Once the dust settles on the difficult year that was 2020, payers and healthcare economists will return their focus to the hottest topic in the pre-COVID-19 era—how to reengineer the delivery system from one that remunerates providers for volume to one that rewards value. A significant limiting factor in this evolution is how to define “value” and, more importantly, how to appropriately measure it.
Perhaps the most widely accepted definition, often attributed to Harvard economist Michael Porter, is: healthcare value = health outcomes achieved / total cost of care.
If you can recall the supply and demand curves from high school or college economics, you can conceptualize value as a proxy for economic surplus. As a reminder, economic equilibrium occurs when the price a buyer is willing to pay for a good or service equals the price a supplier is willing to accept for it (i.e., the intersection of the supply and demand curves). We define economic surplus as the provision of a good or service at a price that is lower than what a buyer is willing to pay or a price that exceeds the supplier’s costs to provide the same. In contrast, an economic deficit occurs when the good or service is offered at a price higher than what the buyer is willing to pay or at a price that does not cover the full costs to the supplier.
In theory, alternative payment models, including episode-based bundles, are meant to promote value. What remains in question, however, is from whose perspective do these methodologies promote value? Which party receives the surplus or deficit? Providers will argue that the recipient of the economic surplus is the payer. Payers will argue that the recipient of the surplus is the member (patient). Patients find themselves entrapped in a pre-approval process used to ensure value that denies and delays care to those who fall out of the normal rubric of “value” for the average case.
The value conundrum exemplified previously, in game theory parlance, is known as the “prisoner’s dilemma.” In the prisoner’s dilemma, if the two opposing parties would simply cooperate, they both would win by capturing a bit of surplus. The dilemma arrives when each party suspects that the other is trying to cheat in the game and take the entire pot. As such, suboptimal choices are made in the pursuit of selfish interests, and both lose out on the surplus to be had.
The remainder of this article focuses on how commercial payers tend to structure their episode-based bundles and provides orthopaedic surgeons potential levers to maximize their chances of success. Total hip arthroplasty (THA) is used as an example of the reference episode.
Episode-based bundle structure and fund-distribution example for THA
An episode-based bundle of care begins with a “trigger event.” The trigger in the example case would consist of a diagnosis of a dysfunctional painful hip and the decision to perform THA. The duration of the episode typically coincides with the 90-day global period. During that period, the commercial entity tracks all charges related to the care of the patient, including any charges that might indicate an adverse event.
Most bundles are constructed in a retrospective fashion. Physicians can expect to get paid the usual contracted rate for their billed services. The patient incurs the typical cost-sharing or out-of-pocket expenses seen in a fee-for-service model of care.
The bundling concept doesn’t come into play until after surgery. Approximately a year after care delivery, the payer will perform a reconciliation, attributing all applicable paid claims to the episode. When said claims exceed an agreed-upon threshold, physicians lose. In contrast, when said claims are lower than the threshold, physicians win. What the participating physicians stand to gain or lose depends on how the contract is structured. There are two basic forms:
- Shared savings: an “upside-only” contract where the surgeon shares in the money saved with the insuring party; if the bundle results in a loss, the surgeon is not liable to remunerate the shortfall
- Full risk: a contract where the surgeon shares the profit or loss with the insuring party
In general, one can stand to gain more surplus with a full-risk arrangement. However, only those with sufficient volume and experience with such contracts are advised to participate, as the risk of falling short is real.
Most commercial contracts focus predominantly on the bottom line, with little emphasis on quality. Most physicians can “win” by focusing on the cost of care provided at each point in the process, thereby rewarding the lowest-cost producer.
The ethical dilemma occurs when the cost bar is reset lower each year: How can all costs be “cut to the bone” when it comes to patient care? How do we know when we hit the lower bound of the cost for good care? How do we avoid this becoming a zero-sum game for all providers at the expense of job satisfaction, patient health, and physician burnout?
Apart from the preoperative services that fall under the umbrella of CPT codes to which the surgeries are linked, the costs related to care essentially begin on the date of surgery and continue for the 90-day global period. As such, let’s break down the leverage points: operative and postoperative costs.
How can physicians gain cost efficiency with THA? Although the following is far from comprehensive, and some consider these easy, low-hanging fruit, there are three major drivers:
- Site of service: In general, the costs of surgery are substantially cheaper at independent outpatient surgery centers compared to hospital-owned facilities. Thus, when clinically appropriate, physicians can score a quick potential “win” by switching a THA case from inpatient to outpatient.
- Implant costs: Some orthopaedic implants cost more than others. Incentive-laden contracts between suppliers and facilities can alter the per-unit cost of a particular implant. Barring any compelling clinical reason for choosing one device over another, use the cheaper implant.
- Surgical time: Fast, efficient surgery provides the benefit of a less-expensive surgical encounter. OR costs (e.g., OR time, anesthesia hours, and indirect overhead) are allocated on a time-related scale.
Let’s assume the example of a hospital-employed surgeon who has no control over any of the aforementioned operative-related levers.
Can that surgeon still find ways to decrease costs related to the postoperative care of the patient? The answer is typically “yes.” Postoperative costs are often the next-best low-hanging fruit, including:
- Immediate postoperative length of stay (LOS): Additional days in the hospital are expensive to all parties. Inpatient claims are predominantly paid at a fixed price. If physicians can decrease the average LOS of THA patients, the hospital will achieve a better profit margin. The patient may benefit as well in terms of lower cost-sharing obligations. Physicians should give some thought as to how they can facilitate shorter stays, perhaps by taking part in transition-planning rounds.
- Rehabilitation costs: Commercial payers (and likely patients) save considerable dollars when patients are sent to outpatient therapists rather than skilled nursing facilities after discharge. For patients who are self-motivated and coachable, a home exercise program can forgo formal therapy charges altogether.
- Mitigating adverse events: Surgeons should give considerable thought to how to avoid adverse events. In particular, try to avoid hospital readmissions by focusing on proper patient education; postoperative discharge planning; and, for patients with significant medical comorbidities, a multidisciplinary team to guide the patient through the postoperative period.
Moving surgical reimbursement from volume- to value-based models continues to evolve. All orthopaedic surgeons are advised to familiarize themselves with these models. Surgeons can and should influence how these models are shaped in the future. If insurance companies continually lower the bar, orthopaedic surgeons will be forced to act differently. If insurers can see past the zero-sum game and gain trust of those providing care, all will gain from the effort.
Samuel D. Young, MD, MBA, FAAOS, is a physician consultant for economic and clinical research at 3M Health Information Systems, as well as a contract orthopaedic surgeon at the Memphis Veterans Health Center. He is also an active-duty orthopaedic surgeon in the U.S. Navy.