11
Payment and Payer-Based Strategies

INTRODUCTION

To obtain better value for investments made in health care, significant discussion has emerged on how best to align economic and health incentives to achieve these goals (Dudley et al., 2007; IOM, 2007; Orszag and Ellis, 2007). Focusing on providers, attention has turned to the current fee-for-service reimbursement model. By placing the incentives on volume over value, fee-for-service fails to create incentives for preventive care and care coordination among providers (MedPAC, 2008; Miller, 2007). As physician practices spend an average of 3 hours a week interacting with health plans at a national cost of $23 billion to $31 billion a year, the administrative complexity created by multiple documentation requirements to varying billing, precertification, and credentialing forms takes time away from clinical care (Casalino et al., 2009). Failure to clearly differentiate the value and benefits of alternative providers, treatments, and health plans obfuscates the signals to consumers (Chernew et al., 2007). The papers in this chapter cover a range of strategies targeting the payment and payer systems as sources of opportunities for lowering costs and improving outcomes, underscoring the importance of streamlined and harmonized health insurance regulation, administrative simplification and consistency, and payment redesign to focus incentives on results and value.

Harold D. Miller of the Center for Healthcare Quality and Payment Reform reviews the broader evidence base of payment reform’s impact on costs and quality and provides a conceptual framework for possible payment policies. Building on Miller’s comments and recommendations on



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11 Payment and Payer-Based Strategies INTRODUCTION To obtain better value for investments made in health care, significant discussion has emerged on how best to align economic and health incentives to achieve these goals (Dudley et al., 2007; IOM, 2007; Orszag and Ellis, 2007). Focusing on providers, attention has turned to the current fee-for- service reimbursement model. By placing the incentives on volume over value, fee-for-service fails to create incentives for preventive care and care coordination among providers (MedPAC, 2008; Miller, 2007). As physician practices spend an average of 3 hours a week interacting with health plans at a national cost of $23 billion to $31 billion a year, the administrative complexity created by multiple documentation requirements to varying bill- ing, precertification, and credentialing forms takes time away from clinical care (Casalino et al., 2009). Failure to clearly differentiate the value and benefits of alternative providers, treatments, and health plans obfuscates the signals to consumers (Chernew et al., 2007). The papers in this chap- ter cover a range of strategies targeting the payment and payer systems as sources of opportunities for lowering costs and improving outcomes, underscoring the importance of streamlined and harmonized health insur- ance regulation, administrative simplification and consistency, and payment redesign to focus incentives on results and value. Harold D. Miller of the Center for Healthcare Quality and Payment Reform reviews the broader evidence base of payment reform’s impact on costs and quality and provides a conceptual framework for possible pay- ment policies. Building on Miller’s comments and recommendations on 9

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0 THE HEALTHCARE IMPERATIVE strategies for transitioning to more value-based payment structures, Amita Rastogi of Bridges to Excellence discusses the promising effects of the PRO- METHEUS (Provider payment Reform for Outcomes, Margins, Evidence, Transparency, Hassle-reduction, Excellence, Understandability, and Sustain- ability) payment system, based on a fee-for-episode system. She focuses in particular on the allowance in the PROMETHEUS system for potentially avoidable complications, which is designed to encourage reduction in such complications by at least 50 percent. Translating their estimates to the na- tional level, she reports a potential cost savings of $165 billion nationally from reducing potentially avoidable complications in 13 medical conditions in the commercially insured population. David R. Riemer of the Community Advocates Public Policy Institute highlights health insurance exchanges as a promising practice for intro- ducing managed competition into the insurance market. Drawing on the lessons learned from one of the nation’s most long-lasting and successful exchanges, operated by the Wisconsin State Employee Health Plan in Dane County, he suggests that three conditions must be in place to maximize the ability of health insurance exchanges in lowering costs: the pool of potential enrollees should have an average or near-average risk profile; the pool of enrollees must be at least 20 percent of the population; and the enrollees must have clear financial incentives for selecting health insurance plans that have the lowest risk-adjusted bids. Turning to consumer incentives, Niteesh K. Choudhry from Harvard University discusses value-based insurance design, focusing on the poten- tial impact of tiering copayments for medications based on evidence-based value. He explains that, with insurance copayments set in a one-size-fits-all style, copayments for essential, high-value services are often set too high, and their resultant underuse leads to missed opportunities to prevent and treat morbid and expensive diseases while copayments for nonessential, low-value services are sometimes not set high enough to minimize their unnecessary use. Although the evidence base is limited, existing studies suggest that value-based insurance design for five chronic conditions may reduce costs by 1 to 6 percent, the equivalent of more than $2 billion an- nually. However, he cautions that these preliminary estimates, by necessity, aggregate groups of conditions into single disease categories, such as “heart disease,” do not account for patients with more than one related condition, and do not distinguish between the impact on patients of different disease severities. In a complementary discussion, Lisa Carrara of Aetna describes a variant of value-based insurance design with a discussion of tiered provider networks and consumer-directed health plans. Based on the experience of the Aetna Aexcel network of designating providers based on clinical quality and cost efficiency, she estimates that up to a 3 to 4 percent reduction in first year claims could be realized by customers if all Aetna patients dem- onstrated a 90 percent utilization of Aexcel-designated physicians.

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 PAYMENT AND PAYER-BASED STRATEGIES Both Robin J. Thomashauer from the Council for Affordable Quality Healthcare (CAQH) and David S. Wichmann from UnitedHealth Group conclude this session by discussing different approaches to administrative simplification. Thomashauer describes CAQH’s work in driving payer col- laboration and process consolidation through multistakeholder initiatives— the Committee on Operating Rules for Information Exchange (CORE) and the Universal Provider Datasource (UPD). Through development of standardized operating rules to facilitate administrative data exchange and promote interoperability, she relays that industry-wide adoption of CORE rules could save $3 billion over the next 3 years. Citing the success of this cross-industry, public–private collaboration, Thomashauer outlines the need for continued collaboration focused on both short- and long-term goals, coupled with appropriate policy support through the federal government. Meanwhile, Wichmann outlines how the use of current technology could improve payment speed and accuracy and streamline provider credentialing, privileging, and quality designation processes, yielding savings of $332 bil- lion over the next decade. To achieve these savings and improve healthcare delivery, he urges shared, consistent action across all payers—commercial and governmental—in partnership with physicians and hospitals. VALUE-BASED PAYMENTS, OUTCOMES, AND COSTS Harold D. Miller, M.Sc. Center for Healthcare Quality and Payment Reform The goals of value-based payment are to give healthcare providers ad- equate resources to deliver efficient, quality care and to remove the penalties that exist today for improving quality and efficiency. Episode-of-care pay- ment and comprehensive care payment systems can help providers prevent health problems; prevent the occurrence of acute episodes among individu- als who have health conditions; prevent poor outcomes during major acute episodes, such as infections, complications, and hospital readmissions; and reduce the costs of successful treatment. By using payment changes to help address these major sources of waste and inefficiency, healthcare costs can be reduced significantly without “rationing” or denying care that patients need (Figure 11-1). Using Episode-of-Care Payment to Reduce Waste and Inefficiency Poor outcomes and high costs of major acute episodes can be reduced through the use of episode-of-care payment systems; this system defines a single amount to cover all of the services that are provided to a patient during a single episode of care (e.g., the treatment of a heart attack), rather than making separate payments for each individual service (Robinson,

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2 THE HEALTHCARE IMPERATIVE Continued Healthy Health Consumer Preventable No Condition Hospitalization Efficient Acute Care Successful Episode Outcome Comprehensive Care High-Cost Payment Successful Outcome Episode-of-Care Payment Complications, Infections, Readmissions FIGURE 11-1 How value-based payment systems address sources of waste and inefficiency. Figure 11-1.eps 2001). Episode-of-care payment gives the involved providers an incentive new, vector editable to coordinate their activities, eliminate unnecessary services, and avoid complications that require additional services (Miller, 2009). Defining an Episode-of-Care There are different versions of episode-of-care payment that address different types of waste and inefficiency (Table 11-1). Although only the fourth and fifth categories—full-episode payments with a limited warranty based on either the type of treatment or diagnosis—can address the full range of problems that occur within a major acute episode, the narrower forms of episode-of-care payment could be used for types of patients where only one issue is of concern, or the narrower forms could be used as tran- sitional steps toward full-episode payment (Center for Healthcare Quality and Payment Reform, 2009b). Encouraging the Use of Higher-Value Providers and Services As indicated in the fourth and fifth categories in Table 11-1, episode- of-care payment can be based on a particular type of treatment, or it can be based solely on the patient’s diagnosis, particularly where there is clear

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 PAYMENT AND PAYER-BASED STRATEGIES TABLE 11-1 Variants of Episode-of-Care Payment That Address Different Aspects of Waste and Inefficiency in Major Acute Episodes Impact of Current Component Current Payment System on Waste Improved Payment Category of Treatment System and Inefficiency Approach 1 Treatment for Hospitals and No financial Inpatient bundled conditions doctors are paid incentive exists payment: a single present on separately and for doctors and payment covering admission to independently hospitals to work both hospital and the hospital for the care they together to improve physician services for provide. Most hospital efficiency. inpatient treatment physicians (except Payers and surgeons and consumers cannot obstetricians) are determine the full paid on a fee-for- cost of treatment in service basis. advance. 2 Treatment Hospitals are No financial penalty Inpatient warranty: for hospital- paid for higher exists for infections, a payment for acquired diagnosis-related complications, or inpatient services conditions groups (DRGs) readmissions. Payers based only on the or given outlier do not know the full cost of treatment of payments when cost of treatment in conditions present infections or advance. upon admission to complications the hospital occur. Most physicians are paid additional fees when additional care is provided. 3 Care after Each provider is No incentive exists Bundled payment discharge paid separately to use posthospital for inpatient and from the for any services care efficiently. Some postacute services: hospital (e.g., they provide. desirable services a single payment rehabilitation, may not be paid covering both home health, for at all. Payers do inpatient treatment outpatient not know the full and postacute care care) cost of treatment in advance. continued

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 THE HEALTHCARE IMPERATIVE TABLE 11-1 Continued Impact of Current Component Current Payment System on Waste Improved Payment Category of Treatment System and Inefficiency Approach 4 Readmissions Hospitals and No incentive Full-episode payment to the physicians are exists to prevent with a limited hospital paid for any readmissions. Payers warranty (based on for reasons readmissions do not know the full type of treatment): related to the in addition to cost of treatment in a single payment original stay payment for the advance. covering inpatient, initial hospital postacute care, stay. and preventable readmissions based on the cost of treatment for conditions present on the initial admission 5 Choice of the Hospitals and No incentive to Full-episode highest-value doctors are paid use lower-cost payment with a treatment and based on the treatments or limited warranty facility for types of treatment facilities that can (based on type of addressing provided (e.g., achieve similar diagnosis): a single the patient’s coronary artery outcomes for the payment to cover conditions bypass surgery) patient’s conditions. all needed services rather than based based on the cost on the patient’s of the highest-value conditions (e.g., treatment available coronary artery for a patient’s blockage). diagnosis evidence as to the appropriate treatment(s) for the diagnosis. Basing pay- ment on diagnosis creates an incentive for a provider to use higher-value treatments—those with equivalent outcomes and lower costs.1 Episode-of-care payment also enables providers to define a single, com- prehensive price for an episode of care, which in turn would enable payers (and consumers, if the price is made public) to more easily see the full cost of treatment and to more accurately compare the costs of different provid- ers that could provide the same treatment. Although there is evidence that costs for the same treatment can vary significantly among providers in the same community (Pennsylvania Healthcare Cost Containment Council, 1 Although the Medicare Inpatient Prospective Payment System is based on Diagnosis- Related Groups (DRGs), many of the DRGs are actually based on the treatment given, rather than just the diagnosis.

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 PAYMENT AND PAYER-BASED STRATEGIES 2007), most payers (e.g., Medicare and major health insurance plans) do not give patients strong incentives to use providers who achieve similar outcomes at lower costs. Why Episode-of-Care Payment Is Better Than Other Payment Reforms Other payment changes that have been proposed or implemented in an effort to reduce infections, complications, and readmissions are not as effec- tive in changing incentives as a true episode-of-care payment that includes a limited warranty. For example, pay-for-performance systems that give bonuses to hospitals for reducing infections do not change the underlying payment system and its rewards for providing more services. Medicare’s rules that exclude hospital-acquired infections from the diagnosis-related group (DRG) formula do not prevent hospitals from being paid for the complications resulting from those infections or from receiving outlier pay- ments for those cases. In contrast, if a hospital and physician commit to a “limited warranty,” similar to what has been done by Geisinger Health System through its ProvenCare program (Casale et al., 2007), they have both a financial and quality incentive to improve, and they can also advertise the warranty to patients and payers as a sign of high-quality care. Experience with Episode-of-Care Payment Although Medicare has been successfully using a narrow form of episode-of-care payment for over 25 years through the Inpatient Prospec- tive Payment System, there has been relatively limited experience using episode-of-care payments that incorporate warranties or bundle together payments for multiple providers. The projects that have been evaluated have all focused on surgery episodes; the evaluations indicate that payers received savings ranging from 10 to 40 percent, without negative impacts on quality (Cromwell et al., 1997; Edmonds and Hallman, 1995; Johnson and Becker, 1994). Using Comprehensive Care Payment to Help Prevent Episodes and to Encourage Use of High-Value Services Despite the many improvements of episode-of-care payment over cur- rent fee-for-service payment systems, it still does not encourage prevent- ing episodes of care from occurring in the first place. For example, the primary goal for patients with chronic diseases should not be to reduce the cost of each episode of hospitalization, but to reduce the number of hospitalizations. Many studies have demonstrated that large reductions in

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 THE HEALTHCARE IMPERATIVE hospitalizations—20 to 40 percent or more—can be achieved through rela- tively simple, low-cost services such as patient education, self-management support, telemonitoring, and so on (Bourbeau et al., 2003; Cordisco et al., 1999; Gadoury et al., 2005). However, many of these services are not paid for under Medicare or private insurance plans, whereas hospitals and physicians are paid for all hospitalizations, no matter how frequently they occur. Comprehensive care payment is designed to solve this problem by defin- ing a single amount to cover all of the services needed to manage a patient’s conditions during a fixed period of time, regardless of how many separate episodes of care occur (Miller, 2009). This gives the providers involved in the patient’s care the flexibility to try innovative approaches and tailor ser- vices based on the patient’s needs, and it gives them an incentive to avoid hospitalizations and unnecessary or overly expensive services. In addition to supporting better care management of chronic diseases, comprehensive care payment can encourage the use of higher-value services for treatment of conditions by providing physicians with both the resources and incentive to engage in shared decision making with their patients. Research has shown that the frequency of many types of surgery can be reduced by 20 to 40 percent (O’Connor et al., 2004) and that the inap- propriate use of diagnostic imaging can be reduced significantly (Bottles, 2009) when a neutral advisor helps patients make an informed choice, but providers are not compensated or rewarded for doing this under fee-for- service payment. Table 11-2 provides a side-by-side comparison of episode-of-care pay- ment and comprehensive care payment. In theory, comprehensive care payment could also be used to encour- age greater emphasis on preventing health conditions from occurring in the first place. However, a patient would have to commit to obtain care from the same provider over a multiyear period (and the patient would need a consistent health insurance plan that encouraged such multiyear arrange- ments) so that if the provider incurred higher costs for prevention today, there would be an assurance that it could reap the benefits of lower treat- ment expenditures in the future. Why Comprehensive Care Payment Is Better Than Other Payment Reforms Although “medical home” initiatives are attempting to change payment systems in order to fill some of the gaps defined above, there is no assur- ance that these programs will reduce spending since medical homes are not given explicit accountability for improved outcomes (Network for Re- gional Healthcare Improvement, 2009). At the other end of the spectrum,

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 PAYMENT AND PAYER-BASED STRATEGIES TABLE 11-2 Comparing Episode-of-Care Payment to Comprehensive Care Payment Episode-of-Care Payment Comprehensive Care Payment • A single, bundled payment would be paid • A periodic (e.g., monthly or quarterly) to a provider or group of providers to cover payment would be paid to a provider to all of the healthcare services needed by the cover all of the healthcare services (including patient during a specific episode of care (e.g., care management, preventive care, and acute treatment for a heart attack, or surgery to care services) needed for management of the replace a broken hip). This single amount patient’s health conditions during that period would be paid instead of individual fees to of time. This single amount would be paid doctors, DRG payments to hospitals, etc. instead of individual fees for services. • The providers involved in the episode • A single provider (e.g., a “medical could create joint arrangements for accepting home”) could accept the comprehensive and dividing up the episode-of-care payment care payment and make payments from it to among themselves, or the episode-of-care other providers who deliver care during the payment could be treated as a budget, and time period covered, or the comprehensive the payer (e.g., a health plan) could divide care payment could be treated as a budget, the payment among the involved providers and the payer (e.g., a health plan) could based on their proportional shares of the divide the payment among the involved care (Gosfield, 2009). providers based on their proportional shares • The amount of the episode-of-care of the total services provided. payment would vary based on the patient’s • The amount of the comprehensive care diagnosis or treatment and other patient- payment would vary based on the patient’s specific factors. However, there would be characteristics—both the specific health no increase in payment to cover preventable conditions they have and other factors adverse events such as errors, infections, or affecting the level of healthcare services they hospital readmissions. will need (e.g., whether they speak English). • Methods would be established for • Methods would be established for monitoring and reporting on the quality of monitoring and reporting on the quality of health care delivered by providers during health care delivered by providers during the each episode, and there could also be period of time covered by the payment, and bonuses or penalties for the providers based there could also be bonuses or penalties for on the quality of care or the outcomes the providers based on the quality of care or achieved. the outcomes achieved. • Ideally, patients would also receive • Ideally, patients would also receive incentives to use higher-quality or lower- incentives to use higher-quality or lower- cost providers and adhere to care processes cost providers and adhere to care processes jointly developed by them and their jointly developed by them and their providers. providers. proposals for “shared savings” payments to providers require a focus on outcomes, but do not change the underlying fee-for-service structure and fail to provide any up-front resources to implement new services (Center for Healthcare Quality and Payment Reform, 2009a). In contrast, com- prehensive care payment gives physicians and other providers both greater

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 THE HEALTHCARE IMPERATIVE flexibility and greater accountability for the use of resources to deliver high- quality efficient care. A comprehensive care payment system also avoids penalizing provid- ers for treating sicker patients—one of the major problems with traditional capitation payment systems—because the amount of the comprehensive care payment would vary depending on the number and severity of a patient’s health conditions (Miller, 2009). Experience with Comprehensive Care Payment Although capitation systems have been widely used, there is little ex- perience with true comprehensive care payment systems. One example is the Patient Choice program in Minnesota, in which groups of doctors and hospitals are paid based on the risk-adjusted cost of providing care to a population of patients (Robinow, 2008). An evaluation indicated that it contained costs without negatively affecting quality (Lyles et al., 2002). In 2009, PROMETHEUS Payment, Inc. began a yearlong pilot test of “evidence-informed case rates” for chronic disease patients (Prometheus Payment, Inc., 2009), and Blue Cross Blue Shield of Massachusetts imple- mented its Alternative Quality Contract (Blue Cross Blue Shield of Massa- chusetts, 2008), both of which incorporate key elements of comprehensive care payment. Choosing a Value-Based Payment System Different types of patients and conditions have different types of waste and inefficiency problems, and different types of payment systems are ap- propriate for addressing them (Miller, 2009). Episode-of-care payments are most appropriate for conditions where there is not a problem with overuse of treatment (e.g., hip fractures and labor and delivery) but where there are opportunities to reduce the cost and complications of the treatment. As noted earlier, comprehensive care payment should be used for conditions such as chronic diseases where there is concern about unnecessarily high rates of hospitalizations. It should also be used for conditions where there is concern about overuse of certain types of procedures (e.g., heart surgery vs. medical management of heart disease). Areas of underutilization, such as the delivery of prevention services with long-term impacts, may be best addressed through fee-for-service payment. Setting the Payment Amount Setting the right payment amount (i.e., the price) is as important as using the right payment method (Miller, 2009). If the amount is too low, providers will be unable to deliver quality care, and if it is too high, there is

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9 PAYMENT AND PAYER-BASED STRATEGIES no incentive to seek out efficiencies. There are several alternative methods of setting payment amounts, each with advantages and disadvantages (Ta- ble 11-3). Different price-setting approaches will likely be needed in differ- ent regions and for different providers and services depending on the local market structure; for example, regulation may be needed in regions where providers have a monopoly on particular services, whereas competition can be used in regions where there are multiple providers for most services. TABLE 11-3 Alternative Ways of Setting Prices in a Payment System Price-Setting Method Example Advantages Disadvantages Regulation: The Maryland Health Avoids cost shifting Requires the regulator government Services Cost Review to small payers. to determine the defines the prices Commission sets all- Enables sharing by “right” price for that a provider payer rates for hospitals all payers of costs of services. Discourages can charge. (Health Services Cost uncompensated care price competition on Review Commission). and of necessary but services where multiple expensive services. providers exist. Price-setting Congress and the Enables consistent Requires the payer by large Centers for Medicare pricing of services to determine the payers: large & Medicaid Services regardless of a “right” price for payers define (CMS) establish the provider’s market services. Discourages the amounts rates that Medicare power. competition on they will pay will pay. price where multiple providers. providers exist. Negotiation Commercial health Enables prices to be Result depends on size between payers insurance plans set based on the cost of payer vs. provider; and providers: negotiate payment rates of delivering services monopoly/oligopoly payers negotiate with major providers in and the value of the providers can demand with providers to most markets. services to the payer premium prices, determine prices. and its member particularly from small consumers. payers. Competition The State of Minnesota Enables providers Requires existence by providers: has created a process to to define the “right” of multiple providers providers set define “baskets of care” price for services, with similar quality prices in order for asthma, back pain, and gives them to enable competition to attract obstetrics, and others; the opportunity to on price and with consumers. providers who want to attract additional sufficient capacity to offer those packages of volume based on handle shifts in patient services set their price, greater efficiency. volume. Requires a and all (commercial) benefit design that payers will be required gives consumers an to pay the same price incentive to use lower- (Institute for Clinical cost providers. Systems Improvement; Minnesota Department of Health).

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9 THE HEALTHCARE IMPERATIVE Leveraging Clinical Information System Reform As the federal government works to implement the Health Informa- tion Technology for Economic and Clinical Health Act (HITECH) of the American Recovery and Reinvestment Act, the inclusion of administrative data in the framework defining the “meaningful use” of health informa- tion technology is critical to realizing national policy priorities. The use of administrative data in the near and medium term represents an essential and available migration path to the eventual marriage of clinical and adminis- trative data, providing visibility and transparency into the cost-effectiveness of high-quality healthcare services. Until clinical data becomes more readily available, administrative data remains a key source of information with which to evaluate the progress to- ward a value-driven system. It can be used to support near-term population- level research priorities, to benchmark quality initiatives, and to support the growing adoption of electronic personal health records and electronic medical records. Administrative data also serves as part of the foundation needed to promote coordination of care across providers in a health information ex- change. For example, market adoption of the CORE transport has enabled one-to-one exchange between providers and payers across the country, creating a basis for one-to-many data exchange relationships that is essen- tial to the proliferation of interoperable systems. In a study by the eHealth Initiative, eligibility inquiries represent some of the high transaction vol- umes within health information exchange efforts focused on clinical data interchange (eHealth Initiative, 2008). The more the “meaningful use” objectives incorporate current health information technology in federal efforts and/or industry initiatives that have significant momentum, the greater potential for accomplishing federal policy priorities. For example, the CORE technical specifications gaining momentum in administrative data transport, also known as connectivity, were designed to be aligned with the Healthcare Information Technology Standards Panel specifications. CORE also aligned its data content rules with the expected requirements for V5010 of HIPAA. Both of these examples demonstrate the importance of integrating multiple approaches in order to advance adoption. Through agreement on a common transport and its related authentication and secu- rity, the full potential of the Internet to serve as a mechanism in changing health care moves closer to becoming a reality. Finally, administrative cost savings, such as those enabled by CORE, will help providers achieve the benefits they need to embrace the bigger vision of transforming the system since stimulus dollars alone will not be enough to fund the move to broader healthcare information technology needed in the care delivery process.

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9 PAYMENT AND PAYER-BASED STRATEGIES Final Note Cross-industry, public–private collaboration is a successful strategy for developing solutions with lasting change. UPD is saving millions of dollars for providers, and its established framework is now being considered as a vehicle for achieving additional industry-wide savings and quality im- provements. CORE continues to expand operating rules built on national standards that are helping organizations achieve the interoperability that has eluded the healthcare industry for many years. Continued collabora- tion focused on both short- and long-term goals, coupled with appropriate policy support through the federal government, is necessary to achieve the widespread adoption of administrative simplification solutions; solutions that promise real reform in both cost efficiency and quality. TECHNOLOGY AND SIMPLIFYING HEALTHCARE ADMINISTRATION David S. Wichmann UnitedHealth Group The nation is grappling with how to respond to the stark and disturb- ing realities of too little quality health care and too much waste. America is simply not getting good value for the $2.6 trillion it spends on health care (CBO, 2008a). Of the $2.6 trillion, an estimated $290 billion per year is spent on the administrative costs at care providers and public and private payers (CBO, 2008a). This article identifies practical ways in which technology can save money by modernizing the administrative and transactional aspects of health care. Its focus is on savings across the healthcare system as a whole—savings that will initially accrue to physicians, hospitals, payers, and government—but ultimately to consumers of health care through reduced premiums, lower taxes, and improved diagnosis, treatment, and outcomes. Through 12 building blocks, we have identified administrative sav- ings opportunities of $332 billion in national health expenditures over the next decade (UnitedHealth Group, 2009). Of these savings, approximately 50 percent would accrue to providers, 20 percent directly to government in its role as healthcare payer, and 30 percent to commercial payers (Unit- edHealth Group, 2009). These savings would likely benefit families and employers through lower healthcare costs. As importantly, they would simplify the lives of patients and eliminate much frustration on the part of doctors and hospitals. These proposals and the savings estimates included herein are derived from UnitedHealth Group’s experience—not just as a large payer and care

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9 THE HEALTHCARE IMPERATIVE management organization, but as one of the largest healthcare technology companies in the United States. UnitedHealth Group’s 12,000 technology professionals oversee 30 terabytes of healthcare data, invest 7 million hours in application development, and oversee 60 billion transactions annually. In funding and arranging $115 billion of health care we interact with over 5,000 hospitals and 650,000 physicians across the country. In this analysis, we limit the discussion to administrative savings, but several of the options raised here easily translate into medical cost savings and better health outcomes. For instance, integrating essential elements of personal health and electronic medical records and using predictive model- ing to prescore claims could save an additional $464 billion in medical costs over the next decade (UnitedHealth Group, 2009). None of these savings are included in the $332 billion administrative cost savings figure. The Options The ideas in this article are supportive of industry-wide approaches to administrative simplification being advanced by others. While not intended as a comprehensive list of options, we believe the 12 approaches identified provide a strong foundation from which to advance an ongoing adminis- trative simplification agenda. The options we studied fall into three broad categories11: • Use common technology and information standards with enhanced interoperability and connectivity. These reforms leverage the ben- efits of modern and available technology to reduce administrative waste. • Use advanced systemwide techniques to improve payment speed and accuracy. Common claims handling and clearing improves claims processing and proactively prescores claims to prevent overpayments. 11 Each of the options is thoroughly explained in the working paper prepared by the UnitedHealth Center for Health Reform & Modernization titled Health Care Cost Contain- men—How Technology Can Cut Red Tape and Simplify Health Care Administration. These savings estimates mostly derive from real-life experience at UnitedHealth Group compared or applied to the available opportunity in broader industry as determined through external studies and sources: Council on Affordable Quality Healthcare (IBM Global Business Ser- vices, 2009), America’s Health Insurance Plans (AHIP, 2006, 2009), Department of Health and Human Services (CMS, 2009), Centers for Medicare & Medicaid Services (CMS, 2008), McKinsey & Co. (LeCuyer and Singhal, 2007), Health Affairs (Casalino et al., 2009), Center for Information Technology Leadership (Kaelber and Pan, 2008), Oliver Wyman (Wyman, 2008). These savings estimates would be phased in assuming improved industry cooperation and broader governmental support.

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99 PAYMENT AND PAYER-BASED STRATEGIES • Streamline provider credentialing, privileging, and quality designa- tion processes. There are numerous opportunities for deployment of select industry utilities to reduce administrative burdens, particu- larly on care providers. In more detail, these three categories can be further broken down into 12 specific recommendations, summarized in Table 11-10. The cost driv- ers targeted in each of these options include excessive manual processing, duplicate entry of data, paper distribution of transaction authentication and other information, use of intermediaries where they enable excessive pro- cess variation, administration associated with medical overpayments, and the costs of process proliferation. In each case, where individual options are interdependent or potentially overlap, we sought to account for possibly duplicative savings estimates. Further, each estimate is prepared net of the costs to administer each option. Use Common Technology and Information Standards, with Enhanced Interoperability and Connectivity The necessary reforms for reducing administrative waste require a firm foundation. More rapid adoption of tighter data and transaction standards, starting with CORE phase I and II eligibility and benefit rules, should precede a quick move to tightened standards for exchanging other HIPAA items, including claims submission, claims inquiry, electronic funds trans- fer, electronic remittance and autoposting, prior authorization/notification, and demographic updates. These new standards should also cover critical encounter data, such as care plan, lab results, conditions, and medication orders. A health information exchange could facilitate the sharing of this information in a fully secure, private environment. The information will then assist care providers and health plans in engaging patients and coor- dinating care. From this foundation, a number of other reforms will be necessary and, in fact, are natural extensions of the new commitment to interoperability and connectivity. Using secure swipe card technology—or an appropriate automated link to a doctor’s or hospital’s systems—the provider can view in real time the patient’s eligibility for benefits, and accurately ascertain what will be reimbursed by the insurer/employer and process the claim. Consumers receive monthly health statements electronically instead of an explanation of benefits for each individual service. These statements would combine all healthcare activity and explain clearly to patients which ele- ments their employer/insurer was responsible for. In fact, all providers should be required to receive both claims payments and remittance advices electronically, which eliminates millions of dollars in printing and postage

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00 THE HEALTHCARE IMPERATIVE TABLE 11-10 Summary of Proposed Actions/Recommendations: 2010- 2019 Savings 2010-2019 Option Savings A. Use of common technology and information standards, with enhanced interoperability and connectivity Option 1: Rapidly develop and adopt systemwide data and transaction Foundational standards to simplify administration and improve patients’ diagnosis, treatment, and outcomes. Option 2: Use of automated cards to validate patient eligibility and ~$18 billion benefits at the point of service. Option 3: Eliminate explanation of benefits for each transaction and ~$14 billion replace with monthly personalized health statements, delivered through secure online portals where possible. Option 4: Eliminate paper checks and paper remittance advice in favor of ~$109 billion electronic funds transfer and electronic remittance advice. Option 5: Implement multipayer transactional capability on practice ~$29 billion management information systems. Option 6: Expand use of electronic data interchange for claims, eligibility, ~$31 billion and coverage verification, notification/administration, and claims status. Option 7: Integrate practice management information systems and payer ~$11 billion administrative systems. Option 8: Integrate essential elements of electronic medical records and ~$13 billion personal health records and promote information sharing and use of data to improve prevention and coordination of care. B. Use advanced systemwide techniques to improve payment speed and accuracy Option 9: Use predictive modeling to prescore claims for coordination of ~$47 billion benefits, upcoding, subrogation, fraud and medical management prior to payment. Option 10: Create a national payment accuracy clearinghouse to settle ~$41 billion underpayments and overpayments. C. Streamline provider credentialing, privileging, and quality designation processes Option 11: Eliminate multiple payer credentialing and separate hospital ~$18 billion privileging. Develop industry utility for credentialing. Option 12: Adopt common quality designation standards and create ~$1 billion single health information database for quality determination. SOURCE: UnitedHealth Center for Health Reform & Modernization. 2009. Health Care Cost and Containment—How Technology Can Cut Red Tape and Simplify Health Care Administration-Working Paper #2. Minneapolis: UnitedHealth Center for Health Reform & Modernization. Reprinted with permission from UnitedHealth Center for Health Reform & Modernization.

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0 PAYMENT AND PAYER-BASED STRATEGIES costs and improves efficiency with bundled payments deposited directly into providers’ bank accounts. These systems require an information system infrastructure that is still far from a reality in most areas of this country. But if the variation arising from individual payers’ requirements were meaningfully reduced or elimi- nated, direct provider Practice Management Information System to payer connectivity would be possible. The resulting system would support a few superregional hub gateways that aggregate payer connectivity and that pro- vide gateways to direct provider connectivity or local geographic aggregator health information exchanges. These gateways would handle the full range of electronic connectivity for payers and could, in addition to providing administrative and financial functions, also provide clinical connectivity and analytics, surveillance, and other services. Systemwide Techniques to Improve Payment Speed and Accuracy A national predictive model prescoring service would actively moni- tor and flag claims prior to payment, leading to a more robust real-time adjudication process for most payments. This service, coupled with the establishment of a national payment accuracy clearinghouse, would reduce the instances of mispayment and administrative friction between payers and providers. Provider Credentialing, Privileging, and Quality Designation Processes Using a single standardized process for accreditation and licensing nationwide would reduce costs for physicians and hospitals without com- promising quality. The government could facilitate this process by creating an antitrust safe harbor allowing hospitals and health plans to agree on common rules and standards. An industry program would then be devel- oped and deployed for provider credentialing. Similarly, we could accelerate the adoption of industry-wide rules and systems for data aggregation and measurement methodologies. Health plans and Medicare, working collaboratively with physicians, hospitals, and other key stakeholders, would agree on the infrastructures and pro- cesses necessary to efficiently pool local data across health plans and set- tings of care. A new independent public–private partnership at the national level would lead and accelerate consistency in the processes necessary to achieve this and ensure uniformity across the country. As a result, physi- cians would be able to access, correct, and use their local aggregated data for performance improvement. Researchers and others would benefit by using the aggregated data for tracking and developing quality improve- ment interventions. Regarding performance measures themselves, and the

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02 THE HEALTHCARE IMPERATIVE methodologies underlying the process of performance measurement, there currently exists a useful infrastructure upon which to build (e.g., National Quality Forum and the American Medical Association’s Performance Con- sortium for Performance Improvement). Focusing on Administrative Waste in Context Administrative programs can have important positive effects on reduc- ing wasteful medical costs. Fraud reduction programs are the most obvi- ous example, where there is ample evidence that Medicare’s administrative underinvestment in fact costs taxpayers through avoidable fraud (GAO, 2008a, 2008b, 2009). Health plans—and self-insured employers—also spend administratively on a wide range of programs that provide patients information to support them in making informed choices, and that iden- tify and offer incentives for best practices on the part of physicians and hospitals. Even so, the Congressional Budget Office estimates that health plans’ use of these administrative initiatives can reduce medical costs by 5 to 10 percent (CBO, 2008b). It follows that minimizing administrative costs should not be a public policy goal in isolation, and reform options for new programs should be assessed against their ability to tackle the well- documented problems of fraud, waste, and inappropriate use that affect U.S. health care today.12 What’s Next? Our experiences suggest that even where the technology exists and efforts have been made to introduce it, its full potential is not being real- ized. We believe that shared consistent action is now needed across all payers—commercial and governmental—in partnership with physicians and hospitals calling for tighter data and transaction standards, seamless health information exchanges, automated processes to replace antiquated manual systems, and standardization of such processes as credentialing and quality measurement. With this commitment, we should be able to identify and support only those value-added administrative programs including those that make a substantive contribution to achieving better care. The momentum is building. America’s Health Insurance Plans, the Council for Affordable Quality Healthcare, the American Medical Associa- 12 It is for this reason that the Congressional Budget Office argues that “medical cost ratios” (which measure the share of spending on medical costs versus administrative items) may not be good indicators of a plan’s efficiency or value (CBO, 2008a).

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