By Christopher Guadagnino, Ph.D

Published January 2000

• React to this article in the Discussion Forum.

Lewis S. Sharps, M.D., is president of Pennsylvania Orthopaedic Society.

PND: What is Episodic Care Management of Pennsylvania?

LS: It is a limited liability corporation that Pennsylvania Orthopaedic Society created approximately six months ago and is owned jointly between Pennsylvania Orthopaedic Society and the network division of Health South out of Birmingham. Its purpose is to bring the necessary infrastructure in order to administer the episodic case rate project that has been ongoing for approximately one year. That infrastructure requires claims and benefit management, NCQA credentialing capabilities, a sophisticated medical information technology component. In order to accomplish this within a reasonable period of time and within a reasonable budget, it was felt that a joint venture with a company that had that infrastructure in place, which also had a presence in the Pennsylvania marketplace and which was familiar with some of the regional issues, would allow us to get from point A to point B much more quickly and efficiently. The organization has a board of four members from Pennsylvania Orthopaedic Society and four members from Health South.

PND: Why is a new physician reimbursement model needed, in your view?

LS: At the present time there are a limited number of reimbursement methodologies that are out there. Managed care has historically tried to ratchet down costs through either capitation or through arbitrary reduction of fee for service in which the reimbursement has been continually decreased. The problems that we’re faced with right now are the ability to deliver a high quality orthopaedic product in an environment in which the reimbursement levels are extremely low as based on national statistics. The most frequently asked question that we receive in the Pennsylvania Orthopaedic Society is, "What is the Society doing to address reimbursement?" And looking at the various alternatives that are out there, episodic case rates appears to be the most viable alternative to address the issue of reimbursement. Also, capitation drives the incentives in the wrong direction. Under capitation, from an orthopaedic standpoint, you would do better if you didn’t take care of patients—it’s one of the reasons capitation has not done well nationally and has stayed somewhere between a six to nine percent market penetration.

When we were originally presented in June 1998 with a very significant reimbursement cut by Independence Blue Cross we went down to senior management of IBC and presented the concept of the Pennsylvania Orthopaedic Society looking for creative solutions to control costs independent of arbitrary reimbursement cuts. Ways in which the Society could work with a managed care company to solve some of their cost problems and at the same time maintain sufficient reimbursement to allow the orthopaedic surgeons to continue to provide the highest quality care possible. That was the incentive and the original germ behind this entire process.

PND: What does the episodic case rate approach entail and how it can overcome the problems you’ve outlined?

LS: It is a risk sharing model that, in my opinion, most appropriately creates goal alignment between the payer, the physician and the patient. To date, I believe that managed care has not been able to do that. A global episodic 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 which starts it to a conclusion event. The episodic case rate also includes the cost of potential complications. So, if there are no complications or fewer complications, there are, in turn, savings. By creating a system that delivers efficient care with emphasis on decreased morbidity and complication, goal alignment exists between the patient, the physician and the insurer. It is in all parties interest to efficiently treat patients and most importantly for them to do well.

PND: Can you give an example of how the approach works?

LS: Look at total knee replacement, which has a known percentage of complications associated with it. The average length of stay in Pennsylvania is somewhere in the neighborhood of 5.2 to 5.5 days. If you can decrease the length of stay and move the patient into an appropriate subacute care facility at an earlier point with proper pre-operative education and proper discharge planning and utilization review and, at the same time, start to get data to look at the complication rates, you can start to have an impact on the facility costs, on the complication costs and in the end deliver a product that has a potential to be of higher quality with less cost.

The global episodic case rate facilitates that process. Number one, there’s a medical advisory board, which the Pennsylvania Orthopaedic Society creates and totally supervises. It is responsible for reviewing utilization and claims-based data, responsible for network development and most importantly it is responsible for educating the members of the Society who participate within the process as to how it works and what the clinical guidelines are that we’re following. So, an educational component across a broader geographic area is now introduced that hasn’t been there to date.

The other thing that episodic case rates generate is claims-based data: outcomes based upon review of very efficient data. Many academies and organizations have attempted to create clinical pathways and outcome data. Historically, those initiatives have ended up being put on the shelves or sitting in drawers and no one ever uses them. And the reason is that most pathways and clinical algorithms and outcomes have been created in an academic vacuum and really don’t take into account the large volume practices or a busy physician’s practice. These outcome tools are also extremely expensive to generate. What you get from episodic case rates is claims-based data by default. You start to get data to review based upon additional claims after the initial surgical event. The outcomes from the surgical event are tracked from a claims-based platform. That’s one of the reasons why we needed a strategic partner working with us that had the computer capability to do claims-based data management. So, by default, this model relies upon a claims-based system which in turn generates information that we can analyze and track and pass on through to the medical advisory board and back to our own members for review.

PND: How would price for medical services be set under the episodes of care approach?

LS: The price is set by reviewing the historical costs of the payer, whether it’s in the commercial insurance line or workers comp, given the fact that each procedure that’s done in a given geographic area has a historical cost attached to it. The global case rate 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. All of those are added together to come to a single number. You then have to factor in an adverse risk pool or outcome fund. You have to look at the overall components and determine if indeed there’s the capability to provide the same or higher level care in a more streamlined manner. If there is, you have to then look at the potential savings from the streamlining of that model and determine if those savings are sufficient to cover the administrative costs that are involved.

There is a also a quality incentive plan (QIP). The QIP is administered by the LLC and measures patient satisfaction and functional outcome. This represents another measure of data and serves to make certain that the patient’s clinical course is enhanced by this new reimbursement model. The additional reimbursement is conditional upon a favorable QIP profile.

PND: Would that price be the same for all orthopaedists across the state?

LS: No. There’s no one insurance company that covers all orthopaedists across the state. Within a given insurer, unless the insurer has cut a separate contract with a given group, which to date is not very common, the professional fee should be the same across a given area in which an insurer has responsibility. But the episodic case rate for a given procedure varies enormously for a payer according to the geographic region. Hospitals have different contracts. Hospitals have different costs. Some hospitals’ charges for a given procedure are significantly higher than others’ for various reasons.

PND: Could the episodic rate approach be extended to primary care services?

LS: The global episodic case rate model lends itself predominately to specialty areas that have high volume and technically dependent services, such as orthopaedic surgery, cardiology, GI. Where episodic case rates do lend themselves well on a primary care level is as a disease management tool. Episodic case rates and disease management have many things in common. You can look at the costs that are inherent, for example, in diabetes and asthma as specific diseases within the continuum of health care. You can create a carve out for asthma or diabetes with a given payer. The payers have an understanding of what those diseases cost them on a yearly basis. There’s the ability to generate a global episodic case rate for that specific disease entity by efficient management, thereby lowering the cost. And the question then becomes, Do you have a mechanism by which to drive any economic benefit for doing that back to the physician?

PND: How is it possible, under the episodic case rate approach, for payers to be saving money and providers to be making more money at the same time?

LS: The costs have to come from some part of the health care dollar in order to result in savings to the payer and improved reimbursement to the physicians, unless the health care dollar were to become larger, which over the past many years it has not. Therefore, you have to look at where the streamlining is going to take place. When you look at episodic case rates your options are to decrease length of stay or decrease the post acute care continuum, and/or decrease complication. If you decrease a clinical component, you have to substitute an appropriate alternative that results in the same outcome. Pennsylvania Orthopaedic Society and the payers are both concerned that the outcomes remain unchanged, that the patient doesn’t suffer because of any change in reimbursement methodology. So, there are potential savings for the provider in three areas: from the facility, from the post acute care spectrum and from decreased morbidity or complication. Payers save under a single price that covers the entire continuum for that surgical procedure. That single price would be less than their historical experience.

PND: Will the episodic case rate approach be done through health insurance companies?

LS: It could be done through a health insurance company or it could be done through a self-insured workers comp company. What global episodic case rates offer the self-insured company is price stability, the ability to set aside appropriate reserves for the coming year so that the reserves are not too high and they know what it’s going to cost them. Where this has significant value in workers comp is the ability to price the frequency of injuries at a specific number which can be slightly lower or even identical to what the self-insured company is presently experiencing, but it remains stable. They understand that the re-operation that might take place within that defined period of time doesn’t get reimbursed the second time. The provider is responsible for the patient completely from the trigger event to the conclusion event.

PND: Why is it better for physicians?

LS: It’s better for physicians because, for the first time, they have the opportunity to regain control over the process. The clinical decision-making now is physician-driven. The clinical pathways are physician-driven. The medical advisory board that oversees is physician-driven by their own peers. The ability to derive economic benefit from delivering efficient care suddenly makes its way back into the provider portion of the equation, which historically has not been happening. If a physician is capable of delivering a high level product in an efficient manner and with a low complication, they deserve to be reimbursed at a higher level.

PND: This model seems to remove managed care’s mechanism of care rationing. What’s to prevent physicians from providing unnecessary care?

LS: The standard primary care gatekeeper model, if it’s in place, continues to remain in place under this. The trigger event occurs once the patient is pre-certified. There has already been a decision made to refer the patient to the specialist or the patient elects to come to the specialist on their own. The specialist reviews the patient, reviews the necessary clinical data and makes a decision if surgery is appropriate. At that point there’s a pre-certification process, as there is with almost every payer in this area. Once that pre-certification process is completed, that becomes the beginning of the trigger event. This program does not decrease the frequency and doesn’t deal with the issue of appropriateness of care.

PND: What has been the experience in implementing this model elsewhere in the country?

LS: It has been done by HCFA at a number of trial centers in Boston, Portland and Ann Arbor, looking at CABG procedures and total hip replacement. What they found was that they actually had equal or better outcomes with physicians, in turn, making more than they did before and HCFA also saved money. So it can be done. It’s been done in the Texas market in a limited way with some of the large self-insured companies. Texas Instruments has had it on a limited basis covering approximately 30,000 lives. We’ve interviewed the orthopaedic surgeons involved in that program and they were delighted with the project. Their only complaint was that there weren’t more patients in the process. Their reimbursement had gone up, the company was satisfied and they wanted to see the project grow. It’s presently taking place in the Pittsburgh market. Highmark sent out a letter in early December to the orthopaedic surgeons requesting meetings stating that they’re going to be implementing a new form of reimbursement methodology based upon episodic case rates. Highmark is joint venturing with another company to provide Highmark the necessary infrastructure to roll this out.

PND: Have you approached Highmark with this program?

LS: To be able to do this in the Pittsburgh market certainly is on our radar screen because it’s one of the areas that has the largest density of business as well as orthopaedic surgeons. So it’s an area that we would have a significant interest in, as we do in the five county region around Philadelphia, for having this project move forward.

PND: Have you approached any other major health insurers in Pennsylvania with this project?

LS: We have in the Philadelphia, five county area and those negotiations are ongoing. We’ve also approached some very large insurance brokerage companies statewide and third party administrators who look upon this as something that they can offer their self-insured companies to help stabilize their costs.

PND: What is the status of your discussions?

LS: We’re hoping to have a contract within the next six months.