improved quality in our construct equals affordability. it may be the clearest win-win in the debate over healthcare reform and as cleve said, it's getting insufficient attention, we believe, here in washington. .. instead of focusing 0 coverage, it focused on cost an you >> and one of the centerpieces of that law was a payment reform

commission which is focused on how do we change payments in massachusetts in a way that advances these twin goals of improved quality and cost. and remarkably, by the first meeting of this commission on which i serve, the consensus emerged was that you have to move away for the fee for service system and we have to move towards a system of global payments, if we're going to as a community slow the rate of growth in health care spending and improve quality. much of the deliberations of this commission, and i believe the ultimate recommendations, which are due to be released within weeks of the summer, were based on the alternative quality contract, which we call our aqc in massachusetts, so i want to explain that now to you, and what we're doing with it. so what is our alternative quality contract? well, the assignment was fairly simple, but challenging to accomplish. design a payment system that

promotes quality and affordability. now, we already had in massachusetts one of the most mature, if not the most mature pay for performance program in the country, but it was built on the chassis of our fee for service system and as such, was insufficient to the task that cleve assigned us, to ultimately work to transform the delivery system so it's routinely and reliable live providing safe and effective care for our members in our community. so even if our mature fee for service system, just emergency if an outpatient physician practiced at one of our leading academic centers, successfully manages a group patients with congestive heart failure and who are not admitted to the hospital as a result of their work, their reward is they get less revenue. conversely, if patients are admitted to the hospital and they contract a preventable infection, the reward to the hospitals and physicians is they get paid for money. clearly that system is backwards and needed to be reversed. so we assembled a team of

reimbursement experts, physicians, measurement scientists, some people new to the world of health plan but not new to the world of thinking about change. we surveyed the work that was done nationally, we surveyed other innovative results but we decided we needed to invent something on our own and what we did essentially was combine, as you'll see, what we call global payments with some very substantial incentives for improved performance. so i'm going to kind of give you a picture of this alternative contract, as if you were, imagine for a second, you're either the leader of a physician practice or perhaps you're a hospital cfo or c.e.o., how do we develop the contract? the first thing we do is establish a global payment, a risk adjusted global payment and i'll explain that to you in a moment, based on the current services offered by either the physician practice, the hospitals, or preferably the two combined. and as cleve often said, we're not trying to pay less than we paid today. what we're trying to do is have

health care grow at a slower rate than it has been and health care, medical trends in massachusetts is currently around 10%, so medical costs are growing at about 10% per year in massachusetts. premiums are growing a little bit lower, because shifting cost to workers, but medical costs are growing about 10%. so then the second thing, and just the second thing we do is then sit down and negotiate an inflation rate, which we're trying to get down to very close to cpi, in the 3% to 4% range, which is very different than what has happened in massachusetts. that's the first thing we do. the second thing we do is talk about performance incentives. and here, we're not talking about the 1% or have percent on even 2%. we're talking about perform an innocencincentives when it coulw hospitals to learn above 10% above their global payments and think for a 2nd, how different this conversation is. most conversations between health plans and physicians and

hospitals are every other year, adversarial conversations about price. this is the conversation about a five-year partnership. a five-year partnership about quality and about affordability. it's an entirely different conversation. so providers in the first year will earn in quality incentives where they are in terms of our measurement, but can earn up to 10%. and then finally, as we try to explain the hospitals and physicians and they're increasingly understanding, there's an enormous opportunity for them to keep the savings from eliminating unnecessary harmful care and waste in the system. but we're not just asking them to do that. we're partnering with them to do it. so what are we doing? we're giving them, each hospital and each physician practice we contract with, customized reports that show down to the physician level the variations in care in their practices. what are their rates of

c-sections and hysterectomies. what are their rates of readmissions, what are their rates, again, down to the physician, using the wendburg style data, but at the physician level, so it's actionable. it's one thing to say minneapolis and miami are spending wildly different rates, but you have to really get down to one physician and office next to theirs, you know, why is one performing endscopes and one rarely performs endscopes, so what's in the global budget that we put in? it's all medical expenses, primary care, experiment care, behavioral health and pharmacy. we want to deal with one of the biggest problems identified in the institute of medicine report which is the intense fragmentation in the delivery system. we know that for example from a safety perspective that one of the greatest risks for safety

are handoffs and not just handoffs between the hospital and the home or the hospital and nursing home, but handoffs within the hospital itself for intensive care unit to the regular floor from the regular floor to a skilled nursing facility. we're also offering as part of our payments infrastructure help. we know that many delivery systems and physician practices are not organized today to manage within a global payment. they need help with information technology, they need help with care management. some of our early adopters are, for example, innovating by having group visits. one of them talks about that the key to success is between the visit, that our whole system has been focusing on a visit, because as we heard from robert reischauer, that's where the payment goes, but what happens between the visit? that's where the crucial moment may be in a person's progress of a medical illness. finally, we're looking at innovative ways to manage risk. this is not about shifting risk

to providers. it's about working with them together to share risk and we can do this a whole variety of means, including reinsurance, stop loss insurance, and other techniques. now, when we started proposing this to physicians and hospitals in massachusetts, some of them naturally said, wait, this is sounding awfully familiar to something, that c word, that c word that we really didn't like in the late 1980's and 1990's, and it's true that there was a very mixed experience with cappation, although surprisingly, there's a number of practices in massachusetts that operate on a risk deal, but how does this deal with capitation. first of all, the initial payment level that we give to this group of physicians and hospitals are derived from the historical experience of that provider group. we're not setting some artificial member to meet our budget expectations. secondly, one of the criticisms of capitation was there might be

incentive to avoid sicker patients. well, we adjust our payments based on every year, based on the health status and morbidity of those statements, that that physician practiced and that hospital is caring for. third, we're adjusting the payment every year in line with inflation. now not the kind of medical inflation that many providers have been earning over the last decade, but still, capitalittation was often at the end of the year is how can we lower the payment? we're not talking about that. and finally to the criticism that there might be withhold willing of care, under a system based on capitation, that can't happen in our system, because this only works financially for fir significances and hospitals and only works for patients if these quality incentives get paid out. and the quality incentives, as you'll see in a minute, are based on quite a comprehensive set of measures. so how do we think about this measurement work is this we start with a set of principles? we said that the measurement

work should build towards the institute of medicine's definition of the end state, which is safe, affordable, patient centered care, that the measures should include process measures, outcome measures and measures of patients' experience. they should go from the inpatient side of care to the ambulatory side of care. we also wanted to get out of some of the flaws for pay for performance. if people don't succeed on a measure, they stop working on it halfway through the year. we established this notion of gates an we defined high performance in absolute terms. we weren't trying to get to, for example, 90% of compliance if 90% was what was achieved in high perform willing regions. we actually wanting to go to theoretical limits. we knew and we've seen that people can eliminate zero infections in intensive care units for month after month after month. 100% compliance with evidence-based guidelines in preventive care and again, we're

looking at outcomes, not, did you do the test, did you do the test for diabetes, but was the blood sugar level under control so a true outcome measure. what do these look like? i'm not going to go through them specifically, but you can see they encompass a whole range of diagnoses, illnesses, outcomes at the inpatient side, cardiac care, pa money i can't care, -- pa money i can't care, infections, safety, complications, experience, and then on the outpatient side, a whole range of diagnoses. we're convinced after spending time with physicians and hospital leaders and clinicians, if for example on the outpatient basis, if a practice were to perform at the highest level in our contract in these areas, they would have built the infrastructure to deal especially with chronic illness, which for our plan, 5% of our members account for 50% of our spending and we know that that's part of the solution to affordability, so who's working with us?

it's a whole range, this contract began in january of 2009, by may we had seven groups signed up. they range from 40-physician practice in the western part of our state to tufts medical center, which is academic medical center in boston with affiliated physicians, across eastern massachusetts. there are community hospitals, there are urban hospitals, there are hospitals outside the city. we expect three other groups to come into this contract within the next four to six weeks. collectively, these organizations and the new ones we expect in are -- account for almost 1,000 primary care physicians, almost 2,000 specialists, and 20% of our mements. and it was really interesting that when we started this process, you know, we first approached those health care organizations which had some history with accepting risk, had some history of integration between physician and hospital

and we expected, you know, honestly, a kind of slow adoption rate. we expected to work closely with a few early adopters, but the environment even in the last six months has changed. pressure for change from washington, pressure for change from massachusetts from our payment reform commission, but i think most importantly, an increasing realization that to be a successful hospital or physician practice in the future, is going to be about providing value and not just building volume. a hospital c.e.o. whispered to if he at a board meet tag we both attended last week, he said, andrew, you've been telling me, you and cleve have been telling me for two years that this is the way to go, i've been rejecting that, i couldn't see how a hospital of our size could actually be successful under this contract. now i understand that unless we're successful under this kind of contract, we won't be successful in the future where we hope medicare, medicaid, and other private plans are paying in a way that promotes quality and pro poets afford -- promotes

affordability. thank you very much. [applause] >> thank you andrew, and thank you, cleve. that's a very interesting experiment. it's not an experiment. i mean, it's really happening in the marketplace and it's unique because of the size and the number of participants in it, and it's really happening and it's really worth paying attention to. now i'd like to introduce paul ginsburg. i'm sure almost everyone knows him. he is a well known expert on health policy and has a very detailed knowledge of markets and costs and he will also be talking about the misaligned incentives and the need for payment reform. and he is frequently quoted in of the paper and asked to testify before congress, because he has that unique ability to take something that's very complex, really understand it, and analyze it, but make it accessible and understandable to a wide audience.

so paul. thank you. >> thanks, nancy, and sometimes it's hard for me to understand it. it motivates me to keep it simple. but i'm going to talk about payment reform. because when many people have asked me, well, seriously, what could be done in the context of health care reform, that actually contains costs for the long term? i believe that payment reform is one of the ripest opportunities. let me go into the background. basically, payers, both public and private, in the united states, have sending the wrong signals to providers of what they want, and these signals are inadvertent. but basically, primary care, forget it, we don't value that. do lots of imaging and

diagnostic procedures? yes. especially if you own the facility. we want to reward that more than if you're just doing the interpretation and providers are responding to these incentives like never before and for many services, the response involves increasing capacity. and the ownership of capacity by physicians tends to further increase the use of these services. now, let me talk about what would the payers like to do as far as payment? what's their objectives in setting provider payment rates? i would say the core beginning for all payers that i have know about is that, at least traditionally, is that the structure of payment rates and i'm talking about within fee for service now, the structure of payment rates should not influence decisions on care delivery. very explicit in medicare. for public payers, there's an

additional issue about fairness to different types of providers. now, both of these goals are achieved when relative payment rates align with relative costs. so it's really not rocket science to know what payers would like to happen, but it's also -- it hasn't really been working out that way. so let me talk about how the pattern of the payment structure deviates from of the cost structure. to if you talk about inpatient hospital payment under medicare, we've known for a long time that the surgical drg's are more profitable for hospitals than the medical drg's. now this was never intended to be the case by cms, and cms deserves a lot of credit for having reduced the magnitude of these distortions, in a revamp

of the drg methods under mark mcclellan's leadership, but the distortions in hospital payment remain for many private payers, who are not using drg's, either the old system or the new updated medicare system, but they are paying on the basis of per diems and discouldn'ted charges. so for privately insured patients, the incentives for hospitals are still there. now, physician procedures involving new technology are more profitable for physicians than evaluation and management services. now there are two aspects to this and this is getting into a little bit of detail. the medicare fee schedule is calibrated so that a big component of it is the physician work or really the time, effort, intensity that physicians personally put into the services and the other major components

is what we call the technical or the facility or the practice expense component. basically, payment for the rent, the services of technicians, nurses, office staffs, that are involved in providing a service. i'm going to point out that the biggest distortions are actually on the technical side. these patterns are not established, really were not intended by payers. now, let me talk about the responses. and this to me is as someone who has been conducting site visits since 1995. i perceive a real change in providers as far as much greater responsiveness to these incentives than in the past. providers will probably tell you, we're under more financial pressure. we have no choice. but basically, hospitals today are pursuing service line

strategies. what is a service line strategy? basically, identifying those service lines, whether it's cancer care or heart surgery, or orthopedic surgery, that the hospital finds most profitable so, you know, creative brands, you know, expand the capacity and try to increase admissions in those procedures. physicians are investing in free-standing outpatient facilities. and they're investing in facilities if their own offices. as we've watched single specialty mergers over time, you know, the number one reason used to be, to have more leverage in negotiating with payers. more recently, the number one on their list is reach the scale needed for equipment, intensive services to be in the practice. if you're not big enough to have an mri, merge with another single specialty group and then

maybe you'll have a scale needed. and now, courtesy of -- mccallan texas is a great example to me of responses by providers, particularly physicians, to the payment incentives in our system. physicians are also shifting to more lucrative specialties. we see primary care shortages increasingly in evidence, and we also have research that shows that specialty mix influences spending basically, the mix that we have in the united states, which differs from most other countries with a much smaller proportion of primary care is a factor that leads to our costs being higher. now, capacity leads to further rates, higher rates of service use. you know, capacity is often justified on the basis of patient convenience.

it's more convenient for the patient to have their test right here in the office. they have don't have to go to this hospital outpatient department. and of course, with we have third party payments, this changes the calculus of patient convenience, so why should the patient be concerned if they're going to a less efficient, more expensive facility. and self-referral incentives now apply to more services as more technical capacity is brought in to physician practices. so it's not just the self-incentive to prescribe morphy significance professional time. now the incentives are prescribing the use of technicians and less constrained resource if a physician practice, so the self-referral incentives become more powerful. when the services involve a technical facility payments and are more profitable.

and one thing that nobody's payment system, except i think in germany, has gotten around, i'm sure there are some others internationally, is that in a service where the average costs of providing the service are much higher, than the marginal costs of providing an additional service, when fixed costs are very substantial, there will be still an additional incentive to use of the equipment more and provide more services. well, what could we do policywise to reduce these price distortions? i believe that medicare is very well positioned to lead in this area. for one thing, it does have credibility with providers. providers don't love medicare, but medicare is probably more credible than private payers with providers. and medicare has the ability to engage the provider leadership in its work. and also, medicare has

sufficient clout with many employers and you know, very contrary to predictions by my fellow economists when the plead care physician fee schedule was introduced in 1992, really changing the pattern of relative payment fairly radically, there wasn't really any evidence of access problems caused by this change in the medicare payment structure, so medicare does have clout. and we find that private payers are increasingly following medicare payment structures, so that if medicare changes, in many areas, the private payers will automatically change as well. the medicare relative value scale for physicians is used extensively, although private payers often need to deviate from it, to accommodate the market power of a particular provider. such as a powerful single specialty group. now, what can medicare do?

well, there's a -- what i call an easy part of the reform agenda, a bunch of steps just to, you know, change the current -- revise the current payment structure so that it more accurately reflects the pattern of relative costs. this is easy, it appeared in a -- in the house schip bill, i guess it was a year or two ago. it's probably doable today. and basically involves a better process for updating physician work values, because that process, which is done by cms, with advice from the relative value update committee, called the ruck, has not succeeded in identifying those services, which because of productivity gains over time have become

relatively overvalued or overvalued compared to the other services. there's also a need for much more accurate estimates of facility. -- facility costs. and there needs to be frequent updating to reflect declining costs associated with technology, probably even considering projections of unit costs. let me give you an example of the problems with the lack of data. for those that have followed this, cms assumes that a piece of equipment, and maybe it's specific to imaging, is run 25 hours a week. when i asked, what's the basis of that assumption? well, we didn't have any data, so we just chose that number, presumably not to offend too many people. net pack has recently urged that that number, based on some date that that they have reviewed, be increased to 45 hours per week, just based on the patterns they

see owed there in the medical care system. so really, pervasive throughout the practice expense side of the fee schedule, there's this need to invest more in gathering more data to do this more accurately. one short-term thing is that we could do what japan does. japan in its physician fee payment schedule, looks for trends in volume, and when it sees services with particularly rapid increase in the volume of services, it takes that as a signal, well, our price must be too high. we'll reduce the price and japan has very sharply reduced the prices of the complex imaging procedures, ct scans, mri's, and cat scans. now, this is the harder part. i think there's real long-term potential of using broader units of payments.

and once we have fixed, but it's very important that we fix the fee for service payment structure first for two reasons. first, the fee for service payment structure will underlie, say particularly if we use a bundle payment approach, a per episode approach, will underlie, to sarah palin operate what the bundled payment rates will be, but also realistically, for years, i suspect, our efforts to pursue broader units of payments are going to be blends of fee for service with the broader payment unit, rather than going cold turkey and eliminating fee for service. so some of the early experience using broad every payment units, sometimes puts providers if a bind. because the incentives to reduce the cost per episode may involve disproportionate reduction of the most profitable services and

that really undermines provider's interest or ability to pursue these changes. so there are initial steps being discussed by congress now as part of health reef form, such as incentives to reduce hospital readmissions, bund i willing post-acute care into the inpatient drg's, post acute care would be care in nursing homes, home care, rehabilitation facilities. and using a supplemental capitation payment for medical home services. you know, the medical home idea is really a payment reform of, in addition to recognizing that many of the services that we believe today constitutes good primary care, many of them are not paid for. and the medical home is really an idea to focus on those additional services and cover them with a capitation