Aligning Incentives in the Context of Biomedical Innovation

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1 Aligning Incentives in the Context of Biomedical Innovation IHA Pay-for for-performance Summit February 16, 2007 Professor James C. Robinson University of California, Berkeley

2 OVERVIEW Continual innovation means continual disruption Example: orthopedic and cardiac implants Example: orthopedic and cardiac facilities Imperatives: coordination and flexibility Primary care, specialists, devices, facilities Aligning incentives: payment and organization

3 The Salience of Biomedical Innovations in Health Care Costs New medical devices, drugs, biologics, radiology, etc. are the principal driver of health cost inflation and must be explicitly considered in discussions of performance measurement, pay-for-performance They offer dramatic clinical improvements but are subject to up-selling, over-pricing, indication creep, off-label prescription, financial conflicts of interest Over-use, under-use, and misuse

4 Dynamic Quality and Efficiency Improved quality and efficiency within the existing set of technologies is important First generation pay-for-performance The bigger challenge is flexible adaptation of incentives within the context of new technologies Second generation pay-for-performance Dynamic quality and efficiency is the goal

5 Medicare s s Highest Payments, by DRG Group ( ) 04) E stim ated M edicare P aym ents (billions) Joints Coronary stents Tracheostom. Heart failure Defibrillators Pacemakers Coronary bypass Spine Source: Orthopedic Network News, Millennium Research Group, July 2005.

6 Percent of 2006 DRG payment devoted to the medical device (cardiology) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DRG 515: Defibrillator insertion DRG Defib insertion w /Cath DRG Angioplasty w /stent DRG : Valve replacement DRG : Pacemaker insertion Percent of DRG payment devoted to medical device Source: Orthopedic Network News, July 2006.

7 Percent of 2006 DRG payment devoted to the medical device (orthopedics) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DRG 544: Hip/knee Implant DRG 545: Revision of hip/knee DRG : Kyphoplasty/ vertbroplasty DRG : Spinal fusion lumbar DRG : Spinal fusion cervical Device Cost as % of Payment Source: Orthopedic Network News, July 2006.

8 Innovation and Incentive Example: (1) Choice of Medical Implant The decision of which cardiac/ortho implant is key to the finances of specialists, hospitals, others Which functional level ( demand matching )? Which device manufacturer (price negotiation strategy)? Potential coordination and incentive failures Up-selling: vendors use consulting, honoraria, CME to influence physician choices Regulation: Medicare ban on physician/hospital gainsharing but no ban on physician/vendor consulting

9 Choice of Medical Implant: Payment Difficulties Medicare: Bundle device into hospital DRG and ambulatory APC, exposing facilities to financial risk without bundling in physician fee and incentives Commercial insurance: Hospitals negotiate device carve-outs from per-day and per-case rates, reverting to charge-based FFS and mark-up

10 Innovation and Incentive Example: (2) Site of Care Choice of site of care is made by MD but affects all Inpatient versus outpatient? And where? Hospital: community or specialty (cardiac, ortho) facility? Ambulatory: hospital OPD or freestanding surgery center? Potential coordination and incentive failures Physician investment/ownership Self-referral, cherry-picking, over-treatment? Ban on physician investment/ownership Hospital monopoly, inconvenience, higher costs?

11 Choice of Site of Care: Payment Difficulties Medicare: DRG payments favor invasive cardiac/ortho procedures over medical diagnoses, stimulating proliferation of service lines and specialty facilities; not well adjusted for severity Commercial insurance: Fee-for-service undermines coordination across episode of care but capitation shifts too much risk to providers

12 Machiavelli on Disruptive Innovation It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order The Prince (1513)

13 Hobbes on Disruptive Innovation Whatsoever therefore is consequent to a time of war, where every man is enemy to every man; without other security, than what their own strength, and their own invention shall furnish them withall And the life of man solitary, poor, nasty, brutish, and short. Leviathan (1651)

14 Imperatives Adaptive coordination via provider incentives Adaptive and flexible provider payment methods Adaptive and flexible forms of provider organization The alternatives to provider incentives: Over-reliance on consumer incentives (cost-sharing) Over-reliance on regulatory mandates

15 The Components of Coordination: Cardiology and Orthopedics Primary care physicians High-cost and high-volume specialists High-cost and high-value implants Hospitals, cathlabs, ambulatory surgery centers

16 Cottage Industry, Fee for Service: Every Component Separate A B C Physician Specialist Orthosurgeon Cardiologist Neurosurgeon Device Joint Stent Spine Facility Hospital Cath Lab ASC

17 Integrated System, Global Capitation: Every Component Included A B C Physician Specialist Orthosurgeon Cardiologist Neurosurgeon Device Joint Stent Spine Facility Hospital Cath Lab ASC

18 Medicare: Physicians Carved Out, Device and Facility Carved In A B C Physician Specialist Orthosurgeon Cardiologist Neurosurgeon Device Joint Stent Spine Facility Hospital Cath Lab ASC

19 IPA Model: Physicians Carved In, Device and Facility Carved Out A B C Physician Specialist Orthosurgeon Cardiologist Neurosurgeon Device Joint Stent Spine Facility Hospital Cath Lab ASC

20 Episode-of of-care Model: Service Line Organization and Case Rates A B C Physician Specialist Orthosurgeon Cardiologist Neurosurgeon Device Joint Stent Spine Facility Hospital Cath Lab ASC

21 Conclusions Biomedical innovation is continual Innovation is important, but disruptive Flexible adaptation is imperative Methods of payment Methods of organization Dynamic quality and efficiency is the goal

Issue Brief. Device Costs, Total Costs, and Other Characteristics of Knee ReplacementSurgery in California Hospitals, 2008

Issue Brief. Device Costs, Total Costs, and Other Characteristics of Knee ReplacementSurgery in California Hospitals, 2008 BERKELEY CENTER FOR HEALTH TECHNOLOGY Issue Brief Device Costs, Total Costs, and Other Characteristics of Knee ReplacementSurgery in California Hospitals, 2008 The Berkeley Center for Health Technology