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PHYSICIANS AND HOSPITALS: Can They Cooperate To Control Costs?

January 19th, 2007

Elliott Fisher and colleagues in their provocative paper published online December 5 validated an approach to quantifying the clinical and economic performance of physician communities clustered statistically around hospitals. Fisher describes the so-called extended hospital medical staff as “hospital-associated multispecialty group practices” or “virtual organizations.” While some physician markets do indeed function as “communities,” with norms and at least informal social control, in the vast majority of places, there is little “community.” These physician “communities” function more like colorful Darwinian ecologies, like a coral reef, with predators and prey, territories, hierarchies, pecking orders, and few rules of any kind. Holding the hospital accountable for the behavior of its community physicians outside the hospital is about as realistic as holding the Lebanese government accountable for the behavior of Hezbollah.

The hospital’s role in this ecology has been shrinking steadily for more than twenty years, as the advance of less invasive diagnosis and treatment has peeled off layers of clinical activity into physician- or investor-sponsored enterprises. Though hospitals have occasionally acted boldly in this space, their share of overall health spending has declined from 41 percent in 1980 to around 31 percent today.

A central flaw. High quality medical care requires good communication and accountability. The current fragmented payment method, which pays hospitals separately from physicians and pays multiple physicians separate fees for diagnosis or treatment of the same patient, fosters neither coordination nor accountability. Along with the piecework incentive inherent in fee-for-service, it is the central flaw in our current Medicare payment system.

The hospital/physician fee division within Medicare goes back forty-one years to the founding of the program, and perhaps thirty years beyond that to the separation of Blue Cross and Blue Shield, on whose template Medicare was built. Fee-for-service physician payment probably goes back to ancient Greece, or perhaps earlier. These payment silos are relics of an earlier medical age, not an adequate foundation for improving Medicare’s payment model.

Attempts to control costs. The current attempts to restrain the costs of Medicare’s Part B, a type of global budget based upon a so-called Sustainable Growth Rate, has become the health policy equivalent of an inflamed hemorrhoid, requiring the annual application of anesthetic and emollients. As procedure-oriented physicians continue running up the tab, growing their volumes at or near double-digit rates, the current SGR model produces annual, formula-driven, across-the-board reductions in physician fees that have virtually compelled congressional rescissions. The current SGR methodology does nothing to restrain economically motivated physician activism. Further, it redistributes wealth from primary care physicians to specialists, by cutting the former’s already paltry fees without restraining the latter’s MRI scans and arthroscopies. There must be a better way.

Fisher’s apparent intent is to use the hospital as a vehicle for limiting payment to both the institution and the community’s physicians. By limiting the total amount of money spent annually by Medicare in a specific physician community, Fisher presumes that both hospitals and physicians would reconsider both physician recruitment and facilities expansions that would lead to increased spending.

Abolishing the division between Part A and Part B and creating some form of unified, severity-adjusted payment methodology, based on per-episode-of-illness, has a lot of appeal. Focusing on the episode of illness (rather than Fisher’s annual communitywide spending) would be a superior method of shifting clinical/economic risk to providers compared to the much-reviled global capitation that proved unworkable in the 1990s. Like capitation, however, it would create incentives to minimize hospitalization as well as expensive diagnostic procedures and could potentially throw off “bonuses” for entities that could manage the care for less than the bundled payment.

Payment problems. However, to whom does Medicare write the check? If one writes it to the hospital and says, in effect, “You worry about how to get money to your physicians,” you’ve created a problem akin to giving the mayor of a town in Al Anbar Province in Iraq a trunkful of hundred-dollar bills and saying, “You pass it out.” At some point early in the process, you need armed guards and someone to start your car for you in the morning. If you write the check to a physician group practice, or a communitywide physician alliance of some kind, how do you assure that the hospital gets paid? The absence of robust organizations with sufficient governance backbone to enforce economic discipline is the fundamental flaw in any such effort, as earlier experiments along this line revealed.

Back in the early 1990s hospitals created “physician-hospital organizations,” in effect joint-venture revenue-gathering organizations, with their physicians. When the expected wholesale shift to capitation failed to materialize, these organizations withered. Those who collected capitated payment from health plans experienced serious problems. Weak governance and poor internal utilization controls doomed many of the organizations lucky enough to get contracts.

Possible solution. It may be that the solution is a two-track approach, with differential incentives to patients to use the more “organized” track. Medicare could continue paying on a per event (per admission, per visit, per procedure) basis, with separate Part A and Part B components, for a complex hospitalization, in which case the patient continues paying part of the bill through Medicare’s current structure of deductibles and limits. These payments could be systemically restrained with current methodologies (e.g., restrictions on hospital updates and on base Part B fees). Or patients could benefit from reduced cost sharing if they agreed to participate in a certified economic arrangement which received a unified, severity-adjusted lump sum for treatment of an episode of illness. (Of course, how one does this without creating windfalls for the patient’s Medicare supplement insurer would be a challenge. One could conceivably mandate that the savings be passed through to subscribers in premium rebates if the supplemental plans are to continue to be approved.)

One can share Fisher’s goals–better-coordinated care and reduced variation in practice costs (and complications)–without fully understanding how one operationalizes his idea of a unified community-based payment approach. Merely being able to conceive a statistical method for unified payments is simply the first step in implementing a complex and much-needed change in payment policy.

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5 Responses to “PHYSICIANS AND HOSPITALS: Can They Cooperate To Control Costs?”

  1. alan lazaroff Says:

    As a geriatrician, I want to comment on two areas raised in the above posts, evidence-based medicine and payment incentives.

    It is undoubtedly true that some physicians use any available excuse to avoid changing their practice, including the changes promoted by the proponents of evidence-based medicine and related P4P. That fact does not negate the reality that there are serious and legitimate objections to EBM and P4p in their current states of development.

    First there are serious questions about the quality of the evidence. Practice guidelines like the ADA diabetes guidelines are complex and nuanced, but when translated to NCQA criteria and P4p measures the nuance is gone. The translation of research evidence into practice usually yields less favorable results than predicted by the research findings. For example, one recent study found that most of the recommendations of the American Heart Association Guidelines for CHF were not associated with any difference in outcomes in clinical practice.

    Most of my patients (average age 80) have multiple diseases, not one. What guideline prescribes the optimal care for a patient with CHF, diabetes, arthrits, osteoporosis and depression. I would argue that the optimal care for the patient with 5 diseases is not the sum of the optimal care for each of the diseases. If you treat the patient according to all 5 guidelines, she will be on 15 or 20 drugs, be instructed to make humanly impossible lifestyle changes,will be unable to execute the treatment, will be unable to afford the treatment, and frankly, will not survive the treatment!

    No guideline will specify the optimal care for the enormous number of combinations of disease, socio-economic status, insurance restrictions, and patient preferences.

    Of course, one can use guidelines in a prescriptive manner for the care of the simple patients, but they are not the ones that cost the money.

    EBM and P4P are seductive concepts, but putting them into practice in the real world is fraught with difficulties.

    The current payment system is broken. When I sat on a non-profit hospital board, I listened to the discussions about which services are profitable (cardiology and ortho especially). The hospital business plan was to pump up the volume of these services, and close others, like psychiatry, that were impossible to make money on. All the hospitals have the same winners and losers. (This also accounts largely for the specialty hospital phenomenon). The reason is that the administered prices are wrong. Some things are overpaid, some underpaid, systematically. When CMS tired to correct this last year, they caved in to enormous pressure from the hospital lobby. They like it just the way it is, thank you. Physicians aren’t the only ones for whom self-interest is a motivator.

    The same sytematic payment disparities characterize physician payment, favoring procedures and disadvantaging cognitive work. As a result, primary care is in desparate straits. I predict a war within the medical profession over this issue.

  2. Henry Beecher Says:

    I really like the analogy of a Darwinian ecology for this situation–so let me belabor it. Remember cooperation in these terms only occurs if it is necessary for survival (and more particularly for reproduction–the perpetuation of their prerogatives). American physicians are lone wolves, coming together only when it is necessary for their survival and to maintain what they see as their rights. Go to meetings and see how physicians feel about evidence based medicine. Proponents of evidence based medicine have been called fascists in the mainstream literature. Anything that conflicts with physicians understanding of their rights will be opposed even if it is good for the patient (remember them?) American physicians will not tolerate anything like what Fischer suggests unless no other choice exists.

  3. agosfield Says:

    I am mystified by the apparent enthusiasm for gainsharing — a way to give workers part of an entity’s profits. Independent physicians are not the hospital’s “workers”. All of the gainsharing models to date are based on giving to the physicians a piece of the “savings” for the hospitals when they standardize services or supplies. Let’s remember that while some hospitals have succeeded financially by cross-subsidizing among disparate payment models, they all complain they aren’t paid enough. How does it make sense to give the physicians a piece of the inadequate monies —if they are inadequate? Although current models have been approved by the OIG when they have a shelf-life of only a year, the fundamental fallacy of all of them is that after the first year, the savings are smaller and then smaller again and eventually whatever you are paying as savings goes away or it isn’t really a part of the savings — so the whole concept is illusory, short-lived and another grasping at straws transitional program with its own problems.

    Why should we waste policy energy on tinkering with a limited model like gainsharin, wasting political capital on fixing a problem which won’t solve the real problem — the one that really needs attention — a new sustainable payment model that encourages quality with resourceful expenditures that lower waste and improve underuse?

    When we present PROMETHEUS Payment to provider groups — hospitals and physicians — they immediately grasp it’s appeal but observe “oh this will be really complex.” Of course it will. If it were simple it would have happened thirty years ago. In fact, the actual implementation of the program by providers is not unmanageably complex and draws on practices that should be in place anyway. The real complexity lies in the development of the software package that permits tracking of data and allocation of dollars in accordance with the incentives and the scorecard. And that is already being created before the program even hits the sidewalk, so when we go live it will be real. Let’s just pull up our socks and get on with the hard work already and stop looking for quick fixes.

    Alice Gosfield

  4. agosfield Says:

    Jeff Goldsmith’s typically colorful and really insightful comments describe common phenomena throughout the country in terms of the exacerbated tensions among hospitals and their own physicians who increasingly compete with them. Both sides also feel hampered by stringent fraud and abuse laws which inhibit creative financial interactions among them. Yet there are significant mythologies afoot there, abetted by overly conservative lawyers who do not understand the real opportunities to enhance quality and the parties’ respective business cases.

    But, the fundamental problems in many of the payment reform models recently discussed include the following: (1) the parties subject to the incentives have to form new legal structures (e.g., PHOs, IPAs) to play; or (2) someone holds the money of someone else for distribution; or (3) someone wants to or has to give a piece of their money to someone else (e.g., gainsharing); or (4) there is a single model through which the parties are permitted to act if they are to take advantage of new incentives. How can this constellation of characteristics possibly advance quality over the long term?

    The principal goal should be to pay fairly for the right bundle of services patients need for their clinical conditions, with incentives that lower administrative burden, enhance quality, and foster clinical collaboration. The PROMETHEUS Payment model — two years in the making (, does that by basing case rates on the resources necessary to provide all the care that good guidelines say the patient should receive, adjusted upward for co-morbid conditions requiring more time, effort and resources, measured in a scorecard. One of the cardinal principles of this model is that no one holds the money for anyone else unless they choose that configuration, yet all share the same clinical incentives. This happens in two ways: (1) Each provider, group of providers or combination of providers, on one hand, and the plan, on the other, agree on the scope of services the provider will provide and at what price. A portion of that price (10% for chronic care and 20% for acute care), is held back in a Performance Contingency Fund which is paid to the contracted provider, pro rata, in accordance with the calculated scores above a quality baseline. (2) The scores turn 70% on what the measured provider does and 30% on what all the other providers treating the patient on that Evidence-informed Case Rate do.

    The beauty of it, among other things, is that not only are there virtually no fraud and abuse implications were it to be employed in Medicare, but because of the elimination of time-wasting administrative burdens (e.g., prior authorizations, certificates of medical necessity, concurrent review, post-payment audits, and more), more time can be spent with patients; and providers can improve their financial margins and efficiencies. The most recent iteration of its principles, ( sets forth the contracting and legal context which will make the program real. PROMETHEUS Payment Inc, is currently identifying pilot markets to test the concepts in real world settings and expects to go live in the second half of 2007.

    Why should anyone care now if the new model is not yet coming to a theater near you? Especially with regard to hospitals and physicians, the forms of clinical collaboration which the PROMETHEUS Payment model rewards are what they can and should be doing anyway. Finding a solution to the lack of care coordination and appropriate common incentives across the care continuum should not be driven by the apparent convenience of a unitary structure or mode. Instead it should be guided by sound principles and policies around which robust and flexible solutions can emerge. Clearly, hospitals cannot survive without the passionate engagement of their physicians with them, particularly around quality. This engagement, however, need not depend on a formalistic extended medical staff structure, but rather on a recognition that what matters – such as how patients are treated before they get to the hospital, their condition when they get to the hospital, the optimal moment for referral from primary physician to specialist and beyond, as well as what happens in the hospital and after discharge — are all quality and business case-relevant to all parties. The PROMETHEUS Payment model offers Provider payment Reform for Outcomes, Margins, Evidence, Transparency, Hassle-reduction, Excellence, Understandability, and Sustainability without the need for new legal configurations and financial risk among providers. Let’s not repeat the mistakes of the past that have taught us that any solution built around a specific vehicle for care delivery and payment will only lead to stifled innovation, burdensome bureaucratic oversight, and, ultimately, anger, resentment, and failure.

    Alice G. Gosfield, Esq.
    Chairman, PROMETHEUS Payment Inc.

  5. James C. Robinson Says:

    Incisive analysis by Professor Goldsmith. With due respect to Fisher and his colleagues, to whom we owe so much statistical insight, assigning doctors to hospitals financially may work in New Hampshire, where hospitals are few and doctors are genteel. But it won’t work in my hometown, the Sunni triangle of Los Angeles, Riverside, and Long Beach California, where hospitals are everywhere and where the wise know never to get between a doctor and a dollar bill. We need payment methods that encourage physician and hospital cooperation without inflaming the antipathies, and episode-based (case rate) pricing as suggested by Goldsmith is a great idea but already pushing the limits. At least case rate pricing will follow the patients and the physicians from community hospital to specialty hospital to ambulatory surgery center to wherever, rather than capitating one facility. The challenge of giving the payment to one entity and requiring all participants to agree with how to allocate that payment is big enough without forcing all physicians to stick with one facility or combining all specialties and procedures into some global payment. Even case rate pricing that bundled physician and hospital payment would politically be a reach. How about as a first step reviewing the gainsharing ban, which explicilty prevents physicians and hospitals from sharing the gains from cooperation?

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