1. Managing the Total Cost of Health
Services for a Defined Population
(Per Capita Cost)
Changing the way we think about the
drivers of health care costs
Changing our system of incentives
8-1
2. The old mindset
• Think like a health care provider in a fee
for service environment – what do you
do to stay in business?
• Keep your hospital full
• Keep your specialists busy
• Favor Emergency Room (more tests, more
procedures, more admissions)
• Limit access to primary care
• Wait for people to get very ill
8-2
3. The old mindset. What can the
government (or an employer) do to
cut healthcare costs?
• In a fee for service environment you:
• Try to eliminate benefits (rationing care)
• Try to reduce payment for providers (or increase their
productivity)
• Eliminate programs that do not generate revenue
(wellness, prevention, case management)
• Shift costs to patients (co-pays, deductibles, annual
premiums)
8-3
4. What did this accomplish?
• Created a high cost, low value health non-system with
everyone out for themselves
• Pitted providers against patients (and employers)
• Promoted supply driven demand (MRI, etc)
• Disincentivized prevention, wellness, and primary care
(from the provider perspective)
• Increased the number of uninsured and denied care for
patients with chronic illnesses
• Drove up costs at 2-3% greater than GDP for the last 40
years
WHAT A MESS !!
8-4
5. The New Mindset –
The magic of pre-payment
• Think like a health plan manager that has been pre-paid for all
of the services for a defined population for the coming year.
What do you do to stay in business?
- Enhance primary care to avoid:
- Unnecessary hospitalizations for ambulatory sensitive
chronic illness and empty your hospitals
- Emergency room utilization
- Unnecessary referrals to specialists
• Focus on wellness and prevention particularly for patients at risk
for chronic illness
• Reduce waste in the system
• Use system engineering to create error free processes
• Focus on handoffs and transitions where bad things happen
8-5
6. To change behavior,
you need to change what you reward
• Old scheme:
• Reward volume – visits, relative value units
(RVUs), relative weighted products (RWPs)
• “Winning” formula (to make a profit):
Maximize output, maximize revenue
• Increase IP, OR, ICU, surgical procedures
• Increase ER utilization
• More tests, more radiological procedures
• More specialist referrals
8-6
7. To change behavior,
you need to change what you reward
• New scheme:
• Reward value: outcomes / cost over time
• Outcomes = Readiness plus Population Health plus
Experience of Care
• Cost over time = Per member per month (PMPM) total costs
• Winning formula: Maximize value by putting quality
first and reducing per capita costs
• Focus on comprehensive primary care
• Reduce waste – follow evidence based guidelines
• Keep your IP, OR, ICU and other high cost venues busy with
“real” work and if you can not, then close them
• Enhance prevention and wellness with a focus on high risk
patients
8-7
8. What is PMPM?
• The accumulated monthly medical costs associated
with enrollees
• Inpatient, Outpatient, Pharmacy, Ancillary
• Wherever DHP care is received
• Direct Care, Purchased Care, TRICARE Mail Order
Pharmacy
• Divide total cost by number of enrollees
• Adjusted for age/gender/beneficiary category
• Reflects differences in underlying demographics
• e.g. 23 year old Active Duty Male vs 49 year old
retired female
8-8
9. MTF Production Unit Cost
TFL Prime Standard
TFL
44 RWPs 87 RWPs 17 RWPs
MEPRS
“A”
$1,324K / 148 RWPs = $8,946/RWP
8-9
10. DACH Enrollee Inpatient Care
NNM WRAMC Purchased Care
C
MTF Production
Unit Cost: $12K/RWP
Utilization: 134 RWPs
MTF Production
Unit Cost: $10K/RWP Total Cost: $1,608K Claims Cost: $970K
Utilization: 62 RWPs Dewitt ACH
Total Cost: $620K
Total IP Cost for Enrollee Care
$620K
$1,608K MTF Production
$970K Unit Cost: $9K/RWP
$783K Utilization: 87 RWPs
8-10
$3,981K Total Cost: $783K
11. PMPM Calculation Example
Sample MTF
Enrollees 79,286
Equivalent Lives 83,932
Direct Care $ Purchased Care $ Total $ PMPM
Inpatient $ 4,200,754 $ 1,278,419 $ 5,479,173 65
Outpatient $ 13,159,945 $ 2,757,346 $ 15,917,291 190
Pharmacy $ 2,153,232 $ 798,808 $ 2,952,040 35
Total $ 19,513,931 $ 4,834,574 $ 24,348,504 290
8-11
12. Additional Breakdown of
PMPM/PMPY
Outpatient PMPM is $190, Outpatient PMPY is ?
$190*12=$2,280 PMPY out of total PMPY of $3480
How much is Primary Care (without lab and rad)?
$240 PMPY
What are the other contributors to outpatient PMPY?
Specialty Care $1200
ER $200 (without lab and rad)
APV $200
Laboratory $200
Radiology $400
8-12
13. What should you do if we change to full
pre-payment with rewards for outcomes?
• Annual payment for each enrollee
• Bonus for:
• IMR Rate
• Well Being of Covered Population
• Population Health – Reduced Health Risk, Improved Quality
of Life
• Experience of Care (Quality, Access, Safety, Equity)
Let’s explore how you win this game!
We will look at outcomes measures in following
sections, let’s look at the management of PMPM
first (the denominator in the value equation)
8-13
14. High Level Drivers of Per Capita Costs
PMPM
Inpatient Outpatient Pharmacy Ancillary
(Institutional) (Professional)
Cost Discharge Cost RVU Cost Scripts Cost Tests
per per per per per per per per
RWP Beneficiary RVU person Script person test person
per year per per per
year year year
8-14
15. Drivers of Inpatient PMPM Expenses
High Level Measure Direct Care Inpatient PMPM
First Level Driver Discharge per
Cost per RWP
Beneficiary per year
Second Level Personnel Hours per
Occupied BedDay Discharges OBDs per
Driver Admission
(OBD) PMPY
(ALOS)
Avoid
Increase Reduce
MTF Action Reduce Salary unnecessary
OBDs unnecessary
Expenses by admissions
(ADPL) by bed days - IP
Optimizing -Outpt
improving Utilization
Staffing Management
access, etc Management
(Disease Mgmt)
Goal: Reduce rate of hospitalization for enrollees, but increase average
daily patient load by filling your hospital with other people’s patients. 8-15
16. Lead and Lag Indicators for IP PMPM?
• Lead Indicators – Drivers of desired performance
– Average Daily Census -
– Average Daily Staffing (non-physician)-
– Unnecessary bed days -
– Unnecessary admissions/ readmissions –
– Standard and other MTF Prime admissions –
– Prime Admissions to Network -
• Lag Indicator – Performance Outcome
• Inpatient PMPM
• Cost/RWP
• Enrollee discharges PMPM
Critical Decision Making for Medical Executives: Keys to Improving Healthcare Delivery
8-16
17. Drivers of Outpatient PMPM Expenses –
Focus on Specialty Care
High Level Outpatient
Measure (Professional) PMPM
First Level RVU per
Driver Cost per RVU
enrollee per year
RVU/ Support staff
Second Level Provider/ labor hours per RVUs PMPM by
Driver encounter Disease
Month
Increase Triage, Disease
Increase
RVU/ Management, Case
MTF Encounters/ Optimize
Encounter Management, Utilization
Action Month Staffing Management
Goal: In primary care, reduce need for specialty referral through case
management, in specialty care, maximize ROFR recapture to keep clinics 8-17
busy
18. Lead and Lag Indicators for Outpatient PMPM
Remember: Primary Care and Specialty Care have
different strategies.
• Lead Indicators – Drivers of Desired Performance
• Enrollment
• RVUs per Month per FTE Specialty Provider-
• RVUs per Month per FTE (non-provider)-
• RVUs/Encounter -
• ER Visits PMPM - (indirect measure of medical
management)
• Lag Indicator – Performance Outcome
• Outpatient PMPM
• Cost/RVU
• RVU/enrollee/year
• Primary Care Performed Elsewhere
8-18
Critical Decision Making for Medical Executives: Keys to Improving Healthcare Delivery SEP 2007 7-18
19. Lead and Lag Indicators for
Pharmacy PMPM
• Lead Indicators – Drivers of Desired Performance
• Home Delivery
• Use of Generics
• Lag Indicator – Performance Outcome
• Retail Pharmacy Use
• Pharmacy PMPM
• Total MTF Pharmacy Expense
Goal: Increase home delivery, encourage therapeutic substitution,
but, be careful not to manage pharmacy in a vaccuum. It could
have unintended consequences!
8-19
21. Medical Cost Per Equivalent Life
400
350
300
250
200
150
100
2005 FQ1
FQ4
2006 FQ1
FQ4
FQ3
FQ4
FQ3
FQ4
FQ2
FQ3
FQ2
2007 FQ1
2008 FQ1
FQ3
FQ2
FQ3
FQ2
FQ2
2009 FQ1
FQ4
2010 FQ1
Army Navy Air Force MCSC MHS
Prior Current FY05 FY06 FY07 FY08 FY09 FY09 FY09 FY09 FY09 FY10 FY10 FY08 FY09 FY10
Qtr Qtr YTD YTD YTD YTD Q1 Q2 Q3 Q4 YTD Q1 YTD YTD YTD YTD
% % %
Army 221 241 249 280 301 312 316 324 314 348 348 10.7% 12.0% 15.8%
Navy 219 231 249 276 301 309 303 304 304 317 317 8.9% 10.1% 6.4%
Air Force 211 227 236 255 267 279 276 275 274 296 296 5.8% 7.9% 12.6%
MCSC: Network/PCM 189 202 214 226 230 244 235 235 236 231 231 5.4% 4.7% 1.2%
MHS Total 209 224 234 255 268 279 276 277 275 287 287 7.3% 8.1% 8.1%
Goal 6.1% 5.0% 6.1%
Data Source: M2 (SIDR/SADR/HCSR-I/HCSR-NI,PDTS); EASIV; Enrollees are adjusted for Age/Gender/Bencat
Current as of Jul 10, with measure reported through Dec 09. (Portions of value are projected due to missing expense data from MTFs.)
Average Annual % Increase (FY06/09): Army: 11.9% Navy: 10.6% AF: 8-21
8.0% MCSC: 6.0%
22. Direct Care Enrollee Difference
From MCSC Enrollee
70%
60%
50%
40%
30%
20%
10%
0%
2005 FQ2 FQ3 FQ4 2006 FQ2 FQ3 FQ4 2007 FQ2 FQ3 FQ4 2008 FQ2 FQ3 FQ4 2009 FQ2 FQ3 FQ4 2010
FQ1 FQ1 FQ1 FQ1 FQ1 FQ1
Army Navy Air Force
Direct Care Enrollees used to cost 10%-20% more than MCSC enrollees.
They now cost 30-50% more.
8-22
23. Direct Care Enrollee Difference
compared to MCSC Enrollees
Active Duty Non-Active Duty
80% 70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0% 0%
2009 FQ1
2005 FQ1
FQ2
FQ3
FQ4
2006 FQ1
FQ2
FQ3
FQ4
2007 FQ1
FQ2
FQ3
FQ4
2008 FQ1
FQ2
FQ3
FQ4
FQ4
2010 FQ1
FQ2
FQ3
2005 FQ1
FQ2
FQ3
FQ4
FQ2
FQ4
2007 FQ1
FQ3
2008 FQ1
FQ4
FQ2
FQ4
2010 FQ1
2006 FQ1
FQ3
FQ2
FQ4
FQ2
FQ3
2009 FQ1
FQ3
Army Navy Air Force Army Navy Air Force
Difference for AD Enrollees growing at a much faster rate
than that for Non-Active Duty .
8-23
24. Major Diagnostic Category
Changes for AD between FY06/09
Tl RVU/100 Eq Lv - DC 06/09 Tl RVU/100 Eq Lv - MCSC 06/09 Total RVU per 100 Eq Lv 06/09
Description 2006 2009 % Change 2006 2009 % Change 2006 2009 % Change delta
Diseases and Disorders of the Nervous System 56.44 75.57 34% 47.34 44.23 -7% 103.8 119.8 15% 16.01
Diseases and Disorders of the Eye 192.26 193.01 0% 11.00 11.34 3% 203.3 204.4 1% 1.09
Diseases and Disorders of the Ear, Nose, Mouth, and Throat 103.03 144.84 41% 34.78 85.21 145% 137.8 230.1 67% 92.23
Diseases and Disorders of the Respiratory System 32.37 41.57 28% 11.20 16.04 43% 43.6 57.6 32% 14.04
Diseases and Disorders of the Circulatory System 47.64 49.22 3% 33.86 36.47 8% 81.5 85.7 5% 4.19
Diseases and Disorders of the Digestive System 89.64 91.26 2% 30.29 38.34 27% 119.9 129.6 8% 9.68
Diseases and Disorders of the Hepatobiliary System and Pancreas 4.13 4.22 2% 2.93 4.06 39% 7.1 8.3 17% 1.23
Diseases and Disorders of the Musculoskeletal System and Connective Tissue 349.52 473.43 35% 187.99 260.53 39% 537.5 734.0 37% 196.45
Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast 132.70 124.22 -6% 29.44 39.29 33% 162.1 163.5 1% 1.36
Endocrine, Nutritional and Metabolic Diseases and Disorders 22.23 26.19 18% 4.51 6.72 49% 26.7 32.9 23% 6.17
Diseases and Disorders of the Kidney and Urinary Tract 17.48 20.31 16% 9.11 13.01 43% 26.6 33.3 25% 6.72
Diseases and Disorders of the Male Reproductive System 8.54 19.54 129% 9.57 11.10 16% 18.1 30.6 69% 12.53
Diseases and Disorders of the Female Reproductive System 30.02 33.43 11% 11.20 13.11 17% 41.2 46.5 13% 5.33
Pregnancy, Childbirth, and the Puerperium 21.06 32.67 55% 25.87 26.45 2% 46.9 59.1 26% 12.19
Newborns and Other Neonates with Conditions Originating in Perinatal Period 0.23 0.47 101% 0.06 0.06 -13% 0.3 0.5 77% 0.23
Diseases and Disorders of the Blood, Blood Forming Organs, Immunological Disorders .24
4 5.17 22% 2.90 4.15 43% 7.1 9.3 31% 2.20
Myeloproliferative Diseases and Disorders, Poorly Differentiated Neoplasm 8.59 10.33 20% 4.91 7.75 58% 13.5 18.1 34% 4.58
Infectious and Parasitic Diseases, Systemic or Unspecified Sites 16.15 12.98 -20% 1.65 2.52 53% 17.8 15.5 -13% (2.30)
Mental Diseases and Disorders 132.33 252.65 91% 25.36 49.06 93% 157.7 301.7 91% 144.02
Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders 46.16 63.81 38% 2.14 7.37 245% 48.3 71.2 47% 22.89
Injuries, Poisonings and Toxic Effects of Drugs 22.76 10.24 -55% 7.13 9.87 38% 29.9 20.1 -33% (9.78)
Burns 0.77 1.86 142% 0.53 0.92 73% 1.3 2.8 114% 1.48
Factors Influencing Health Status and Other Contacts with Health Services 873.22 1,033.76 18% 14.05 19.12 36% 887.3 1,052.9 19% 165.61
Human Immunodeficiency Virus Infections 1.61 1.91 18% 0.03 0.03 -2% 1.6 1.9 18% 0.30
Total 2,213.11 2,722.68 23% 507.87 706.75 39% 2,721.0 3,429.4 26% 708.45
2.0 more RVUs per person per year in MDC 08 – Ortho
1.5 MDC 19 – Mental Health
1.7 MDC 23 – Factors Influencing Health
5.2 more RVUs per person per year or 74% of total increase for ambulatory
8-24
25. All Enrollee AD MDC-23 Health Status
V705 Break out
V705 Diagnosis Code Detail - In descending order by Change in RVUs 2006 2009 FY06/09 RVU Change
MDC Adj BenGrp Diag Desc RVU/100 Vst/100 RVU/100 Vst/100 Delta Pct
23 AD V705 2 PERIODIC HEALTH ASSESSMENTS (PHA) 49.42 27.48 113.21 59.60 63.79 129.1%
V705 D PRE-DEPLOYMENT ASSESSMENT 0.00 0.00 39.77 22.07 39.77 N/A
V705 E INITIAL POST-DEPLOYMENT ASSESSMENT 0.00 0.00 14.56 13.68 14.56 N/A
V705 F POST DEPLOYMENT HEALTH REASSESSMENT (PDHRA 0.01 0.00 12.13 10.67 12.13 N/A
V705 7 DUTY STATUS DETERMINATION ENCOUNTER 8.21 4.21 15.65 8.57 7.44 90.6%
V705 3 OCCUPATIONAL EXAM 15.47 7.93 19.53 11.01 4.06 26.3%
V705 H OTHER EXAM DEFINED POPULATION - - 3.34 1.56 3.34 N/A
V705 1 AVIATION EXAM 29.37 9.80 32.31 11.54 2.94 10.0%
V705 A HEALTH EXAM OF DEFINED SUBPOPULATIONS 0.59 0.32 3.34 2.20 2.75 470.5%
V705 9 SEPARATION/TERMINATION/RETIREMENT EXAM 14.77 6.80 16.74 8.25 1.97 13.3%
V705 8 SPECIAL PROGRAM ACCESSION ENCOUNTER 1.17 0.50 2.80 1.19 1.64 140.6%
V705 C PHYSICAL READINESS TEST (PRT) EVALUATION 0.00 0.00 1.49 0.93 1.48 N/A
V705 B ABBREVIATED SEPARATION/TERMINATION/RETIREMENT EXAM 1.60 0.78 2.97 1.53 1.37 86.1%
V705 G GLOBAL WAR ON TERRORISM/WOUNDED WARRIORS - - 0.97 0.60 0.97 N/A
V705 5 INTRA-DEPLOYMENT ENCOUNTER 2.30 1.27 0.64 0.38 (1.66) -72.1%
V705 0 ARMED FORCES MEDICAL EXAM 20.10 9.76 16.59 7.88 (3.51) -17.4%
V705 HEALTH EXAMINATION OF DEFINED NATURE 7.55 4.94 0.08 0.04 (7.47) -98.9%
V705 4 PRE-DEPLOYMENT RELATED ENCOUNTER 59.33 30.80 23.70 13.53 (35.63) -60.1%
V705 6 POST-DEPLOYMENT RELATED ENCOUNTER 90.36 41.30 45.38 21.12 (44.99) -49.8%
AD Total 300.25 145.90 365.21 196.36 64.96 21.6%
23 Total 300.25 145.90 365.21 196.36 64.96 21.6%
Note: Only Direct Care breaks out the V705 codes into more detail. Purchased care remains as the
summary V705 HEALTH EXAMINATION OF DEFINED NATURE.
Pre/Post Deployment Encounters are mixed codes over the years and are highlighted. Overall there
was a net increase of 4 per100 for Pre-Deployment and decrease of 18 per 100 for Post-Deployment
8-25
26. Cost per Adjusted Total RVU
$120
$100
Cost per Adj Enhanced Total RVU
$80
$60
$40
$20
$0
FQ3
FQ2
FQ3
FQ4
FQ2
FQ4
FQ2
FQ3
FQ3
FQ2
FQ4
FQ3
FQ4
FQ2
FQ4
2007 FQ1
2005 FQ1
2006 FQ1
2008 FQ1
2009 FQ1
Army Navy Air Force PSC
Average Annual % increase: Army: 5.98% Navy: 6.02% Air Force: 8.24% PSC: 0.78%
8-26
27. Cost per RWP
$18,000
$16,000
$14,000
$12,000
Cost per RWP
$10,000
$8,000
$6,000
$4,000
$2,000
$0
FQ3
FQ4
FQ3
FQ4
FQ2
FQ3
FQ4
FQ2
FQ2
FQ3
FQ4
FQ2
FQ3
FQ4
FQ2
2006 FQ1
2008 FQ1
2005 FQ1
2007 FQ1
2009 FQ1
Army Navy Air Force PSC
Average Annual % Increase: Army: 7.11% Navy: 9.26% AF: 10.26% PSC: 4.37%
8-27
28. PMPM Comparison for Services Wilford Hall
MTF Prime Enrollee $505, 80%
increase
MCSC MHS
Avg 236 Avg 300
50%
40%
MHS
Avg 28.1%
30%
% Change 06/09
Industry
Avg 19.9%
20%
10% MCSC
Avg 16.8%
0%
-10%
$150 $200 $250 $300 $350 $400
PMPM 2009
8-28
NOTE: Size of circle is in proportion to # of enrollees
Army AF Navy
29. PMPM Comparison for Services
AD MTF Prime Enrollee
Ft Knox $527, 96%
MCSC MHS NMC SD $387, 60%
Avg 276 Avg 384
60%
366th MEDGRP-
50% MTN HOME $406, 47%
MHS
40% Avg 37.8%
% Change 06/09
30%
Industry
Avg 19.9%
20%
10% MCSC
Avg 16.1%
0%
$250 $300 $350 $400 $450 $500
PMPM 2009
8-29
NOTE: Size of circle is in proportion to # of enrollees Army AF Navy
30. Summary
• The gap is growing in PMPM for those enrolled to an
MTF vice those enrolled to Civilian PCMs
• Purchased Care unit costs growing at significantly
lower rates than MTF unit costs
• OPPS, in particular, has lowered PC unit costs
• Growth most pronounced with Active Duty members
enrolled to an MTF
• Some is clearly the consequences of the war
• PTSD, pre and post deployment exams
• However, utilization growth warrants further study
• PMPM at three sites with high PMPM increases show
significant variation in root causes
8-30
