1. The 2010 Affordable Care Act and the Future of Provider Payment in the U.S.: New Urgency, New Ground Rules Meredith B. Rosenthal, Ph.D. Associate Professor of Health Economics and Policy February 5, 2010 1

2. 2010 Patient Protection and Affordable Care Act: A watershed moment in U.S. health policy 2

3. 32 million fewer uninsured by 2019 3 Source: Estimated Financial Effects of the “Patient Protection and Affordable Care Act,” as Amended. Centers for Medicare and Medicaid Services, Office of the Actuary, April 22, 2010.

4. New urgency: Medicaid expansions will strain public coffers 4 Source: FY 2008 State Expenditure Report, National Conference of State Budget Officers, Washington DC, 2009.

5. New urgency: affordability of individual insurance is critical 5

6. New urgency: influx of demand may cause access problems as in Massachusetts 6 Source: Long SK and Masi PB, Access and Affordability: An Update on Health Reform in Massachusetts, Fall 2008. Health Affairs May 2009.

7. Important New Ground Rules for Payment Reform in 2010 Independent Payment Advisory Board Center for Medicare and Medicaid Innovation 7

8. Spectrum of Provider Payment: Reform Trajectory Moving Towards Global Payment Current payment for units of service Add pay for performance Subtract payment for preventable complications Mixed payment (fee for service and capitation) Episode- based (bundled) payment Global payment 8

9. What We Know About Provider Payment That Should Inform Current Policy Providers respond to incentives at the margin One size does not fit all Organizational capabilities need to be aligned with payment policy Provider and patient incentives should fit together 9

10. Providers Respond to Incentives at the Margin 10 Source: Rosenthal MB. Risk Sharing and the Supply of Mental Health Services. Journal of Health Economics, 2000 Nov; 19(6):1047-65.

11. 11 One Size Does Not Fit All Category of providerImprovement in Cervical Cancer Screening after pay for performance Bonuses Earned Providers with performance above target at baseline 2.5%$ 436,618 Providers with performance just below target at baseline 7.4%$ 127,632 Providers with performance more than 10 points below target 11.1%$ 26,859 Source: Rosenthal et al., From Concept to Practice: Early Experience with Pay for Performance, JAMA, 2005.

12. Organizational capabilities need to be aligned with payment policy Moving towards global payment requires contracting with organizations of greater scope Experience in California suggests that these organizations transmit incentives through non- financial means 12 Source: Rosenthal et al., Transmission of financial incentives to physicians by intermediary organizations in California, Health Affairs, 2002.

13. Provider and patient incentives should fit together 13 Source: Rosenthal et al., Impact of Financial Incentives for Prenatal Care on Birth Outcomes and Spending, HSR, 2009.

14. Ongoing Natural Experiments That Will Yield Additional Insights Medicare rule precluding severity adjustment for preventable complications Patient-centered Medical Home pilots Prometheus Payment case rate pilots 14

15. 15 Medicare rule precluding severity adjustment for preventable complications ConditionNumber of Medicare Cases for FY 2006 Object left in surgery764 Air embolism45 Blood incompatibility33 Cather-associated UTI11,780 Pressure ulcer322,946 Vascular catheter-associated infection Unknown Mediastinitis after CABG108 Falls2,591 Source: Medicare program: changes to the hospital inpatient prospective payment systems and fiscal year 2008 rates. Fed Regist 2007;72:47379-428.

16. Patient-centered Medical Home Pilots 16 Patient- centered medical home Philosophical principles: Patient-centered Team-based care Coordinated care Structural elements: Electronic health record Disease registries Enhanced access Quality improvement infrastructure Payment model: Primary care capitation Mixed payment Accountability for quality, downstream costs

17. Prometheus Payment case rate pilots Pay for performance Warranty for complications Base case rate Quality, patient satisfaction All potentially avoidable complications (PACs) Warranty set at 50% of baseline Evidence-based services Other routine care for condition Risk adjusted 17

18. What We Need to Learn to Implement Payment Policy That Works Where to use pay for performance and how much weight to give it Where to use episode-based payment and how to address appropriateness of episodes How to structure global payment to optimize tradeoffs among efficiency, selection, and risk aversion How to use incentives and information to engage patients in ways that complement new payment models 18

19. Will this work? Coverage reform looks easy compared to provider payment Affordable Care Act provides some traction Critical to success: – Tailored approach – Remove the status quo as an option – Align patient incentives 19