The Health Care Fix

When Dr. Jorge Garcia, associate director of the residency program at Swedish Family Medicine, talks to his young residents about the dysfunctional way most health care is paid for in the United States, he tells them to imagine a patient who comes in with a cancer in her right arm. In the operating room, the surgeon accidentally amputates the patients left arm. He sends a bill for the surgery and the patients insurance company pays the usual fee. But since the cancer is still untreated, the surgeon calls his patient back to cut off the cancerous right arm, billing yet again for the second operation. Recent regulatory changes make that particular scenario less plausible. Still, the key lesson remains uncomfortably true: Americas fee-for-service practice of charging for health care based on every service provided some compare it to buying a car by acquiring each part separately doesnt keep people as healthy as it should and leads to a lot of unnecessary, even harmful, care.

The federal Centers for Medicare and Medicaid Services (CMS) estimate that about $870 billion of the $2.9 trillion spent on health care nationwide in 2014 was waste resulting from overuse, fraud and abuse. It drives up costs, putting a heavy burden on consumers and employers alike.

Major companies, public employers, insurers and medical providers in Washington state are leading an effort to break that logjam, using something called value-based purchasing, in which health care is paid for not by volume but by quality and outcome.

The Boeing Company broke new ground in 2014 when it contracted directly with UW Medicine and Providence Health & Services using value-based contracts. Boeing pays a fixed amount to cover employees based on their claims histories. The medical systems, in turn, agree to handle all the patients medical needs through an Accountable Care Organization (ACO) of hospitals and physicians groups.

These ACOs are similar to the health management organizations (HMOs) of the 1980s in that patients must use the doctors and facilities that are part of the network. But while HMOs limited care to save money, the ACOs are required to meet quality and patient-satisfaction targets. If the ACO meets the targets at a lower cost than expected, it shares in the savings; if expenses are higher, it swallows some of the costs. Consequently, the providers have strong incentive to come up with better ways to deliver better quality health care at a lower cost.

We wanted to offer employees an option that improved health and productivity, says Greg Marchand, director of benefits policy and strategy for Boeing. He says patients using the system have given it an 85 percent approval rating so far.

Early this year, the Washington State Health Care Authority (HCA) began offering members of its Public Employee Benefits (PEB) Board program a similar plan through UW Medicine and a network of providers that includes Virginia Mason and Overlake Medical Center. So far, more than 10,000 have enrolled.

We are one of the first public employers to do this, says HCA Chief Policy Officer Nathan Johnson. In what Johnson calls a tectonic shift, HCA is also negotiating with the federal government for a waiver that would allow it to offer value-based care to the states 1.8 million Medicaid clients.

And starting in 2017, physicians who treat Medicare patients will be monitored on a range of measures, including quality of care and the use of technology to communicate with patients and coordinate care. In 2019, physicians will begin receiving bonus payments or penalties based on their 2017 performance data.

The increased use of value-based purchasing could have a downside. Since those contracts typically require medical systems to take on higher risks, there is a strong incentive [for medical centers] to amass the largest possible population, argue Michael Porter and Robert Kaplan in the July-August issue of the Harvard Business Review. The risk and complexity of providing health care based on fixed prices for a given population, what the industry calls capitation, will accelerate consolidation in the health care industry and reduce competition, they suggest.

Many experts believe that in the Puget Sound region the health care system will ultimately consolidate into four large systems: Providence, UW Medicine, Group Health/Kaiser and a fourth one yet to be determined.

Industry analysts also speculate that Medicares new value-based requirements for doctors, including the mandate to use electronic medical record systems, will add significant additional pressure on physicians with small practices, forcing many more to merge or affiliate with larger medical systems.

While consolidation could reduce competition, potentially raising prices, Joseph Gifford, former CEO of Providence and now SVP for population health at Lumeris, a Texas-based provider of technology to hospitals, says larger health systems working with value-based contracts have a tremendous opportunity to create systems that deliver on the promise for more efficient care.

Value-based care has always made a great deal of sense from a public health perspective, says UW Medicine CFO Jacqueline Cabe. In the past, she notes, it was more difficult to follow those principles because we didnt have the incentives to decrease costs. [Now] we have a much better idea for the total cost of care and what to do to minimize that cost. Furthermore, since everyone covered through UWs ACO will get treatment through UWs network of providers, UW Medicine has more control over how to improve care, she adds.

UW Medicine has aggressive initiatives in place to improve everything from the way it performs operations and the processes it uses to the use of medicines. A significant amount of waste is from variation, says Carlos Pellegrini, UW Medicines chief medical officer. We have created elaborate care paths that delineate what we will do with a given circumstance. He says that approach includes what should be told to patients when and even the time of day a particular operation should occur.

The value-based contracts have made UW Medicine more disciplined about how it deals with new technologies and treatments.

In the past, when a new technology was available, we became the testing ground for it, Pellegrini points out. There was more of a public willingness to cover that cost.

Today, UW Medicine has a scientific approach that includes mechanisms to predict the overall costs of new treatments and their effects on patients. For example, whereas in the past the success of a surgical procedure to deal with acid reflux might have been determined by a patients score on a follow-up medical test, today that assessment also includes whether the operation improved the patients quality of life by, say, reducing pain or helping the person get back to work.

Stricter standards for introducing new treatments, drugs or medical instruments expected under value-based contracts are already shaping investments in the biotech and biomedical sector.

Health care has been one of the few areas where new technology actually raises costs, observes Chris Rivera, who advised many startups in his former role as executive director of the Washington Biotechnology & Biomedical Association. Rivera says he advises entrepreneurs to stick to business models that can show clearly how a device or drug will be able to reduce health care costs. Last year, Regence launched Cambia Grove, an organization that hopes to tap Seattles vibrant startup community to come up with digital solutions to cutting health care costs.

Transforming the way health care is provided will require not just new innovations but also a major change in culture. Integrating a patients care across multiple hospitals and doctors groups, for example, requires physicians to work together, and thats not as easy as it sounds.

A physicians training is about diagnosis. They learn to make decisions, says Leo Greenawalt, a former CEO of the Washington State Hospital Association (WSHA), who has become familiar with the issue as a member of Group Health Cooperatives board of trustees. But in a team setting, dealing with complex issues, youll get 100 different opinions. The culture of employing physicians takes 20 to 30 years to develop.

The states HCA hopes to accelerate cultural change by including in its contracts the requirement that health providers adopt the recommendations of the Bree Cooperative (see story on page 26), including one that patients engage in shared decision making with medical personnel other than surgeons to discuss the potential complications as well as benefits of a given procedure, or to watch a video on it. A 2012 Group Health study found patients who used decision aids prior to possible hip and knee replacements were as much as 38 percent less likely to undergo the surgery. Medicare alone spends $6 billion a year on hip and knee replacements.

Even though large medical systems are likely to take market share as a result of value-based contracts, a few hospitals could succeed by becoming competitive in specific niches. Virginia Mason Medical Center, for example, adopted Bree Collective recommendations to great success and was recently designated by the state as a Center of Excellence in joint- replacement surgery. Those enrolled in the state HCAs value-based plan will be able to choose Virginia Mason for these operations. The state would pay for the procedure on a bundled basis, establishing a fixed price for all aspects of the operation. The hope is fewer operations will be performed, but when they are, they will cost on the lower end of the $17,000-to-$61,000 price tag nationwide.

Long term, the benefit of moving to value-based contracts is likely to be significant, but the journey could be rocky.

Its a gutsy move [by the state] to be the first mover, says Nancy Giunto, executive director of the Washington Health Alliance. Most assume value-based contracts will cut costs, she notes, but it could take years before that happens and the state could come under criticism if the system ends up costing more money.

For health care providers, says Claudia Sanders, SVP of policy development for the WSHA, its one foot in the canoe, one foot on the dock. The state HCAs contract with health care providers, for example, is 155 pages long and details performance metrics the health care provider must meet on a range of areas from depression to medication management.

In most cases, providers must invest up front so their IT systems can track a diabetes patients path through an often fragmented medical system from primary care doctor to orthopedist to eye doctor. It may be years before the new systems actually cut costs. In the meantime, hospital systems end up taking on the heavy burden of serving two payment systems.

We [primary care doctors] need to see patients just as fast while trying to do a whole lot more, and still document and bill to support fee-for-service, says Garcia. Thats contributing to high levels of burnout and early retirement just when the demand for primary care is rising.

Contracts can also create an ethical dilemma. If a hospital learns that a diabetes support group helps reduce costs and offers it to value-based clients, does it then offer the same service to fee-for-service patients even though the service cannot be charged under other insurance plans?

The good news is that medical systems going through the transformation should end up with a more competitive health care system that offers better care to patients at a lower cost to employers.

The value-based plans are being priced to attract participants. Enrollees who select the states value-added plan get a one-third discount on premiums, with no deductible for primary care. Boeing employees who choose the value-based options get faster access to network primary care providers and specialists, and more after-hours care availability. They receive more personalized and coordinated care especially if they have complex medical conditions like diabetes or heart disease and access to their doctors through electronic messaging. For an individual, the cost is about $360 a year less than standard health coverage. There are no copayments for seeing network primary care providers, and generic prescription drugs are covered at 100 percent.

Other organizations are also looking at value-based contracts. The Association of Washington Cities, which has a trust fund for 160 communities in the state, is considering a new value-based benefit plan for city workers. Private employers are preparing to follow in Boeings footsteps, too. Antonucci says Regence has built more value-based pricing elements into its traditional preferred provider organization health insurance plans. But the most extensive value-based contracts are offered through ACOs at places like UW Medicine, the Everett Clinic, MultiCare Health System and in a partnership between Evergreen Health Care and Virginia Mason. Those plans, in which Regence acts as administrator rather than as an insurance provider (charging a fixed fee), are aimed at individuals and midsize companies.

Antonucci says he expects a half-dozen or more self-insured companies will offer their employees ACO plans next year, with a larger number of midsize companies following in 2018.

The concept of value over volume is a transformational shift, says Pat Chestnut, CEO of AristaPoint, a benefits provider. He adds that smaller companies are exploring their options for shifting to value-based contracts.

Washington state has more than a few advantages as it goes through this transition. To begin with, it has a long history of providing value-based care. That was the principle on which Group Health was established in 1947. A King County decision to offer Group Health coverage to employees in 2007 resulted in substantial savings both to the county and employees, as did financial incentives to employees for participating in a wellness program.

Group Healths structure has helped hold down costs among competing providers by, for example, preventing them from building too many new hospitals. Since one of the primary ways in which value-based contracts cut costs is by encouraging preventive care and avoiding hospital stays, the result is expected to be a decline in hospital revenues. The lack of overcapacity in Washington puts medical providers in a better position to weather that decline in activity.

Another advantage Washington has in transitioning to value-based payments is the unusual level of cooperation among health care institutions, says Giunto. The Washington Health Alliances 175 members include purchasers such as Boeing, Alaska Air Group and the Port of Seattle as well as major insurance companies and health care providers. The existence of that forum made it easier for Boeing to connect with health care providers to develop its value-based offerings.

This collaborative atmosphere has also helped the alliance to collect and share data on the performance of the states medical systems on things like the number of hysterectomies, back surgeries and knee replacements performed at each facility, helping to identify hospitals that may be performing more procedures than necessary.

Control of medical costs is critical for Washington companies competing in a global economy. Employers dont have much idea of what they are buying, says Robert Mecklenburg, M.D., medical director at the Center for Health Care Solutions at Virginia Mason. You could go to a medical center here in Seattle … with a headache, and depending on the day of week, get an MRI, an aspirin or many different things. The system as we know it is unsustainable and unaffordable.

Mecklenburg adds: If youre an American company competing globally, youre starting with a big disadvantage because a European company isnt hobbled by health insurance costs and so it can price its products lower.

As for Boeing, its early yet, but it seems satisfied with the experience so far. Weve had really strong enrollment, says Marchand. Its only the second year, so its hard to gauge if the employees choosing the value-based option are staying healthier. But employees like the care and service they are receiving, and Boeing is happy enough with the plan that its rolled out a value-based care option to employees in St. Louis, Charleston and Los Angeles.