1) Payment reform is needed to address distortions created by fee-for-service payments, such as overuse and misaligned incentives, but moving away from FFS requires greater integration among providers which could reduce competition. 2) Bundled payments that cover broader "units of service" could help coordinate care better while also improving consumers' ability to search and compare costs. 3) While competition is important to control healthcare costs, the US healthcare market has challenges such as a lack of price transparency, provider market power, and consumers having difficulty making informed choices in a complex system.

1. Payment Reform, Competition,
and Integration
Sept 12, 2011

2. Health Care Markets
Payers
– Public
– Private
Providers
– Hospitals
– Doctors
– Post acute/ long term care providers
– Manufactures

3. Payment Reform

4. Payment Reform
Level of prices
– Price sends signals to firms and consumers
– Signal to consumers are distorted by
insurance
– Mispricing can lead to inefficiencies
“Unit” of pricing
– How broad are service categories
– Unit of pricing is typically a unit meaningful to
consumers

5. Fee-For-Service
Very micro product definitions
Services do not span providers
Medicare physician fee schedule:
– 10 office visit codes: 5 levels of complexity x new vs
established patients
– About 175 codes for CT
Body part
With or without dye
Accompanying test
– Adjustments for where procedure is performed
In “facility” or not
Medicare inpatient fee schedule
– Bundled by admission type (DRG)

6. FFS Distortions
High prices:
– Encourage over use and over investment
– Transfers funds from payers to providers
Low prices:
– Create access and potentially quality
problems
– Discourage product innovation
– (May encourage process innovation)

7. FFS Distortions (cont.)
Conflicting incentives
– No incentive for population health/ chronic
disease management
– Profits rise with increased use
Readmissions

8. Bundled Payment
Definition
– An aggregated payment, across services and
providers
Motivation
– Improves incentives to coordinate care
– Control spending (combines price and
quantity)
– Definition of a “unit of service” approximates
what patients care about

9. Types of Bundled Payment
Global payment
– Pay for all care for a defined time period
Episode
– Pay for all care associated with an episode
Hip fracture
Heart disease
Diabetes

10. Bundled Payment Issues
Who controls the bundled payment
– New organization forms are needed: ACOs
– Who is residual claimant?
Scope
– What services are included?
– How to define an episode?
Risk transfer
– reinsurance
Rate setting (and updating)
Protecting quality
– Combine with P4P

11. Example: Episode Based Payment
Prometheus
– Privately developed episode payment system
– Payment takes the form of an evidence informed case
rate (ECR)
– Payment rates set for selected episodes
AMI, Hip replacement, diabetes, asthma, etc.
30% of spending
– ECR based on estimates of cost of high valued care
Adjusted for risk, „unavoidable‟ complication rates
– Quality bonus paid based on performance score
Source: http://www.rwjf.org/files/research/prometheusmodeljune09.pdf

12. Example: Global Payment
AQC (BCBS MA)
– Risk adjusted global payment (capitation)
– Paid to primary care physician‟s group
– Updates set contractually for 5 years
– Bonus based on performance score
ACOs
– Integrated provider groups
– Risk adjusted „comprehensive‟ targets set actuarially
– Providers „share‟ any savings below target

13. Bundled Payment Success
Organizational ability to manage care and
risk
Comprehensiveness
Discipline in setting rates and updates
Political sustainability
– Concordance with patient incentives

14. Integration

15. Concerns with a Fragmented,
System
Information flows
– Hard to coordinate care across settings
– Concerns about discharge planning

16. Types of Integration
Vertical
– Hospitals combine with physicians
– PCPs join with specialists
Horizontal
– Providers of same type combine
Big hospital systems
Multispecialty group practices

17. Integration Concerns
Diseconomies of scale
– Motivating workers
– Monitoring performance
– Innovating
Competition

18. Competition
(Among providers)

19. Basic Theory
Prices convey signals to producers and
consumers
Competing firms drive prices to marginal
cost
Competition spurs innovation
Competition forces providers to be
customer (patient) centric
 Search by consumers is crucial

20. Market Based Prices
Insurance distorts demand signal
Providers may have market power
Prices in the US higher than abroad
– Angioplasty almost 2.5 times more expensive
– Normal delivery 83% greater
– Scanning and imaging consistently higher
Measurement is challenging, quality is
unobservable, costs hard to measure
Too many specialists
Source: International Federation of Health Plans 2010

21. Mechanisms to Control Prices
Regulation
Competitive bidding
– Durable medical equipment
– Medicare Part D
HSAs
Least costly alternative rules
Tiered Networks

22. Integration and Competition
Integration could exacerbate price
distortion
– Fewer providers (worry most about horizontal
integration)
Integration facilitates bundled payment
Bundled payment may facilitate search

23. Will Competing Insurers Control
Price (or use)?
Positives
– Innovative
– Must respond to consumers
Natural check against poor access and quality
Negatives
– Lack the market power of the government

24. Concerns with Competition
Disparities
Willingness to accept restrictions on
provider choice
Cognitive impairment/ general information
problem
Short time for decision

25. Summary
FFS pricing is complex and leads to
several distortions with potential for abuse
Moving away from FFS requires
integration among providers
– Integration may have other benefits as well
But integration raises concerns about
competition and price
– Bundled payment may improve search