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Project Tests Direct Contracting for Surgery

Robert D. Sutton, for HealthLeaders Media, March 29, 2010

A little-noticed announcement in February may be a watershed event affecting who, what and how complex surgery is provided throughout the United States. That announcement discussed a new relationship between Lowe's, the nation's second-largest home improvement retailer, and the Cleveland Clinic to direct all heart surgeries for Lowe's employees and dependents to the Clinic.

This three-year deal is to provide heart surgery to all Lowe's employees and dependents. To encourage participation, Lowe's is prepared to pay for the travel of the patient and one family member and to discount the employee's co-pay and deductible.

For the Cleveland Clinic, the approximately 125 more patients annually is just a blip on the radar to the over 40,000 cardiac surgeries they perform. However, if just the top-50 companies by size in the United States, representing 12.3 million employees plus an equal number of dependents, were to send their cardiac surgery business any single health provider, then another 15,000 cardiac surgeries would be siphoned away from community hospitals. If other types of surgery like orthopedics adopt this concept, the impact and the role of the community hospital would change drastically.

Aiding self-insured companies is the emergence of Personal Health Assistance (PHA) firms. These firms seek to contract with large self-insured companies to reduce healthcare benefit expenditures by managing costs and outcomes. PHAs assist care coordination throughout the healthcare system including preventive care, pre- and post-care, and episodic care. Potentially, these PHAs will begin to represent self-insured companies to contract with providers for disease management. With proper information, technology, and clinical expertise the PHA can be positioned to contract with the lowest overall cost providers measured by managing the diagnosis, not the procedure.

Understanding the challenges to hospitals
If self-insured companies, insurance companies, and/or PHA firms, are able to direct complex surgeries to providers with the lowest cost and best outcomes, this creates significant challenges for hospitals including:

  • Steerage of "lucrative" surgery business from community-based providers
  • An outdated reimbursement system that rewards physicians and hospitals on volume
  • Inadequate quality and cost measurement
  • Inadequate capabilities to contract with multiple, large self-insured multi-nationals

Hospitals that perform few complex surgery cases annually rely on high margin surgeries to make up for losses in other services like obstetrics. Over the last decade many hospitals have made investments in equipment, physicians, and infrastructure to grab some market share on high margin complex surgeries. These services have significant fixed costs that require a minimum volume to achieve a return on investment. Because these volumes remain low, the average cost is higher than in high volume settings like the Cleveland Clinic.

Our current reimbursement system rewards hospitals and physicians for volume. Although CMS and some private payers are piloting quality and outcome payments, the reimbursement system tends to be volume oriented. Also, with relatively few exceptions like the Cleveland Clinic, Mayo Clinic, Geisinger, etc., hospitals and physicians are paid separately. This archaic payment system provides little incentive to manage disease.

Many hospitals across the country have limited technological capabilities to truly measure their cost and quality outcomes. Information technology in hospitals is typically a "Best of Breed" purchase. The result is disparate systems within the hospital that rarely interact. Efforts to match statistics against billing systems and accounting systems create eye-popping variances. Further, when data is funneled into a hospitals' decision support, standards for cost are rarely, if ever updated. This limited cost data puts the hospital at a significant disadvantage in the bid process.

Another big challenge for providers is their capacity to bid on request for proposals to the self-insured companies, or PHAs. While hospitals are well-positioned to negotiate with insurance companies, they are often reactionary negotiations. After an insurance company provides a payment scheme, the hospital or physician counters with a proposal. The lack of expertise and information presents healthcare providers with a distinct disadvantage.

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