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Insurance Risk & Performance Risk: An Alternative Payment Mechanism, Compliments of the Robert Wood Johnson Foundation

Posted Jan 23 2009 5:06pm
While readers and the Obama Adminstration search for better ways to pay for health care, the Disease Management Care Blog remains skeptical of basic fee-for-service, capitation (or 'global fees') and pay for performance. Like the Three Little Bears, the first is too hot (it promotes overuse), the second is too cold (it’s a disincentive for care) and the third is just… unproven.

That’s why it continues to like the ‘episode of care’ (EOC) reimbursement approach of having a single fee for a medical event that covers all subsequent services over a set period of time. An example would be paying for the hip surgery, the hospitalization(s), the physical therapy and all the follow-up physician visits with a single check. Think of EOC as capitation (which is supposed to cover all unrelated medical services over a period of time, typically a month) for a single condition, not a single patient.

There’s a very understandable discussion of the topic in a Robert Wood Johnson Foundation supported report from the Network for Regional Healthcare Improvement. The DMCB likes their notion of distinguishing between ‘ insurance risk” (based on the numbers and types of diseases that occur in a population) and ‘ performance risk’ (based on what is done to mitigate those diseases, which is a function of the numbers and types of treatments that are applied). The folks at the Network argue that while there is overlap of performance risk with insurance risk, the performance risk still can be measured, monetized and transferred to the providers.

Think of it in terms of automobile insurance. Insurers can sell policies that are designed to make you 'whole' if you have an accident (that’s the risk). They assess your age, gender, past driving record and zip code, which helps define much of the risk being priced. They collect your check (the premium) along with checks from thousands of others. However, they also have to pay attention to how much it would cost to fix the various cars in their book of business, such as parts and labor. In the Network world, the car insurers would collect your premium but then could cut a deal with the car repairmen and their body shops by negotiating a standard fee (which is functionally now an insurance premium that they ironically have to pay) to manage all the repairs that occur over the course of a year. Since the repairs occupy the lion’s share of the costs most of the money goes to the repairmen in the ‘network.’

Ahhh, but you correctly point out that diabetes and high blood pressure don’t work that way, because there is no end - like there is with hip surgery or a car that comes out of the repair shop. No problem, says the Network folks: there are cars out there that don’t necessarily need new fenders but burn oil, have threadbare tires, worn seats and cracked windshields. Since the drivers can’t give them up (they don’t like the alternative), their car needs lots of extra maintenance. For those cars, the insurers can still cut a global performance risk transfer deal with monthly payments that don’t end. That’s called ‘condition-specific capitation.’

The DMCB likes the concept because its ultimately rewards the services that are being provided for the condition at an EOC level. The payment is better targeted. That being said, it has several caveats to keep in mind while we think about paying providers a set monthly fee for a specific condition:

1) if the payment is to be done at a provider level, it requires a significant amount of physician/hospital/provider coordination, with good information transfer and ironclad hand offs. That is more likely to be present in smaller integrated healthcare systems but is tough to achieve in usual community settings with independent providers. Electronic health records are necessary but are not sufficient to pull this off.

2) while many physicians ‘get it’ and would do all the things necessary to mange their risk with higher levels of efficiency, using technology appropriately and keeping their costs to a minimum, many fine physicians would struggle in trying to adapt to this kind of arrangement. Between ‘here’ and ‘there,’ much work would need to be done. This is not a turnkey payment solution. A new fee schedule is necessary but not sufficient.

3) which is why performance risk transfer may be better thought of in terms of disease management. The DMCB thinks DM organizations understand risk (that's their pedigree) and can partner with providers in the absence of formally integrated networks to maximize coordination. Disease management, however, is also necessary but not sufficient to pull this off.

4) this would be a bear to administer, which makes it unsuited for large “mainframe” insurers like Medicare. Accordingly, the DMCB doesn’t expect this to see the light of day in national healthcare one-size-fits-all reform efforts. However, among the smaller innovative, nimble employer-based self-insured entities out there, the DMCB hopes to see this given a shot. Who knows, if a competing government sponsored insurance entity is created, the private insurers may be able to compete by offering novel payment systems like this.

5) finally, while the payment process described above transfers risk, it’s not ‘insurance’ from the point of the State or Federal regulators. Ultimately, only one party can be responsible for managing the total risk of health insurance for an individual policy holder who pays a single premium. In other words, if a hospital fails to meet its contractual obligation to provide timely and medically necessary care which, in turn, results in additional cost to the policy holder, the party ultimately responsible for fixing it is still the health insurer, not the provider.
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