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Money Ball, Subprime Mortgages and Health Care?

Before I was allowed to turn off of Nassau Street with my public policy degree in hand, Dean Slaughter stopped me and asked me just one more time, “So, what is the most important lesson you’ve learned here at Princeton?” I promptly and dutifully responded with “that financial incentives shape people’s behavior.” Then, I turned west and headed back to Chicago.

Whether it’s a housing credit or sin tax (cigarettes and the like), people respond to the incentives in which they make decisions. In this forum, we’ve mused on the misaligned incentives that underlie our nation’s health care system and how changing these incentives can enhance its quality and efficiency. It’s this focus on appropriately spreading financial risk across care teams that we believe can most quickly transform our health care system. “Bundled payment” is the term applied to the formal aligning of financial incentives and is a topic we’ve discussed in multiple posts. Under a bundled payment, or episode-based payment, reimbursement for multiple providers is “bundled” into a single comprehensive payment that covers all of the services involved in a patient’s care. The intent is to also index these payments to quality of care. It’s easy to see how these types of payments can wire together care teams that consist not only of the usual suspects – hospitals and physicians – but also those providers who often operate independently in the community, such as home health care providers, yet are critical to optimizing quality of care.

We’re not the only ones who think that bundled payments can and will improve our health care system. RAND Health, a division of the RAND Corporation – only the nation’s largest independent health policy research shop in the country – recently conducted an impact study of 8 existing policy/payment options that they believe have the potential to most reduce health care expenditures (while holding quality constant, of course). Drumroll please…yep, bundled payments came out on top, beating out other well-know contestants such as establishing medical homes and decreasing resource use at the end of life And now, the American Hospital Association has given bundled payments a top slot on its 2010-2012 research agenda, recently publishing a white paper on the status of this payment model and the challenges that remain to expand its use and impact.

With all the bemoaning of the glacial pace at which health care changes, how quick can bundled payments make a measurable difference? Well, I think it’s useful to take a look at how fast changing incentives can work in other markets. In my mind, they work fastest in financial markets with respect to the flow of capital to new investment opportunities that offer higher returns than existing vehicles. A very vogue book these days in DC – on both sides of the aisle – is “The Big Short” by Michael Lewis (yep, the same guy who wrote The Blind Side and Money Ball, but also Liar’s Poker). His latest work is so popular with staffers and even their bosses because it provides a quick and accessible explanation and chronology of the events that led up to the housing market collapse that precipitated the 2008 economic meltdown. It also includes a number of great vignettes that underscore the how quickly new incentives can change behavior once any constraints are resolved.

One of the primary character’s in Lewis’s analysis is Dr. Mike Burry, a neurologist who lost interest in the practice of medicine and then opened an investment firm. According to Lewis, Burry was one of the first folks to not only see the imminent housing collapse but to take advantage of it. Essentially, Burry decided to short the housing market and created a new financial vehicle to do so, the sub-prime mortgage collateral debt swap – a mouthful. This investment instrument did not yet exist so Burry had to lobby the large investment firms such as Bank of America, Goldman Sachs and Merrill Lynch, to develop and offer this type of collateral debt swap product. (Ironically, part of Burry’s motivation for this approach was the rapid change of behavior he witnessed in healthcare. Once Medicare reduced reimbursement rates to ophthalmologists for cataract procedures to erase the relatively generous margin they enjoyed, ophthalmologists started performing a new procedure called radial kertotomy that had been spared the Medicare ax. The Lasik cabbage industry was thus born!) He compellingly outlined how this new vehicle offered an even higher rate of return for investment firms, which quickly bit at the opportunity. The only hurdle that remained was how to contractually execute this arrangement. After this roadblock was cleared, this obscure investment tool – conceived by one visionary investor who knew the power of incentives and how to harness them – grew to a more than $30 billion market in just a few months.

Of course, health care is much more complex than private finance (not to mention its social implication) and its financial arrangements involve more layers (most of the time). But, the Lewis example gives us a nice analytical tool to parse out exactly what needs to happen to unleash the full power of bundled payments. Generically, the incentives are compelling for all participants. Patients get better care, providers are rewarded for performance and system costs drop. And, this all happens by properly marrying the financial incentives of the cross-setting teams involved in providing care.

Perfecting the Model: To date, most bundling demonstration projects at the federal and state level have focused on discreet episodes of care, such as coronary artery bypass grafts (CABG) and have not yet successfully tackled chronic conditions. The reason is obvious. It is much easier to figure out and reward who does what for these cookbook type procedures. The surgery occurs in the hospital, follow-up happens with the docs and outcomes can be specifically measured. And, there’s a nice tradition of risk-based payments for both hospitals and physicians. Most hospitals receive Diagnostic Related Group (DRG) case payments from Medicare while, for more than a decade, physicians have participated in capitation contracts where they’re at risk for the cost of care for a specific population. You can look to a number of sources for directions on establishing a bundled payment system for acute care episodes, such as the Robert Wood Johnson Foundation’s PROMETHEUS Payment project, Geisinger Health System’s ProvenCare , and Medicare’s Acute Care Episode Demonstration. And, as we’ve discussed on this blog, there’s some cool stuff happening in Minnesota. But, as RAND notes, transformation akin to that caused by Dr. Burry will only occur once the chronic care recipe is perfected. Recently, the Commonwealth Fund dropped the gauntlet, prioritizing the study of bundled payments for chronic conditions – the conditions that most contribute to our skyrocketing health care costs. Who has picked up this gauntlet? Interestingly, the public sector has yet to mobilize. The most innovative work on bundled payments for chronic care is happening in Massachusetts, the cradle of modern-day health care reform. But, its not the state legislature that stoking the winds of change, it’s Blue Cross Blue Shield of Massachusetts (BCBSMA) and its Alternative QUALITY Contract (ACQ) program. The ACQ program is the health care financing analyst’s nirvana. The bundled payment program applies to ALL conditions that BCBSMA members present with and includes a pay for performance kicker of up to 10%. Most importantly, 20% of the BCBSMA network has already acted on these incentives and have joined the ACQ program. Once the data from this program are analyzed, refined and applied elsewhere, watch for other private insurers to quickly emulate BCBSMA, with Medicare falling in-line.

Clearing the Roadblocks: Once the models for acute and chronic care are refined, then how are they applied on a national scale? Most of the demonstration participants who have “knocked bundling out of the park” are highly integrated networks that directly control most of the care team inputs. What about the rank and file community hospital? This is the area where commitment from folks such as RWJF and The Commonwealth Fund is critical. More importantly, for bundled payments to work for chronic care, a new dimension of “risk” adjustment is needed. We’re no longer talking about just co-morbidities but also about socio-economic variables, such as income and support structures. These are the types of factors that lead to poor compliance to care plans and result in re-admissions or complications. Where will this data come from? Will we just use Medicaid participation as a proxy for income or will we need something more elegant? How do we measure and adjust for patient support structure? Just because I have three kids doesn’t mean they collectively care more about my health than a patient who has a single child! Lastly, who should be point for different procedures–meaning who gets the bundled payment and is responsible for distributing payments to care team members? Its clear who’s point for procedures such as hip replacements but what about for others? These organizations will also need information systems that can manage this payment model.

Despite these remaining questions, I’d like to end on an upbeat note. The point of this article is that change, based on the proper incentives, can happen quickly once the model and its distribution mechanism are figured out. So, in a tip of the hat to Michael Lewis, keep an eye on the blind side in health care because bundled payments, once perfected for chronic care, may transform our system overnight (which in health care means 18-24 months!)