major contributor to our unsustainable healthcare inflation rates. America is now at a crossroads. If we are unable to deliver consistent quality outcomes and gain control of healthcare costs, our entire financial structure is on a downward slope to failure.
However, a few recent developments now make quality and cost controls achievable. Most notably, federal legislation facilitates the formation of Consumer Operated and Oriented Plans for health insurance. These can be sponsored by providers and can serve as a means to align hospitals’ and physicians’ incentives as well as reimburse them for producing high-quality, cost-efficient care. While the Patient Protection and Affordable Care Act also creates several programs within CMS to achieve the same quality and efficiency goals, CO-OPs are noteworthy because they deal with private health insurance. Success under these models requires technologies that facilitate physician-directed best practice improvements in clinical and financial outcomes. Luckily, these tools are available and accessible to hospitals and medical staffs that are motivated to use them. Further, the output of these technologies furnishes physicians, hospitals and employers with transparent and easily understood performance measures of hospitals’ and physicians’ clinical and financial outcomes.
Employers who insure their employees through a regional CO-OP will experience the benefits of value-based healthcare purchasing with lower premiums and greater patient satisfaction. Participating providers will benefit by self-determined quality controls and sharing of financial savings — based on objective and transparent measures of quality and efficiency.
CO-OP legislation
Decades of competing healthcare factions, disincentives to improvements, third party intrusions and providers’ inability to deliver value have created a bizarre triad of: excessive profits for third-party payors who don’t dispense care; insufficient funding for dedicated providers who deliver care and diminishing services for patients who need the care. Chaos in the system and distrust among all parties has ensued making the promise of value-base healthcare purchasing an elusive goal for patients as well as public and private employers — until now.
Over the years, Medicare inflation has been consistently 3 percent higher than the consumer price index. The Congressional Budget Office stated in June 2010, “Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for federal fiscal policy.” This imperative to successfully control public outlays resulted in part, with the passage of the PPACA. Section 1322 of the law defines CO-OPs as non-profit insurance companies. Prior to passage of PPACA, a bipartisan group of senators were said to have created this concept as a means of facilitating a competitive model to traditional health insurance companies.
Hospitals and physicians are consumers and can therefore integrate themselves and form a “provider-sponsored CO-OP.” The provider version of CO-OPs is probably the most likely to succeed because hospitals and physicians have a vested interest in, and are the actual means of accomplishing the stated goals of producing high-quality care and containing costs. CO-OPs will facilitate these outcomes by aligning physicians’ and hospitals’ incentives to improve quality outcomes and share savings — when their utilization of medical resources is appropriate and efficient.
The federal government initially allocated $3.8 billion to assure the success of CO-OPs by providing both start-up funding and reserves that all insurance companies must maintain. Organizations wishing to become a CO-OP must submit appropriate requests for funding to HHS along with their proposed board structures and business plans. If selected, the funding is made available to the CO-OP’s board as very favorable loans. The organizational structure is a 501(c)29 not-for-profit insurance company that excludes traditional insurance companies from either becoming a CO-OP or interfering with its formation.
When combined with best practice improvement technologies and transparent clinical-quality outcomes, the CO-OP model has every opportunity to rapidly accomplish verifiable quality improvements and cost containment. It will accomplish these goals by aligning the incentives of all stakeholders, facilitating the means for hospitals and physicians to improve clinical and operational quality and create a value-based healthcare delivery system with which employers and patients will eagerly contract to receive the benefits of lower healthcare premiums and objectively defined, high-quality care.
Federal (Medicare) and state (Medicaid) purchasers will experience the same quality improvements and financial benefits for their beneficiaries as CO-OP patients receive when physicians are incentivized to “bend the cost curve.”
Creating value with quality-improvement
A key goal of hospitals and other providers engaging in the CO-OP model must be to reduce variation in clinical and organizational processes. The following three steps further explain how this can be achieved.
Implementing physician-directed best practices. When clinicians and hospital personnel create reductions in outcomes variations and document appropriate utilization of resources through physician-directed best practices, the hospital-physician enterprise can be assured there will be net savings for sharing. Hospitals’ all-payor medical records data are the most readily available and reliable basis for physician-directed best practice assessments. These patient-level data must be risk-adjusted and formatted for ease of physicians’ use to quantify the hospital’s and clinical services’ clinical outcomes. Financial (resource consumption) data must also be aggregated in a similar manner to demonstrate the wide variations that exist in physicians’ care processes and outcomes. Charges are an excellent surrogate for the number of resources consumed since each hospital’s chargemaster is the same for all resources and physicians. If a hospital’s costs are available, they can and should be used in place of charges. Length of stay should also be displayed with charges to give a graphic display of the variations that exist within relatively homogeneous patient cohorts.
Evaluating physician performance. Drill-down techniques using patient-level data can be deployed to reveal each physician’s own best-demonstrated performance and then contrasted to his/her patients with inefficient outcomes. This can only be accomplished if the data is of sufficient granularity that the physicians can identify which of their specific diagnostic, treatment and choices of consultants demonstrated greater and lesser efficiencies. The differences in these patient cohorts define physicians’ practice variations.
Comparing physicians’ performances using their own variations and outcomes with those of hospital peers is a powerful way to rapidly effect practice pattern changes. These best practices are most effectively shared during one-on-one educational and non-threatening educational sessions. The vast majority of clinicians embrace these methods because physicians desire to continuously improve, but they need reliable clinical information with which to work.
Evaluating hospital performance. Hospital personnel must also engage in similar activities. Simultaneous with the physician-level implementation, the drill-down techniques should target those patients in which hospital-induced inefficiencies have prevented physicians from reducing clinical variations or moving the patients through the hospital in the most expeditious fashion. One of many hospital-induced inefficiencies is the lack of certain diagnostic equipment or discharge planning on weekends. In my experience, half of a hospital’s inefficiencies are directly caused by hospital impediments as opposed to being physician-induced.
Measuring quality improvement
Physicians and hospital personnel are often willing to adjust their own practices to fit best practices if data can be provided to support doing so will bring about improvements. However, some health systems fall into the trap of overwhelming them with data, which they are unable to interpret and act upon. In order to show quality improvement data in a straight-forward, easy-to-comprehend manner, Verras recently developed the Index of Quality Improvement. The IQI consists of six industry-standard measures, which hospitals and physicians have historically used to objectively measure quality and cost efficiency outcomes. The quality metrics must be trended over at least three years to accurately reflect providers’ abilities to improve their outcomes.
The IQI affords providers a comprehensible means of marketing the CO-OP to local employers and self-pay patients. Moreover, the IQI metrics are excellent for comparing the efficiencies of competing HMO or other enterprises, using publicly available data.
The six IQI metrics are as follows:
1. National Hospital Quality Measures and The Joint Commission metrics, including patient satisfaction
2. Patient readmission rates – 30-day, risk-adjusted
3. Mortality rates – risk-adjusted, including 30-day rates
4. Morbidity rates – risk-adjusted complications
5. Reductions in variation (RIV) – most resource intense 5 DRGs per the top 5 MDCs
6. Financial – resource consumption as measured by inflation of charges
Dividing savings among CO-OP providers
One of the biggest challenge facing providers who participate in any of the bundled-payment models, ACOs or in a CO-OP will be determining how to divvy up any savings achieved. The percentages and categories for hospital distribution of net savings are determined by the COOP board (generally consisting of employers, hospitals and physicians), and then the board or hospitals determine the physicians’ percentages.
Take for example a hypothetical eight hospital CO-OP that achieved a $20 million year-end net savings. The savings would be divided between first the employers and patients ($10 million in premium reductions) and the eight hospitals according to the CO-OP board’s decision. In this example, a quality improvement score, such as the IQI, facilitates the dividing of the $10 million provider portion among the eight hospitals based on clinical and financial outcomes.
Verras recommends using three categories to determine hospital reimbursements: 1) high initial quality scores to reward past performance, 2) improvement in quality and cost efficiency performance during the year and 3) equal-share percentage for participation in the CO-OP. These three categories can be weighed according to the board’s determination.
Next, distribution to physicians must be determined. The distribution of dollars between the hospital and entire medical staff is generally based on a sliding scale from 50 to 80 percent. The greater the objective quality and efficiency outcomes produced by the physicians over the year, the greater the percentage of dollars that are allocated to the participating medical staff members. It should be noted that the hospital would experience significant Medicare and Medicaid savings that accrue as the medical staff increases their clinical efficiencies. The hospital’s Medicare and Medicaid net gains are not shared with the independent physicians due to Stark regulations, unless the hospital participates in a CMS-regulated shared savings program. These restrictions do not apply to the commercial patients covered under the CO-OP insurance plan.
Finally, the hospital’s medical staff members should divide their share of the net savings according to each clinical services’ improvements in four recommended measurement areas: 1) resource consumption, 2) reductions in variation, 3) mortality and 4) morbidity. This will ensure that those clinical services that achieve the most improved quality and efficiency outcomes will receive the greater reimbursements.
Conclusion
The provider-sponsored CO-OP model is arguably the most efficient, effective and predictable, public-private healthcare delivery system ever devised because it aligns the incentives of physicians and hospitals as well as financially rewards them for quality outcomes. Regional hospitals and medical staffs can create a CO-OP and utilize the hospitals’ readily available data to implement physician-directed best practices that will continuously improve their clinical and financial outcomes. Sharing the net savings between employers, patients, hospitals and physicians will bring value to an entire region where the CO-OP can successfully compete with traditional insurance companies and HMOs.
Employers will readily embrace this model because they devoutly desire to purchase high-quality, cost-efficient care for their employees. This will align with the incentives of their local physicians and hospitals that are motivated to produce objectively defined value for their patients. Through the CO-OP, employees and self-pay patients can be directed to the highest-quality, most cost-efficient providers thereby creating a rational medical market that rewards providers who demonstrate value.
The timing is right for significant change, and the provider-sponsored CO-OP model is the ideal strategy. It will fulfill the national cost containment imperative by transitioning our inefficient price-based medical sector to an effective and efficient, value-based healthcare delivery system — one region at a time.
Physicians’ primary incentive is to deliver the highest quality patient care. Costs are secondary considerations, in spite of the fact physicians direct about 80 percent of all inpatient dollars and 100 percent of all dollars in their offices. Physicians are not indifferent to costs, but the disincentives for them to be cost efficient are numerous and significant. Patients want them to “spare no expense,” and Medicare and most insurance companies pay physicians on a modified fee-for-service basis that maximizes their revenues when they order and interpret more tests and treatments. Paradoxically, physicians’ greatest disincentives arise when they actually conserve the hospital or third party’s resources. The resulting financial rewards only accrue to either the insurance company or to the hospital, never to offset the physicians’ malpractice risk of not having ordered a test or treatment that he or she believed to be clinically indicated.
Unless physicians practice in an HMO or staff model clinic setting, there are few, if any, financial inducements for cost containment. In fact, these conflicting incentives have been partially responsible for decades of spiraling healthcare costs with the only financial winners being insurance companies and HMOs. Rewarding third-party payors for anything other than administering payments is a misallocation of precious resources and a major contributor to our unsustainable healthcare inflation rates. America is now at a crossroads. If we are unable to deliver consistent quality outcomes and gain control of healthcare costs, our entire financial structure is on a downward slope to failure.
However, a few recent developments now make quality and cost controls achievable. Most notably, federal legislation facilitates the formation of Consumer Operated and Oriented Plans for health insurance. These can be sponsored by providers and can serve as a means to align hospitals’ and physicians’ incentives as well as reimburse them for producing high-quality, cost-efficient care. While the Patient Protection and Affordable Care Act also creates several programs within CMS to achieve the same quality and efficiency goals, CO-OPs are noteworthy because they deal with private health insurance. Success under these models requires technologies that facilitate physician-directed best practice improvements in clinical and financial outcomes. Luckily, these tools are available and accessible to hospitals and medical staffs that are motivated to use them. Further, the output of these technologies furnishes physicians, hospitals and employers with transparent and easily understood performance measures of hospitals’ and physicians’ clinical and financial outcomes.
Employers who insure their employees through a regional CO-OP will experience the benefits of value-based healthcare purchasing with lower premiums and greater patient satisfaction. Participating providers will benefit by self-determined quality controls and sharing of financial savings — based on objective and transparent measures of quality and efficiency.
CO-OP legislation
Decades of competing healthcare factions, disincentives to improvements, third party intrusions and providers’ inability to deliver value have created a bizarre triad of: excessive profits for third-party payors who don’t dispense care; insufficient funding for dedicated providers who deliver care and diminishing services for patients who need the care. Chaos in the system and distrust among all parties has ensued making the promise of value-base healthcare purchasing an elusive goal for patients as well as public and private employers — until now.
Over the years, Medicare inflation has been consistently 3 percent higher than the consumer price index. The Congressional Budget Office stated in June 2010, “Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for federal fiscal policy.” This imperative to successfully control public outlays resulted in part, with the passage of the PPACA. Section 1322 of the law defines CO-OPs as non-profit insurance companies. Prior to passage of PPACA, a bipartisan group of senators were said to have created this concept as a means of facilitating a competitive model to traditional health insurance companies.
Hospitals and physicians are consumers and can therefore integrate themselves and form a “provider-sponsored CO-OP.” The provider version of CO-OPs is probably the most likely to succeed because hospitals and physicians have a vested interest in, and are the actual means of accomplishing the stated goals of producing high-quality care and containing costs. CO-OPs will facilitate these outcomes by aligning physicians’ and hospitals’ incentives to improve quality outcomes and share savings — when their utilization of medical resources is appropriate and efficient.
The federal government initially allocated $3.8 billion to assure the success of CO-OPs by providing both start-up funding and reserves that all insurance companies must maintain. Organizations wishing to become a CO-OP must submit appropriate requests for funding to HHS along with their proposed board structures and business plans. If selected, the funding is made available to the CO-OP’s board as very favorable loans. The organizational structure is a 501(c)29 not-for-profit insurance company that excludes traditional insurance companies from either becoming a CO-OP or interfering with its formation.
When combined with best practice improvement technologies and transparent clinical-quality outcomes, the CO-OP model has every opportunity to rapidly accomplish verifiable quality improvements and cost containment. It will accomplish these goals by aligning the incentives of all stakeholders, facilitating the means for hospitals and physicians to improve clinical and operational quality and create a value-based healthcare delivery system with which employers and patients will eagerly contract to receive the benefits of lower healthcare premiums and objectively defined, high-quality care.
Federal (Medicare) and state (Medicaid) purchasers will experience the same quality improvements and financial benefits for their beneficiaries as CO-OP patients receive when physicians are incentivized to “bend the cost curve.”
Creating value with quality-improvement
A key goal of hospitals and other providers engaging in the CO-OP model must be to reduce variation in clinical and organizational processes. The following three steps further explain how this can be achieved.
Implementing physician-directed best practices. When clinicians and hospital personnel create reductions in outcomes variations and document appropriate utilization of resources through physician-directed best practices, the hospital-physician enterprise can be assured there will be net savings for sharing. Hospitals’ all-payor medical records data are the most readily available and reliable basis for physician-directed best practice assessments. These patient-level data must be risk-adjusted and formatted for ease of physicians’ use to quantify the hospital’s and clinical services’ clinical outcomes. Financial (resource consumption) data must also be aggregated in a similar manner to demonstrate the wide variations that exist in physicians’ care processes and outcomes. Charges are an excellent surrogate for the number of resources consumed since each hospital’s chargemaster is the same for all resources and physicians. If a hospital’s costs are available, they can and should be used in place of charges. Length of stay should also be displayed with charges to give a graphic display of the variations that exist within relatively homogeneous patient cohorts.
Evaluating physician performance. Drill-down techniques using patient-level data can be deployed to reveal each physician’s own best-demonstrated performance and then contrasted to his/her patients with inefficient outcomes. This can only be accomplished if the data is of sufficient granularity that the physicians can identify which of their specific diagnostic, treatment and choices of consultants demonstrated greater and lesser efficiencies. The differences in these patient cohorts define physicians’ practice variations.
Comparing physicians’ performances using their own variations and outcomes with those of hospital peers is a powerful way to rapidly effect practice pattern changes. These best practices are most effectively shared during one-on-one educational and non-threatening educational sessions. The vast majority of clinicians embrace these methods because physicians desire to continuously improve, but they need reliable clinical information with which to work.
Evaluating hospital performance. Hospital personnel must also engage in similar activities. Simultaneous with the physician-level implementation, the drill-down techniques should target those patients in which hospital-induced inefficiencies have prevented physicians from reducing clinical variations or moving the patients through the hospital in the most expeditious fashion. One of many hospital-induced inefficiencies is the lack of certain diagnostic equipment or discharge planning on weekends. In my experience, half of a hospital’s inefficiencies are directly caused by hospital impediments as opposed to being physician-induced.
Measuring quality improvement
Physicians and hospital personnel are often willing to adjust their own practices to fit best practices if data can be provided to support doing so will bring about improvements. However, some health systems fall into the trap of overwhelming them with data, which they are unable to interpret and act upon. In order to show quality improvement data in a straight-forward, easy-to-comprehend manner, Verras recently developed the Index of Quality Improvement. The IQI consists of six industry-standard measures, which hospitals and physicians have historically used to objectively measure quality and cost efficiency outcomes. The quality metrics must be trended over at least three years to accurately reflect providers’ abilities to improve their outcomes.
The IQI affords providers a comprehensible means of marketing the CO-OP to local employers and self-pay patients. Moreover, the IQI metrics are excellent for comparing the efficiencies of competing HMO or other enterprises, using publicly available data.
The six IQI metrics are as follows:
1. National Hospital Quality Measures and The Joint Commission metrics, including patient satisfaction
2. Patient readmission rates – 30-day, risk-adjusted
3. Mortality rates – risk-adjusted, including 30-day rates
4. Morbidity rates – risk-adjusted complications
5. Reductions in variation (RIV) – most resource intense 5 DRGs per the top 5 MDCs
6. Financial – resource consumption as measured by inflation of charges
Dividing savings among CO-OP providers
One of the biggest challenge facing providers who participate in any of the bundled-payment models, ACOs or in a CO-OP will be determining how to divvy up any savings achieved. The percentages and categories for hospital distribution of net savings are determined by the COOP board (generally consisting of employers, hospitals and physicians), and then the board or hospitals determine the physicians’ percentages.
Take for example a hypothetical eight hospital CO-OP that achieved a $20 million year-end net savings. The savings would be divided between first the employers and patients ($10 million in premium reductions) and the eight hospitals according to the CO-OP board’s decision. In this example, a quality improvement score, such as the IQI, facilitates the dividing of the $10 million provider portion among the eight hospitals based on clinical and financial outcomes.
Verras recommends using three categories to determine hospital reimbursements: 1) high initial quality scores to reward past performance, 2) improvement in quality and cost efficiency performance during the year and 3) equal-share percentage for participation in the CO-OP. These three categories can be weighed according to the board’s determination.
Next, distribution to physicians must be determined. The distribution of dollars between the hospital and entire medical staff is generally based on a sliding scale from 50 to 80 percent. The greater the objective quality and efficiency outcomes produced by the physicians over the year, the greater the percentage of dollars that are allocated to the participating medical staff members. It should be noted that the hospital would experience significant Medicare and Medicaid savings that accrue as the medical staff increases their clinical efficiencies. The hospital’s Medicare and Medicaid net gains are not shared with the independent physicians due to Stark regulations, unless the hospital participates in a CMS-regulated shared savings program. These restrictions do not apply to the commercial patients covered under the CO-OP insurance plan.
Finally, the hospital’s medical staff members should divide their share of the net savings according to each clinical services’ improvements in four recommended measurement areas: 1) resource consumption, 2) reductions in variation, 3) mortality and 4) morbidity. This will ensure that those clinical services that achieve the most improved quality and efficiency outcomes will receive the greater reimbursements.
Conclusion
The provider-sponsored CO-OP model is arguably the most efficient, effective and predictable, public-private healthcare delivery system ever devised because it aligns the incentives of physicians and hospitals as well as financially rewards them for quality outcomes. Regional hospitals and medical staffs can create a CO-OP and utilize the hospitals’ readily available data to implement physician-directed best practices that will continuously improve their clinical and financial outcomes. Sharing the net savings between employers, patients, hospitals and physicians will bring value to an entire region where the CO-OP can successfully compete with traditional insurance companies and HMOs.
Employers will readily embrace this model because they devoutly desire to purchase high-quality, cost-efficient care for their employees. This will align with the incentives of their local physicians and hospitals that are motivated to produce objectively defined value for their patients. Through the CO-OP, employees and self-pay patients can be directed to the highest-quality, most cost-efficient providers thereby creating a rational medical market that rewards providers who demonstrate value.
The timing is right for significant change, and the provider-sponsored CO-OP model is the ideal strategy. It will fulfill the national cost containment imperative by transitioning our inefficient price-based medical sector to an effective and efficient, value-based healthcare delivery system — one region at a time.