I need help with case study homework. Healthcare Finance

 

Bundled Physician and Hospital Payment.

St. Patrick’s is a 550-bed teaching hospital in Kansas City that does not employ physicians outside of radiology, anesthesiology, emergency medicine, and pathology.[1]  St. Patrick’s had an operating margin in 2015 of 5.0% on operating revenue of almost $600 million (see the first worksheet in the Bundled_Payment_2016.xls file for more information on current and projected financial performance, although this is presented here just for background.  You do not need to do any analysis of the overall hospital’s financial situation).

 

In late 2015 a private health insurance company, HealthSource, approached St. Patrick’s CFO and asked if the hospital would be interested in accepting a single (i.e., bundled) payment that would cover both the facility and professional services payments for three product lines: interventional cardiology (e.g., angioplasties), cardiac surgery, and orthopedics.  For orthopedics, the bundled payment would cover the facility and professional services payments, as with the other two product lines, but also re-admissions and all post-acute care for the 90 days following the index admission (i.e., like Model 2 in the Medicare Bundled Payments for Care Improvement initiative).  HealthSource accounts for about 20% of St. Patrick’s total admissions and is, therefore, an important payer.  HealthSource indicated that its goal for 2016 was to sign such bundled contracts with four Kansas City health systems and direct all of its patients to those four facilities in 2016, and subsequently concentrate its business at two of these four health systems in 2017. 

 

After analyzing the hospital’s current costs and information on physician fees, the CFO agreed to accept bundled payments from HealthSource for 2016 for these three product lines.  The payment amounts are reported in the second worksheet of the “Bundled_Payment_2016.xls” file.  HealthSource’s payments in 2015 for these three product lines were close to the overall hospital average.  The spreadsheet contains information on the average facility payment per case (the amount actually collected from payers, not charges), separately for each product line, and the average hospital cost per case.  Average costs include the variable, or marginal, costs per case, as well as fixed service-line specific costs (e.g., nurse managers) and allocated overhead costs (e.g., a portion of the hospital’s data processing costs). 

For orthopedic patients, the spreadsheet also has information (starting in column J) regarding the percentage of patients who are readmitted following their initial/index admission, the percentage discharged to various locations following their index admission, the average private insurance payment for post-acute care services and readmissions for those patients who need them (these data were provided by HealthSource).  St. Patrick’s will be taking risks for these costs in the bundled contract (i.e., the bundled payment builds in those estimated costs, and St. Patrick’s will have to pay them).  St. Patrick’s does not own any post-acute care facilities, so it will be contracting with them as part of the HealthSource contract.

The spreadsheet also breaks out the device cost per patient and other variable expenses per patient for these three product lines.

One reason why the CFO agreed to a bundled price that was lower than what HealthSource had been paying the facility and its physicians in 2015 was her belief that St. Patrick’s could reduce its medical costs if it were able to enlist the support and assistance of the surgeons.  Bundled payments allow physician and hospital incentives to be aligned versus the traditional situation where an insurer pays the facility and physicians separately.  Ketcham and Furukawa (2008) analyzed hospitals that instituted gainsharing programs that allowed them to share cost savings with their physicians.  These authors found that such an arrangement resulted in a 7.4% reduction in the device cost per patient, on average.[2]  A good deal of the savings occurred via reduced medical device prices. 

In 2009 Medicare initiated the Acute Care Episode (ACE) demonstration program with five health systems in the Southwest to examine how bundled payments for physician and hospital services in orthopedic and cardiac procedures affect costs and quality.  Vanguard Baptist Health System in Texas saved $1.4 million and $800,000 in orthopedic and cardiology device costs, respectively, in the initial year of the ACE program.  Hillcrest Medical Center in Oklahoma reduced its orthopedics and cardiology device costs by 10% and 3%, respectively, in the initial year of ACE. 

In the first year of the Medicare Bundled Payments for Care Improvement (BPCI) program (October 2013 through June 2015), health systems accepting bundled payments for orthopedic surgery in Model 2 (physician services, hospital services, and post-acute care services) reduced Medicare spending by 3.8% (by $1,166 per case, from an average of $30,551 before BPCI) relative to control patients who were treated by hospitals that did not volunteer for the BPCI payments (source: Dummit et al., JAMA, September 19, 2016).  Most of these savings were due to reduced use of post-acute care at the BPCI-participating organizations.

 

With bundled payment, a hospital may try to encourage physicians to help the hospital reduce other hospital variable costs, such as labor costs associated with how long patients stay in the hospital. In the early 1990s, Medicare ran a demonstration program where they paid participating hospitals a bundled payment (i.e., to be divided by the hospital and physicians) for two open-heart surgery DRGs.  Participating hospitals saved an average of $5,300 per case (about 20% - 25% of the total cost).  According to a Crimson Press business case, “the savings came mostly from shortened hospital stays, the use of generic drugs, and a reduction in the use of laboratory tests, x-rays, and disposable supplies.”  Although these data are old, you may want to use them in your analysis.

The CFO at St. Patrick was eager to gain experience with bundled payments before the voluntary program with Medicare became mandatory for many DRGs, which is what many people expected to happen, such as with the 2016 Comprehensive Care for Joint Replacement initiative in 67 markets. 

Your team’s first job is to determine how and how much to pay physicians in each of these three product lines. Remember that the physicians are not employed by the hospitals.  Take the HealthSource payment amounts for 2016 as given; you cannot do anything to change these amounts for this year.  Although you do not know precisely what the St. Patrick’s physicians receive from private payers such as HealthSource, you believe that they receive about 50% more than the fees they receive from Medicare.  Physician fees from Medicare and the estimated average fee that physicians receive from private payers are reported in the spreadsheet, separately for each of the three product lines.  

Although the physicians are not employed by St. Patrick’s, when you develop your proposed payment method and amounts for the physicians under this contract, you can be creative in building performance incentives/bonuses into the physician reimbursement.  For example, you could decide to withhold a certain amount from a physician’s payment and then return that amount at the end of the year if a physician (or the physicians as a group) hit certain pre-defined cost, quality, re-admission, or length of stay targets or targets regarding use of post-acute care.  That is, you can use the reimbursement method to align more closely the physicians’ incentives with those of the hospital.  The one thing you cannot do legally with these performance payments is provided financial incentives for physicians to admit more patients to the health system; that would be deemed by Medicare to be fraud and abuse (you can pay physicians a high amount per admission, but you cannot make a physician’s bonus payment a function of how many admissions they initiate).  There is much more money to “play with” for orthopedics versus the other two product lines since the bundled amount includes expected readmission and post-acute care costs.

Many of the St. Patrick’s physicians have admitting privileges at either University Health System or Kansas City General.  Therefore, if you propose physician fees that are substantially lower than the fees physicians can receive by admitting patients at these other hospitals, the physicians may divert HealthSource patients away from St. Patrick’s to the other hospital(s) where they have admitting privileges.

 

Case Discussion Questions (The case study answers will be evaluated based on clarity of thought, appropriateness of the solution proposed, and strategic use of reasoning and logic). 

1) What reimbursement system do you propose for the bundled payment contract?  A complete system should include:

a) The proposed payment method for physicians and St. Patrick’s (e.g., fee-for-service, percent of charges, per diem, case rate payment).  If you propose any performance payments/bonuses, explain how these would work (e.g., withhold a percentage of physician’s fee and allow him/her to earn it back if the hospital’s medical device costs in that product line fall by a certain pre-determined amount, or if discharges to SNFs the decline for orthopedics).

b)  The expected physician payment amount per patient for each of the three product lines. If you propose performance payments, report the base and the expected physician payment amounts.

 c) The expected hospital payment per patient per product line. Be prepared to write the information for “b” and “c” on the chalkboard at the beginning of class. 

2) Justify your proposed reimbursement system.  Why is your system the optimal one from St. Patrick’s perspective?

3) In 2017, after one year of experience with the “bundled price” contract, HealthSource decides, as expected, that it wants to consolidate its bundled contracts at two Kansas City facilities in order to receive even better pricing (in 2016 HealthSource has bundled price contracts at St. Patrick’s and three other Kansas City area medical centers – University Health System, Kansas City General, and Methodist).  HealthSource has asked the four health systems to submit sealed bids for a separate bundled price per case for the three relevant product lines.  What should St. Patrick’s bid for each product line (be specific)?

At the bottom of the second worksheet in the spreadsheet is information on the hospitals’ cost structure for 2015.  In 2015 St. Patrick’s had a higher cost per case than Kansas City General and Methodist, but lower than University.  Direct costs are costs that are actually incurred by departments that provide patient care and generate charges for patients, such as nursing departments, lab, pharmacy, and physical therapy.  Indirect costs are incurred by overhead and support departments such as administration, finance, security, and data processing.  Generally most, but not all, direct costs are variable; and most, but not all, indirect costs are fixed. 

 4) If the physicians in these three product lines were employed by St. Patrick’s, how would that change, if at all, St. Patrick’s enthusiasm for bundled payment?  If St. Patrick’s owned and operated its own home health and SNF facilities, how would that change their enthusiasm for bundled payment?