Professor James C. Robinson University of California, Berkeley Aligning Incentives in the Context of Biomedical Innovation IHA Pay-for-Performance Summit February 16, 2007

Continual innovation means continual disruption – Example: orthopedic and cardiac implants – Example: orthopedic and cardiac facilities Imperatives: coordination and flexibility – Primary care, specialists, devices, facilities Aligning incentives: payment and organization OVERVIEW

New medical devices, drugs, biologics, radiology, etc. are the principal driver of health cost inflation and must be explicitly considered in discussions of performance measurement, pay-for-performance They offer dramatic clinical improvements but are subject to up-selling, over-pricing, indication creep, off-label prescription, financial conflicts of interest Over-use, under-use, and misuse The Salience of Biomedical Innovations in Health Care Costs

Improved quality and efficiency within the existing set of technologies is important – First generation pay-for-performance The bigger challenge is flexible adaptation of incentives within the context of new technologies – Second generation pay-for-performance Dynamic quality and efficiency is the goal Dynamic Quality and Efficiency

Medicare’s Highest Payments, by DRG Group ( ) Source: Orthopedic Network News, Millennium Research Group, July 2005.

Percent of 2006 DRG payment devoted to the medical device (cardiology) Source: Orthopedic Network News, July 2006.

Percent of 2006 DRG payment devoted to the medical device (orthopedics) Source: Orthopedic Network News, July 2006.

The decision of which cardiac/ortho implant is key to the finances of specialists, hospitals, others – Which functional level (“demand matching”)? – Which device manufacturer (price negotiation strategy)? Potential coordination and incentive failures – Up-selling: vendors use consulting, honoraria, CME to influence physician choices – Regulation: Medicare ban on physician/hospital “gainsharing” but no ban on physician/vendor consulting Innovation and Incentive Example: (1) Choice of Medical Implant

Medicare: Bundle device into hospital DRG and ambulatory APC, exposing facilities to financial risk without bundling in physician fee and incentives Commercial insurance: Hospitals negotiate device “carve-outs” from per-day and per-case rates, reverting to charge-based FFS and mark-up Choice of Medical Implant: Payment Difficulties

Choice of site of care is made by MD but affects all – Inpatient versus outpatient? And where? Hospital: community or specialty (cardiac, ortho) facility? Ambulatory: hospital OPD or freestanding surgery center? Potential coordination and incentive failures – Physician investment/ownership Self-referral, cherry-picking, over-treatment? – Ban on physician investment/ownership Hospital monopoly, inconvenience, higher costs? Innovation and Incentive Example: (2) Site of Care

Medicare: DRG payments favor invasive cardiac/ortho procedures over medical diagnoses, stimulating proliferation of service lines and specialty facilities; not well adjusted for severity Commercial insurance: Fee-for-service undermines coordination across episode of care but capitation shifts too much risk to providers Choice of Site of Care: Payment Difficulties

“It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order…” The Prince (1513) Machiavelli on Disruptive Innovation

“Whatsoever therefore is consequent to a time of war, where every man is enemy to every man; without other security, than what their own strength, and their own invention shall furnish them withall…And the life of man solitary, poor, nasty, brutish, and short.” Leviathan (1651) Hobbes on Disruptive Innovation

Adaptive coordination via provider incentives – Adaptive and flexible provider payment methods – Adaptive and flexible forms of provider organization The alternatives to provider incentives: – Over-reliance on consumer incentives (cost-sharing) – Over-reliance on regulatory mandates Imperatives

Primary care physicians High-cost and high-volume specialists High-cost and high-value implants Hospitals, cathlabs, ambulatory surgery centers The Components of Coordination: Cardiology and Orthopedics

Physician Specialist Device Facility PCP Orthosurgeon Joint Hospital PCP Cardiologist Stent Cath Lab PCP Neurosurgeon Spine ASCABC Cottage Industry, Fee for Service: Every Component Separate

Integrated System, Global Capitation: Every Component Included Physician Specialist Device Facility PCP Orthosurgeon Joint Hospital PCP Cardiologist Stent Cath Lab PCP Neurosurgeon Spine ASCABC

Medicare: Physicians Carved Out, Device and Facility Carved In Physician Specialist Device Facility PCP Orthosurgeon Joint Hospital PCP Cardiologist Stent Cath Lab PCP Neurosurgeon Spine ASCABC

IPA Model: Physicians Carved In, Device and Facility Carved Out Physician Specialist Device Facility PCP Orthosurgeon Joint Hospital PCP Cardiologist Stent Cath Lab PCP Neurosurgeon Spine ASCABC

Episode-of-Care Model: Service Line Organization and Case Rates Physician Specialist Device Facility PCP Orthosurgeon Joint Hospital PCP Cardiologist Stent Cath Lab PCP Neurosurgeon Spine ASCABC

Biomedical innovation is continual Innovation is important, but disruptive Flexible adaptation is imperative – Methods of payment – Methods of organization Dynamic quality and efficiency is the goal Conclusions