Under the Knife: Public, Private Insurers Cut Into Fee-For-Service Health Plan

by Mark Friedman  on Monday, Apr. 9, 2012 12:00 am  

Public and private insurers are cutting into fee-for-service business plans.

Starting in the fall, doctors, hospitals and other health care providers in Arkansas will have a strong financial incentive to keep a lid on health care costs.

A new Medicaid reimbursement policy is expected to be the start of radical change in the delivery of health care, which has traditionally operated under a “fee-for-service” model that generates revenue for every patient contact and every procedure performed.

Under the new system that private health insurers expect to copy, Arkansas’ Medicaid program will fi-nancially reward health care providers who control costs while penalizing those who don’t.

Medicaid will set a target price for a procedure, such as a hip replacement. Doctors and hospitals who keep actual costs below that target price will then share in the savings, but those who go over the target price might have to pay.

“It requires health care providers to really think completely differently about the way they deliver care,” said Harold D. Miller, executive director of Center for Healthcare Quality & Payment Reform of Pittsburgh. “Rather than saying that if there’s something else I’d like to do for a patient, I can do it and get paid for it, as opposed to saying, there’s a budget … on what you need to spend on a particular patient.”

While the details are still being hammered out on the exact price points and the potential savings or penalties for health care providers, Medicaid is tiptoeing into the new model.

It will start with only six procedures of the more than 7,500 diagnoses that a person can have. Those six are:

  •  Pregnancy and delivery;
  •  Hip and knee replacements;
  •  Congestive heart failure;
  •  Ambulatory/upper respiratory infections;
  •  Attention deficit disorders; and
  •  Developmental disabilities.

Medicaid Losses

Sparking the payment reform were the projected losses of Arkansas’ Medicaid program. The joint federal-state program provides health insurance for about 750,000 disabled and low-income adults and children in Arkansas, about a quarter of the state’s population. The federal government covers about 71 percent of the Medicaid budget, which was $4.1 billion in the fiscal year that started July 1, 2009 and rose to $4.38 billion a year later. For the fiscal year that will end June 30, it is projected at $4.65 billion.

The Medicaid shortfall is forecasted at between $250 million to $400 million for the fiscal year that starts July 1, 2013, said Andy Allison, director of medical services for DHS and is its Medicaid director.

“The shortfall will only grow thereafter because the program is growing faster than the tax base,” he said. “Costs will not go down or slowdown if we just stand back and watch.”

But not all providers are cheering the proposed changes.

“Physicians are taking a wait-and-see attitude,” said David Wroten, executive vice president of the Arkansas Medical Society. “They’re not sure how it’s going to affect them.

“There’s a lot of anxiety and a lot of concern out there about how is this going to affect physicians and their patients.”

Wroten also said that he didn’t think the new pay model was a panacea, because he doesn’t know its outcome.

“Does it seem like an appropriate thing to try? Yes,” he said. And he added that the physicians have been helping DHS officials craft the new payment model.

Paul Cunningham, senior vice president of the Arkansas Hospital Association, also said he didn’t know what the new payment system will mean for hospitals.

“Certainly initially we don’t think it’s going to save a lot of money,” Cunningham said. But he said hospital officials are working with DHS to provide input.

Allison, the director of Medicaid, said he didn’t have a projection on what the savings will be. “We’re optimistic that it will reduce costs and change the trajectory of growth,” he said.


Allison said the goal of the reform is to pay for quality and efficiency in health care.

“We just have to get away from paying for volume,” he said.

Arkansas Surgeon General Joe Thompson, who is working with Medicaid to reform the system, said that under the fee-for-service mo-del, no one manages the entire experience of the patient.

As a result, when someone enters the hospital for, say, congestive heart failure and is treated and discharged, no one is assigned to make sure the patient is getting the medication he needs when he gets home, he said.

“Essentially, in the fee-for-service system, there’s nobody who is the assigned quarterback,” Thompson said. “Right now the payment system aligns financial incentives to have lots of things done for you and to you.”

Under the new system, called Arkansas Health Care Payment Improvement Initiative, patient’s care won’t be rationed, Allison said.

Instead, he said, the bill from the providers will go to Medicaid after treatment is received, just as it does now, he said.

“We’re not going to change the way that we pay for individual patients,” he said. “But now after all is said and done, the payers will go back and review how efficient that whole episode [was].”

The review will determine the average cost for the procedure, he said.

Allison said an average approach was taken to account for patients who have complications and require extra care.

If the cost of the procedures is lower than what has been determined to be acceptable, then the provider — which could be the doctor, hospital or combination of the two — will share in the savings, he said.

If the cost is higher, however, “that provider who’s responsible for the costs is going to share that extra cost with the state.”

One statistic also that will be looked at is the hospital readmissions, Thompson said. He said some patients are returning to the hospital within 30 days of being discharged because of infections they picked up at the facility or for a relapse, he said.

“What we want to do is have a hospital … have responsibility for keeping that patient from coming back into the hospital within 30 days,” Thompson said. “So when a hospital discharges [the patient] that first time, they may need to call the patient to make sure they’ve got their prescriptions filled.”

Starting in July, Medicaid will have a price set for the episodes and will start collecting data from providers. Possibly starting in September, providers will be paid under the new model, Allison said.

The delay in implementing the payment would “give clinicians the chance to understand where they are and what they might need to improve on,” Thompson said.

Allison said that more procedures could be added to the list of six starting next year.


Wroten, from the Arkansas Medical Society, said he doesn’t think the fee-for-service model has to change.

“The fee-for-service model is not the problem,” he said. “The problem is health care is expensive.”

He said Medicaid is trying to use doctors to control health care costs.

“And that’s fine, but physicians only have control over a limited amount of those other health care dollars,” such as what happens in a nursing home, he said.

Miller, of the Center of Health Care Quality, said moving away from a fee-for-service model to one based on patient outcomes should provide for more flexibility in the way health care is delivered.

Under the fee-for-service model, for example, a doctor gets paid for seeing a patient in his office, when it might be more efficient to call the patient, Miller said.

“If you wonder why you can’t get your doctor on the phone, it’s because they don’t get paid for that,” he said. But under the system based on efficient care, the doctor has an incentive to use a better phone system or email to communicate with patients, he said.

The University of Arkansas for Med-ical Sciences in Little Rock is working on meeting the new requirements. UAMS’ Chancellor Dan Rahn said the new payment model is a “big change” and UAMS is working on a blueprint on how it will work.

“We as an organization need to decide how the payments get divided and how we will reduce health system expenditures,” he said, “while at the same time operating in a way that provides us with enough revenue to pay the physicians and cover our operating costs in the hospital.”

Rahn said that he thinks having families, physicians, other providers and payers all work together will make the health care industry more efficient and the costs lower.

“The first thing we need to do is try to stem the rate of rise in health care expense,” Rahn said. “Then, we could do the next thing, which might be to bring down the overall expenses.”



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