Use of diagnosis-related groups by non-Medicare payers

Medicare's prospective payment system (PPS) for hospital cases is based on diagnosis-related groups (DRGs). A wide variety of other third-party payers for hospital care have adapted elements of this system for their own use. The extent of DRG use varies considerably both by type of payer and by geographical area. Users include: 21 State Medicaid programs, 3 workers' compensation systems, the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS), more than one-half of the Blue Cross and Blue Shield Association (BCBSA) member plans, several self-insured employers, and a few employer coalitions. We describe how each of these payers use DRGs. No single approach is dominant. Some payers negotiate specific prices for so many combinations of DRG and hospital that the paradigm that payment equals rate times weight does not apply. What has emerged appears to be a very flexible payment system in which the only constant is the use of DRGs as a measure of output.     

Medicare-the development of publicly financed health insurance: Medicare's impact on the nation's health care system

It is useful for health care managers to understand Medicare's history and the impact on providers of ever-changing Medicare payment methods. Initially, Medicare payments resembled those of commercial insurance plans and Blue Cross Blue Shield plans. When Congress became concerned about the increasing costs of Medicare, new payment methods were created to limit payments to providers. The prospective payment system, imposed on hospitals in 1987 and later on nursing homes, home health agencies, and other services, has been adapted by commercial plans, Blue Cross Blue Shield associations, and state Medicaid programs. Changes in payer reimbursements require health care managers to adjust the department's charge master and exert more control of departmental costs. The story of Medicare's beginnings and development can provide some insight into the possibility of national health insurance, given the historic and current politics that limit publicly financed social programs. This article discusses the development of Medicare and its administration and serves as an introduction to the complex realities of health care reimbursement policy.     

Early lessons from accountable care models in the private sector: partnerships between health plans and providers

New health care delivery and payment models in the private sector are being shaped by active collaboration between health insurance plans and providers. We examine key characteristics of several of these private accountable care models, including their overall efforts to improve the quality, efficiency, and accountability of care; their criteria for selecting providers; the payment methods and performance measures they are using; and the technical assistance they are supplying to participating providers. Our findings show that not all providers are equally ready to enter into these arrangements with health plans and therefore flexibility in design of these arrangements is critical. These findings also hold lessons for the emerging public accountable care models, such as the Medicare Shared Savings Program-underscoring providers' need for comprehensive and timely data and analytic reports; payment tailored to providers' readiness for these contracts; and measurement of quality across multiple years and care settings.     

Hospitals respond to Medicare payment shortfalls by both shifting costs and cutting them, based on market concentration

The coverage expansions planned under the Affordable Care Act are to be financed in part by slowing Medicare payment updates to hospitals, thereby reigniting the debate over whether low prices paid by public payers cause hospitals to increase prices to private insurers--a practice known as cost shifting. Recently, the Medicare Payment Advisory Commission (MedPAC) proposed an alternative explanation of hospital pricing and profitability that could be used to support policies that pressure hospitals to reduce overall costs rather than to only raise prices. This study evaluated the cost-shift and MedPAC perspectives using 2008 data on hospital margins for 30,514 Medicare and privately insured patients undergoing any of seven major procedures in markets where robust hospital competition exists and in markets where hospital care is concentrated in the hands of a few providers. The study presents empirical evidence that, faced with shortfalls between Medicare payments and projected costs, hospitals in concentrated markets focus on raising prices to private insurers, while hospitals in competitive markets focus on cutting costs. Policy makers need to examine whether efforts to promote clinical coordination through provider integration may interfere with efforts to restrain overall health care cost growth by restraining Medicare payment rates.     

Emerging Lessons From Regional and State Innovation in Value‐Based Payment Reform: Balancing Collaboration and Disruptive Innovation

Policy Points:

• Public and private purchasersmust create a "burning bridge" of countervailing pressure that signals "no turning back" to fee-for-service in order to sustain the momentum for value-based payment.
• Multi-stakeholder coalitions must establish a defined set of quality, outcomes, and cost performance measures and the interoperable information systems to support data collection and reporting of value-based payment schemes.
• Anti-trust vigilance is necessary to find the "sweet spot" of competition and cooperation among health plans and health care providers.
• Provider and health plan transparency of price and quality, supported by all-payer claims data, are critical in driving value-based payment innovation and cost constraint.

Context

In recent decades, practitioners and policymakers have turned to value-based payment initiatives to help contain spending on health care and to improve the quality of care. The Robert Wood Johnson Foundation funded 7 grantees across the country to design and implement value-based, multistakeholder payment reform projects in 6 states and 3 regions of the United States.

Methods

As the external evaluator of these projects, we reviewed documents, conducted Internet searches, interviewed key stakeholders, cross-validated factual and narrative interpretation, and performed qualitative analyses to derive cross-site themes and implications for policy and practice.

Findings

The nature of payment reform and its momentum closely reflects the environmental context of each project. Federal legislation such as the Patient Protection and Affordable Care Act and federal and state support for the development of the patient-centered medical home and accountable care organizations encourage value-based payment innovation, as do local market conditions for payers and providers that combine a history of collaboration with independent innovation and experimentation by individual organizations.Multistakeholder coalitions offer a useful facilitating structure for galvanizing payment reform. But to achieve the objectives of reduced cost and improved quality, multistakeholder payment innovation must overcome such barriers as incompatible information systems, the technical difficulties and transaction costs of altering existing billing and payment systems, competing stakeholder priorities, insufficient scale to bear population health risk, providers’ limited experience with risk-bearing payment models, and the failure to align care delivery models with the form of payment.

Conclusions

From the evidence adduced in this article, multistakeholder, value-based payment reform requires a trusted, widely respected “honest broker” that can convene and maintain the ongoing commitment of health plans, providers, and purchasers. Change management is complex and challenging, and coalition governance requires flexibility and stable leadership, as market conditions and stakeholder engagement and priorities shift over time. Another significant facilitator of value-based payment reform is outside investment that enables increased investment in human resources, information infrastructure, and care management by provider organizations and their collaborators. Supportive community and social service networks that enhance population health management also are important enablers of value-based payment reform. External pressure from public and private payers is fueling a “burning bridge” between the past of fee-for-service payment models and the future of payments based on value. Robust competition in local health plan and provider markets, coupled with an appropriate mix of multistakeholder governance, pressure from organized purchasers, and regulatory oversight, has the potential to spur value-based payment innovation that combines elements of “reformed” fee-for-service with bundled payments and global payments.     

Accountable Care Organizations: roles and opportunities for hospitals

Federal health reform has established Medicare Accountable Care Organizations (ACOs) as a new program, and some states and private payers have been independently developing ACO pilot projects. The objective is to hold provider groups accountable for the quality and cost of care to a population. The financial models for providers generally build off of shared savings between the payers and providers or some type of global payment that includes the possibility of partial or full capitation. For ACOs to achieve the same outcomes with lower costs or, better yet, improved outcomes with the same or lower costs, the delivery system will need to become more oriented toward primary care and care coordination than is currently the case. Providers of clinical services, in order to be more effective, efficient, and coordinated, will need to be supported by a variety of shared services, such as off-hours care, easy access to specialties, and information exchanges. These services can be organized by an ACO as a medical neighborhood or community. Hospitals, because they have a management structure, history of developing programs and services, and accessibility 24/7/365, are logical leaders of this enhancement of health care delivery for populations and other providers.     

The Lessons Of Medicare's Prospective Payment System Show That The Bundled Payment Program Faces Challenges

Policy makers have been trying to replace Medicare's fee-for-service payment system for years with approaches that pay one price for an aggregation of services. The intent is to reward providers for offering needed care in the most appropriate and cost-effective manner. Medicare's first payment change designed to accomplish such a change was the hospital prospective payment system, introduced during 1983-84. But because it focused only on hospital care, its impact on total Medicare spending was limited. In 2011 Medicare began a new initiative to expand the "bundled payment" concept to link payments for multiple services that patients receive during an episode of care. The goal of Medicare's current bundled payment initiative is to provide incentives to deliver health care more efficiently while maintaining or improving quality. This article provides a detailed analysis of how Medicare implemented the hospital prospective payment system, how hospitals responded to the new incentives, and lessons learned that are applicable to the bundled payment initiative. The lessons include that any Medicare payment reform needs to continuously respond to the many different components of the health system and that payment reform should be coupled with analogous reforms in private insurance payment, so that providers receive consistent signals to alter their behavior.     

Accountable Care Organizations: Roles and Opportunities for Hospitals

Abstract

Federal health reform has established Medicare Accountable Care Organizations (ACOs) as a new program, and some states and private payers have been independently developing ACO pilot projects. The objective is to hold provider groups accountable for the quality and cost of care to a population. The financial models for providers generally build off of shared savings between the payers and providers or some type of global payment that includes the possibility of partial or full capitation. For ACOs to achieve the same outcomes with lower costs or, better yet, improved outcomes with the same or lower costs, the delivery system will need to become more oriented toward primary care and care coordination than is currently the case. Providers of clinical services, in order to be more effective, efficient, and coordinated, will need to be supported by a variety of shared services, such as off-hours care, easy access to specialties, and information exchanges. These services can be organized by an ACO as a medical neighborhood or community. Hospitals, because they have a management structure, history of developing programs and services, and accessibility 24/7/365, are logical leaders of this enhancement of health care delivery for populations and other providers.     

Hospital cost shifting revisited: new evidence from the balanced budget act of 1997

This paper analyzes hospital cost shifting using a natural experiment generated by the Balanced Budget Act (BBA) of 1997. I find evidence that urban hospitals were able to shift part of the burden of Medicare payment reduction onto private payers. However, the overall estimated degree of cost shifting is small and varies according to a hospital’s share of private patients. At hospitals where Medicare is a small payer relative to private insurers, up to 37% of BBA cuts was transferred to private payers through higher payments. In contrast, hospitals with greater reliance on Medicare were more financially distressed, as these hospitals saw large BBA cuts but were limited in their abilities to cost shift.     

Health care provider payment systems

Health care provider payment systems regulate the relationship between patients, providers, and third payers in order to maximise benefits and minimise costs of the whole health care system. Health care providers could be paid by a price or a fee for service, by capitation systems, or by reimbursement of production costs. It would be interesting to develop innovative payment systems aimed to the payment of the entire health care pattern of patients. This would be particularly desirable for certain health conditions where it is impossible to divide the health care delivery pattern into single health services e.g. psychiatric care, long term and rehabilitation care.     

Fee-for-service Medicare in a competitive market environment

Since its inception, the Medicare Program has allowed for the participation of private health plans, but the relationship of private plans to the government-sponsored fee-for-service (FFS) plan has been the subject of debate. Increased payments to private plans, the introduction of regional preferred provider organizations (PPOs), and a mandated demonstration of price competition that includes FFS Medicare reflect an ongoing attempt to define the role of private plans. The purpose of this article is to explore the roles of private plans and FFS Medicare and to attempt to identify the advantages and disadvantages of each.     

Medicare's operational history and impact on health care

Medicare was originally designed in the 1960s to fit into the existing health care delivery system. However, the program's early years showed an inflationary impact on health care costs. Medicare was the second largest federal domestic program and the fastest growing one, making it a target for those concerned about the size of government in general. By 1980, Medicare constituted 15% of the nation's expenditures for personal health care; and Medicare's administrators recommended substantive changes in provider payments through the introduction of the prospective payment system. Prospective payment system legislation impacted hospitals initially and later skilled nursing facilities and home health agencies. As policymakers made changes in Medicare payments to providers, providers made changes in the way services were delivered. What eventually evolved, in an insidious manner, was implicit management of the nation's health care delivery system by the Medicare program.     

Payment source and the cost of hospital care: evidence from a multiproduct cost function with multiple payers

This study investigates the capacity of hospitals to vary the intensity of their services based on patients' expected sources of payment. While the concept of price discrimination by hospitals based on payer generosity ("cost-shifting") has been discussed extensively, the notion that hospitals can adjust payer-specific marginal costs to reflect differences in reimbursement policies has not been studied in depth. To examine this issue. this analysis employs a multiproduct cost function with hospital outputs defined as admissions by payment source, controlling for the distribution and severity of illness ("casemix") for each payer. Marginal costs of casemix-adjusted discharges are obtained and compared for Medicare, Medicaid, Private Payers, and a residual category that includes uncompensated care. We find that indeed, payer-specific marginal costs generally reflect payer generosity.     

Accountable care organizations: the case for flexible partnerships between health plans and providers

Under the Affordable Care Act, the new Center for Medicare and Medicaid Innovation will guide a number of experimental programs in health care payment and delivery. Among the most ambitious of the reform models is the accountable care organization (ACO), which will offer providers economic rewards if they can reduce Medicare's cost growth in their communities. However, the dismal history of provider-led attempts to manage costs suggests that this program is unlikely to accomplish its objectives. What's more, if ACOs foster more market concentration among providers, they have the potential to shift costs onto private insurers. This paper proposes a more flexible payment model for providers and private insurers that would divide health care services into three categories: long-term, low-intensity primary care; unscheduled care, including unscheduled emergency services; and major clinical interventions that usually involve hospitalization or organized outpatient care. Each category of care would be paid for differently, with each containing different elements of financial risk for the providers. Health plans would then be encouraged to provide logistical and analytic support to providers in managing health costs in these categories.     

Provider Monitoring and Pay-for-Performance When Multiple Providers Affect Outcomes: An Application to Renal Dialysis

Objective. To characterize the influence of dialysis facilities and nephrologists on resource use and patient outcomes in the dialysis population and to illustrate how such information can be used to inform payment system design.
Data Sources. Medicare claims for all hemodialysis patients for whom Medicare was the primary payer in 2004, combined with the Medicare Enrollment Database and the CMS Medical Evidence Form (CMS Form 2728), which is completed at onset of renal replacement therapy.
Study Design. Resource use (mainly drugs and laboratory tests) per dialysis session and two clinical outcomes (achieving targets for anemia management and dose of dialysis) were modeled at the patient level with random effects for nephrologist and dialysis facility, controlling for patient characteristics.
Results. For each measure, both the physician and the facility had significant effects. However, facilities were more influential than physicians, as measured by the standard deviation of the random effects.
Conclusions. The success of tools such as P4P and provider profiling relies upon the identification of providers most able to enhance efficiency and quality. This paper demonstrates a method for determining the extent to which variation in health care costs and quality of care can be attributed to physicians and institutional providers. Because variation in quality and cost attributable to facilities is consistently larger than that attributable to physicians, if provider profiling or financial incentives are targeted to only one type of provider, the facility appears to be the appropriate locus.     

Implementing evidence-based medicine through medicare coverage decisions

Management of technology diffusion to improve quality and constrain spending in health care remains an elusive goal. Along with efforts to improve the quality of evidence, providers and payers must ensure that evidence actually effects changes in practice. Medicare coverage policies grant, limit, and condition payment based on evidentiary standards. This paper identifies the sizable barriers to implementation of evidence-based medicine in Medicare and proposes policy solutions to address them.     

Competition and prospective payment: a new way to control health costs

Health care costs must be controlled to finance the expanded eligibility and coverage promised during the Presidential campaign. As a practical reality, reforming the existing fee-for-service system is the only way that significant cost control can be achieved during the next four years. The expansion of the basic Medicare prospective payment system to all health care settings and to all payers, combined with price discounting and consumer incentives to use providers that discount, can form the basis of a competitive prospective payment system (PPS). A competitive PPS can bring down costs and complement managed competition and other ongoing cost-containment initiatives.     

An economic history of Medicare part C

Context: Twenty‐five years ago, private insurance plans were introduced into the Medicare program with the stated dual aims of (1) giving beneficiaries a choice of health insurance plans beyond the fee‐for‐service Medicare program and (2) transferring to the Medicare program the efficiencies and cost savings achieved by managed care in the private sector. Methods: In this article we review the economic history of Medicare Part C, known today as Medicare Advantage, focusing on the impact of major changes in the program's structure and of plan payment methods on trends in the availability of private plans, plan enrollment, and Medicare spending. Additionally, we compare the experience of Medicare Advantage and of employer‐sponsored health insurance with managed care over the same time period. Findings: Beneficiaries’ access to private plans has been inconsistent over the program's history, with higher plan payments resulting in greater choice and enrollment and vice versa. But Medicare Advantage generally has cost more than the traditional Medicare program, an overpayment that has increased in recent years. Conclusions: Major changes in Medicare Advantage's payment rules are needed in order to simultaneously encourage the participation of private plans, the provision of high‐quality care, and to save Medicare money.     

Medicare Drug Price Negotiation in the United States: Implications and Unanswered Questions

The United States is a relatively free-pricing market for pharmaceutical manufacturers to set list prices at the product launch. Few drug price controls exist, and federal price negotiation as a policy has historically been politically untenable. After decades of debate on whether the federal government, specifically the Medicare program, should more actively manage drug prices, the US Congress passed legislation authorizing Medicare to directly negotiate prices with manufacturers. The purpose of this article is to describe elements and implementation of the price negotiation provisions and then comment on the potential impacts on payers, innovations, and the pharmaceutical industry. While impacting only a few drugs each year in the beginning, price negotiation in the Medicare program will have secondary and long-term effects in the US market and beyond. It is clear that in the United States, the Medicare market for drugs will no longer be a free-pricing environment in the industry.