Total Cost of Care Contracting: A Proven Clinical Transformation Catalyst

In 2009, the healthcare sector represented 17.6 percent of the United States gross domestic product. Moreover, economists predict that without an inflection point, it will be over 20 percent by 2018. Even more troubling is that nearly 30 percent of the $2.5 trillion spent on care, or $750 billion, is spent on unnecessary, inappropriate care and administrative functions. Clearly, this type of care does little to improve the health of the nation.

The average American spends nearly $5,500 per year on healthcare. The rising cost is a major affordability deterrent to insurance coverage and in many cases contributes to a large number of personal bankruptcies. So why does care cost so much? There is no shortage of answers to that question; all of them address one or another underlying failing of the health system. However, it's important not focus on blame, but rather to focus on solutions. And to follow the advice of W. Edwards Deming, we should focus on the system design because "Every system is perfectly designed to get the result that it does."

The current system promote inefficiencies, utilization, acute intervention and sporadic, specialized and uncoordinated care. The current payment structure is not aligned to reward prevention, health maintenance or avoidance of complications, hospitalizations and surgeries. There is certainly no incentive for keeping patients healthier longer. Simply, the fee-for-service system pays more for bad outcomes than good outcomes.

Most people are shocked to learn that more than 80 percent of the healthcare dollars — $4,400 per person per year — are spent on the treatment of illness rather than the maintenance of health.

Total Cost of Care (TCOC) contracting presents a better way to reward physicians. TCOC contracting covers all professional, pharmacy, hospital, ancillary care and administrative payments, which are risk-adjusted to capture differences in patient population characteristics. TCOC reimbursement models help align incentives toward prevention and improved outcomes. 

TCOC contracts have much in common with CMS' Medicare Shared Savings Program's rules for accountable care. At their core is a goal of improving care while bringing down the cost curve. TCOC's moderate-term focus (12 months) on outcomes and cost encourages providers to focus on delivering timely, efficient and coordinated care services in the most appropriate settings. Most of the savings are achieved by avoiding unnecessary hospital admissions and procedures, which account for 30 to 35 percent of healthcare spending.

So, how does it work? Well, first you need a willing insurer, hospital and physician group who work in geographically-defined area. The contract period tends to be for three to five years with limits to the annual rates of increase. The hospital and physician group agree to a modest, often less-than-market annual increase in rates. The insurer assists with patient attribution and identification, data sharing and analytics. Through effective clinical integration and care coordination, the use rates of emergency room, inpatient admissions, brand name pharmaceuticals and high-cost diagnostic testing go down. 

The model has been used with both HMO and PPO businesses, permitting insurers to cover the vast majority of their commercial insurance market. Blue Cross Blue Shield of Massachusetts and Illinois, as well as United Healthcare, Aetna and others, have TCOC models in place. Some providers are moving to include self-insured and union plans.

Under TCOC, all providers are still paid fee-for-service at the less-than-market rates. At the end of the year, the per-member-per-year medical loss ratio is calculated. The savings are defined as the difference between the expected (market) minus the actual per-member-per-year medical loss ratio times the number of members. Typically the insurer will retain a small portion of the savings, and the hospitals and physicians share the rest. Hospitals often receive at least half of the remaining savings because their revenues are most impacted. Physicians are often rewarded based on quality, patient satisfaction and personal and group savings achievements.

If you want to know where this arrangement can take you, you don't have to look far. Commercial insurers and provider organizations in Massachusetts, Minnesota and Illinois have the most mature TCOC programs. Advocate Physician Partners has been involved in TCOC contracts for over eight years.  Their contracts reportedly cover over 100,000 people and $1.2 billion in care costs. There are 12 participating Advocate hospitals and approximately 3,900 participating providers (including more than 3,200 are independent physicians). 

Health systems have more leverage in controlling costs through in-network services. Attracting patients to in-network providers is critical to organization's success under TCOC since up to 50 percent of healthcare spending is for out-of-network providers in open networks. By attracting admissions from outside of the network to lower cost in-network providers, organizations can achieve large savings. For example, in 2010, one organization achieved savings of nearly $1,100 per-member-per-year, or $110 million by improving its in-network utilization.

Keeping patients in-network also mitigates one of the major concerns hospitals have when considering TCOC; that is, lower admission rates impacting average daily census. Some organizations have noted that utilization reductions from TCOC patients were more than offset through (1) higher retention of in-network admissions, (2) accretive volume from splitter physicians participating in TCOC and (3) new physicians seeking participation status under TCOC.

Total cost of care contracts help align the health delivery system toward prevention and improved outcomes, coordination of care and reduction of unnecessary and inappropriate care. All this fueled by a financial model that creates teams among professionals who are known for their independence. The teams' yardstick of success is then transformed from individual provider volumes to clinical outcome improvements and efficiency.

Dr. Akram Boutros is an executive with a 20-year record of success leading hospitals. He is president of BusinessFirst Healthcare Solutions, an international advisory firm to health systems. He has led successful projects focused on strategic repositioning, operational redesign, clinical and physician integration and accountable care organization development.

More Articles Featuring Akram Boutros:

Solving the Clinical Transformation Puzzle: How to Unlock the Keys to the Next Phase of Healthcare Delivery
7 Steps to Navigate Payment Allocation Under ACOs

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