Example 1

A physician group paid primarily on a fee-for-service basis instituted a new program to improve blood sugar control for diabetic patients. Specifically, pilot studies suggested that tighter diabetic management could decrease hemoglobin A1c levels by 2 percentage points for about 40 percent of all diabetic patients managed by the physician group. Data from two randomized controlled trials demonstrated that better sugar controls should translate into lower rates of retinopathy, nephropathy, peripheral neurological damage, and heart disease (The Diabetes Control and Complications Trial Research Group, 1993). The savings in direct health care costs (i.e., reduced visits and hospital episodes) from avoided complications have been estimated to generate a net savings of about $2,000 per patient per year, on average, over 15 years (Demers et al., 1997). Across the more than 13,000 diabetic patients managed by the physician group, the project had the potential to generate over $10 million in net savings each year. The project was costly to the medical group in two ways. First, expenses to conduct the project, including extra clinical time for tighter management, fell to the physician group. Second, over time, as diabetic complication rates fell, the project would reduce patient visits and, thus revenues as well. The savings from avoided complications would fall to the insurer or a self-funded purchaser.

Example 2

A delivery system refined and implemented the American Thoracic Society’s practice guideline on community-acquired pneumonia in ten rural Utah hospitals, focusing on indications for hospitalization and choice of initial antibiotics. In a prospective nonrandomized controlled trial using other Utah hospitals as controls, compliance with the guideline in the intervention hospitals increased from 22 to 40 percent (p<0.001); the proportion of patients suffering significant complications fell from 15.3 to 11.6 percent (p<0.001); inpatient mortality rates fell from 7.2 to 5.3 percent (p=0.015); and costs fell by 12.3 percent (p<0.001), primarily as a result of expenses avoided through the lower complication rate. The cost savings in those ten small rural hospitals totaled more than $500,000 per year, but an analysis of net operating income showed a loss to the facilities of over $200,000 per year. The reason was that as the complication rate fell, patients shifted from diagnosis related groups (DRGs) associated with complications (such as DRG 475, respiratory system diagnosis with ventilator support, carrying a per case payment of about $16,500 and providing a small excess of payment beyond treatment costs) to classifications such as DRG 89 (simple pneumonia and pleurisy, age>17, with complications or comorbidities, carrying a per case payment of about $4,730, which failed to cover the full costs of care).

Quality problems can be grouped in three categories (Chassin et al., 1998). Overuse is the provision of a health care service under circumstances in which its potential for harm exceeds the possible benefit. Underuse is the failure to provide a health care service when it would have produced a favorable outcome for a patient. With misuse an appropriate service is provided, but a preventable



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