Some of you will recall that about a month ago, I gave a guest lecture at Ernst Berndt's course at MIT's Sloan School, entitled "Economics of the Health Care Industries," and gave the students this essay assignment:
First, read this blog post. Then, the question is: What methodology would you propose for the allocation of an annual global payment, to divide it up among primary care doctors, community hospitals, tertiary hospitals, specialist doctors, nursing homes, etc. -- all of whom are involved in caring for a given population of patients? How would you make the transition from the current fee-for-service approach?
Those in the field will grasp the difficulty of this assignment, and it may have been unfair to pose it at the beginning of the semester. But, hey, these are MIT students, and so we should expect a lot. I said I would post the best answers, and I start with this entry. I don't have room for the entire essay, so I will take excerpts. Others will follow in three separate posts.
The first is from Joshua Copp. Feel free to offer your grade and observations, as if you were his professor, in the comment section below. Here is the excerpt:
Examining the costs in order of priority for payment, we would need to start by paying for any materials consumed in the care of the patient. Think of these as the direct costs for treating a patient...
Following direct material costs, a fixed payment will have to be negotiated between physicians groups and care centers. This contract between the physician group and the hospital or nursing home would be very similar in nature to the contract between BCBS-MA and BIDPO...
Base compensation will be a difficult policy to establish, but it is the final cost before considering any efficiency gains or bonus payments. In order to set base salaries, the physician work relative value unit established by Medicare will be the most objective and accurate way to account for training requirements, skill, and time needs. Initially, using a weighted average RVU for each specialty group (cardiologists, nephrologists, orthopedic surgeons, etc) multiplied by the PCP base salary will set that group’s base salary.
The PCP base salary is the compensation level corresponding to an RVU equal to one. For example, if a PCP base salary is $100,000 per year, and the average RVU for nephrologists is 1.2, then a nephrologists’ base salary would be set at $120,000 per year. An inherent assumption for base compensation is that the number of specialists relative to PCP’s will likely decline under the AQC in equilibrium.
Now we must consider how efficiency gains by physicians and quality bonus payments are allocated. First, with efficiency gains, this should tie directly into the direct material costs associated with patient care, and therefore one should be able to tie gains directly to physician groups. For example, if the orthopedic surgeons identify a lower-cost knee implant that saves $500 per implant, then the total savings should be allocated to the orthopedic group. However, to ensure that the least efficient groups are not being over-compensated, target efficiency gains should be normalized across all provider groups.
The next consideration is how to handle quality of care improvements. Specifically, this is targeted at the additional 10% payment available upon meeting certain quality benchmarks for the contract as a whole. First, because the hospital influences the metrics used for bonus payments, the fixed payment contracts established with the care centers should include bonus payouts if the hospital meets certain quality standards. Further, payments to the hospital should be tied to the total AQC bonus payment, ensuring that bonus payments to hospitals only happen when quality benchmarks were met by all, not just the hospital.
In order to tackle the bonus payments to physicians, consider first only those group practices which as a whole delivered on their quality improvement metrics. For those groups, the bonus payment should be divided evenly across each division, and no bonus is paid to groups who, as a whole, did not meet the improvement threshold. The next layer is the individual physician within those groups that improved. For the individual physicians, only those which delivered on their quality levels will be awarded a bonus, evenly split across all physicians who delivered on quality of care. Therefore, an individual’s ability to receive a bonus is directly tied to the ability of the team to gain a bonus, reinforcing the teamwork necessary to develop an efficient system.
The final consideration with bonus payments and incentives is how they fund and support the overall mission of the physician organization and provider network. Thinking specifically in the case of BIDPO, this is an academic institution that has a large teaching contingent. Therefore, in order to support their mission of research and instruction, all bonus payments should be ‘taxed’ at an appropriate rate each year before any distributions are made. For example, if BIDPO received $100 million in care quality bonus payments, then 30% of this is automatically set aside to fund research and training, before any consideration is given to group payouts. This tax would be used to fund research, training and continued education across the institution.
The final consideration is how to transition from the fee-for-service model to the global payment system. Two main points need to be addressed to ensure an effective transition. First, negotiations need to begin immediately with all care centers to accurately gauge the annual effective rental expense for each center, based on the mix of procedures and usage. Second, communication with specialist physicians must begin immediately. There will likely be attrition from the specialist groups as the transition is made, and as such retaining the best trained physicians will be imperative to providing the highest quality care. The key for retaining the top specialists will be to explicitly demonstrate how they will not suffer in compensation, research opportunities, or in their ability to care for the patient.