Value Talks Podcast Episode 5: Payment Reform

Hosted by Travis Tasset, the Value Talks podcast explores a range of topics that matter to people, including healthcare, leadership, and culture. In this episode, Travis and I discuss healthcare payment reform.


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Transcript of Episode 5

Welcome to another episode of Value Talks, with your host, Travis Tasset.

Travis Tasset: Joining me again today is Dan Tasset and Dan, we’ve talked a lot. You’ve written a lot about healthcare and healthcare transformation. I’m just curious, we’re going to dive into the weeds a little bit today on payment reform and hopefully we’ll get to bundled payments and your thoughts on that. But let’s kind of back up for a minute and talk to me a little bit about why we need to implement some of these changes within healthcare.

Dan Tasset: Well, I mean, what we’re trying to do today, as being an innovator in healthcare, we’re trying to get competition to thrive. We’re trying to develop our competitive landscape, we’re trying to innovate, we’re trying to have transparency in pricing. And overall, the end result of that needs to be, we’re trying to make healthcare insurance more affordable, but we’ll never make healthcare insurance more affordable if we don’t make healthcare more affordable. In other words, we can’t lower the cost of health insurance if we don’t lower the cost of the actual healthcare itself. This is all about lowering the cost of healthcare and at the same time, improving quality and patient satisfaction. So, ultimately we improve the overall value or value proposition to the patient, to the consumer. So this is what the rest of this podcast is going to be focused on.

Travis Tasset: And in order to do that, you’ve talked often about two main themes that you see in the industry right now. Talk a little bit about that-

Dan Tasset: Yes, the two major drivers in the industry today, as I see them and there’s others but the two major ones, and I think most people, most innovators and most entrepreneurs today, in fact, you know, if the government regulators in Washington DC were focused on these same things, I think we’d make a lot of progress in lowering the cost of care and subsequently the cost of insurance. But those two things are consumerism and payment reform, and I think we’re here today to talk about payment reform and save consumerism for another day.

The Basics of Payment Reform

Travis Tasset: So can you give me kind of a big picture of payment reform and maybe the continuum of what that looks like and all the different elements and we can come back to-?

Dan Tasset: Yes, right and come back to what we’re focusing on right now. So again, today what we do, we call it fee for service, right? We’re in the fee for service world. You go in and see the physician, he- whether it’s primary care, whether it’s a surgeon, whatever it might be- he does the work. He sends you the bill, you pay for it. If you have to go back the next day and see him again or if you have surgery and the surgery doesn’t work, it doesn’t work as well as you’d like it to and you have to go back, you pay again. So not only do you pay him, the surgeon, but you pay the facility, the hospital, the ambulatory surgery center, you pay anesthesia, you would pay home health, you would pay physical therapy and if you have to go back again, you pay him again.

Again, that’s fee for service. And so beyond fee for service- so people are trying to say, “We’d like to advance the payment system. We would like to actually see some sort of reform.” So right after that, people have started to adopt pay for performance, pay for performance or shared savings. In other words, if I’m able to do something a little less expensive, maybe I get a bonus as a physician or I get a bonus as a hospital or I get a bonus as a surgery center or whatever, a group of providers. And while that has had some success, generally speaking, I think it’s failing and it’s failing in my opinion, for one specific reason because both shared savings or pay for performance, is upside only to the providers and it doesn’t really have downside risk.

Travis Tasset: So they’re still fee for service based models, right?

Dan Tasset: They’re still basically fee for service with a bonus.

Travis Tasset: Just with upside.

Dan Tasset: Right, just with upside. So the step beyond that is really called a retrospective bundle, which looks a lot like a shared savings program, as well as what CMS has implemented. And this is where sometimes you look at what the government’s doing and they just fall- they had generally a good idea what they’re wanting to do, but they fall short. So they implement a program that’s less than successful, a lot as less than it should be because they haven’t thought through the whole impact. A CMS retrospective bundle is a good example of that. Then beyond that is a prospective bundle. You pay in advance, not pay in advance, but you agree to in advance, a case rate for an episode of care or medical condition or a surgical procedure or a general procedure and you agree in advance of what that cost is going to be. And if it’s more than that, you eat that cost. If it’s less than that, you reap the benefits.

So there’s an upside, downside reward that’s called a prospective bundle, agreeing in advance of what that should be. The step beyond that is a prospective bundle with a warranty. That warranty period could start out as 30 days. It could go to 90 days. It could go to, you know, 180 days and even beyond. So a prospective bundle with a warranty is the step beyond that continuum. Then beyond that is a capitation of a service line. In other words, “We’re going to take care of all of your orthopedic needs for a certain price per person or per member,” and then beyond that full capitation: “We’re going to take care of all of your medical needs for a price per member, per month,” traditionally known as full capitation.

So there are a lot of articles. I was just looking at one here before we were getting ready to start. I think the terminology that they use in this particular article talks about a- calls this a “population based payment” or a “global population based payment”, is another term, but it’s generally capitation. What we’re focusing on, is we’re focusing on a prospective bundle with a warranty or a prospective bundle without a warranty, a prospective bundle with a warranty and then trying to lengthen the warranty period. I think that’s the sweet spot of where we need to go. We need to bypass shared savings, need to bypass pay for performance. We certainly need to get out of the fee for service world, but there’s a lot of people, including self-funded employers, who are not ready for capitation. Although capitation works in some populations, like a Medicare population.

Medicare Advantage companies are successfully using capitation and it’s working well for them, but in the employer world, generally employers are not very enthusiastic about capitation because they fear that their employees will be subjected to access to healthcare, thereby keeping the costs down. And they’re afraid, okay, they might keep the cost down by limiting access, restricting access, but it will cost them either on preventative care or it’ll cost them on employee satisfaction. So higher employee turnover results in additional costs as well and so, most self-funded employers now are really not in favor for their employee population base, are not in favor of capitation or population based payments; are more leaning towards prospective bundles, certainly for episodes of care. So that’s what we’re focusing on.

Travis Tasset: So that’s the continuum. We have fee for service and then we get into shared savings models, pay for performance models, retrospective bundles, prospective bundles, and then prospective bundles with warranties and then full capitation.

Dan Tasset: Yes. Service line capitation and then full capitation at the very end. I think you could even take it beyond that and say that ultimately you could get to a provider based or provider owned insurance product, I suppose, you know, if you want to take it even further than that.

Prospective Bundles

Travis Tasset: So why do you feel that the prospective bundles, either with or without a warranty, is really the sweet spot right now?

Dan Tasset: Because it really- first of all, it’s easier to implement than most people think, than most people believe. It requires a lot less data analytics, a lot less study of costs. It’s- well, let me back up. Payment reform, and certainly in the prospective bundle, in the simplest form, is a shift of risk from the payor, whether it’s an insurance company or a self-funded employer, it’s a shift of risk from the payor to the provider and a shift of risk, meaning, you know, if you have upside, downside risks. So if you do better, you get to keep the money. If you do worse, you know –

Travis Tasset: You have to pay a penalty perhaps.

Dan Tasset: So as you talk about shifting risk, the very first step on that continuum, is prospective bundles. So- and I think most thought leaders will agree today, it’s not true risk unless it has downside.

So if this is about shifting that risk and you can’t do that without the downside and the first step along that way is prospective bundles. So I think that’s where we start. That’s the sweet spot. We’re doing it, it’s working. Many are doing it, it’s working. It’s working for the provider, meaning it’s- they’re still profitable, it’s not a race to the bottom, they’re taking the risk, they’re managing the risk. It’s working for the self-funded employer, it’s working for the payor because it’s decreasing their costs and that should result in more affordable health insurance.

Travis Tasset: So you just mentioned there’s a lot of different players here. We have the payors, we have providers, we have, you know, perhaps self-funded employers, are, you know, writing the check at the end of the day for their population. So what do all these different groups have to do to, you know, move to prospective bundles, either with or without a warranty? So let’s just start with the payors first.

Dan Tasset: Well, the first thing the payors have to do, is they have to agree that this process is going to lower their medical spend and they have to be willing to analyze their own data to be able to make that determination. In other words, they have to say, “Real data analytics,” not just, “Well, we know how much we’re spending here and spending there.” For example, we’ve done data analytics for payors before and we’ve said, “Before we get started, would you give us an idea of what a hip or knee replacement, what you’re spending on that?” And they would give us the number and we would say, “Could we have access to your data and be able to get a data dump and be able to do some real true analytics on it?” And while initially they wouldn’t give that to us because they also know that we’re working with providers to help manage that risk once it’s transferred, they have- based on our success, they’ve agreed to now to start giving us some.

So as we look at their data, what they’re not taking into consideration is readmissions to the hospital or to the emergency room for a hip and knee replacement, keeping with that same example. So they just looked like the initial cost of care and the two or three days that were initial part of the piece but one payor in particular, we found out that almost one in every nine of their patients ended up back in the emergency room and those reasons were a variety of different things but the number one reason was given, it was kidney failure. Well, that wasn’t coincidental to these patients, it was that they took too much narcotics, wasn’t monitored. They didn’t manage the risk. So they ended up in the emergency room because their kidneys were beginning to shut down because they were essentially OD’ing on the narcotic or the pain medication.

So once you start taking that readmission, now all of a sudden if they thought their total hip, total knee replacement costs were in the, you know- the $35 to $40,000 range; for the hospital, for the surgeon, for the implant, for so on and so on, and now you start adding that readmission cost and average it across eight, nine cases. Now they have to increase it by another three, four, $5,000 per case. Then you can just go on and on and on, failure rate and whatever that might be. And so their true cost associated with that case was much higher than what they- So back to your question, what do payors need to do? They need to be willing to study and let others study their own data to truly see where they’re spending their money, on their medical spend and what episodes of care and what other places they’re spending in. And are there models out there that would cause them to decrease their medical spend, thereby saving money and ultimately passing that savings along to the patient or to the member. So number one, they have to be willing to study data and engage in a process of seeing if we can lower their costs.

Travis Tasset: And understanding that they may not know the true cost of some of their services, procedures because there are these linkages with other complications, right? They’re thinking maybe separate episodes, separate, but they’re actually- they’re actually tied together.

Dan Tasset: Exactly, yes and good data analytics will show that. When I say data analytics, you’ve going to have a good biometric team. You’ve got to have epidemiologists on your team. You’ve got to have a lot of different people that are studying that, to be able to make those determinations. I think the other thing that payors are going to have to be willing to do, is they’re going to have to be willing to stand up to more expensive providers and not let them continue to use the clout they have in the market to leverage the fact that maybe they have the majority of the delivery system in the market. To leverage that and making sure they continue to get paid at a high rate or unreasonably high rate for procedures or episodes of care that could be done less expensively. So I think they’ve got to be willing to say, “You know, we need to do the right thing here. We need to see how we can truly lower the cost to our members.” So that’s a few of the things. There’s others.

Payment Reform for Self-Funded Employers

Travis Tasset: So that’s the payors and as, you know, a self-funded employer, I mean they’re a payor in that sense that they’re writing the check for some of the services, the health services provided to their population. Is it the same? Do they have to do anything different than a payor or is it just understanding, being willing to look at their data and understand their costs?

Dan Tasset: Yes, that’s a good question. It is essentially the same, but there’s more that- actually a payor could do this thing, we really need the payors’ help in educating their members and then directing their members into a bundled payment type system or to a network of facilities and surgeons that would actually be willing to take on risk. While that’s been harder to convince the payor to do because of the political setting and political environment, with the big health systems in the market, self-funded employers are more willing to direct their own patients and steer their own patients into an ambulatory center of excellence network and to a lower costs network of surgeons and facilities, particularly for very specific procedures. I mentioned hip and knees earlier, spine procedures, those that are very expensive. In particular to direct those into a less expensive site of service and less expensive network, higher value, good patient outcomes, better patient outcomes, better patient experience.

Also, some of the things that a self-funded employer can do to help direct their employees, is to adopt technology that allows them to do that and there’s a lot of good technology out there. As you know, HealthJoy is a company that we use for our own employees, to be able access and direct them to generic drugs. We’re implementing now, to be able to direct them to a less expensive surgery network or procedure network. So there’s a lot of technology adoption that an employer or a payor could adopt to help on the consumer side of this, which we’re not talking about today but would help direct them into this network. Then lastly, I think an employer, as well as the payors themselves, they could do benefits plan design changes that would encourage their employees to be able to use this network and direct them to this network.

Things like waiving copays and deductibles for procedures that, if they stay in the network, they get away with copays and deductibles. That starts with of course implementing a higher deductible plan, which most employers now are doing anyway. So, to augment their benefits plan design change. If you can’t do a benefits plan design change because it only comes around once a year, there’s other ways to do that. Again, through technology adoption and I mentioned, you know, HealthJoy is just one. Being able to adapt that technology that calculates for their member, a discount, if you will, against copay and deductible and that can be implemented anytime during the year, without actually doing a benefits plan design change.

Payment Reform for Providers

Travis Tasset: Yes. Perhaps we can do a future episode and talk more about how we really incentivize consumers through plan design changes, but going back to the payors and the self-payors and employers if they’re self-funded, what are the steps that they can take to help move forward towards prospective bundles, prospective bundles with warranties? But you mentioned the providers and transferring the risk to the providers and helping them manage that risk. I’m just curious, you know, if I’m a provider, that’s probably the last thing that I want to take on and I guess it might depend on if I’m a good provider of high quality services or a poor provider. So what’s the sentiment that you sense out there with providers? Are they willing to take this or are they not? Are they resisting it? And if so, why? What are their challenges?

Dan Tasset: It’s like everything else in life, there’s early adopters and there’s laggards and there’s everything in between and that’s true here with the providers. When we say providers, that’s a broad category, right? But that early adopters and laggards would be true with, whether it’s a physician, whether it’s a surgeon, whether there’s a procedure list, whether it’s a, you know, ambulatory surgery center, whether it’s a hospital, whatever that might be. We have some that are willing to be early adopters and then some that are followers and some that go to the opposite end of the spectrum that are laggards. But I think my argument for the provider is, is if you’re number one in the market and you have market share and you’ve got a lot of leverage against the consumer, the employer or the payor and the patients themselves and you just want to stay in the fee for service model and you don’t want to do the right thing, okay, if you have enough leverage than keep doing it. But I would hope that people would say, “This is the right thing, it’s what we need to do.”

There’s no other industry and certainly no other product or service that you can buy in this country that doesn’t have- that is in a fee for service type world. It doesn’t make any sense and the time has come for this to change. So, but if you say, “I want to do the right thing,” or “I have to do the right thing because you know, I don’t have that leverage in the market,” then you need to start working in this direction. So I think if you’re the taxi cab driver in Kansas City, you’ve got to say, “Maybe I ought to switch over and become an Uber or a lift driver,” or you can be stubborn and say, “I’m going to be a taxi cab driver. I’m just going to stick with it and I’m going to ride it right on down the toilet.” That would be my message to the providers is that.

And where we see this adoption happening by a lot of surgeons, a lot of proceduralists, a lot of physicians, a lot of health systems, believe in everything that I’m talking about right now. Not only adopting it but are in fact begging for us to come and help them in this transformation from fee for service into advanced payment models. This thing we call payment reform, they’re ready, they’re doing it, it’s working. And my second argument to them, other than, you know, gaining market share and doing the right thing, is, it’s not a race to the bottom. Everybody thinks that in the fee for service world, “Those were the good old days and we want to stay there,” but the interesting part about it, and we’re proving it, that if you’re willing to take on risk and have that risk transferred to you, from the provider or the payor and you’re willing to take on that risk, you can make more money, not less. If and only if you can manage the risk; otherwise, you have to rely on luck and we don’t want to do that. So, what we’re about as an organization, is convincing the payor that they want to do this through their own data analytics and then convincing the payor that we can help the provider to sustain it and be able to manage that risk, and then convince the provider that we can in fact help them manage that risk successfully and make more money, not less money and everybody wins.

Managing Risk

Travis Tasset: So how do we help them manage that risk? I mean, is that risk managed with a warranty, without a warranty? Is that part of-?

Dan Tasset: Yes. Well, I mean, you know, number one, information helps you know more about what you’re doing. And so the number one, our number one strategy for managing risk, is make sure we know everything about what’s going on. If we took an episode of care and let’s stick with hip and knee, for example, the way you take on that risk, the prospective bundle and add a warranty to it, is know everything about what you’re doing and track it real time and through data. The more you track it and the more aggregate data you have-

Travis Tasset: The more you can manage.

Dan Tasset: The more you can manage. And so what’s interesting in the world today, is almost all the technology, whether it’s Cerner or Epic or whatever you have in a surgery center, physician office, it’s all based on a fee for service model.

So the EHR doesn’t really manage an episode of care. And so what we’ve developed is the technology to manage the episode of care real time. So hip and knee, for example, what do we know about the patient in advance? Everything. What happens during the prior to the procedure? What happens during the procedure? How long was the patient under anesthesia? How long was the tourniquet on? What is the process that’s being used? How quickly did they ambulate after surgery? What was the distance of ambulation? How long did they recover? What did they do? And be able to track that over time and then what comorbidities were associated with it? And then be able to eventually do predictive analytics and say, “If we have this patient at this age, with this comorbidity, with this type of procedure, that if we do this, this is what the outcome is.”

So knowing real time and then aggregate among multiple facilities, among multiple surgeons, so that we actually achieve best practice. That doesn’t exist today in a broad sense. And so in answer to your question, is number one, in order to help the provider, the surgeon, the ASE, the hospital, manage risk, we have to have data. We have to have information and it’s got to be real time. It’s got to be aggregate; so that we can take it and slice it and dice it however we want. So that we can match what we’re doing to the data that I just talked about and the needs of the payor or the self-funded employer. There are other things as well, in order to manage that risk, to be on the data. I think, you know, there’s different elements of course, what we’re talking about, the real time analytics; is mostly to be able to manage clinical outcomes, like orthopedics. Ultimately, you know, the functional outcome of the patient, functional mobility of the patient, but there’s also, how do we manage the cost? So we want to certainly manage patient satisfaction. We want to certainly manage clinical outcomes, which would be the numerator in the value equation. The denominator in the value equation-

Travis Tasset: Is cost.

Dan Tasset: Is cost. So how do we manage cost? Well, you have to understand, again, what are those costs?

Travis Tasset: What are the drivers of that?

Dan Tasset: What are the drivers of the cost? And we know that’s primarily going to be the cost of supplies and the cost of salaries, wages and benefits. So how do we manage that? Do we manage it through site of service selection? And so, you know, does this patient need to stay two days, three days? And traditionally everybody says, “Well, we want to decrease the length of stay.” I say, I think we might want to increase.

Travis Tasset: Depending on what the outcomes show, right?

Dan Tasset: Depending on what the outcomes show and yes, you traditionally say, “Well, I want to decrease the length of stay,” if the stay is in a hospital, “because of the expense associated with it.” Right? But if the stay could be somewhere else, in a hotel with home health and a care suites or in a whatever, skilled nurses, or whatever that might be, maybe we should look at it not as a length of stay, but length of opportunity: length of opportunity to improve the mobility of a patient so they don’t fall when they get home, a length of opportunity and opportunity to educate the patient about what they need to be doing, a length of opportunity to get them off of any sort of pain medication, a length of opportunity to educate their family members of what it needs to look like when they get home.

So it’s a whole paradigm shift of how we look at it and that all happens because we’re taking on risk. And so that’s another element of helping manage risk. And ultimately then, what you said and many others in between; that is the procedure reinsurance. So you really can’t take unlimited risk on every single procedures, unlimited procedures. So in our opinion, we’ve got to have a cap on our risk, on per procedure and an aggregate risk and traditionally known as reinsurance. And so we have as a company, not only the first, avoidable complications warranty for episodes of care, but we have the only reinsurance warranty for an episode or surgical procedure or whatever it might be. And we’re only able to provide that warranty through data, aggregate data that we can then underwrite it. You can’t get the aggregate data without the technology that I talked about and you can’t get the cost down without really looking at your supply cost and how do we lower the cost and how do we lower the length of stay and increase the length of opportunity? So all of those work together in the reinsurance product that we now offer our partners.

The Role of Warranties

Travis Tasset: And that’s a 90 day warranty?

Dan Tasset: Yes, it’s a 90 day avoidable complications for warranty. Of course, if the patient leaves and they go out and get in an automobile accident, we’re not happy to cover that readmission but almost everybody will know what an avoidable complication warranty would be. And we plan on, once everybody else catches up to us on the 90 day, we plan on extending that to six months and we’ll have the data to show. We already actually have the data to show that we can take on an additional 90 days of warranty over and above what we have, at very little additional cost. If the provider will let us help them manage that risk through a number of different technologies, a number of clinical protocols and a number of different sites of service. Shift a lot of different things.

Travis Tasset: Well, you know, we started with kind of why we need to have these elements with healthcare transformation and if you look at the per capita cost of healthcare in the United States, it’s, I think more than any other developed country out there.

Dan Tasset: By far.

Travis Tasset: By far, right. And I think it’s, I don’t know, around $10,000 and you know, now it’s approaching the total cost of healthcare. 18, 19, you know, maybe soon it will be 20% of our total GDP. I mean, that’s a huge spend.

Dan Tasset: Yes and you know, here’s the interesting part about what we’ve been talking about for the last 15 minutes. The interesting part about this is, is that roughly a third of our $3 trillion healthcare spend is spent in this area and could be subjected to a risk transfer to the providers themselves.

Travis Tasset: In this area. You mean the-

Dan Tasset: The surgical procedures, medical care, medical condition care based, that’s roughly a trillion dollars and you know, it’s hard to get any actuary to put a number on it, but right now, most thought leadership is that that could be reduced by two to $300 billion a year in decreased costs, out of the system, while improving the clinical outcomes. That’s a massive number. I mean, if you take that times the total GDP, I mean, it could be two, three percent of our total GDP we could take out of the- take out of the cost immediately. Think what that would do for our overall economy and-

Travis Tasset: Quality of life for-

Dan Tasset: It would be amazing. So it’s a big deal. This is transformational. It’s a big deal for our country. It’s a big deal for the economy. It’s a big deal worldwide because of the role that we play, the United States plays in the world stage.

Travis Tasset: Well, last time we had a chance to talk about the fundamentals in innovation and that really starting with the problem to solve and I think the challenge that we have with the rising healthcare costs is a perfect example of the problem that we’re facing and that the industry’s facing, and then some of the solutions that we just discussed, I think kind of brings that full circle. So, thank you for your time today, Dan.

Dan Tasset: You’re welcome, thank you.

Travis Tasset: Next week or next episode, I look forward to talking a little more in depth about consumerism and what that means.

Dan Tasset: Thanks, I will too. Thank you.

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