Jean Drouin

In a recent opinion piece, Paul Levy, the former CEO of Boston-based Beth Israel Deaconess Medical Center, reaches the conclusion that value-based payments are a ‘doomed’, ‘energy-sapping distraction’. Levy builds his argument on the example of global payments, omitting a multitude of other value-based reimbursement models including pay-for-performance, episodes, bundles, and patient-centered medical homes (PCMH). His central observation is that current global payment incentives are too small to outweigh the personal financial incentives for clinicians to order procedures and bill up to the allowable limit under the current system. In other words, why collaborate to lower costs if an individual achieves little-to-no personal gain under global payments?

Rather than considering whether stronger global incentives might be required, he contends that the problem is not the fee-for-service system, asserting that ‘in virtually every other sector of the economy, we employ fee-for-service pricing.’ The issue is that patients are not empowered to make decisions about their care. When they do have options to consider, they must rely on limited pricing information. With a call to embrace more transparent pricing models, Levy closes his piece with a prediction that ‘entrepreneurs in healthcare will focus on disintermediation.’

While there is no doubt that price transparency is an issue that must be addressed, the prescription to abandon value-based payment models misses the mark. After all, there is nothing more transparent than the fixed price that comes with episodes and bundles of care.

Understanding the assembly line of an episode

If Levy is right, and disintermediation is the future of healthcare delivery, what can we learn from industries that have undergone similar transformations? One of the greatest innovators and ‘disintermediators’ of our time was Henry Ford, who is well-known for his use of the assembly line technique of production to systematically lower costs – and make the car accessible and affordable to the masses. How would Henry Ford evaluate the current state of our fee-for-service model?

To find out, let’s walk through an example of a total joint replacement and see how health systems ‘produce’ this episode of care today. First, a surgeon makes the decision to operate. Then, the patient is given cursory instruction on the process and told that there is a class once a month at 2pm that will provide more detail. If they cannot attend, they are offered a binder (with poorly photocopied pages of information from several years ago) for further reading. Once the operation takes place, the patient is in the hospital for 2-3 days. Then, the patient is prescribed a highly-variable post-acute journey that may or may not involve inpatient rehab, a skilled-nursing facility stay, and home health. Under the fee-for-service system, no one is incentivized to act as the quarterback to ensure quality or affordability across the entire journey.

To delve in deeper, let’s assess how we currently pay for this episode. Each actor in the process is reimbursed a piece-rate for what they contributed (fee-for-service)—unlike Ford’s world of car manufacturing, where rather than sending consumers multiple bills after the fact to compensate individual workers along the production line, companies offer fixed prices ahead of time for the entire car. Contrary to what Levy asserts, fee-for-service is most certainly not the dominant or desired pricing model across all industries. What may seem like fee-for-service at a cursory first glance is actually an economy built on transparent bundled payment models.

Ford did not just standardize production, he made it possible to reliably offer a fixed price for a complex good. And he would likely see a massive opportunity to bring healthcare from the 19th to 21st century production methods and mindsets.

Much like car-buyers, total joint replacement patients are not looking for an anxiety-producing deluge of opaque bills after the fact. They would prefer to agree on a flat price up front and avoid surprises. That is precisely why entrepreneurial surgeons are beginning to do just that – disintermediate health systems by offering total joint replacements for as low at $19,000 when the commercial rate is often two to three times that. The entrepreneurs are offering their own versions of value-based pricing, just as is done in most other industries.

However, other industries do differ in an important respect - innovation usually lowers costs. Healthcare has been an exception to this rule. But, why? Could it be that the fee-for-service model plays a role? The circumstantial evidence is highly damning. The degree of observed variation in resource utilization for episodes such as total joint replacements, cardiac bypass or cancer is far higher than in production processes in other industries. It is also interesting that integrated health systems such as Kaiser Permanente, who are de facto on a global payment regime, often tend to be more resource efficient.

Fix the root cause, with strong enough medicine

Levy is spot on in identifying that current global payment incentives are not aggressive enough and too far removed from the individual physician to be successful in overcoming the in-built incentives to drive volume and under-invest in coordination inherent in the fee-for-service model.

This is where episodes and bundles of care have the potential to be much more effective.

First, bundles offer consumers a transparent fixed price that guarantees an outcome. Second, they can provide up to 40% upside and downside incentives when defined as they are in CMS’s mandatory CJR (comprehensive care for joint replacement) program. This gets the attention of CFOs. Third, bundles are specific to the process of production in a way that global payments are not. An orthopedic bundle is highly visible to an orthopedic surgeon, in a way that the total hospital budget is not. This is an especially important consideration given that surgeons are now entitled to up to 50% of additional compensation if they generate savings in their CJR bundle. Fourth, bundles reward more efficient and higher quality performers with higher bonuses. By contrast, fee-for-service rewards any provider – good or bad – for additional activity and billings. If there is one thing the current healthcare debate makes clear, it is that Americans across the political spectrum are increasingly frustrated and angry about the cost of healthcare. Health systems that sap their energies resisting the inevitability of patients and employers demanding value-based reimbursement models risk closing their doors and delivering no care at all.

Jean Drouin

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