1. The Role of Pay-for-Performance in California Health Care Reform
Cindy Ehnes
Director
Department of Managed Health Care
February 15, 2007

2. California Health Care Reform: Three Principles
Governor Schwarzenegger’s plan addresses
the “hidden tax” which the insured pay to
cover the uninsured. It will fix the broken
system through three essential elements of
reform:
Prevention and wellness
Coverage for all
Affordability 2
The Hidden Tax
Plan is based on the premise that currently insured and those who pay are subject to the “hidden tax” to subsidize the uncompensated costs of care to uninsured Californians. Hidden tax – estimated to be 10% of premiums - is paid by employers, families and individuals.
State contributes to the “hidden tax” as well, by not paying Medi-Cal providers shifting uncompensated costs to the insured – estimated to be 7% of premiums.
Governor Schwarzengger’s health care reform proposal will reduce the hidden tax, lower costs, support better care and create a healthier California.
Three principles of reform
The Governor’s plan will fix the broken system through three essential elements of reform:
Prevention and wellness
Coverage for all
Affordability
Prevention and Wellness
First, prevention and wellness. The Governor’s plan recognizes that to promote a healthier California and better manage health care costs over the longer term, we must make health promotion, disease prevention and wellness a priority. Prevention pays off for our long-term physical and financial wellbeing.
The Governor’s plan outlines a comprehensive prevention policy – one that encourages and rewards healthy behaviors through innovative health benefit designs; one that supports new efforts to prevent new cases of diabetes and better manage existing cases - one of our most costly and debilitating diseases; and, one that engages medical facilities and professionals to reduce medical errors by hundreds of millions of dollars, through electronic-Rx and other strategies.
Coverage for All
Second, coverage for all. The Governor’s plan recognizes that health coverage for all Californians will benefit all Californians. With universal coverage, everyone will share the benefits: individuals by being healthier; government from a more functional system; doctors and hospitals will be paid their fair share; health plans will see the insurance pool expanded by 4 to 5 million; and employers will benefit from lower health care costs and a healthy and productive workforce.
The Governor recognizes that coverage and cost are inextricably linked. That’s why the third essential element reform is affordability.
Individual tax benefits - pre tax dollars and HSAs.
Lower regulatory barriers that impede innovation, limit patient choice, and increase costs, which DMHC has already made a priority (licensing review time lowered, EOCs, efiling).
Longer-term cost management through prevention, health and wellness.

3. Governor Schwarzenegger’s Health Care Reform Proposal
Shares responsibility for fixing the system
Promotes personal responsibility
Promotes prevention -- tackles obesity, diabetes, and smoking to improve health and drive down costs
Promotes patient safety and prevents medical errors 3
Shared Responsibility
Just as all sectors of society share in the benefits of universal coverage, so too must each sector share responsibility for securing universal coverage. As the Governor has said, we have to share responsibility across the board so everyone can benefit.
HOW will each sector share responsibility for fixing the broken system and achieving this new market dynamic?
It begins with the individual having the responsibility to obtain health insurance.
Without an individual mandate, people will continue to voluntarily forgo coverage, shifting uncompensated costs to insured individuals.
It also will protect people because for many, a lost job can mean lost health care. An individual mandate means continuity of health care regardless of income or employment.
Government has a responsibility to promote a functional health care system, to help lower income Californians.
Healthy Families and Medi-Cal will be expanded for all children in families earning up to 3x the poverty level, or $60,000 for a family of four.
Subsidies will be provided through a new state-administered purchasing pool for working families earning between $20,000 and $50,000 a year.
Medi-Cal will be expanded to cover low income adults below poverty;
State will pay hospital, doctors and health plans fairly and increase Medi-Cal rates by $4 billion to more closely align with provider costs.
Doctors & Hospitals have a responsibility to provide affordable, quality care, partner with patients to improve wellness and health outcomes; and share in cost savings.
Doctors & hospitals will be relieved of costs associated with caring for the uninsured and will receive significantly increased Medi-Cal rates; an add’l. $10-$15 billion.
In turn, the Governor’s plan calls for doctors and hospitals to contribute a portion of this “coverage dividend” associated with universal coverage. Physicians - 2 % of revenues and hospitals - 4 % (more new revenues than they are asked to contribute)
Health Plans have a responsibility to make sure that insurance is available; guarantee access to coverage in the individual market; new market rules to protect against age, health status or excessive premiums (85% on care).
Employers have responsibilities as well.
More than 10 employees with no coverage, contribute 4% of payroll.
Offer Section 125 plans.
Health information technology is another area where the DMHC has taken a lead. HIT will streamline operations, reduce duplication of services, prevent medical errors. A paperless system with strong privacy protections within 10 years is achievable, and we must begin with Patient Health Records.
Leverage private sector investments.
Make cost and quality info available to consumers.
Health reform has never been easy in California or in the United States. We are committed to working with all parties to understand these issues and the Governor’s plan. We want to build the partnerships that are necessary to make health reform a reality.
Personal Responsibility
Californians should take personal responsibility for smart health choices
This requires transparency of health care information
Healthy Action Programs will reward Californians who take preventative health actions (smoking cessation, diabetes management, weight reduction, screenings) with vouchers or credits for health related goods, services and items, such as gym memberships
Governor’s challenge for kids – kids participate in healthy fitness programs to win $1000 in exercise equipment and the chance for a new fitness center for their schools
Prevention
Tackling obesity, diabetes, and smoking to drive down costs
Uses same approach as California’s internationally recognized anti-tobacco campaign
Stop smoking will result in more than $400 M in savings
Diabetes – 2 M Californians have it – 600,000 are not aware of it
Expected to double by 2025
Sixth leading cause of death in US
Drives up health care costs
Avg annual medical expenditure for a person with diabetes is $13,243, compared to $2,560 for a person without it.
Promoting patient safety and preventing medical errors
Teams providers with the State to promote patient safety
Promotes use of HIT
Requires e-prescribing by all providers by 2010
Calls for facilities to implement critical safety measures for infection control, surgical errors and adverse drug events by 2008
Enacts new health care safety measures and reporting requirements
Establishes an Office of Patient Safety within the Dept of Public Health
Reduces costs – 10% reduction in medical errors reduce costs by est $450 m per yr.

4. Governor Schwarzenegger’s Health Care Reform Proposal
Envisions a Culture of Quality
Promotes Value-Driven Health Care
Utilizes performance measurement, public reporting, and pay-for-performance incentives
Encourages the adoption of HIT to increase health care efficiency 4

5. California’s Marketplace
Of California’s 36 million residents:
17.5 million have employer-sponsored coverage
2.3 million have individual coverage
3.3 million have Medicare coverage
6.0 million have Medicaid coverage
6.6 million are uninsured
California is unique in the nation in its use of large integrated medical groups and independent practice associations 5
California is unique in the nation in its use of large integrated medical groups and independent practice associations that deliver care to half of its population.

6. DMHC is Unique in its Focus on Delivery System Quality
DMHC’s main focus is ‘the right care at the right time’ for enrollees
Consumer protection requires a focus on clinical quality disparities
Transparent information can support enrollees to make health care decisions
Electronic medical records can enable improvements in quality and safety 6
the three years since I assumed my position at the DMHC, I have had the opportunity to work with representatives of the various stakeholder groups concerned with improving the safety, quality, and affordability of health care services. I believe that the key stakeholders of the managed care market realize that the status quo is unsustainable, and are willing to work together toward innovative solutions that address the cost/quality problems.
Preventive medicine does not pay in the current American medical system.
Current system rewards inefficiency, redundancy, over-treatment and re-work
Health insurance sector benefits from slow claims or lost claims, overpayment of deductibles, confusing EOBs
All parties claim to want disclosure of data on cost and quality, yet resist publication
Physicians bear costs of system that will reduce billables and save $$ for payers

7. How to Create a Culture of Quality & Value in CA Health Care
Recognize that it takes a care team approach
Adopt systems that reduce risk of errors & provide decision support
Focus on care of populations over time
Encourage patients in supported self-management skills

8. P4P in California: Lessons Learned
HIT investment is key to performance measurement
Groups see rewards in investments in HIT systems to support P4P data collection
Risk of ‘Digital Divide’ exists
Erosion of Capitation risks Quality Infrastructure
Government ‘Hand’ needed to level playing field 8
One final note -- implementing electronic health records and related information systems is not a mere technology project, but requires a transformation in the way care is delivered. Of significant concern to policy makers should be the possibility that costs and other implementation complexities will result in “haves” and “have-nots” that disadvantage vulnerable populations -- those who are largely covered under public programs.
Government’s Role as Leader, Convenor, Purchaser, Regulator

9. Role of Government to Remedy Perverse Incentives
Impediment
No Pay for Quality
Inability of consumers to perceive differences in quality
Displacements of payoffs in time & place
Government Role
Promote integrated care models
Promote capitation
Require Public Performance Reporting
Pay differentially for quality
Pay for innovative care models
Use market power to insist on best practices

10. Role of Government to Remedy Perverse Incentives
Impediment
Uneven Access to relevant clinical information
Remedy
Set high expectations for industry
Support IT infrastructure buildout
Develop public-private capital funding approaches
Support IT development evenly among clinical settings

11. Steps California Can Take to Accelerate HIT Adoption
Stakeholders identified five key action areas:
Establish statewide HIT leadership – a designated leader and a strong advisory group
Structure incentives and identify financing methods
Invest in HIT using state’s role as purchaser
Augment current privacy and security protections
Engage consumers 11
Broadband
The California Emerging Technology Fund is promoting broadband Internet access in rural and other underserved areas with money from telecommunication company mergers.
In October, the Governor issued an Executive Order that eliminated fees for installing high-speed Internet conduit along state rights of way and set up a Broadband Task Force.

12. California Incentives for Improving Quality Improvements & Health IT
Establish provider incentives for adopting HIT
Begin with P4P in Medi-Cal and CalPERS
Create special payments for community clinics
Pay for early quality improvement, such as managing chronic conditions
Push the market by paying for use of HIT enabled care management 12
Establish new provider incentives for use of HIT
Payments for HIT Use
Pay for Performance in Medi-Cal and CalPERS
Pay for an “accredited, qualified data search” in specific clinical venues (e.g., 1st visit to specialist, ER, any venue where likely to order lots of tests)
State must define ‘qualified’ (e.g., Must be a community wide search of information ; an intra-hospital system search would not be sufficient
State must research and determine highest value clinical venues to pay for search
Must use CCHIT accredited EMR application
With 2 years notice of this payment majority of providers will change behaviors
Special payments for community clinics
Seed funding, because safety net provider margins are too thin to float the initial revenue decline due to temporary HIT-induced productivity loss (i.e., 3-6months)
Additional ongoing payments, because safety net providers unlikely to see an increase in post-HIT revenue (unable to capture higher bill code services)
Pay for early QI / managing chronic conditions (e.g., high risk pregnancy)
Consider “Expanded scope of services” payment on top of FQHC payment structure
Push the Market:
Craft a financial incentive to encourage providers to go farther with HIT (e.g., general payment differential, differentiated fee schedule) to encourage additional market competition