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Tuesday, September 25th 2012

Incentivizing Savings

Some prominent voices in health care reform have a new editorial in The Wall Street Journal today.

Pilot programs under the Affordable Care Act, such as Medicare’s Acute Care Episode Demonstration in the Baptist health system in San Antonio, have produced 15% to 30% savings in hip and knee replacements.


We also recently proposed letting market competition determine prices for many health-care goods and services. Rather than have the government set prices for things like laboratory tests, manufacturers and suppliers should compete to offer the lowest prices. Where it has been used, competitive bidding has reduced Medicare spending by 42%. Does this sound like government-controlled health care — or a market-friendly policy?

I appreciate the attempt to pitch current reform efforts as part of the conservative ideal. But the pilot program referenced is likely neither sustainable nor generalizable from the participants I’ve talked to. The Acute Care Episode Demonstration has shown some cost savings, at least in its orthopedic wing, but those savings seem a novelty.

The pilot has two key components.

  • Medicare beneficiaries are being being paid up to $1100 to go to ACED pilot participation sites, as long as those sites are meeting certain quality measures. So, if grandma gets her hip replaced at Hillcrest Medical Center as compared to St. Francis hospital she is paid.
  • CMS is bundling payments for these surgeries to hospitals. Hospitals then turn around and reimburse the surgeons. As long as the hospital is meeting certain quality metrics, then CMS is allowing the hospital to share cost savings, up to 125% of the Medicare fee schedule for the surgery, with the surgeon

Providers are a large component of both quality and cost. There are gains in both to be had by procedural and process changes but substantial gains are obviously impossible without physician engagement. So an attempt to incentivize physicians towards such goals is not new. Where those incentives are coming from may be the largest problem with the Acute Care Episode Demonstration.

At Baptist Health System, which is cited in the editorial, for all intents and purposes all of the cost savings in the orthopedic wing have come from negotiation on implant costs. The hospital went to the surgeons and essentially said, “I know you’re using Company X artificial hips right now but we can get Company Y for cheaper. Would you start using Company Y artificial hips if we paid you more?”

Cost savings elsewhere throughout the process have been elusive. This one time jump to reduce costs raises questions about the sustainability of the program. In conversation, the increased reimbursements for surgeons are tied to savings in a set fiscal temporal period and don’t carry forward. The surgeons helped the hospital save money in the first fiscal year of the pilot but they did so almost entirely by agreeing to use low bid implants. That is not a repeatable trick. The surgeons have to help the hospital find new savings on the same order the next year, otherwise their compensation starts heading back towards the baseline Medicare fee schedule. Everyone is working against a new benchmark. That’s at least how I understand it.

As well, while not mentioned in the editorial, the payments to Medicare beneficiaries don’t appear to be driving them to pilot program participants.

Explain to me if I’m wrong but I have serious doubts about the Acute Care Episode Demonstration and all of CMS’ pilots looking at incentivizing savings and quality.