Episodes of Care - the New Frontier

Much has been written of late about the "evils" of managed care. Patient dissatisfaction with limited choice and quality of care is rapidly increasing. Physicians, too, voice serious concern about the loss of autonomy over patient care, and the erosion of the doctor-patient relationship crucial to successful treatment.

Moreover, courts, which are perhaps the least suited vehicle to define economic relationships, are now taking a more active role in sorting out the mess and imposing liability on managed care plans to promote accountability for a health care system some would argue has run amok.

To top it off, health maintenance organization and other managed care plans are faced with flat or dwindling profits, fueling questions as to whether "managed care" is indeed the panacea to all the nation’s health care ills. The net result is a growing health care paradigm which may not even work.

The Problem With ‘Gatekeeper’ Managed Care

The root of the problem is trying to force square pegs into round holes.

Under present models of managed care, insurers, such as HMOs and health insurers, effectively function as providers of medical care and make crucial medical decisions through mechanisms styled as "closed networks," "benefit management," "precertification," "utilization review," "medical directives," and "quality assurance."

Similarly, physicians and provider networks, while still providing medical care, increasingly function as insurers because they accept fixed, per-patient amounts (i.e., capitation and global capitation) to provide all the care a patient may require. In addition, health care providers frequently share in profits and losses from health insurance business through pools and other incentive arrangements designed to reduce costs and, thus, the amount of services delivered.

As a result, insurers and providers focus on restricting patient choice in order to cut costs, and patients, who traditionally have played an active role in selecting providers and shaping the course of treatment, frequently have little or no say in their care.

To compound the problem, the current regulatory system is not well-equipped to oversee these new "vertically integrated" vehicles for providing care. Insurance regulators find themselves monitoring entities that exercise medical judgment (insurers and HMOs), while health regulators often oversee persons and entities that assume health insurance risks (providers and risk-assuming provider networks).

Again, the result is a system with haphazard regulatory controls and widely differing levels of quality and patient protection.

Probability Risk And Technical Risk

The obvious answer is to reorganize how care is provided and financed, thereby positioning the different players to do what they do best and most efficiently. Under such a system, insurers would insure, providers would provide, regulators would regulate in their areas of expertise, and patients would choose.

The appeal of this simplistic approach is compelling. The starting point is understanding the difference between probability risk and technical risk.

Probability risk (insurance risk) is the risk assumed by one entity (the insurer) when it agrees, in exchange for a payment (premium), to do something of value for another (the insured) upon the happening of a contingent, future event. Premiums for similar risks are pooled, and the premium charged is calculated to be sufficient to fund the performance obligation from the pooled premium.

Therefore, probability risk is the risk that total premiums collected will be adequate to fund total performance obligations due upon the occurrence of contingent, future events. Capitation is an example of probability or insurance risk because a health care provider (insurer) agrees, in exchange for a fixed, per member per month payment (premium), to assume the risk of providing potentially unlimited amounts of defined health benefits (something of value) to the patient (insured) upon the happening of sickness or injury (a contingent, future event).

Insurers are expert at managing actuarially determined, probability risk, while health care providers most certainly are not.

In contrast, technical or "efficiency" risk is the risk of efficiently producing a good or service. It is not the risk that premiums will be adequate to fund performance shaped by contingent, future events, but rather the risk that a good or service can be produced at or below a fixed, per unit price. For example, when a provider agrees to perform a medical procedure for a defined fee (i.e., a fee-for-service payment), the provider has assumed the technical risk of efficiently performing the procedure at a cost less than the fixed fee.

The provider has not assumed, however, the probability risk of how often the procedure will be required for a given population, and thus is not functioning as an insurer (because the fee-for-service payments vary by volume of procedures required). Providers are certainly expert at managing the risk of efficiently performing health care procedures, whereas insurers are not.

Of course, reimbursing providers on a traditional fee-for-service basis would represent a giant step backwards if the goal is to encourage system-wide efficiency because providers would economically be encouraged to perform more or unnecessary procedures. Further, the traditional fee-for-service system often lacked sufficient competition to drive prices for health services to the lowest possible levels.

Therefore, a system then is needed that will place probability risk with insurers, technical risk with providers, choice with the patient, and, at the same time, promote competition and discourage overutilization.

Episodes Of Care: A Team Approach

The answer is to organize the funding and performance of care around defined "episodes of care."

For example, an episode of care could be defined as a heart valve replacement. A financially integrated provider team would handle all facets of the episode of care, including diagnosis, treatment and follow up, for a single, fixed global fee for the episode of care.

In the case of heart valve replacement, the team might include the manufacturer of the valve, a cardiologist, a surgeon, an anesthesiologist, and a hospital. The team would compete with other similar teams to provide the given episode of care at the lowest possible cost to insurers and insureds (patients).

The insurer would contract with one or more provider teams to handle the given episode of care based on, among other things, cost, service, and past patient satisfaction with each team. The insurer then would make available to the patient (insured) the names of and information about one or more teams, and the patient would be free to select any of these teams, or any other team desired by the patient. The insurer would reimburse the patient for the cost of the lowest-cost team, and the patient would pay the difference if the patient desired to use a more costly team.

Patients would evaluate the chosen team throughout the treatment process, and provide feedback to the insurer. As more data accumulates, insurers and providers could more accurately define episodes of care and provide better, more cost-effective care.

In this fashion, the risk of how often an episode of care would occur in a given population (i.e., probability risk) would remain with the insurer, the risk of efficiently diagnosing and treating the episode (i.e., technical risk) would rest with the provider team, and provider choice would remain with the patient.

Because teams would compete with each other in areas of price and service, prices would naturally fall and service would increase. In addition, because patients would pay out-of-pocket to use more expensive teams, the incentive to overutilize would be greatly minimized.

As an added bonus, the need for regulation and oversight of fraudulent arrangements would be greatly reduced. Provider teams would be less likely to engage in abusive kickback or referral arrangements within the team, because competing teams (those not paying a kickback to others on the team and thus not shouldering this additional cost) would eventually undercut the price of the "abusive" team by eliminating the amount of the kickback.

Finally, state insurance and health regulators could easily determine who to regulate: insurance regulators would monitor persons who assume probability risk (insurers), and health regulators would oversee persons who assume technical risk (providers) — thereby permitting regulators to focus on their areas of expertise.

Emerging Acceptance

The appeal of episodes of care is catching on, although no one has yet to implement such a system on a full-scale basis.

For example, Oxford Health Plans Inc. recently unveiled a new strategy to provide care for certain expensive procedures, such as coronary-artery bypass surgery, hip replacement, and premature birth, using provider teams that would receive a fixed, per case payment. This case payment would be made in stages and would be tied to patient satisfaction, thereby encouraging provider efficiency while reducing dissatisfaction with gatekeeper managed care (3 MACR 324, 4/2/97).

Like Oxford, the Public Employees Health Program of Utah has achieved promising initial results using episodes of care as part of its "designated service provider" program, although lack of integration on the provider side still hampers full-scale implementation.

In the public sector, HCFA has reported success with the Medicare Participating Health Bypass Demonstration Project, under which seven "centers of excellence" (provider teams) performed more than 7,000 coronary-graft bypass procedures for a fixed, global fee, generating estimated savings to the government of $35 million.

Yet, even though providers are slowly accepting the concept of episodic care, few have formed the fully integrated teams essential to cost-effective diagnosis and treatment of an entire episode of care. This is so because most providers do not know the cost of each component of an episode of care, and lack the information systems to capture cost and quality-of-care data.

Maximizing Beneficial Outcomes

The current system of managed care leaves much to be desired from all perspectives. A new system organized around episodes of care would place probability (insurance) risk on insurers, technical (efficiency) risk on health providers, and choice with patients.

At the same time, such a system would encourage efficiency by providers and patients. Competition among providers would reduce prices, naturally eliminate the "fat" from abusive kickback and referral arrangements, and simplify (by eliminating much of the need for) federal and state fraud and abuse regulation. Further, insurance and health regulators could regulate along functional lines, focusing on probability risk to define insurers and technical risk to define health providers, thus avoiding the acronym game that today clouds regulatory focus.

Finally, perhaps the greatest benefit of this new system would be the creation and dissemination of information. A system organized around episodes of care would constantly capture data about quality of care, cost of care, and patient satisfaction, and provide crucial feedback to insurers and providers. This feedback would permit more accurate measuring of outcomes and finetuning of episodes of care to maximize beneficial outcomes while reducing cost.

In short, episodes of care means better care it the lowest cost — without the loss of patient choice. Is this the new frontier? Let’s hope so.