Improving US Healthcare Through Payment Incentives Denis A. Cortese Director, ASU Healthcare Delivery and Policy Program Robert K. Smoldt Associate Director, ASU Healthcare Delivery and Policy Program Washington, D.C. January 17,

Objective for US Healthcare: – Better Health – Better Care Delivery – Lower Cost Value = Patient Outcomes + Safety + Service/Cost over time 2

Two Key Points on Cost: 20% of Population = 80% of cost Total Cost = Price per unit of service x Use Rate Use Rate 3

Use rate is the key "… utilization - not local price differences - drives Medicare regional payment variation…" * “Most of this variation (Medicare spending) was not due to differences in the price of care in different parts of the country, but rather to differences in the volume…." ** There is a two fold difference between the MSA with greatest service use (Miami, FL) and the MSA with the least service use (Lacrosse, WI).” (After adjusting for regional prices, added payments for GME, IME, etc., demographics and beneficiary health statues)*** *"Prices Don't Drive Regional Medicare Spending Variations” Gottlieb, Zhou, Song, Gillman Andrews, Skinner and Sutherland ; Health Affairs, March 2010, vol 29. no 3, pp ** "Tracking the Care of Patients with Severe Chronic Illnesses” Wennberg, Fisher, Goodman, and Skinner; The Dartmouth Atlas of Health Care 2008 *** MedPac Report to Congress, January 2011, “Regional variation in Medicare services use.” 4

The Medicare Price Control Cycle 5 Reduce line item payment rate to providers

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Where to start given the two key points: – Expensive Patients – (those hospitalized) – Expanded DRG lump sum payments (to encourage judicious use rates) Expanded DRGs = Present DRG + longer time than hospitalization + include physician services – Announce plan, give providers two years to self organize – Start with Medicare's most expensive DRG and go DRG by DRG – Providers define outcomes 7

Third Key Point – How to set the payment amount – Not formulas – Reality based pricing concept (Dr. Hal Luft*) Cost of resources used by medical centers getting best risk adjusted outcomes + 3% * Luft, H., “Total Cure,” Harvard University Press, 2008, Pages

Hypothetical Example of EDRG payment amount based on concepts suggested by Dr. Hal Luft* Cost for EDRG “x” ($000s) Outcomes for EDRG “x” Proposed pricing point * Luft, H., “Total Care,” Harvard University Press Experience of teaching hospitals for EDRGx Median Cost all teaching hospitals Top 1/3 of hospitals on outcomes Median cost of top 1/3 of hospitals on outcomes