Why do insurers ignore the most promising way of cutting health costs?

How to fix health policy.
April 29 2010 9:47 AM

Little Bundles of Joy

Why do insurers ignore the most promising way of cutting health costs?

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To overcome these drawbacks, hospitals and clinics merge into accountable care organizations, or ACOs, which are massive, vertically integrated health collectives that can perform or subcontract all necessary services for tens of thousands of patients. But this strategy has its own risk for overall health spending. ACOs can become so huge that they transform into health care monopolies. In Boston, for example, the dominant Partners HealthCare (which includes Massachusetts General Hospital and Brigham and Women's Hospital) has used its market dominance power to drive up prices for everything from routine X-rays to cardiac surgery.

Enter the Prometheus model, which was developed in conjunction with the Robert Wood Johnson Foundation in 2006 and represents the most promising way of structuring bundled payments. At first glance, it seems to continue traditional fee-for-service payments: Hospitals still bill for each procedure or consultation. But once the patient leaves the hospital, the insurer tracks additional costs for complications like infections or rehospitalizations, which account for up to 80 percent of costs for conditions like heart failure. If the patient's total bill care comes in under the "evidence-informed case rate" (essentially, the budget set by the insurer), the hospital keeps the difference. If it goes over, the insurer still pays.

The key to Prometheus is that the initial caregiver is strongly, and positively, incentivized to avoid complications. Francois de Brantes, a former General Electric executive who oversees the Prometheus model, explains, "You start with payment to create organizational change, not the other way around."

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Here's how Prometheus could reduce the cost of cardiac bypass surgery, which might be complicated by poorly controlled diabetes requiring extra intensive-care days and a wound infection necessitating readmission. Under the prior fee-for-service, a hospital might get $47,500 for the bypass and the surgeon $15,000. The avoidable diabetes complications cost an extra $14,000, and the avoidable wound infection $25,000. In the end, the insurers cough up about $101,000.

Under Prometheus, the insurer pays the hospital $61,000 and pays the physicians a further $13,000. Now, according to Prometheus data, the average patient might be expected to consume another $15,300 for complications (called the "severity induced allowance"). If no complications result, the hospital and surgeon pocket the $15,300 allowance. The insurer also wins, since the evidence-informed case rate is $89,300, which is $12,800 less than the fee-for-service cost. (If the complications occur anyway, the insurer pays for the care and nobody is worse off than under the previous system.)

Now imagine how this might help asthmatic children in Boston. Suppose the typical child with severe asthma cost $500 in outpatient visits and $3,000 in emergency-room visits and hospitalizations. The total cost per patient is $3,500.

With a Prometheus-style bundled payment, outpatient care for severe asthma might cost $1,500 (which would pay for the innovative Community Asthma Initiative program), and the severity induced allowance for emergency or inpatient care might be $1,000. If 80 percent of emergency visits and hospitalizations are avoided, the outpatient caregivers earn a large windfall for their high-quality care—nearly $1,000 per patient. And the insurer also wins, since the total costs per child is $2,500 instead of $3,500.

Now that health insurance reform has passed, the wonky work of designing the right payment plans has begun. And the Prometheus model is a good start.

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Darshak Sanghavi, a pediatric cardiologist, is a fellow of the Brookings Institution and Slate’s health care columnist. Follow him on Twitter.