Bundled Pricing atBoston Children’s Hospital

George McMillan Fleming Center forHealthcare Management

2nd Annual Case Competition

Agenda

• Competitive Pressures Facing BCH• Bundled Pricing and Quality Improvement• Pros and Cons of Bundled Pricing• Costing for Accurate Bundled Pricing• Physician Pay for Performance• New Value Proposition Moving Forward

Porter’s 5 Forces and Hospitals

Suppliers include healthcare equipment companies, pharmaceutical companies, and physician organizations.

Industry CompetitorsMODERATE

Threat of New

EntrantsLOW

Bargaining Power of Buyers

MODERATE

Threat of Substitutes

LOW

Bargaining Power of SuppliersMODERAT

E

New entrants face barriers to entry such as substantial capital expenditures and government regulations.

Rivalry among competitors

Buyers include government insurance companies, commercial insurance companies, and patients.

Substitutes include alternative medicine, exercise, and stand-alone urgent care clinics.

Health Care Industry Changes

Industry Competitors

HIGH

Threat of New

EntrantsLOW

Bargaining Power of BuyersHIGH

Threat of Substitutes

LOW

Bargaining Power of SuppliersHIGH

Hospitals are footing the bill for the 2.3% federal medical device tax.Source: “Device Makers Add Fees to Cover Health Tax,” Wall Street Journal, January 26, 2013

Payers have successfully negotiated discounts of 5-20% from hospitals.Source: “Health Law Pricing Begins to Take Shape,” Wall Street Journal, February 28, 2013

New Health Plan Demands

• Recent consolidations in health insurance

• Health reform will give plans new membersImages from http://www.inquisitr.com/268859/aetna-sued-by-thousands-of-california-doctors-for-coverage-denials/,

http://www.businessreviewusa.com/news_archive/news/health-plans/coventry-health-care-expands-mhp-acquisition,http://vaccinenewsdaily.com/medical_countermeasures/321410-wellpoint-urges-flu-vaccinations-for-seniors/,http://www.edmarc.org/amerigroup-elves-are-busy/

New Patient Demands

• The rise of consumer-driven health care

Consumer-Driven Health CareImage from http://www.americanprogress.org/issues/healthcare/news/2008/05/19/4359/myth-vs-fact-consumer-driven-health-plans/

What BCH Must Do to Compete

Bundled Pricing of Services

Accurate Costing Models

Quality Improvement Efforts

Pros and Cons of Bundled Pricing

• Shift risk away from health plans to BCH–More attractive for health plans– Greater chance of cost overruns

• Reap benefits of streamlining care– No penalty for cutting CPT codes– Less overutilization

• Set industry standard early in the game

Accurate Costing → Accurate Pricing

Price

Markup

Costs

Different Costing SchemesFactors RCC RVU TDABC

Calculation Mechanism

Cost of procedure = RCC rate * procedure

charge

Cost of Resource = Total Dept. Cost/Total Dept. RVUs x RVUs for

event

Complex allocation based on Time taken

by every resource

Arbitrary numbers/assumptions

used in calculation

RCC rate RVU None (very objective process)

Does it take into account the difference in resource utilization patterns for different ?

No Yes Yes

Ease of implementation

Easy Easy Difficult

Process Mapping No No Yes

Benefits of TDABC

• Better exclusion of research costs• More objective allocation of overhead• Treats excess capacity costs as separate• Process mapping of treatments

Process Mapping: Key to TDABC

Image from http://www.cavalue.com/webdocs/KaplanPorterHowtoSolveCostCrisisinHCHBR%202011.pdf

TDABC Example: Plastic/Oral Surgery

Plagiocephaly Neoplasm Skin Excision Craniosynostosis0

50

100

150

200

250

300

350

ReimbursementTotal RCC CostTotal TDBAC Cost

Plastic and Oral Surgery Procedures

Cost

/Rei

mbu

rsem

ent i

n $

TDABC Example: Cast Room

Long Leg Cast, Cotton Padding

Long Leg Cast, Gore-Tex Padding

Petrie Long Leg Cast

Clubfoot Cast Total

0

200

400

600

800

1000

1200

1400

ReimbursementTotal RVU/RCC CostTotal TDABC Cost

Cast Room Procedures

Cost

/Rei

mbu

rsem

ent i

n $

Improving Patient Quality

• Effects of process mapping– Exposes inefficiencies– Exposes deviations from clinical

guidelines

• Alignment of incentives with bundled pricing

• Physician buy-in with pay for performance

Physician Pay for Performance

• Continue current payment arrangements– Physician services provided by BCH Physicians– Health insurance vs. BCH as payer

• Add pay for performance– Up to 5% of base pay

Structure Process Outcom

e

P4P Metrics

Structure Process Outcom

e

Physicians on call Follow clinicalguidelines

Reduce length of stay

Reduce readmissions

Reduce hospital-acquiredinfections

High patient satisfactionscores

Coordinate care

BCH’s Value Proposition

Patients

Payers

Quality

Value

Next Steps

• Process mapping of other departments• Compare TDABC costs with current

charges– Use information to develop prices

• Meet with BCH Physicians – Get buy-in– Collaborate to develop P4P metrics

ReferencesBoston Children’s Hospital. (December 2012). “Brand Style Guide.” Accessed April 1, 2013. http://www.childrenshospital.org/chnews/bchbrand/images/BCH_BrandGuidelines_v1.0.pdf.Kaplan, RS & ME Porter. (September 2011). “How to Solve the Cost Crisis in Health Care.” Harvard Business Review. Accessed April 1, 2013. http://www.cavalue.com/webdocs/KaplanPorterHowtoSolveCostCrisisinHCHBR%202011.pdf.Melnick, G, VY Wu, & YC Shen. (September 2011). “The Increased Concentration of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices.” Health Affairs 9: 1728-1732. Accessed April 1, 2013. http://www.rand.org/news/press/2011/09/08/index1.html.Rosenthal, MB & RA Dudley. (February 21, 2007). “Pay-for-Performance: Will the Latest Payment Trend Improve Care?” JAMA 297(7): 740-744. Accessed March 31, 2013. http://www.commonwealthfund.org/usr_doc/Rosenthal_P4P.pdf.Weaver, C. (January 25, 2013). “Device Makers Add Fees to Cover Health Tax.” Wall Street Journal. Accessed April 2, 2013. http://online.wsj.com/article/SB10001424127887323854904578264170779696696.html.Matthews, AW & J Kamp. (February 28, 2013). “Health Law Pricing Begins to Take Shape.” Wall Street Journal. Accessed April 2, 2013. http://online.wsj.com/article/SB10001424127887323699704578328693720458354.html.

Graphics:

http://www.cavalue.com/webdocs/KaplanPorterHowtoSolveCostCrisisinHCHBR%202011.pdfhttp://www.americanprogress.org/issues/healthcare/news/2008/05/19/4359/myth-vs-fact-consumer-driven-health-plans/http://www.inquisitr.com/268859/aetna-sued-by-thousands-of-california-doctors-for-coverage-denials/http://www.businessreviewusa.com/news_archive/news/health-plans/coventry-health-care-expands-mhp-acquisitionhttp://vaccinenewsdaily.com/medical_countermeasures/321410-wellpoint-urges-flu-vaccinations-for-seniors/http://www.edmarc.org/amerigroup-elves-are-busy/http://www.childrenshospital.org/chnews/bchbrand/

Bundled Pricing atBoston Children’s Hospital

George McMillan Fleming Center forHealthcare Management

2nd Annual Case Competition