How payment innovation can change healthcare Nuffield Summit Ben Richardson

8 March 2013 Discussion Document

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McKinsey & Company | 1

Changing how we pay for healthcare is key to unlocking innovation

▪ Payment innovation is a way to align payors and multiple providers on the

triple aim of improved quality, better experience and reduced cost

▪ It can do this by helping to 1) making value conscious choices, 2) reduce needless variation in cost, 3) target resources where it is needed, 4) changing patient behaviour

▪ Broadly three different models exist for payment: capitation, episodes, and

pay for performance

▪ These payment models are being put into place by different types of players

▪ Note of caution: payment innovation on its own isn’t enough—other enablers are required

▪ Putting in place payment innovation can be done at multiple levels

McKinsey & Company | 2

4 levers that payment innovation can support

Make value-conscious choices ▪ Practice (eg. resolve in 1ry care) ▪ Procedure (eg. decisions) ▪ Products (eg. Gx) ▪ Providers (eg referrals) Reduce unwarranted variation ▪ Understand “normal” ▪ Peer review “abnormal”

Better management of chronic conditions ▪ Coordinate care ▪ Faster response ▪ Proactively manage

Change patient behaviour to support healthier lifestyles

1

2

3

4

▪ Allow provider to benefit from reducing cost

▪ Upside better performance

and/or improvement ▪ Downside for poor performance

▪ Fund additional care ▪ Allow provider to benefit from

reducing cost ▪ Incentivise individual behaviour ▪ Provide personal budgets

Lever Payment innovation

McKinsey & Company | 3 SOURCE: HES 2010/11, McKinsey analysis, ONS, IMD, DH Exposition book

Elective (R2 = 0.53) OP (R2 = 0.64) Non-elective A&E (R2 = 0.64)

Weighted median = 136 Weighted median = 126 Weighted median = 1,565 Weighted median = 482

Activity distribution by practice Activity per 1000 weighted population (normalised for average IMD score)

Unwarranted variation in practice-level activity and cost

2.6 2.6 2.6 2.7

11-22%

McKinsey & Company | 4

20% of patients drive 80% of costs

SOURCE: McKinsey team analysis, NHS NWL data; HES 2010/11, FIMS, Q research/NHS Information centre, PSSEX; NHS Reference Costs

Total / average

Very high risk

High risk

Moderate risk

Low risk

Very low risk 378,020

322,609

142,773

41,675

4,757

104

186

354

327

118

300

500

2,400

8,700

39,600

~890,000 1,230 1088

Average cost per capita per annum, £

Total spend, £m Population

2010/11 data, 4 London CCGs

1 Includes elective admissions, outpatient, and A&E 2 Includes community health & primary care

There is a 40X variation in spend (and

needs) between average and highest

risk patients

Social care spend

Health spend

There is a 40X variation in spend (and

needs) between average and highest

cost patients, the mostly flat, “one size

fits all” payment model doesn’t address

this

McKinsey & Company | 5

There are 3 major complementary payment models being deployed in US

Full alignment of payment to outcomes

Most applicable Population-based payment

Pay for performance

Episode-based payment Retrospective Episode Based

Payment (REBP) Bundled payment

▪ Bonus payments tied to quality ▪ Bonus payment tied to value

▪ Capitation ▪ Primary prevention for healthy ▪ Care for chronically ill

(e.g., managing obesity, CHF)

▪ Acute procedures (e.g., CABG, hips, perinatal)

▪ Most inpatient stays including post-acute care, readmissions

▪ Acute outpatient care (e.g., broken arm, URI, some cancers, some behavior health)

▪ Discrete services provided by entity with limited influence on upstream or downstream costs (e.g., MRI, prescription, medical device, Health Risk Assessment)

McKinsey & Company | 6

International experiments with a wide variety of new reimbursement and risk-sharing models

SOURCE: McKinsey Analysis

▪ Provider system that takes full risk either with own health plan or under contract, using integrated clinical system to deliver value

▪ Provider organisation accountable for quality, cost, and overall care; share cost savings if performance metrics are met

▪ Payor-led affiliation or acquisition of health system seeking full clinical/operational integration to reduce costs, improve experience, and manage referrals

“Provider-led” integrated network

“Payor-led” integrated network

▪ Team of physicians and extenders, coordinated by a PCP, coordinate provide high levels of coordinated care; typically tied to P4P contract

Patient centered medical home

Pay for value ▪ Payment bonus tied to efficiency metrics

(e.g., reduction in ER visits, imaging)

Gai

n sh

arin

g

ACO

Episodes of care ▪ Covers all aspects of preadmission, inpatient,

and follow-up care, including postoperative complications within a set time period

Description Select examples

Ris

k sh

arin

g Fu

ll ris

k

McKinsey & Company | 7

Payment innovation must meet 8 requirements to drive cost-reducing innovation in care delivery

Significant

Supportive

Sustainable

Striving, but practical

Supply-demand integration

Setting expectations

at Scale

Stable

Payment innovation necessary but not sufficient—needs support for transformation

Ensure providers that adapt thrive financially

Design approach to be effective in current regulatory, legal, industry structure

Clarify long-term vision and commit to providers

Align reimbursement with patient engagement, benefits, network design, etc.

Maximize provider revenue and earnings subject to outcomes-based reimbursement

Ensure a critical mass of providers within a local market transition to outcomes-based reimbursement

Expand use of population-based and episode-based payment

McKinsey & Company | 8

Significant impact of payment innovation internationally

Country Example Impact achieved

▪ 25% lower cost per head ▪ 30% drop in admissions ▪ 90% patient satisfaction

▪ 18-30% lower admission ▪ 17-43% lower readmissions ▪ 92% net promoter score

▪ 7% below median costs ▪ Top decile outcomes ▪ 58% fewer amputations

▪ 13% reduction in cost per head

McKinsey & Company | 9

The major success stories that we have studied have all had a major innovation around reimbursement

Innovative delivery model matched to needs

Care delivery innovation: Segmentation of population by risk

Patient/user partnership

Accountability and governance

Clinical leadership and development of culture

Information flow and IT platform

Innovative payment mechanism at scale

McKinsey & Company | 10

How do you take this forward?

System-level

Local Health Economy

Commissio-ners

Providers

Action

Establish and fund innovation model with 5 at scale testing sites and 10 planning sites

Creates risk adjusted individual-level capitation payments

Change hospital reimbursement to create capitated ACOs

Create multi-payor/multi-provider partnerships with payment innovation, governance structure, information tools, clinical change and patient engagement

Change reimbursement mechanisms and information flow to transfer some risk to providers and incentivise management of total medical cost

Accountable Providers with at-risk reimbursement based on quality and performance, creating system with clinical model, people model and information to drive superior performance

US: CMS State Innovation Model

GE: mRSA

US: Medicare ACOs

US: Sacramento UK: NHS NWL DE: Bundes-

knappschaft

US: Arkanas US: BCBSMA AQC DE: AOK

US: Chen Med ES: Ribera Salud

Example

McKinsey & Company | 11

Changing how we pay for healthcare is key to unlocking innovation

▪ Payment innovation is a way to align payors and multiple providers on the

triple aim of improved quality, better experience and reduced cost

▪ It can do this by helping to 1) making value conscious choices, 2) reduce needless variation in cost, 3) target resources where it is needed, 4) changing patient behaviour

▪ Broadly three different models exist for payment: capitation, episodes, and

pay for performance

▪ These payment models are being put into place by different types of players

▪ Note of caution: payment innovation on its own isn’t enough—other enablers are required

▪ Putting in place payment innovation can be done at multiple levels

12 12

Arkansas Payment Improvement Initiative (APII):

William Golden MD MACP

Medical Director, Arkansas Medicaid UAMS Professor of Medicine and Public Health

William.Golden@arkansas.gov

Preliminary working draft; subject to change

13

The populations that we serve require care falling into three domains

Acute and post-acute

care

Prevention, screening,

chronic care

Supportive care

Patient populations within scope (examples) Care/payment models

• Healthy, at-risk • Chronic, e.g.,

‒ CHF ‒ COPD ‒ Diabetes

Population-based: medical homes responsible for care coordination, rewarded for quality, utilization, and savings against total cost of care

• Acute medical, e.g., ‒ AMI ‒ CHF ‒ Pneumonia

• Acute procedural, e.g., ‒ CABG ‒ Hip replacement

Episode-based: retrospective risk sharing with one or more providers, rewarded for quality and savings relative to benchmark cost per episode

• Developmental disabilities

• Long-term care • Severe and persistent

mental illness

Combination of population- and episode-based models: health homes responsible for care coordination; episode-based payment for supportive care services

STRATEGY

14

PAPs that meet quality standards and have average costs below the commendable threshold will share in savings up to a limit

Shared savings

Shared costs

No change

Low

High

Individual providers, in order from highest to lowest average cost

Acceptable

Commendable

Gain sharing limit

Pay portion of excess costs -

+

No change in payment to providers

Receive additional payment as share as savings

15

Draft thresholds for General URIs

Provider average costs for General URI episodes Adjusted average episode cost per principal accountable provider1

Aver

age

cost

/ ep

isod

e D

olla

rs ($

)

Principal Accountable Providers

15

46

67

Antibiotics prescription rate below episode average2

Antibiotics prescription rate above episode average2

1 Each vertical bar represents the average cost and prescription rate for a group of 10 providers, sorted from highest to lowest average cost 2 Episode average antibiotic rate = 41.9% SOURCE: Arkansas Medicaid claims paid, SFY10

Year 1 acceptable

Year 1 commendable

Gain sharing limit

17

▪ More information on the Payment Improvement Initiative can be found at www.paymentinitiative.org

– Further detail on the initiative, PAP and portal

– Printable flyers for bulletin boards, staff offices, etc.

– Specific details on all episodes

– Contact information for each payer’s support staff

– All previous workgroup materials