decided we needed to invent something on our own and what we did essentially was combined as you will see what we call global payments with some very substantial incentives for improved performance. so i'm going to give you a picture of this alternative contract as if you would imagine for a second he would be the leader of a physician practice

or hospital ceo or cfo. so how we develop a contract? we establish a global payment risk adjustable payment. i will explain that to you in a moment, based on the current services offered either by the physician practice, the hospitals or preferably the two combined. and asset said we are now trying to pay less than we do today. what we are trying to do is have health care grow at a slower rate than it has been and i will tell you the health care trend in massachusetts currently around 10% of the medical costs are growing about 10% per year. premiums are growing a little bit lower because shifting costs of workers but medicare costs are growing about 10%. so the second thing we do is then sit down and negotiate an inflation rate we are trying to get down close to cpi and the three to 4% range which is different than what's happened in massachusetts. so that's the first thing we do.

the second thing we do is talk about performance incentives and here we are not talking about the 1% or half percent or 2%. we are talking about performance incentives when fully executed could allow physicians and hospitals to earn up to 10% above their initial global payment. think for a second how different this conversation is. most conversations between health plans and physicians and hospitals are every other year adversarial conversations about price. this is a conversation about a five-year partnership. five-year partnership about quality and about affordability. it's an entirely different conversations of providers in the first year that will earn quality incentives where they are in terms of measurement can earn up to 10%. and then finally as we try to explain to hospitals and physicians and the are increasing the understanding there is an enormous opportunity for them to keep the savings

from eliminating on necessary harmful care and waste in the system but we are not just asking them to do that. we are partnering with them to do it so what are we doing? we are giving each hospital and each position customized reports that show down to the physician level the variations in care and their practices. what are their rates of c-sections and hysterectomies, again, down to the physician using the wind burke steel data but at the individual physician levels but it's actionable. it's one thing to say minneapolis and miami are spending different rates, but you have to get down to one physician and office next to theirs, why is one performing for every case of reflux disease and one rarely performs and get them talking about that to see what the evidence actually shows.

so what's in the global budget that we put in? it's all medical expenses, primary care, specialty care, hospital care, behavioral health and pharmacy. we want to deal with one of the biggest problems identified in the institute of medicine report which is in tents fragmentation in the delivery system. we know from a safety perspective on of the greatest risks for safety and handoffs and not just handoffs in hospital and the home or hospital and nursing home but handoffs within the hospital itself in the intensive care unit to the regular floor to skilled nursing facility. we are 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 earlier doctors are innovating by having group

visits. one of them talks about the key to success is between the visit, that our whole system is focusing on a visit because as we have heard from robert, that's where the payment goes but what happens between the is it? that's where the crucial moment may be in a person's progress if medical illness and finally we are 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 with a variety of means including reinsurance, stop lost 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 word in the 90's we didn't like and it was a mixed with capitation however there is still a number of practices in massachusetts which operate on some.

but how does this -- how does this differ from capitation at least the capitation as it was practiced initially? 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 group. we are not sitting some artificial number to meet our budget expectations. secondly, one of the criticisms of capitation was there might be incentive to of weight sicker patients. we adjust our payments based on every year on the health status and morbidity of those patients that physician practiced in that hospital is caring for. third, we are adjusting the payment every year in line with inflation. not the kind of mccaul inflation many providers have been learning the last decade, but still in capitation was often at the end of the year when we lowered the payment. we are not talking about that. finally, to the criticism there might be withholding of care

under a system based on capitation that can't happen in the system because it only works financially for physicians and hospitals and only for patient safety is quality incentives get paid out and quality incentives as you will see in a minute or based on quite a comprehensive set of measures. so how do we think about this measurement work? we start with a set of principles and said 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 said include process measures, and measures of patients experience that should go from the end site patient care to the ambulatory side of care. we also wanted to get out of some of the falls and paid for performance where if people will succeed on a measure the stop working and halfway through the year realize they are ongoing to get there so instead we established this notion of gates and defined high performance in

absolute terms. we weren't trying to get for example 90% of compliance if 90% is what was achieved in a high performing regions. we actually wanted to go to theoretical limits. we've known and have seen people can eliminate cero infections in intensive care units month after month after month. 100% compliance with evidence guidelines and preventative care and again, we are looking at outcomes, not did you do the test -- did you do the test for diabetes because the blood sugar level under control so a true outcome measure. what did these look like? i'm not going to go through them specifically but you can see they encompass a range of diagnoses, illness at the end patient side, cardiac care and pneumonia care, broad search pleasures, infections, safety, complications, experience, and then on the outpatient side, a whole range of diagnosis. we are convinced after spending

time with physicians and hospital leaders and commissions for example the outpatient basis every practice were to perform at the highest level in the contract in these areas, they would have built the infrastructure to deal especially with chronic illness which in our plan 5% account for 50% of the spending and we know that's part of the solution to affordability. so who is working with us? it's a whole range. this contract began in january of 09. blight may we had seven groups signed up. they ranged from 40 physician practice in the western part of the state to the 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 account for almost 1,000 primary-care physicians, almost 2,000 specialists and 20% of our members. and was interesting when we started this process we first approached those health care organizations which had some history with risk and history of integration between physicians and hospitals and we expected, you know, honestly slow adoption rate. we expected to work closely with earlier doctors but the environment even the last six months has changed. pressure for change in washington, pressure for change in massachusetts from payment reform but i think most importantly 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 ceo whispered to me at a board meeting we boast attended last week he said andrew, you've been telling me,

you and clevelan have been telling me this is the way to go. i've been rejecting that. i couldn't see how a hospital of our size could be successful on for this contract and now i understand unless we are 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 for a way that promotes quality and affordability. thank you very much. [applause] >> thank you, andrew and cleveland. that's a very interesting experiment. it's not an experiment. it's really happening in the marketplace and its unique because the size and number of participants and it's really happening and it's really worth paying attention to. now i would like to introduce paul ginsburg. he's a well-known expert on health policy and very detailed knowledge of markets and cost

and he will also be talking about the misaligned incentives and the need for payment reform. and he is frequently quoted the paper and asked to testify before congress because he has that unique ability to take something that's very complex, really understand and analyze it but make it accessible and understandable to a wide audience. paul, thank you it's hard for me to understand that it motivates but i'm going to talk about payment reform because when many people ask me well, seriously, what could be done in the context of health care reform that actually contains cost for the long term i believe payment reform is one of the ripest opportunities. let me go into the background.

basically hare's both public and private in the united states are sending the wrong signals to providers of what they want and the signals or inadvertent. basically the signals are primary care, forget it. we don't value that. do lots of imaging and other diagnostic procedures? es, especially if you own the facility. we want to rework that more than just doing the professional activities of 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 well what the payers like to do, what are

their objectives and sitting rates? i would say a core beginning for all payers that line about is at least traditionally the structure of payment rates and i am talking about within fee-for-service, the structured payment rates should not influence decisions on care delivery. very explicit in medicare the. for public appears there is an additional issue about fairness to different types of providers. now, both of these goals are achieved when a relative payment are aligned with relative costs. so it's really not rocket science to know what the papers would like to happen, but as i will show it hasn't really been working help that way. so let me talk about how the pattern of the payment structure deviates from the cost structure. so if you talk about inpatient

hospital payment under medicare, we have known for a long time that the surgical the argie's are more profitable for hospitals the and the medical drg. 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 and a revamping of the methods under mcclelland leadership but the distortions of hospital payment remain for many private payers who are not using drg either the old system or the new updated medicare system but they are paying on the basis of per diem for discounted charges and so this for privately insured patients the incentives for hospitals are still there now physician procedures involving new technology are more profitable

for physicians ban evaluation and management services. now there are two aspects of this and this is getting into a little bit of detail. the medicare fee schedule is calibrated to the big component is the officious -- decision work that physicians personally put in to the services and fielder major component is what we call the technical office of the or practice expense component basically payment for the rent, service technicians, nurses, staff and providing the service. the biggest distortions are actually on the technical side. these patterns are not -- were not intended by payers. let me talk about the responses. and this to me as someone who

has been conducting visits since 1995, i received a change and providers as far as much a greater responsiveness to these incentives than in the past. providers will probably tell you we are 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, with its cancer care or heart surgery or orthopedic surgery at hospital finds most profitable so create a brand expand the capacity and try to increase emissions in those procedures. physicians are investing in freestanding outpatient facilities and they are investing in facilities in their own offices. as we've watched single

specialty mergers over time the number one reason used to be to have more leverage in negotiating with payers. more recently the number one on the list is reach the scale needed for equipment and tens of services to be in the practice. if you're not big enough to have an mri, merge with another single specialty group and may be will have a scale. and now courtesy of the tool mcallen texas is now a famous example to me of responses by providers particularly physicians to the payment incentives in our system. physicians are also shifting to more lucrative specialties that we see primary care shortages increasingly in evidence and we also have research that shows specialty makes influence spending basically the mix we

have in the united states. different from most other countries with a much smaller proportion of primary care is a factor that leads to our cost being higher. now, capacity leads to further higher rates of service use. 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 don't have to go to this hospital outpatient department and of course when we have third-party payments this changes the calculus of patient convenience so why should the patient be concerned if they are going to a less efficient, more expensive facility? and self referral incentives now apply to more services as more technical capacity is brought into physician practices. so it's not just the cells

incentive to prescribe more physician professional time. now the incentives are prescribing the use of technicians and less constrained resource in a physician practice so the self referral incentives become more powerful when of the surface is involving a technical facility payment and more profitable. and one thing that nobody's payment system except i think in germany has gotten are down, sure there are others internationally, is in a surface where the average costs of providing the service are much higher than the marginal cost of providing additional service on fixed costs are substantial there will still be additional incentive to use the equipment more and provide more services. well, what could we do policy wise to reduce these

distortions? i believe medicare is well positioned to lead in this area. for one thing it does have credibility with providers. mabey providers don't love medicare but medicare is probably more credible than private payers and medicare has the ability to engage the provider leadership in its work and also medicare has sufficient clout with many providers and very contrary to predictions by my fellow economists when the medicare physician fee schedule was introduced in 1992 and changing the pattern of relative payment it was and to really any evidence of access problems caused by this change in the medicare payment structure so medicare does have clout. and we find private payers are increasingly falling medicare payment structures so that if

medicare changes in many areas the private payers will automatically change as well. the medicare bill to value scale for physicians is used extensively although private payers often need to deviate to accommodate the market power of a particular provider such as a p.o.w. waffles in symbol specialty group. now, what can medicare do? well, there is what i call and easy part of the reform agenda a bunch of steps just to change the current, revising current payment structures of it accurately reflects the pattern of relative costs. this is easy. it appeared in the house schip bill. i guess it was a year or two ago. it's probably due today. and basically would involve a better process for updating

physician work values because that process which is done by cms with advice with their relative value update kennedy called rvuc which because of productivity gains over time have become relatively overvalued or overvalued compared to the other services. there's also the need for much more accurate estimates of facilities costs. and their needs to be frequent updating some reflect declining costs associated with technology probably even considering projections of unit cost. but if you an example with problems of lack of data. for those that have followed this, cns assumes a piece of equipment and maybe this is 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. they've recently urged that number based on some data that they have reviewed the increase to 45 hours per week. just based on the patterns that they see out there in the medical care system. so really pervasive toward what the practice expense side of the schedule there is this need to invest more in a gathering more data to do this more accurately. one short-term thing is we could do what japan does. japan is its payment schedule looks for trends in volume and when a sea surface with particularly rapid increase in the volume of services it takes that as a signal well as our price must be too high.

we will reduce the price. and japan has sharply reduced the prices of the complex imaging procedures, ct scans, mri and cat scans. now, this is the harder part. i think there is long-term potential of using broad units of payment and once we've fixed, but it's very important we fixed the fee-for-service payment structure first for two reasons. first, the fee-for-service payment structure will underline particularly if we use a bumbled payment approach, it will underline to calibrate what the bundled payment rates will be but also realistically for years i suspect our efforts to pursue broader units of payments are quinby 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 payment units sometimes puts providers in a bind because the incentives to reduce the cost per episode may involved disproportionate reduction of the most profitable services, and that really undermines providers interests or ability to pursue these changes. so there are initials steps being discussed by congress now as part of health reform such as incentives to reduce hospital readmissions, bundling care into the and patient drg, nursing homes, home care, rehabilitation facilities, and using a supplemental capitation payment for medical home services. you know the medical home idea

is a payment reform in addition to recognizing many of the surface is the we believe today constitute good primary-care many of them are not paid for and the medical home is an idea to focus on those additional services and cover them with a capitation payment. now, beyond these and you may be surprised some of the things i thought were the easy things in the payment i think the big challenge is the big rewards or per episode bundles and unaccountable care organizations and i would say that when you just heard about in massachusetts is i shouldn't have said accountable care. i think that's a buzz word. let's just say capitation like structures. so let me say a few things about per episode bundles. first, the key is including all

the providers involved in an episode of care. our system is long experience using bumbles for a single provider, but the point here is to use a bundle that crosses all the providers involved in care and this provides incentives for an efficient delivery of an episode of care. it provides incentives for the different providers to choose efficient provider partners so that the orthopedist doing the hip replacement becomes concerned about the fact that if they do meet at the most expensive hospital in town they never get a reward in their per episode payment but if they do we get a more efficient hospital that's less expensive they might not even have to change anything they do and this way they could be a winner in the per episode bundles. now the attribution of episodes of patients to different

episodes or different providers can be a challenge. it's easy with a major surgical things. this actually has been pursued by private insurers as a modification of fee-for-service basically bonuses or penalties in per episode efficiency. and cms to me is leaving the groundwork for this in the future as they are implementing as directed by congress resource use reports which basically are for informational only reports to physicians on the efficiency with which episodes of treatment they are involved with are provided. now there has been some criticism by some of the proponents of capitated methods of per episode bumbles and i would interpret the criticisms