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Toward a Business Case for Performance Improvement

The American Journal of Managed CareDecember 2011
Volume 17
Issue 12

Recent legislative action and private sector innovation, driven by the unsustainability of the current system, may gradually create a business case for performance improvement.

Between 2007 and 2009, Intermountain Healthcare, an integrated delivery system in Salt Lake City, Utah, used delivery optimization techniques to standardize lung care for premature infants born in its hospitals. These efforts yielded a 75% reduction in the use of postnatal mechanical ventilation, an improvement in quality that generated hundreds of thousands of dollars per year in savings.1 Since 1995, Intermountain has successfully undertaken more than 100 similar performance improvement initiatives, resulting in improved clinical outcomes and lower care delivery costs.2 Yet because payers reimburse healthcare delivery organizations based on the episodes of care that these quality improvement initiatives seek to reduce, investments in quality and efficiency improvement have often resulted in revenue losses for Intermountain and a large share of cost savings accruing to commercial health plans and government payers.

As the Intermountain case illustrates, healthcare delivery organizations have historically faced high net costs resulting from improvement, due to a combination of largely unreimbursed input costs (eg, hiring care coordinators), realization of revenue reductions when improvements are successful (eg, reductions in avoidable hospital admissions), and the accrual of most of the cost savings to insurers or government programs. As a result, critical tools that are known to improve care and produce greater efficiency—electronic health records and information sharing between providers (health information technology [HIT]), care process redesign, and business process management—are underused because of the longstanding misalignment of incentive between the historically dominant payment policy and the means to improve efficiency and quality.

A new legislative and market context, driven by the perceived unsustainability of an industry whose spending growth rates have exceeded those of the rest of the economy for several generations without proportionate gains in quality and health, has the potential to gradually establish a stronger business case for performance improvement. The current strategies for testing and bringing to scale innovative HIT and provider payment models in the public and private sector are intended to gradually lower the net costs that healthcare delivery organizations like Intermountain face when their efforts to redesign care processes and improve outcomes are successful.

First, the Health Information Technology for Economic and Clinical Health Act provisions of the American Reinvestment and Recovery Act subsidize the adoption of HIT in the delivery of care, thereby temporarily offsetting some of the unreimbursed input costs that healthcare delivery organizations face when modernizing their information systems. This law provides up to $63,750 in temporary payment incentives for individual physicians and more than $2 million for hospitals to demonstrate the meaningful use of electronic health records.3 “Meaningful use” creates a minimum floor for improvement by incentivizing physicians and hospitals to apply HIT to record health information and improve processes that can lead to better outcomes.

Second, several provisions in the Affordable Care Act and new payment innovations among private payers and delivery organizations are together introducing new reforms in the market, including accountable care organizations (ACOs), a range of bundled or “episode-based” payment models, and expanded implementation of advanced patient-centered medical homes. The Affordable Care Act also chartered a new Center for Medicare and Medicaid Innovation in the Centers for Medicare and Medicaid Services that is testing and will scale new models of care and payment that prove effective. Similarly, many state Medicaid programs (eg, those in Utah, Colorado, and Oregon) are experimenting with new forms of “accountable care” payment arrangements as alternatives to “pure” fee-for-service systems.

Together, temporary federal subsidies for HIT and new provider payment innovations in the public and private sectors are designed to gradually alter the economics of performance improvement, making healthcare delivery organizations’ pursuit of excellence more technically and financially viable than was possible in a health system characterized by paper records and fee-for-service payments.

To be clear, as capital investments, HIT implementations, and new care delivery strategies are implemented in the short run, most healthcare delivery organizations participating in new payment models are unlikely to see their earnings grow as rapidly as they might in an environment of unfettered fee-for-service payments. For example, consider an ACO model offering healthcare delivery organizations 50% of the savings it generates from improvements once the first 2% in savings is achieved. (These are the basic parameters of the Medicare Physician Group Practice Demonstration, an early ACO-like model launched in 2005.) If the ACO earns 5% in gross cost reductions through, for example, implementation of new care coordination programs that achieve reductions in hospital admissions,4 it will receive a 1.5% return in sharedsavings bonuses—not accounting for the infrastructure and other human investments that will be required to achieve these savings.

Accordingly, in the short run, reforms that support HIT adoption and the proliferation of new payment models should not be viewed as mechanisms for physicians and healthcare delivery organizations to achieve dramatically higher earnings. 5 These models would be better viewed as mechanisms to support delivery organizations’ transition to care models delivering better-coordinated, safer, and more efficient care by lowering the net costs that providers face when investing in successful clinical improvements. Hence, even modest shared-savings payments from new payment models can help temporarily offset some of the input costs and revenue losses

for delivery organizations that undertake efforts to improve quality and lower per capita healthcare costs.

This notion is consistent with the experience of the 10 demonstration sites that participated in Medicare’s Physician Group Practice demonstration,6 implemented in 2005, and the early experience from the Office of the National Coordinator for Health IT’s Beacon Communities program, implemented in 2010.7 Healthcare delivery organizations and other stakeholders participating in the 17 Beacon Communities are using federal funding to design and implement new long-term strategies to prevent and manage chronic disease, and to reduce avoidable emergency department utilization and hospital readmissions. Hospitals and physicians in these communities, including Intermountain as part of the Improving Care through Connectivity and Collaboration Beacon Community in Utah, are actively considering new provider payment programs with public and private payers with healthcare payers that can best accommodate the longterm sustainability of these iniatives.

While in the short run new payment models should be viewed as mechanisms to lower the net costs that delivery organizations face to achieve improvements, over a longer time horizon they should make it possible for healthcare organizations that deliver high-quality, efficient care to prosper. An increasing number of healthcare delivery organizations will develop the HIT, performance measurement, and process improvement capabilities to more aggressively improve outcomes and lower per capita costs. In turn, these changes will make delivery organizations increasingly capable of participating in more advanced payment models— such as partial capitation and other forms of risk sharing—that will be uniquely enabled by HIT and the data and analytic capabilities it supports.

The precise long-term impact of simultaneously modernizing information systems and payment models is uncertain, although directionally positive. The policy and technical issues related to implementation—for government, healthcare delivery organizations, and commercial payers—remain incredibly complex.8 Beyond the government’s direct role in promulgating new regulations to implement new HIT and payment programs and the private sector’s efforts to innovate in a changing marketplace, improvement projects like those developed at Intermountain need to be replicated in thousands of hospitals and tens of thousands of physicians’ offices nationwide—no small feat.

Despite these challenges, the fates of HIT and payment reforms are linked. Achieving large-scale improvement in a current system whose spending is increasingly out of balance will require taking full advantage of HIT and other delivery optimization tools available in the modern age and embedding them in payment systems that consistently lower the costs that healthcare delivery organizations face in achieving better care, improved health, and greater value.

With effective collaboration, we may be gradually building toward a new business case for performance improvement that can result in the high-value, high-quality system of care that is technically possible and that our nation deserves.


The authors gratefully acknowledge the contribution of James Walker,MD, chief health information officer at Geisinger Health System, for offering helpful comments and suggestions on an earlier draft of this commentary, as well as to the anonymous reviewers whose contributions improved it. This article reflects the perspectives of the authors and does not reflect any official positions or policies of Brigham and Women’s Hospital or the Office of the National Coordinator for Health Information Technology.

Author Affiliations: Department of Health Policy and Management, Gillings School of Global Public Health, University of North Carolina at Chapel Hill, Chapel Hill, NC (AM), US Department of Health and Human Services (AM), Washington, DC; University of Cincinnati College of Medicine, Cincinnati, OH (CB); Department of Medicine, Brigham and Women’s Hospital and Harvard Medical School, Boston, MA (SHJ).

Funding Source: None.

Author Disclosures: The authors (AM, CB, SHJ) report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Concept and design (AM, CB); analysis and interpretation of data (CB); drafting of the manuscript (AM); and critical revision of the manuscript for important intellectual content (AM, CB, SHJ).

Address correspondence to: Aaron McKethan, PhD, University of North Carolina at Chapel Hill, Chapel Hill, NC 27514. E-mail: amckethan@gmail.com.

1. Leonhardt D. Making health care better. New York Times Magazine. November 3, 2009. http://www.nytimes.com/2009/11/08/magazine/ 08Healthcare-t.html. Accessed April 19, 2011.

2. James BC, Savitz LA. How Intermountain trimmed health care costs through robust quality improvement efforts. Health Aff (Millwood). 2011;30(6):1185-1191.

3. Blumenthal D, Tavenner M. The “meaningful use” regulation for electronic health records. N Engl J Med. 2010;363(6):501-504.

4. Naylor MD, Aiken LH, Kurtzman ET, Olds DM, Hirschman KB. The care span: the importance of transitional care in achieving health reform. Health Aff (Millwood). 2011;30(4):746-754.

5. Haywood TT, Kosel KC. The ACO model—a three-year financial loss? N Engl J Med. 2011;364(14):e27.

6. Iglehart JK. Assessing an ACO prototype—Medicare’s Physician Group Practice demonstration. N Engl J Med. 2011;364(3):198-200.

7. McKethan A, Brammer C, Fatemi P, et al. An early status report on the Beacon Communities’ plans for transformation via health information technology. Health Aff (Millwood). 2011;30(4):782-788.

8. Ginsburg PB. Spending to save—ACOs and the Medicare Shared Savings Program [commentary]. N Engl J Med. 2011;364(22): 2085-2086.

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