By Christopher Guadagnino, Ph.D.

Alan H. Gradman, M.D., governor of the board of the American College of Cardiology, western Pa. region

Published March 2000

• Implementing a new physician reimbursement paradigm
  
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Physician reimbursement based on episodes of care has been held out as a way to decrease the overall cost of medical care, while at the same time increasing quality of care and physician reimbursement. While some physicians, such as Pennsylvania Orthopedic Society President Lewis S. Sharps, M.D., advocate this approach, they acknowledge that the way Independence Blue Cross has been implementing it over the past five years has slashed physician reimbursement and endangered quality of care, and they fear that Highmark Blue Cross Blue Shield’s plans may be similarly flawed.

Philadelphia-area cardiologists and gastroenterologists have seen their reimbursement cut in half since Independence Blue Cross (IBC) replaced fee-for-service on its commercial and Medicare HMO panels with capitation in 1994 and 1995. Some believe that capitation has, by its very design, eroded the quality of care provided.

In western Pa., Highmark said it plans to change the way it reimburses cardiologists, orthopods and ophthalmologists in Allegheny and 16 surrounding counties for services provided to Highmark’s SecurityBlue Medicare HMO patients, with future plans to extend the program to other managed care product lines and to other counties. The new approach, although not the same as IBC’s, raises some of the same concerns about unilateral reimbursement changes using a mechanism that some physicians believe may negatively impact patient care.

Physicians themselves are pursuing yet a third approach to fundamentally change the mechanism of reimbursement to some specialists that is similar in some ways to Highmark’s plan, but has key differences. The effort is being spearheaded by Sharps.

It will be up to physicians to determine how to adopt episode of care reimbursement: whether forging it themselves or seeking avenues of unity to help shape the models imposed on them by insurers.

IBC’s Episode of Care Capitation

In 1994, IBC launched its Quality Focused Cardiology Care program, designed to control overutilization of specialty care, and fundamentally changed the way it reimburses cardiologists in southeastern Pa. for services to its Keystone Health Plan East (KHPE) commercial and Medicare HMO patients. A similar program for gastroenterologists began a year later.

The program offered cardiologists the opportunity to accept an "episode of care" (EOC) payment, or a flat fee covering 90 days of cardiology services for every patient referred to their practice by a KHPE primary care physician. As a 1994 contract addendum to KHPE’s participating provider agreement for the program states: "Such payment shall be full and complete compensation for all Cardiologist Services provided to members regardless of the aggregate level of Cardiologist Services used by such members."

The EOC payment covers the professional component of all cardiologist services including invasive and interventional cardiac services (inpatient and outpatient); and the facility/technical component of all outpatient cardiology monitoring and imaging services with the exception of outpatient cardiac catheterization services.

The EOC reimbursement program was designed to reward efficient providers while protecting physicians treating the sickest patients and reflecting population differences in expected physician work and out-of-pocket costs, according to materials used by KHPE to present the program to physicians.

The program’s EOC reimbursement is drawn from a fixed pool representing KHPE’s historical cost of treating its cardiology patients, divided by the number of EOCs triggered by referrals and adjusted for case mix severity and quality incentive rates based on a practice’s utilization patterns, notes James G. Kitchen, III, M.D., who is part of a 30-physician practice in the Philadelphia suburbs and is governor of the board of the American College of Cardiology, Eastern Pa. region.

Kitchen has seen his EOC reimbursement decline steadily from about $520 in 1994 to $280 today, despite increases in overhead and medical costs since the program’s inception. As the number of patients covered by KHPE’s commercial and Medicare managed care plans has increased, the number of EOCs under the fixed budget has also increased, further diluting the amount of each EOC payment. The percentage of KHPE patients seen by Kitchen’s practice has grown from three percent when the EOC program started to 30 percent today, he says.

Although KHPE told physicians at the outset that the EOC model and reimbursement amount would change to reflect patient needs as practice norms and treatments change, one cardiologist who asked not to be identified said: "I’m currently getting paid 50 cents on the 1994 dollar."

Despite KHPE’s use of specialty-specific peer review groups for the EOC program, composed of five to ten participating physicians and a dedicated medical director, the program continues to draw other criticisms from physicians.

Although KHPE issues EOC payments on a monthly basis, Kitchen says his practice has experiences payment delays longer than 90 days for specific patients.

The program encourages riskier care, according to a gastroenterologist who practices in the Philadelphia suburbs and asked not to be identified. Rather than having to pay out-of-pocket for a hospital’s facility fee, physicians may perform some procedures, such as colonoscopy, in their office that may be more appropriately done in a hospital, he observes.

"The program could work equitably if physicians get a lot of referrals that don’t require procedures or if it were used for chronic disease management, where how often I see a patient is tied to how well I treat them," he adds. "But I currently have no say in how many patients are referred to me and my payment is tied to treatments delivered by physicians in other practices."

Beyond the economic loss to physicians who would lose KHPE patients by declining to participate in the EOC program, physicians may be further pressured not to drop out by hospitals that threaten to recruit competing physicians to its medical staff.

Solo physicians lost KHPE patients by default, as the EOC program was made available only to practices consisting of two or more physicians, notes Julian Katz, M.D., president of the Pennsylvania Society of Gastroenterology.

The program may also promote gaming the system, i.e., having a patient come back in 91 days so that a new EOC payment is triggered, adds Katz.

While the program has the potential to achieve efficiencies in medical services and reduction in costs, Katz believes it remains flawed because it manages care in a financial way, which might inappropriately reduce necessary care by encouraging physicians to order less expensive tests. Despite minor tinkering, the program has yet to offer adequate severity adjustments for its reimbursement, he adds.

IBC did not return phone calls requesting comment.

Highmark’s Case Rate Payment Proposal

An EOC reimbursement model has been proposed by Highmark Blue Cross Blue Shield in western Pa., which plans to institute specialty-adjusted severity case rate payments to cardiologists, orthopods and ophthalmologists in Allegheny and 16 surrounding counties beginning July 1 for services provided to Highmark’s 148,000 SecurityBlue Medicare HMO members.

Highmark’s rationale for implementing the model is to rein in double-digit price inflation for medical costs without issuing across-the-board cuts in reimbursement, says Anthony Killian, M.D., Highmark’s medical director for clinical program development. Responding to studies showing significant regional variations in patterns of procedure rates and expenses across physician practices despite a similar case mix-adjusted patient population, "We thought that attacking variation could be a good opportunity to address some of the cost variations, as well as addressing quality," he adds. "All we are hoping to accomplish is to pay fairly for the right care to appropriate patients."

Like KHPE’s model, Highmark’s case rate approach would set a separate, fixed budget for the professional fees of each specialty based on the amount it paid out in previous years for that specialty under fee-for-service. The basis of the payments, however, is quite different from Keystone’s.

Highmark will allocate the budgets for each of the three specialties according to severity-adjusted ICD9 diagnosis codes using algorithms established by Adesso Healthcare Information Services, Inc., a software company from California, which also contracts its services to Aetna U.S. Healthcare, Humana and PacifiCare.

Severity adjustments include place of service, degree and intensity of resources used, and age and sex of the patient, according to Richard Longo, Highmark’s vice president of provider initiatives. Approximately 20 percent of each specialty’s fixed budget will be devoted to a separate reimbursement pool that covers subspecialty-level procedures and tests under Highmark’s current fee-for-service schedule, he adds.

For example, a diagnosis of angina would be reimbursed under the diagnosis case rate, but infrequent procedures such as those that only an electrophysiologist would perform would be reimbursed separately out of the fee-for-service procedure pool.

While the overall budget for a specialty is fixed, what falls under the diagnosis, procedure and testing categories is subject to revision once the case rate methodology evolves in the market, Longo notes.

Highmark also intends to create a physician advisory board for each specialty, each consisting of 10 to 12 physicians selected by Highmark to provide input about variables affecting allocation methodologies.

Highmark’s announcement of its intent to implement the case rate reimbursement model has met with some vocal opposition by physicians. The initial April 1 launch has been pushed back to July 1 to give Highmark more time to work out the details of the program sufficiently to address physician concerns.

Some physicians believe the case rate model amounts to inappropriate care rationing. "Its exactly the sickest patients who will suffer under this program—those already identified as having a cardiac problem," says Alan H. Gradman, M.D., governor of the board of the American College of Cardiology, western Pa. region. Gradman says that Adesso has achieved a 27 percent reduction in utilization of health care services in other markets and believes the model encourages physicians to do the least amount of services by distorting the incentives. "How is a cardiologist going to spend three hours in a cath lab doing a complex angioplasty when he or she can send everybody to surgery because they have a separate pool?" he wonders.

Gradman acknowledges that overutilization by some physicians is a problem and believes that physicians are not opposed to utilization management approaches that are focused directly on patient care quality, such as cholesterol and lipid control programs. But American College of Cardiology members fear that Adesso’s algorithms used to allocate Highmark’s fixed budget are not adequately tested for impact on patients, he notes.

Finally, Gradman says that physicians feel they are being pressured into the program unfairly, given Highmark’s market dominance and its requirement that physicians accept the case rate program or drop out of its Keystone Health Plan West panel, which includes Highmark’s HMO.

The western Pa. chapter of the American College of Cardiology sent a letter to Highmark and to the Pa. Health Department indicating its concerns. Health Department approval is necessary for Highmark to implement the program.

The Pennsylvania Academy of Ophthalmology circulated a notice to its western Pa. members indicating that Highmark’s case rate payment program could affect 30 to 40 percent of some ophthalmology practice revenues, that Highmark has not offered any funding schedule guarantee or assurance that the fixed budget would increase if utilization or enrollment increases, that the program disincentivizes surgery and has the potential to lead to dumping of the sickest patients, and that accounts receivable are difficult to track under the system.

Orthopods in western Pa. expressed similar skepticism about the program and are holding meetings with other professional society members and with members of the other two affected specialties to explore their options, says Jeffrey A. Baum, M.D., second vice president of the Pennsylvania Orthopedic Society.

Baum points out that the Adesso model is not working well in some other markets. Logistical difficulties and pressure from physicians have caused United Healthcare to cancel a case rate reimbursement contract with Adesso for Denver-area physicians. Among the reasons cited by United Healthcare for ending the two-year-old Adesso contract, which covered between 350,000 and 400,000 commercial HMO patients and applied to all 130 orthopedic surgeons and 110 cardiologists in the Denver region, was that outsourcing the program to Adesso produced administrative difficulties and caused payment delays to physicians, who in turn had difficulty adjusting their individual billing systems to meet Adesso’s data requirements, according to Jeri Jones, a United Healthcare director of health care delivery systems in Colorado.

After experiencing a significant proportion of claims processing errors and discovering instances in which Adesso had used erroneous payment calculations, a large number of physicians, including 60 percent of the region’s orthopods, approached United three months ago and negotiated new contracts that excluded Adesso’s program, said Peter McNally, administrator of Hand Surgery Associates, which is part of a 45-member IPA for orthopedic surgeons in the Denver area. McNally estimated that 15 to 20 percent of referrals to Denver’s orthopedic surgeons are United enrollees.

Highmark believes, given that resource utilization by physicians can be described as a bell-shaped curve, that approximately 70 to 80 percent of physicians will receive higher reimbursements under the case rate reimbursement methodology than under Medicare, says Longo.

Highmark intends to make adjustments to the reimbursement rates as data on under- and overutilization becomes available through use of the methodology and in consultation with its physician advisory boards, Longo notes. Physicians on those boards will have access to all of the network utilization and financial data, but will be required to sign a statement to protect its confidentiality, he says, noting that certain information about payment methodology is licensed and proprietary to Adesso. Highmark also intends eventually to share aggregate data across its physician network and will consult its advisory board on how it will be shared, adds Longo.

Similarly, Highmark will consult its advisory boards to reassess its overall budget for a specialty and make adjustments if required, in the event of a significant change in medically necessary demand or number of patients enrolled, or if new advances in technology come to the fore in a calendar year, says Killian.

What constitutes appropriate care is tied to Highmark’s observation of large regional and local variations in care delivered to patients, according to Killian. Using profiling data, Highmark will continue to put the burden on a specialist who spends three times as much or uses three times as many procedures as his or her peer group in caring for patients with similar clinical presentation and severity, he adds. That approach, Highmark maintains, ensures that utilization review and reimbursement decisions remain a peer-focused activity among physicians who provide their clinical input.

As for how Highmark will avoid the logistical difficulties and payment delays experienced by United Healthcare and its physicians in Denver, "There has to be a very strong commitment on the part of an insurance company to provide the data, infrastructure and level of support to Adesso so that they can, in fact, efficiently and appropriately adjudicate the claims. We are committed to do that with Adesso," says Longo.

The new methodology will be virtually transparent to physicians, who will continue to submit HCFA 1500 forms to Highmark, Longo says, while receiving monthly reports that will help physicians adjudicate claims and post against accounts in their practice management system.

In response to the view among physicians that Highmark presented the case rate model to them as a done deal, Killian concedes that Highmark, as many other payors, has traditionally reserved the issues and details of reimbursement as their own prerogative. He draws the comparison to how the federal government didn’t ask physicians or hospital administrators if they liked DRGs.

"We did adopt this methodology and we didn’t seek a lot of input from outside physicians. That said, we’re doing our best to involve physicians to help us execute this to make sure that all interests are fairly represented," Killian says.

Highmark will not allow physicians to reject participation in the case rate program for SecurityBlue HMO patients without also dropping participation in Keystone Health Plan West HMO because the two products are part of a single contract, explains Longo, who also notes that participation in Highmark’s indemnity and Premier Blue PPO plans are not affected because they have separate provider contracts.

Physician Recourse and Alternatives

The western Pa. Chapter of the American College of Cardiology’s letter to Highmark and the Pa. Health Department’s Bureau of Managed Care lists its concerns about how payment methodologies and administration of Highmark’s case rate payment program may affect quality and access to care, about Adesso’s involvement in the project and about Highmark’s requirement that physicians drop out of Keystone Health Plan West HMO if they decline the case rate program for SecurityBlue.

The College is considering legal options, including sending a letter to the Pa. Insurance Department maintaining that the program may violate the Unfair Trade Practices Act, says Gradman.

The College is also considering launching a large-scale public education campaign to garner support for its concerns, Gradman adds.

Recognizing the financial cost to an individual practice of saying no to Highmark’s KHPW patients, Gradman believes that the program can effectively be blocked if 25 percent of cardiologists say no. The challenge is how to engineer that collective response without violating federal antitrust law and without exemption from antitrust that would be granted by legislative initiatives: the Campbell bill at the federal level and three separate State Action Doctrine bills in the Pa. legislature.

It was unified action by large IPAs, which together represented 60 percent of Denver’s orthopods, that leveraged United Healthcare’s dismissal of the Adesso contract.

An IPA representing some 30 percent of ophthalmologists in the Delaware Valley region may have been instrumental in discouraging IBC from extending their episode of care program to that specialty two years ago. KHPE had sent a letter to the region’s ophthalmologists asking them to sign on to the program, but suspended the effort weeks later, says Samuel H. Galib, M.D., an ophthalmologist in Paoli and Bryn Mawr and founder and first president of Pennsylvania Eye Care IPA, LLC.

"Our idea was to preempt them with an alternative plan," Galib says, explaining how his IPA had worked out its own alternatives for acceptable episode of care approaches, including a specific global reimbursement figure for a full capitation approach and global reimbursement figures for an approach that would reimburse a spectrum of patient care for specific diagnoses.

A third-party messenger model is another mechanism available to physicians to respond in a unified way, and Gradman says that cardiologists would be interested in exploring such an option, as long as negotiations do not accept any form of capitation.

Given the problem of systematically declining reimbursement over the past few years, and dominant insurers saying, "Take it or leave it," some physicians may start to talk about unionizing, says Baum, who notes that representatives of several large orthopedic practices are not happy about the Highmark proposal. He also notes that the Federation of Physicians and Dentists was scheduled to hold meetings with western Pa. physicians in late February. Baum points to how united physician action was effective in modifying unilateral reimbursement cuts by IBC to orthopods in southeastern Pa. last year.

Kitchen thinks a third-party messenger model could be effective, but worries that insurers can refuse to negotiate with a messenger who represents many physicians, effectively delaying negotiations for years by agreeing to negotiate only with messengers for individual practices.

Another option is for physicians to explore alignments of interest with hospitals with respect to episode of care reimbursement models and ask hospitals to support the physicians’ interests when hospital negotiate their contracts with insurance companies, says Brenda Esopi, executive director of the Cardiovascular Alliance of the Delaware Valley, an IPA representing 75 cardiologists and cardiovascular surgeons, including Kitchen’s practice.

The Alliance sent letters to hospitals whose contracts expire at the end of the year requesting that they consider bargaining for adjustments to KHPE’s episode of care payment methodology, e.g., making some large ticket procedures part of a hospital’s global reimbursement rather than physicians’ reimbursement and ensuring timely reimbursements.

Physicians may also approach insurance companies with their own episode of care reimbursement methodology, as Sharps has done for orthopods in southeastern Pa. (See "Implementing a new physician reimbursement paradigm")

Whereas Highmark’s method of reimbursement is based on diagnosis codes, transferring to physicians the "probability risk" of having to spend more to treat sicker patients, Sharp’s global episodic care management approach bases reimbursement on specific surgical procedures. The global case rate is a single price that covers the entire spectrum of costs, including technical and professional, associated with a given surgical procedure over a defined period of time from a trigger event to a conclusion event, says Sharps.

"The global case rate," says Sharps, "is made up by adding the facility, the surgical fee, professional service pool—which consists of anesthesia, pathology, radiology, necessary medical consults—and the post acute care pool, which would be made up of SNF unit costs, home care costs, outpatient rehab costs. You then factor in an adverse risk pool or outcome fund and add a quality incentive plan."

Sharps is in negotiations with a major insurer in southeastern Pa. and with reinsurers for workers compensation, and hopes to have contracts for his program within the next few months. Should the program prove to be viable, Sharps would like to expand it to other regions of Pa., including western Pa., should Highmark’s model be unsuccessful, he says.