1. Examining Business Cases for Interventions to Improve Quality of Care: Presentation to the Washington State Conference on Quality-Based Health Care Purchasing Douglas A. Conrad, PhD University of Washington December 4, 2006

2. Perspectives in Establishing a “Business Case” for Quality Define the “Business” of Interest: –Health Plan (Insurance Firm or Self-Insured Employer) –Employer (not self-insured for employee health care costs) –Healthcare Provider  Integrated Health System  Hospital  Medical Group  Independent Medical Practice

3. Next Step in Establishing the Business Case Identify the costs and benefits of quality improvement from the perspective of the specific “business” –Logic is that the expected value of the benefits captured by the business must exceed the costs borne by the business to motivate the entity to invest in a particular quality improvement (QI) initiative –“Externalities” (benefits and costs of the business’ QI shifted to other parties) matter

4. Business Case “Next Steps” (continued) Investment perspective dictates the variables to be considered in analysis of the business case: ( cash flows are key in capital decisions ) 1)Time horizon for the QI initiative 2)Level of upfront investment required (including working capital requirements) 3)Expected ongoing cash (or equivalent) costs of QI initiative by time period 4)Expected cash revenue “ “ by time period 5)Required return on comparably risky investments

5. Employer Perspective Captures the portion of worker productivity benefits not passed through to employees as wage or salary increases due to increased efficiency (some gain-sharing between employee and employer of “firm-specific” human capital) Employers have an incentive to engage in health promotion if the costs are less than the benefits in improved worker efficiency Can help build the case by paying more for higher quality care (challenge is “budget neutrality”)

6. Health Plan Perspective Captures any short run savings in health care payments under hospital and physician reimbursements tied to utilization, i.e., through reduced –hospital days, hospital admissions, and/or professional units of service Captures a premium pricing advantage if applies reduced medical care costs to premium reductions May gain enrollee loyalty if “ brand” care mgmt advantageously

7. Prepaid Integrated System Perspective Closed panel HMOs have the greatest potential to capture the gains from care management as integrated delivery and financing systems –Incentives are aligned between providers and the health plan, as gains accrue jointly to the plan and provider sides within the unified organization

8. Provider Perspective Hospitals and Physicians may gain Patient Loyalty if Care Management is linked specifically to those providers Trick is to create “Organization-Specific” Health Capital (applies potentially to plans, as well as providers) Specialists practice within a narrower domain, but have more focused expertise in care management

9. Individual Person Perspective Captures 100% of any health benefits but (As consumer) Captures only the “patient cost- share” ~ 20% at point of service (copay, coinsurance, or deductible) of any health care cost savings and any “risk-rated” premium reduction (As employee) Captures part of the increased work and household productivity benefit

10. Tools for Enhancing a Business Case Employer : Reduce employee turnover (increase loyalty) by creating brand name in “health capital” (reputation for health promotion) Channel employee demand to providers and health plans with high “value for money” Focus on worksite health promotion initiatives of demonstrated cost-effectiveness Communicate message to employees that they collectively “take home” the cost savings on their employer-sponsored health insurance ( not the employer’s owners or consumers of their products)

11. Business Case Tools (continued) Health Plan: “Paying for Quality” to Enhance the Business Case –Capturing Cost Benefits from QI –Benefit Captured by Plan Depends (in Part) on Unit of Payment:  FFS (per service, per day, per case)  Per case (e.g., Prometheus™ Evidence-Based Case Rates)  Capitation QI as Instrument for Attracting and Retaining Positive-Margin Enrollees (a “favorable selection” tool for the plan) Collect Risk-Adjusted Premiums & Pay Providers on Risk-Adjusted Basis (Win-Win Contracting for Sustainable Advantage: sharing “gains from trade”)

12. Business Case Tools (continued) Integrated Health System: If System has integrated delivery with financing, strongest “business” potential to internally align incentives and QI opportunities across the plan (financing), medical group, and hospital(s) Question is whether internal discipline from “vertical integration” can match external market discipline of contracting between constituent parts, i.e., “virtual integration” of payer and providers

13. Business Case Tools (continued) Provider: Unit of Payment is Critical for Incenting QI –Capitation: provider captures all QI-related cost savings –Per case: “ “ captures savings in LOS and intensity (e.g., cost per day, per service) –Per day: “ “ only captures savings in intensity Payment Methods Mixing Incentives for Cost Control & Quality are Likely to Be Best Clinician professionals’ “intrinsic motivation” enhances the organization’s “business case” (attenuates ‘stinting’ and ‘risk selection’ incentives)

14. Evidence on the Business Case Examples from Leapfrog Economic Analysis (Conrad and Gardner 2004) –Computerized Physician Order Entry (CPOE) –Intensivist Physician Staffing of ICU Examples of Medicare Payment for Adverse Events (Payer vs. Hospital Incidence of Costs) Estimates of Employer Costs per Employee of Selected Medical Conditions

15. Base Case Distribution of CPOE Net Savings per Inpatient Day by Payment: Capitation DRG or per CasePer DiemFFS to Hospital$8.69 $5.84($6.45) to Payer$0.00 $2.45$13.02 to Patient$0.00 $0.40$2.12 Total:$8.69

16. Base Case Distribution of IPS Net Savings per ICU Day (12-Bed Unit) by Payment: Capitation DRG or per CasePer DiemFFS to Hospital$578.36$465.23($93.07)($138.97) to Payer$0.00$97.30$578.21$616.91 to Patient$0.00$15.84$94.13$100.43 Total:$578.36

17. Medicare Payment Impacts of Adverse Events (2002) Event: Average total payment Average extra payment due to adverse event Percentage of extra costs covered by payments (~) Decubitus Ulcer$15,958$73515% Iatrogenic Pneumothorax $20,629$136918% Postoperative hemorrhage and hematoma $22,682$229224% Post-op pulmonary embolism & deep vein thrombosis $27,420$252026% Post-op sepsis$44,884$888134%

18. Estimated Annual Employer Costs ($US) per Employee (ee) with Selected Medical Conditions Medical Condition: Depression, Anxiety, or Emotional Disorder Back or Neck Disorder Heart/ Circulatory Arthritis, Joint Pain, Or Stiffness Prevalence4.3%7.0%7.1%9.0% Medical Cost/ee $2017$2249$2531$2623 Absentee cost/ee $1525$839$613$441 “Impaired Presentee” cost/ee $15,322$6879$6207$6095 Total cost/ee (with multiplier) $25,771$13,131$12,147$11,839

19. Peer-Reviewed Evidence Base Findings: Scant attention to measuring cost of implementing quality- enhancing initiatives 9 of 15 articles with sufficient data on business case variables dealt with patient self-management of chronic conditions Example: Multidisciplinary NICU care teams for high-cost infants produced $9 in savings for every $1 in investment (Rogowski et al 2001) Savings vary considerably across conditions

20. Concluding Remarks on Business Case for Quality-Based Purchasing Balance of Evidence Suggests That a Business Case Can be Made for Patient Safety and QI Establishing the Business Case Requires an Investment Perspective Principal “Returns” on Quality-Based Purchasing Derive from Improved Margin & Increased Employee and Consumer “Loyalty”