3
Inefficiently Delivered Services

INTRODUCTION

As the debate on healthcare reform continues to focus on the financial impacts of rising expenditures, the discussion has simultaneously included analyses of cost-control methods (Pear, 2009). Specific attention has been drawn to the potential for care management, clinical service reengineering, and administrative simplification to increase the efficiency of care delivery (The Commonwealth Fund, 2009; UnitedHealth Group, 2009). In this session, speakers continue to use the lens of efficiency to focus the discussion of opportunities to improve quality of care and decreased costs. Whereas in the previous session, the focus was on how to maintain quality by eliminating unnecessary services, the presenters now focus on the savings opportunities available if appropriate services were provided in the most efficient ways possible, drawing clear connections to the problems resulting from underlying system fragmentation, and perverse economic and practice incentives.

In 1999, the Institute of Medicine (IOM) landmark study To Err Is Human (IOM, 2000) pushed medical safety to the forefront of the American consciousness. Building on the study’s report that at least 44,000 people, and perhaps as many as 98,000 people, die in hospitals each year as a result of medical errors that could have been prevented, Ashish Jha from Harvard University discusses reducing the prevalence of adverse events and duplication in testing in the inpatient setting. Calculating that over 3 million preventable adverse events occur in hospitals annually, with over half of these attributable to hospital-acquired infections and adverse drug events,



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3 Inefficiently Delivered Services INTRODUCTION As the debate on healthcare reform continues to focus on the financial impacts of rising expenditures, the discussion has simultaneously included analyses of cost-control methods (Pear, 2009). Specific attention has been drawn to the potential for care management, clinical service reengineering, and administrative simplification to increase the efficiency of care delivery (The Commonwealth Fund, 2009; UnitedHealth Group, 2009). In this ses- sion, speakers continue to use the lens of efficiency to focus the discussion of opportunities to improve quality of care and decreased costs. Whereas in the previous session, the focus was on how to maintain quality by eliminating unnecessary services, the presenters now focus on the savings opportunities available if appropriate services were provided in the most efficient ways possible, drawing clear connections to the problems resulting from underlying system fragmentation, and perverse economic and practice incentives. In 1999, the Institute of Medicine (IOM) landmark study To Err Is Hu- man (IOM, 2000) pushed medical safety to the forefront of the American consciousness. Building on the study’s report that at least 44,000 people, and perhaps as many as 98,000 people, die in hospitals each year as a result of medical errors that could have been prevented, Ashish Jha from Harvard University discusses reducing the prevalence of adverse events and dupli- cation in testing in the inpatient setting. Calculating that over 3 million preventable adverse events occur in hospitals annually, with over half of these attributable to hospital-acquired infections and adverse drug events, 09

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0 THE HEALTHCARE IMPERATIVE he estimates that eliminating clearly preventable adverse events and redun- dant tests could save hospitals a potential $25 billion, or 8.2 percent of all inpatient costs. In describing the limitations of his analysis, he highlights in particular that the estimates were based on data that were several years old, and therefore may not reflect current costs, and that data were not available for all patient populations (e.g., women admitted to the hospital for labor and delivery). Jha concludes by suggesting that improving quality of care while saving costs will require additional efforts to systematically measure and publicly report adverse event rates in U.S. hospitals. Gary S. Kaplan’s discussion of the recent work at Virginia Mason Med- ical Center (VMMC) demonstrates that coordinated systems can dramati- cally cut costs for high-cost conditions, such as the treatment of back pain. However, coordinated systems can also address other quality issues, such as patient satisfaction with services. By focusing on back pain, migraines, and breast nodules and by applying a systems-based healthcare model to these common, high-cost conditions, Kaplan describes how healthcare spending at VMMC fell between 5 and 9 percent relative to industry peers. Furthermore, waiting time for appointments decreased from 1 month to less than 2 days, patient satisfaction grew to 96 percent of maximum, and 95 percent of patients suffered no loss of work time. Kaplan attributes these savings and improved outcomes to reductions in unnecessary imag- ing and provider visits, as well as eliminating the overuse of physician providers in favor of nurse practitioners when appropriate, and the often concomitant poor coordination of care. Mapping this analysis to the na- tional healthcare landscape, he suggests that more efficient use of mid-level practitioners for common conditions could reduce national expenditures by $13 billion annually. In closing, he outlines key factors to affordable health care, including: accountability; efficient use of labor; use of effective care pathways for high-cost conditions; alignment of reimbursement with value; and electronic health records embedded with evidence-based deci- sion rules. Framing clinical and administrative waste in terms of intra- and inter- organizational contexts, William F. Jessee of the Medical Group Manage- ment Association focuses on inefficiencies within medical practices. He describes considerable unexplained variation among medical practices in the cost of producing care, and identifies almost $26 billion in possible cost reductions from increasing the efficiency of delivering care in physician of- fices. While Jessee suggests that this estimate is provocative, he also cautions that it is preliminary in nature, as it was based on limited cross-sectional survey data. Arnold Milstein of Pacific Business Group on Health contin- ues this discussion by addressing inefficiencies in hospitals. Referencing the analyses of the Medicare Payment Advisory Commission, he explains that if all hospitals replicated the attainment of the top 12 percent in terms of

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 INEFFICIENTLY DELIVERED SERVICES cost per case and quality, their 30-day mortality rates would decline by about 18 percent and inpatient costs by 12 percent, yielding 2 percent sav- ings in national health expenditures, all without lowering quality of care. He further identifies technical assistance in the form of standardized care pathways, other clinical reengineering processes, and procompetitive poli- cies as the most promising avenues of intervention. Cost-saving strategies need to focus not only on inefficiencies, spe- cifically within hospitals and provider offices, but also on those inefficien- cies generated by poorly coordinated service systems. Mary Kay Owens concentrates on the cost of care fragmentation, an increasingly common problem given the aging population and increasing numbers of individuals with multiple chronic conditions (Martini et al., 2007; Meara et al., 2004; Wolff et al., 2002). She estimates a potential opportunity for $240 billion in savings exists from improved care coordination through such initiatives as disease management programs, patient education programs, and the de- velopment of new provider delivery and payment models. She additionally emphasizes that these estimates do not account for the population of un- insured nor do they factor in future demographic trends in chronic disease or a growing elderly population. COSTS OF ERRORS AND INEFFICIENCY IN HOSPITALS Ashish Jha, M.D., M.P.H. Harvard University Ever since the publication of To Err Is Human, there has been consider- able interest in improving patient safety, but there is very little evidence that safety has improved. Prior estimates of the costs of adverse events have been limited to studies at individual institutions or national extrapolations from the data of a small number of institutions. To Err Is Human suggested that preventable medical injuries were responsible for between $17 and $28 bil- lion in direct medical costs (IOM, 2000). These estimates were based on data that were from two epidemiologic studies that were conducted nearly 2 decades ago. Other estimates are derived from administrative data, which are well known for undercounting many types of adverse events, such as healthcare-associated infections and adverse drug events. One such study used National Inpatient Sample (NIS) data and patient-safety indicators (PSIs) to estimate the cost of 18 types of adverse medical events at $4.6 bil- lion (Zhan and Miller, 2003). However, given that the coding of PSIs is in- consistent, the inaccurate measurement of the actual occurrence of adverse events commonly occurs. These studies give us a significant starting point, but our current un- derstanding of the impact of adverse medical events is neither current nor

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2 THE HEALTHCARE IMPERATIVE granular enough to know where and how to focus our activities in these areas. Calculation of National Estimates A Health Affairs publication presents a detailed analysis of how reduc- ing adverse medical events and eliminating redundant tests could contribute to a dramatic reduction in hospital spending (Jha et al., 2009). Since there was no precise, current data available for the prevalence of adverse events, we used a combination of literature review, consultation with experts, and review both of unsafe care lists compiled by patient safety advocate groups and of major epidemiologic studies. We used a working definition of adverse event that included injuries from medical care not caused by the underlying condition (Jha et al., 2009). We further categorized the adverse events as either preventable or nonpreventable, based on the provision of error-free care: if a patient experienced an adverse event despite having received error-free care, that adverse event was considered to be nonpre- ventable. We also examined the prevalence of redundant laboratory and radiologic tests. Based on our results from the literature review, we selected 10 adverse events commonly described in over 3,000 studies: adverse drug events, falls, pressure ulcers, pneumothorax, thromboembolic disease, surgical site infection, catheter-related blood stream infection, urinary tract infection, pneumonia, and hematoma. Using these studies as a foundation and look- ing specifically at these 10 adverse events, we were able to use an iterative methodology to estimate the at-risk population, prevalence of these events, and the associated impact of those prevalences in terms of dollars expended and redundant or unnecessary services provided.1 1 We used nationally representative data from the 2004 National Inpatient Sample (NIS) to determine the population that was at risk for suffering each of these adverse events. To estimate the number of patients that actually experience an adverse event, we multiplied the number of at-risk patients by the incidence among the at-risk population (Jha et al., 2009). We used a range of incidences to account for the variation observed in the literature. We then multiplied that figure by the fraction of events that is considered preventable, as determined by the literature and by quality improvement studies, to calculate the number of preventable adverse events for each category (Table 3-1). To determine the potential savings associated with the reduction or elimination of an adverse event, we considered only the direct medical costs associated with that adverse event and did not factor in incidental costs, such as the patient’s lost wages. After inflating all costs to constant 2004 dollars with the Producer Price Index (PPI), we calculated potential savings based on estimates found in our literature review. Because there were often multiple values cited for these savings, we used the midpoint of the ranges in our calculations. We subsequently built Monte Carlo simulation models, and ob- tained almost identical results to the midpoint calculations. We therefore used the Monte Carlo results for our analysis in the manuscript. To determine the cost of completely eliminating an

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 INEFFICIENTLY DELIVERED SERVICES Potential Savings Nationally In 2004, patients who received care in U.S. hospitals experienced ap- proximately 5.7 million adverse events (Table 3-1). The majority of these adverse events were adverse drug events (2.2 million events) and hospital- acquired infections (1.7 million events). Of these 3.9 million events, 46 per- cent were preventable adverse events (389,000 adverse drug events and 1.4 million hospital-acquired infections). Avoidable costs were those as- sociated with adverse events that were clearly preventable based on cur- rently available approaches, while total costs included the financial impact of all adverse events. Adverse drug events cost the system an avoidable $3.8 billion (95 percent confidence interval [CI], $3.1-$4.6 billion) in 2004 (Table 3-2), and, if eliminated entirely, could result in a savings of $8.8 bil- lion (95 percent CI, $7.4-$10.2 billion). The sum of all categories of preventable adverse events represents an avoidable cost to the system of $16.6 billion (95 percent CI, $12.9- $21.2 billion) (Jha et al., 2009). If redundant tests are added to this figure, the avoidable costs are $24.8 billion (95 percent CI, $20.4-$30.7 billion), or 8.2 percent of all inpatient costs (Table 3-2). Were the errors and re- dundant tests to be eliminated entirely, the figure jumps to $40.5 billion (95 percent CI, $31.9-$50.5 billion), or 13.5 percent of inpatient costs (Table 3-2). A breakdown of the percentage of cost savings by adverse event is shown in Figure 3-1. The prevalence of these adverse events also appears to be correlated with other factors. We examined the prevalence of adverse events and redundant tests in various hospital settings: by location (urban vs. rural), by size, and by teaching status—and found, for example, that patients in teaching hospitals were most likely to experience adverse events. Reforms in these teaching hospitals could account for $11 billion or 45 percent of the potential savings discussed here (Jha et al., 2009). Primary Caveats and Assumptions Despite best efforts, there were limitations to this study. We used Monte Carlo simulations to account for variation in the data and to compensate adverse event, we multiplied the number of occurrences of that event by the cost of each event (Jha et al., 2009). We used a similar approach for redundant tests. We identified the rates of redundant laboratory and radiology tests from our comprehensive literature review. While there are no standard definitions for classifying a test as redundant, this term is often ascribed to the proportion of ordered tests that are cancelled by clinicians when they are made aware of prior results of that test. Therefore the determination of the frequency of redundant tests was made by the ordering clinicians themselves and not by external sources. Given that redundant tests could be completely eliminated, we determined that the associated savings would simply be the cost of all of the tests that were ordered unnecessarily.

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 THE HEALTHCARE IMPERATIVE TABLE 3-1 Estimates of Total Adverse Events and Number of Preventable Adverse Events Estimated Number of Estimated Number of Total Adverse Events Preventable Adverse Events (thousands) (thousands) Thromboembolic disease 828 511 Hospital-acquired infections 1,725 1,449 Adverse drug events 2,169 589 Decubitus ulcers 226 184 Other adverse events 783 290 Total adverse events 5,731 3,023 for some of the weaknesses in the data from our review. Even so, some of the study data were several years old, and therefore our estimates may not be current. It is likely that, given that the hospitalized patient population has become sicker, we may have underestimated the rates of adverse events and their associated costs. There were also important patient populations for whom we could not estimate the frequency or costs of adverse events. For example, we found no reliable estimates for women admitted to the hospital for labor and delivery or for pediatric patients (except for adverse drug events). Again, the omis- sion of these hospitalizations likely led to an undercount of the number of adverse events and their associated costs (Jha et al., 2009). TABLE 3-2 Avoidable and Total Costs and the Percentage of Inpatient Costs They Represent Avoidable Costs Percent of Total Costs Percent of in Millions* Inpatient in Millions* Inpatient (95% CI) Costs (95% CI) Costs Thromboembolic disease $3,090 1.0 $5,041 1.7 ($1,979-$4,466) ($3,444-$6,966) Hospital-acquired $5,797 1.9 $8,912 3.0 infections ($3,773-$8,198) ($5,833-$12,515) Adverse drug events $3,823 1.3 $8,840 2.9 ($3,067-$4,626) ($7,442-$10,181) Decubitus ulcers $748 0.3 $913 0.3 ($256-$1,332) ($343-$1,595) Other adverse events $3,165 1.1 $8,569 2.7 ($526-$7,884) ($1,905-$18,192) Redundant labs and $8,229 2.7 $8,229 2.7 radiology tests ($5,015-$11,829) ($5,015-$11,829) Total potential savings $24,848 8.2 $40,503 13.5 ($20,386-$30,673) ($31,929-$50,464) *Costs in 2004 dollars.

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 INEFFICIENTLY DELIVERED SERVICES Hematoma 2% Pneumonia UTI ADE 12 % 7% 23 % CR-BSI Falls 10 % 16 % SSI Pressure Thrombo- embolic 5% Ulcers Disease 5% 14% Pneumothorax ADE = Adverse Drug Event 1% UTI = Urinar y Tract Infection CR-BSI = Catheter-Related Blood Stream Infection SSI = Surgical Site Infection FIGURE 3-1 Breakdown of potential national savings by type of adverse event. SOURCE: Copyrighted and published by Project Hope/Health Affairs. Jha, A. K., D. C. Chan, A. B. Ridgway, C. Franz, and D. W. Bates. 2009. Improving safety and Figure 3-1.eps eliminating redundant tests: Cutting costs in U.S. Hospitals. Health Aff (Millwood) 28(5):1475-1484. Our estimates represent only the direct costs associated with the care provided in hospitals. They do not account for additional sources of sav- ings, such as the lost productivity and wages of individuals affected by poor medical care. So, in all of these cases, the limitations of this study are likely to cause us to understate the costs and therefore potential savings from an intervention aimed at preventing adverse events. Lastly, and quite significant for public policy, we chose not to examine what kind of financial impact hospitals might face in implementing solu- tions to decrease adverse events and redundant tests. Yet, the cost of such interventions and its relationship to the potential savings of eliminating adverse care will be important considerations for policy makers who wish to target these sources of potential cost savings. Thoughts About Next Steps Eliminating clearly preventable adverse events and redundant tests could save hospitals a potential $24.8 billion (2004 dollars), or 8.2 percent

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 THE HEALTHCARE IMPERATIVE of all inpatient costs. Although current efforts by the Centers for Medicare & Medicaid Services (CMS) and others around the “no-pay” rules are meant to begin to capture some of these savings, most of the early data from other similar efforts suggest that the rules are unlikely to have a major impact. More salient will be efforts to systematically measure and publicly report adverse event rates in U.S. hospitals, which will force hospitals to examine their own processes and, as we have seen with public reporting efforts elsewhere, make concerted efforts to improve care. Such a strategy will improve patient well-being while simultaneously enabling the health- care system to save billions of dollars. COSTS FROM INEFFICIENT USE OF CAREGIVERS Robert S. Mecklenburg, M.D., and Gary S. Kaplan, M.D. Virginia Mason Medical Center President Obama’s Council of Economic Advisors estimates that 30 per- cent of U.S. healthcare expenditures do not contribute to positive healthcare outcomes (Romer, 2009). Providing care for all Americans while reducing per capita spending requires improving the efficiency of the current delivery system. Because most of the cost of producing health care relates to the cost of labor, the inefficient or unnecessary use of healthcare workers is a major avoidable expense for providers that is passed on to purchasers. Identify- ing, quantifying, and reducing healthcare encounters that are inefficient or unnecessary offers immense opportunity for savings. For example, one retrospective study of national survey records (Meh- rotra et al., 2007) indicated that 8 percent of ambulatory care visits were for preventive health examinations at an annual cost of $7.8 billion. Most preventative care occurred in conjunction with other visits, however, and 75 percent of patients had been seen by providers for other reasons within the previous year. It is likely that a greater proportion of preventive care ser- vices could be delivered in an equally effective but more efficient manner. At VMMC, we have directly measured cost reductions from decreas- ing non-value-added healthcare encounters and projected the savings to a national level. A Collaborative Approach to Enhancing Efficiency and Quality of Care In 2002, VMMC began removing costly waste in healthcare delivery by applying the principles of the Toyota Production System (Bush, 2007; Bohmer and Ferlins, 2005). This method uses standardized best practice reinforced by reliable systems to reduce costly individual variation. Qual- ity and timeliness become system attributes, ensuring consistent, high-value performance from each healthcare provider. In 2004, VMMC expanded this

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 INEFFICIENTLY DELIVERED SERVICES work by engaging employers and health plan executives in “Marketplace Collaboratives” to identify and reward value in the delivery of health care (Fuhrmans, 2007; Pham et al., 2007). These groups approached the issue of efficiency in healthcare delivery by doing the following: 1. Assigning priority to prevalent and costly medical conditions based on claims data of employers. Three such conditions included back pain, headache, and breast conditions. 2. Defining measurable value from the customer’s perspective with five quality indicators: a. Same-day access to care, b. Rapid return to function, c. Prospectively defined, value-added, evidence-based care pathways, d. 100 percent patient satisfaction, and e. Reduced cost for both purchasers and providers. 3. Applying a general model of care delivery that eliminates both non-value-added components and waits and delays, meets quality specifications, and reduces costs. Collaboratives produced standardized pathways that featured rapid access to evidence-based care, aligning skill and training of providers with ap- propriate clinical tasks. As collaborative teams improved efficiency, we quantified waste elimi- nated from the preexisting system. We measured reduced use by direct ob- servation of clinical operations during process improvement, including the number of MRI procedures. CareConnections measured physical therapy use and work loss for back pain. VMMC’s finance section provided data for 2009 on reimbursement and VMMC’s cost of producing care. Reduction of Unnecessary Health Encounters Assuming our costs and reimbursement rates are generally applicable, the savings we identified would generate savings in the United States of over $22 billion per year while improving speed of access, quality of care, and capacity to care for more patients. The first category of major savings realized by the collaboratives was in the area of reducing unnecessary visits and services. Fewer Unnecessary Office Visits Outpatient visits were reduced by using an evidence-based scheduling tool that matched a patient’s condition with an appointment that integrated evaluation, education, and therapy into a single same-day visit. In the back

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 THE HEALTHCARE IMPERATIVE pain pathway, 96 percent of patients returned to work after an initial ap- pointment with a physical therapist and a physician. For those requiring additional physical therapy, return to function was accomplished with an average of 4.4 visits compared to 8.8 visits for marketplace peers. In the breast value stream, care was completed in a single same-day visit for the 89 percent of women who do not require biopsy. For patients with uncom- plicated migraines, one same-day visit was needed for evaluation and treat- ment for most patients. Our model eliminated at least 50 percent of office visits for these conditions, including “new visits” to multiple providers. Applying VMMC’s experience to the national level, reduction of un- necessary office visits related to such common conditions as back pain, headache, and breast nodules can generate savings of up to $5.1 billion annually (Table 3-3).2 Less Unnecessary Imaging Unnecessary visits for imaging represented another opportunity to re- duce non-value-added care. We installed a system within the process flow of scheduling for imaging that required the provider to designate one of a list of evidence-based indications to complete the order. Prior to installing such systems for back pain and migraine, VMMC performed 17,128 MRI studies per year of which 1,886 (11 percent) were lumbosacral spine images and 1,026 (5.9 percent) were brain images. When such evidence-based decision rules were embedded in the sched- 2 Claims data from over 7,000 persons receiving health care financed by VMMC indicated that back pain, headache, and benign breast conditions comprise 8.8 percent of medical visits (Medical claims data for VMMC employees; reporting period 1/1/08-6/30/08 with 47,093 episodes of care during this time period). For the U.S. population there were 1.1 billion am- bulatory care visits in 2006 (Schappert and Rechtsteiner, 2008). If back pain, headache, and benign breast nodules comprise 8.8 percent of total U.S. outpatient visits, these conditions would account for 96.8 million visits per year. We believe that at least 50 percent of outpatient visits for these three conditions, or 48.4 million visits per year, could be eliminated by using an efficient care model. In terms of savings, of the 1.1 billion U.S. outpatient visits per year, 23 percent of patients are aged 65 or older (CMS reimbursement age range) and 59 percent are aged 15-64 (commer- cial reimbursement age range). We assumed that the 48.4 million non-value-added visits per year were distributed in this proportion. If visits for the CMS group were paid at a $69 average reimbursement rate (assuming 50 percent “new patient” charge codes 99203 and 50 percent “return visit” charge codes 99213), savings would be $0.77 billion per year (48.4 million × 0.23 × $69). If 59 percent of visits were paid at the current commercial rate of $152 (assum- ing 50 percent 99213 charge codes and 50 percent 99203 charge codes), savings would be $4.3 billion per year (48.4 million × 0.59 × $152) and the total for both age groups would be $5.1 billion per year. Differences in contracted commercial reimbursement, proportion of “new” and “return” visits, and major differences in CMS, commercial, and uninsured patient populations could affect this estimation.

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9 INEFFICIENTLY DELIVERED SERVICES TABLE 3-3 Cost Savings from Reductions in Unnecessary Office Visits* VMMC rate of reduction for unnecessary office visits 50% Total U.S. outpatient visits 96.8 million Potential reduction in number U.S. office visits 48.4 million Medicare Commercial Health Health Insurance Insurance Mean reimbursement rate per visit $69 $152 Potential savings in dollars $0.77 billion $4.3 billion NOTE: VMMC = Virginia Mason Medical Center. *Limited to outpatients visits for back pain, headache, and benign breast conditions. uling process, MRI volumes decreased 31 percent for back pain and 41 per- cent for headache at a time when patient volumes for these conditions were increasing (Table 3-4).3 If 30 percent of all MRI studies in the nation did not add value and could be avoided, the same type of evidence-based process successful at VMMC could realize savings of up to $6.5 billion per year. Although we have no direct data to confirm the projection of 30 percent unnecessary imaging to all MRI studies, it is our opinion that our sample likely reflects general practice. 3 The American College of Radiology estimates that 26 million MRI examinations were performed in the United States in 2007, of which 9 million were performed on CMS patients (American College of Radiology, n.d.). We assumed the remaining 17 million examinations were performed on patients with employer-based health plan financing. To calculate savings we used average cost to CMS at $500 per MRI and average cost to employers at $1,000 per MRI. Looking more specifically at the VMMC experience, lumbosacral MRI studies constitute 11 percent of all MRI images performed. If in the general population 11 percent of MRIs were lumbosacral images, we would project 990,000 (9 million × .11) images for patients with CMS funding and 1,870,000 (17 million × .11) images for patients with commercial funding. A 31 percent reduction would be 306,900 images for CMS and 579,700 images for commercial populations. At a cost of $500 to CMS and $1,000 to commercial purchasers, annual sav- ings for lumbosacral MRI imaging would be $153 million per year for CMS and $580 mil- lion per year for commercial purchasers for a total of $733 million per year. In like manner for MRI studies of the brain, 5.9 percent of 9 million and 17 million would be 0.53 million CMS-funded and 1.0 million commercially funded images, respectively. A 41 percent reduc- tion would be 217,710 and 411,230 images, respectively, with savings of $109 million and $411 million for CMS and commercial patients for a total of $520 million per year. Assuming 30 percent of all 9 million MRI studies on CMS patients and 17 million studies on commercial patients did not add value and could be avoided, this would be 2.7 million MRI studies in CMS patients and 5.1 million studies in non-CMS patients per year. At the above reimburse- ment rates CMS savings would be $1.4 billion and commercial savings $5.1 billion per year for a total of $6.5 billion per year.

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0 THE HEALTHCARE IMPERATIVE by approximately 18 percent; readmissions would decline by about 4 per- cent; and cost of inpatient care by about 12 percent, all while patients’ experiences of care remain unaffected (see Table 3-11). Another way of stating the savings opportunity associated with clos- ing the performance gap is that overall U.S. hospital inpatient cost per case would decline by about 11 percent. If these hospital cost savings were passed along to consumers, it would lower U.S. healthcare spending by nearly 2 percent, since inpatient spending comprises approximately 60 per- cent of hospital spending, and hospital spending comprises approximately 30 percent of total healthcare spending. Failure to collect comprehensive nationally standardized information on hospital structural features and processes in the United States prevents full understanding of what accounts for better performance by the highest ranking 12 percent. However, data available to MedPAC shows that lower hospital costs are highly associated with financial pressure on hospitals in the form of lower negotiated average price per case by payers other than Medicare; more non-Medicare financial pressure on hospitals is associated with lower hospital production cost (see Table 3-12). Capturing the Potential Savings How might these savings be captured in the United States? Combin- ing the dissemination of standardized care pathways and other successful elements of clinical process reengineering in top-performing hospitals with more procompetitive health industry regulatory policies appears to be a promising approach. If this approach were implemented vigorously, it is likely that today’s “price-performance frontier” in U.S. hospital care would also advance, generating a long-term flow of gains in hospital cost and qual- ity. This would constitute a virtual cycle of efficiency comparisons, rewards TABLE 3-11 Hospital Performance on Quality Measures, 2004-2006 Type of Hospital Relatively Efficient Other During 2004-2006 Hospitals Relative Historical Performance, 2004-2006 (%) (%) Risk-adjusted: Composite 30-day mortality, 2004-2006 (AHRQ) 87 106 Readmission rates, 2005 97 101 Standardized cost per discharge, 2004-2006 90 102 NOTE: AHRQ = Agency for Healthcare Research and Quality. SOURCE: MedPAC, 2009.

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 INEFFICIENTLY DELIVERED SERVICES TABLE 3-12 Impact of Financial Pressure on the Financial Characteristics of U.S. Hospitals Level of Financial Pressure, 2002-2005 High Pressure Low Pressure (non-Medicare Medium (non-Medicare margin 5%) Financial characteristics, 2007 (medians) Non-Medicare margin (private, Medicaid, –2.4% 4.5% 13.5% uninsured) Standardized cost per discharge $5,800 $6,000 $6,400 Annual growth in cost per discharge 2004-2007 4.8% 4.9% 5.0% SOURCE: MedPAC, 2009. for excellence, and faster hospital productivity gain; comparable to what occurred in most other U.S. service and product sectors, beginning in the 1990s. Though MedPAC has not yet completed similar analyses for other provider types, there is no a priori reason to expect that the size of the ef- ficiency gap or the best closure method would substantially differ. COSTS OF UNCOORDINATED CARE Mary Kay Owens, R.Ph., C.Ph. Southeastern Consultants, Inc. As the United States faces a daunting future where healthcare spend- ing promises to double to over $4 trillion dollars per year within the next decade (CMS, 2009), several strategies have emerged in response, such as enhanced care coordination, payment reform, and the implementa- tion of health information technology in order to cut costs and improve health outcomes. A concrete example is provided by the Patient-Centered Primary Care Collaborative (PCPCC), which has recently supported the patient-centered medical home (American College of Physicians, 2007). This approach has already improved quality of care and access to services and reduced cost through an interprofessional, multidisciplinary team ap- proach to patient-centered care coordination across a variety of systems. In the following analysis, we review the benefits of efforts to coordinate care, which include such innovations as the patient-centered medical home, and estimate the cost savings possible from these reforms. The Problem In a recent analysis by Southeastern Consultants, Inc. (SEC) of 9 mil- lion Medicaid only and Medicaid/Medicare dually enrolled patients in five

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2 THE HEALTHCARE IMPERATIVE large states, we found a cohort of patients exhibiting patterns of extreme uncoordinated care.9 In the state example provided, these uncoordinated care patients represented less than 10 percent of patients, but they ac- counted for an average of 46 percent of drug costs, 32 percent of medical costs, and 36 percent of total costs for the population. These percentages of total cost contributed by the uncoordinated care populations did not differ significantly among the various states examined (Figure 3-2). The following is an example of an actual patient with extreme uncoor- dinated care identified in the datasets. This patient is a 46-year-old female with a cardiac condition, chronic obstructive pulmonary disease, and de- pression who had use patterns within the 12-month period that included a total of 185 prescriptions ($8,388) from 34 different prescribing physicians, and used 21 different pharmacies. This patient also had 395 separate medi- cal events ($28,125) among which included 45 emergency room (ER) visits ($10,012), 147 outpatient visits ($14,120), and 85 physician visits ($2,237) from 54 different treating physicians, and received other numerous types of services as well. This patient is representative of many patients we observed with extreme uncoordinated care and inefficient use patterns that drive up costs unnecessarily and compromise quality of care. Moreover, these uncoordinated care patients have significant differ- ences in all cost service components, including lab, outpatient, ER, phar- macy, practitioner, and hospital services. Comparisons of average annual 9 Southeastern Consultants, Inc. (SEC) performed comprehensive claims analyses on over 9 million Medicaid only and Medicaid/Medicare dually enrolled patients in five large states for various periods from 2000 through 2006. These analyses included use and expenditure analyses of drugs and medical services, a disease profile of the population, and the identifica- tion of access and care patterns indicative of uncoordinated care in a subset of the population. SEC examined drug and medical use and costs attributed to these extremely uncoordinated care patients in an effort to supply policy makers addressing healthcare reform at the state and federal levels with compelling new data as to the importance of improving the coordination of care. In addition, SEC conducted statistical-based, predictive modeling to estimate expected costs and created matched comparison groups to further evaluate estimated program savings that can be achieved from a more integrated approach to better coordinate care by implement- ing a patient-centered primary care medical home model with enhanced health information technology applications and an appropriate provider incentive payment model. Using the claims and eligibility classification data, patients were separated into Medicaid only, dual eligibles, and long-term care subgroups and screened for patterns of uncoordinated episodes of care and the absence of a medical and pharmacy home. Various statistical methods were ap- plied and algorithms created to identify patients with patterns of use associated with extreme uncoordinated care. Patterns identified included using excessive numbers of prescriptions, therapeutically duplicative drugs, frequently changing drug therapies, using multiple prescrib- ers and multiple pharmacies concurrently and in random patterns, accessing the emergency room frequently for nonemergent or preventable care, and numerous other access patterns indicative of uncoordinated care. Not surprisingly, over 98 percent of identified uncoordinated care patients in the datasets had at least one chronic condition.

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 INEFFICIENTLY DELIVERED SERVICES 46% 45% 36% 32% 10% Percent Percent Percent all costs Percent Percent scripts drug medical (drug + medical) patients costs costs Coordinated Care Patients Uncoordinated Care Patients FIGURE 3-2 State example: uncoordinated care percentages for Medicaid only group. Figure 3-2.eps total cost observed for the most extreme uncoordinated care patients were $15,100 compared to $3,116 for those with better coordinated care ob- served in the remaining population (Figure 3-3). The patterns were even more significant among the subset of older (pre- Medicare) and Medicare dual patients who experience a greater prevalence of chronic diseases and comorbid conditions. For example, about one- quarter (28 percent) of these patients exhibited patterns of extreme unco- ordinated care and accounted for an astounding 71 percent of drug costs, 44 percent of medical costs, and 52 percent of total costs for that popula- tion (Figure 3-4). The results were similar among the states studied. How Much Does Uncoordinated Care Cost? In the SEC analysis, we found that patients with uncoordinated care exhibited many of the same patterns in their care histories. The variables that seem to be predictors of higher than expected total cost, and thus are

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 THE HEALTHCARE IMPERATIVE Lab Outpatient ER $189 Pharmacy $16,000 Practitioner $1,039 Hospital $14,000 $1,669 $12,000 $10,000 $4,907 $ 222 $8,000 $6,000 $ 46 $5,295 $287 $4,000 $714 $2,000 $1,340 $2,001 $506 $0 Coordinated Uncoordinated care patients care patients $3,116 $15,10 0 FIGURE 3-3 State example: Medicaid only group total annual expenditures—pa- tients with and without uncoordinated care. Figure 3-3.eps markers for identifying patients with the greatest savings opportunities, were those that were correlated with episodes of uncoordinated care and treatment. These predictors included excessive or inappropriate numbers and types of prescriptions, high numbers of different prescribing and treat- ing physicians, using a high number of different pharmacies, and frequently accessing the ER for nonemergent or preventable care (Billings, 2000). All of these patterns contribute to higher than expected unnecessary costs. One very significant characteristic observed in the population studied was inappropriate medication usage, including both overuse and low adher- ence, which highlights an important opportunity for pharmacists to provide medication therapy management and monitoring services to patients and the entire healthcare team in a collaborative effort to improve outcomes and reduce costs. Once these uncoordinated care patients were identified, we could begin to compare their care histories with those of similar patients in order to estimate the cost or the opportunity for savings should these uncoordinated care scenarios shift to a more continuous and coherent care plan. Below, we provide an illustrative example from one of the state datasets for a group of 10,081 uncoordinated care patients matched to 37,873 coordinated care patients by age, gender, primary disease (as shown), major comorbid disease(s), and severity of illness score. Comparing the costs of each group and using the healthcare costs associated with the coordinated group as the

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 INEFFICIENTLY DELIVERED SERVICES 71% 70 % 52% 44% 28% Percent Percent Percent all costs Percent Percent scripts medical (drug + medical ) drug patients costs costs Coordinated care Uncoordinated care FIGURE 3-4 State example: Uncoordinated care expenditures for pre-Medicare group (ages 55-64). Figure 3-4.eps baseline, the estimated excess cost of uncoordinated services is $74 million (43 percent of the total actual cost of $172 million) or $7,340 per patient (Figure 3-5). In the analysis, we adjusted for numerous contributing factors and found that the cost differences were in fact driven primarily by those selected variables correlated with patterns of extreme uncoordinated care. The Opportunity Patients with extreme uncoordinated care clearly account for a dispro- portionate share of costs. In fact, the costs of uncoordinated care averages approximately 30 percent of total plan costs studied. Based upon multiple analyses, we estimated that an average of 35 percent of the costs contrib-

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 THE HEALTHCARE IMPERATIVE $66 Actual Cost $70 Expected Cost $60 Savings $46 $50 $39 $40 $29 $27 $24 $24 $30 $22 $20 $12 $20 $12 $9 $7 $3$4 $10 $0 Asthma Diabetes Seizures Cardiac Psychosis FIGURE 3-5 State example: $74 million in estimated cost savings due to uncoor- dinated care. Figure 3-5.eps uted by patients with extremely uncoordinated care should be avoidable with improved care integration, enhanced and targeted interventions, and care coordination between providers. Again, this figure is derived from the various comparisons among uncoordinated care patients and matched cohorts of patients demonstrating more coordinated care. Extending these estimates to the national level, the savings opportuni- ties are formidable. Assuming that national health reform efforts aimed at these uncoordinated care patients are developed and phased in over 3 years (realizing savings at 25, 50, and then 75 percent levels), the average savings in the period 2010-2018 are estimated at $240.1 billion per year or an aver- age of 8.8 percent of total annual expenditures. (Table 3-13). Key Assumptions Similar Costs for Uncoordinated Care Patients Among the Publicly and Privately Insured According to the 2009 Almanac of Chronic Disease, 75 percent of U.S. healthcare spending overall is for patients with one or more chronic conditions, and 83 percent of all Medicaid spending and 96 percent of all Medicare spending is for patients with one or more chronic condi- tions (Kott, 2009). Furthermore, a national Gallup Serious Chronic Illness Survey reveals that 81 percent of people with a serious chronic condition were treated by two or more different physicians, and of that group over 32 percent of people were treated by four or more physicians (Anderson,

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 INEFFICIENTLY DELIVERED SERVICES TABLE 3-13 Estimates of National Savings from Improved Coordination of Care (Billions) Estimated Estimated Total Cost Cost Savings Estimated Contributed by from Improved Coordinated Percent NHE Total Patients with Coordination Care Annual Coordinated Projected Uncoordinated of Care (35% Savings (phase Care Savings Costsa Year Care (30%) avg. savings) in over 3 years) of Total Cost 2010 $2,040.1 $612.0 $214.2 $53.6 2.6% 2011 $2,152.8 $645.8 $226.0 $113.0 5.3% 2012 $2,278.5 $683.6 $239.2 $179.4 7.9% 2013 $2,420.8 $726.2 $254.2 $254.2 10.5% 2014 $2,581.2 $774.4 $271.0 $271.0 10.5% 2015 $2,761.3 $828.4 $289.9 $289.9 10.5% 2016 $2,956.7 $887.0 $310.5 $310.5 10.5% 2017 $3,169.5 $950.9 $332.8 $332.8 10.5% 2018 $3,398.4 $1,019.5 $356.8 $356.8 10.5% Total $23,759.3 $7,127.8 $2,494.7 $2,161.2 Average annual coordinated care savings $240.1 8.8% 2010-2018 NOTE: NHE = National health expenditure data. a The categories of NHE spending used to compile the baseline costs included direct care expenditures for hospital, professional, home health, and medical products and excluded administrative, nursing home, structures, and investments. Source data: National Health Expenditure Data Projections for 2010-2018, Table 2, Centers for Medicare & Medicaid Services, Office of the Actuary, released January 2009. 2007). Again, treatment by many different physicians was a common char- acteristic among uncoordinated care patients. So available data would sug- gest that in public and private payer contexts, chronically ill patients and patients with uncoordinated care are certainly common and likely occur at comparable rates. Mental Health Does Not Drive the Observed Cost Variance Even though it may be a contributing factor, patients with serious mental health conditions such as psychosis or bipolar disorder accounted for only 20 percent of the patients and 34 percent of the total cost for the entire group of extreme uncoordinated care patients. Caveats First, even though we removed all suspected fraudulent, incorrectly paid, duplicate, and otherwise aberrant claims from our analysis, it is pos-

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 THE HEALTHCARE IMPERATIVE sible that some small percentage of fraudulent claims remained undetected and were included in this analysis. Second, all patients with catastrophic illnesses and at the end-of-life were removed from the datasets and excluded from the analysis and cost- saving estimates. These included patients with severe trauma such as those with head injuries, burns, or other catastrophic conditions and any patient who died during the 12-month analysis period. Third, only the most extreme uncoordinated care patients were identi- fied and included in the cost-saving estimates. Therefore the estimates are very conservative since moderately uncoordinated care patients were not included in the cost-saving estimates and certainly represent additional savings opportunities. Fourth, the cost-saving estimates do not include future cost avoidance in nursing home and long-term care costs that can reasonably be expected to occur due to improved coordination of care and enhanced clinical out- comes of patients who receive appropriate treatment earlier in the course of their disease and extend their physical and mental functionality and independence. Fifth, the cost-saving estimates do not account for the 47 million unin- sured people who may soon be integrated into the healthcare system since the national health expenditure (NHE) data does not include that possible scenario in the national healthcare cost projections. Finally, the cost-saving estimates do not account for the rapidly in- creasing rates of chronic disease and obesity since NHE data appears to only use population and demographic trend factor adjustments and not disease prevalence-based adjustments in the projections for future health- care expenditures. Conclusion The findings from these comprehensive claims analyses provide compel- ling evidence that the opportunity for effective cost avoidance is significant. Measures to improve care delivery and payment models, as well as efforts to leverage health information technologies to facilitate system wide, en- hanced coordination, should be implemented within existing state, federal, and commercial program structures. Healthcare reform efforts must recog- nize and address the problem and significant avoidable cost of uncoordi- nated care if there are going to be “real” and “meaningful” changes to the healthcare delivery and payment systems. Public and private health plans can reduce unnecessary expenditures attributable to uncoordinated care, preserving valuable resources without reducing appropriate access to care or needed services. These preserved resources can also be used for funding expansion programs for the uninsured and underinsured populations and improving the quality of health care for all citizens.

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