Business & Health: Outcomes management: buying value and cutting costs; when healthcare becomes

Outcomes management: Buying value and cutting costs

Purchasers of health care know they need to improve the value of what they are buying from the health care marketplace. They've been trying to do that for years. In the 1980s, the cost side of the equation V = Q/C (Value equals Quality divided by Cost) was attacked with vigor, primarily through discounting. But discounting simply squeezed one end of the balloon, shifting costs from big purchasers and government onto small employers and private payers that is, those with less buying power. So, overall, health care inflation kept rising unabated.

The other part of the equation--the definition and measurement of quality--has remained even more difficult to solve, largely because of the scarcity of solid, objective data needed to evaluate and set standards for health care.

But that's changing. Since the publication of Paul Ellwood's Shattuck, lecture, researchers have developed a critical mass of techniques and tools to manage, monitor and report out the cost and the quality of health care. Severity of illness measurement systems, hospital and physician performance indicators, small area variations analysis, and patient satisfaction and health status measures are all being used to identify potential problem areas. (See box.)

Many of the quality assessment systems, especially the severity of illness systems, attempt to measure outcomes of medical interventions and to compare those outcomes across institutions or physicians. While the term "outcomes management" is fairly new and definitions vary, the practice it describes generally involves gathering and analyzing the results of medical processes and performances, and then using that data to manage health care provision.

While outcomes management had been considered the provider's bailiwick, many employers, including Nestle, Honeywell and Orange County Public Schools, are now using it as a tool, working together with providers to purchase health care more effectively and, ultimately, to purchase more effective health care. With the information gained from outcomes management, the goal is to change the incentives in the health care system to reward efficiency and effectiveness.

Orlando, Fla.: A case history

About two years ago, the Orange County (Fla.) Public School System decided to self-insure health benefits for its 14,000 covered employees and dependents. The school system hired John Hanson, an executive with more than 20 years' experience in managed care, as director of insurance. "I had come to the point where I believed that discounts, utilization management, and other controls had maxed out on effectiveness," says Hanson. "I felt the biggest return on investment was in state-of-the-art computer systems, which could be used to gather and analyze medical data."

Hanson sits on the board of directors of the Central Florida Health Care Coalition, whose 36 members (including the Orange County school district) represent about 250,000 covered lives. At his urging, the coalition decided to use a software system designed by MediQual Inc., a Westborough, Mass., software publisher, to evaluate local hospitals for outcomes and appropriateness of care. The system, called MQ-PinPoint, uses data from the UB-82 (universal billing) forms that are collected by the Florida Health Care Cost Containment Commission. (The Commission is a state-funded organization that collects data on hospital charges and resource use.)

The MQ-PinPoint analysis regroups data from the billing forms into outcome risk catgories. It then compares these categories to its own database and issues reports on appropriateness of admission and efficiency of resource use. In the Orlando case, the analysis estimated that purchasers in the region were spending $29 million on inappropriate care $57 million on inefficiency and overly long lengths of stay and $27 million on ineffective care.

"What they're saying is, in the Orlando area, there could be over $100 million worth of potential savings to employers," Hanson explains. "For example, we had one hospital in the area whose actual charges are always low or lower, and its average length of stay a little bit shorter, than other area hospitals. Based on those data, you would expect that hospital to have about 40 percent of its patients in the lowest severity group. In fact, 55 percent were in that group. That hospital's charges seemed to be in line with its peers, but it had almost twice as many admissions of the lowest severity than other area hospitals. The inescapable conclusion is that the hospital's numbers are what they are because they have a bunch of patients that don't need to be there anyway.

"Using such data, we went to the hospitals and said we'd like them to purchase MedisGroups II. That software system, a more advanced product, uses clinical data directly from the patient record to correlate patient admission severity with clinical outcome and resource use data. The MedisGroups data are based on actual medical information on a patient's charg for example, a patient's actual EKG reading. The sort of billing-based data supplied by the Cost Containment Board, on the other hand, would only say that the patient's EKG was abnormal."

According to Hanson, the coalition prefers chart-based data because with it a patient's progress can be tracked--within 72 hours of admission--by measuring severity. Further severity measurements would be taken at discharge or eight days later, whichever comes first. Such a system compares favorably with those that only look at average severity during the hospital stay.

"In particular," Hanson notes, "the coalition wanted to make a point about quality control. A nationwide food service chain, for example, needs to be sure that wherever it serves a shrimp dinner, there are exactly six average-size shrimp on the plate. That's the job of quality control. Businesses in the coalition spend from 5 to 6 percent of revenues on quality control, whereas area hospitals, we've found, spend about 1 percent of revenues on quality control."

The two large hospital systems with tertiary institutions, Orlando Regional Medical Center and Florida Hospital, which together comprise about 80 percent of Orlando's health care business, agreed to purchase the MediQual system. Some smaller hospitals also are considering it, Hanson says.

The systems don't come cheap, but the coalition agreed to pay a $10 "abstracting" charge for each admission to help defray the costs. Although the price of the system varies with hospital size, hospitals can expect to pay roughly $500,000 over a 5-year period. "The administrators at the hospitals were extremely cooperative," says Hanson. "They said this is the first time anyone's ever asked them to purchase a quality system and that they'd be willing to pay for it."

Hanson expects to see the first reports at the end of the first quarter, 1991. "Initially, we'll ask for preliminary reports, without the physicians' names, and will sit down with the hospital, the TPA, and the PPO," he says. "We'll talk in principle about what we're going to do to try to improve problem areas, change behavior through education, or institute sanctions. We probably won't be able to start talking about strategies for change until the third or fourth quarter although one such strategy might be to change the behavior of those hospitals that are performing too many Caesarean sections."

"Our primary goal is to improve quality and reduce medical costs," Hanson continues. "Our secondary goal is to reduce administrative costs. We've seen our administrative costs in health plans, for utilization review, precertification, etc., double and triple. That's just on the payer side. From what providers tell me, it's just as bad on their part. For every physician, there are two equivalent office staff that do nothing but deal with managed care providers."

Hanson suggests that when there is agreement on community standards and on a method for accountability, the practitioners who meet those standards won't have to submit to the typical UR practices prevalent today. "For those we trust, we can say, 'you just practice medicine, send us the bill and we'll pay it'," says Hanson. "But those who can't perform up to the standards would still have to jump through the UR hoops. It's a way to get the policing mechanisms removed from the 95 percent of the doctors' offices where they aren't needed anyway."

Cleveland: Buying right

Employers may never need to get involved in outcomes management if they use the "Buy Right" strategy for market reform, according to Walter McClure. (See B&H, "Corporate execs can make a difference," July 1990.) "The problem isn't the assessment, but the incentive," McClure contends.

Powell Woods, vice president of human resources at Nestle Co., agrees. "McClure's thesis, that any system will respond to the incentives in it and become whatever it is rewarded for being, is the basis for what wer're trying to do in the Cleveland Health Quality Choice Program," he says.

The program, which started in 1989, is a cooperative effort among businesses, hospitals and physicians to measure quality uniformly across all hospitals in the area. Employers can then use this information

to provide incentives for employees to use the highest quality providers.

"Employers' part of the bargain will be to devise benefit plans that will divert patient flow to the highest quality and most efficient providers," Woods explains. The 125 employers participating in the project represent about 20 percent of the community population serviced by area hospitals.

Members of the project agreed last July to use Apache III, a software system developed at George Washington University, to gather the outcomes data. They'll spend the rest of 1991 recording the first batch of data. Those data will be forwarded to an independent agency, The Quality Information Management Council, whose members are just now being picked. The council's job will be to sort, manipulate and analyze the data and then present its findings. Because those findings may not present some area providers in the best light, Woods notes that data analysts must be "non-aligned, and with impeccable credentials."

By January 1992, the information will be ready for release to the business community. "At that point we would offer incentives to our employees," Wood says.

"What we have been doing systematically for the last 30 years has been rewarding high-volume producers--those physicians who order too many tests and perform inappropriate procedures," Woods continues. "A significant number of buyers, public as well as private, must agree somehow and commit themselves to doing all they can to steer patients toward the most efficient and high-quality producers of health care, and away from the high-volume producers. If we can do that, we'll totally change the incentives so that we'll be rewarding quality rather than quantity."

But, Woods cautions, employers can't expect to get results without working in tandem with providers. "The systems that measure the outcomes must have the design input and approval and credibility of the medical community behind them," he says. "To get that, you have to have the cooperation, support, and enthusiasm of those involved."

Even though the Cleveland project is a purchaser-led movement, Wood says that it couldn't have moved forward without a spirit of trust and collaboration on the part of all patients. "I really do believe that the local hospital community, in particular, has shown tremendous vision and courage in embarking on this path," he says. "I've had lots of people say to me, why are they doing it? I think the reason is that they are tremendously attracted to a quality-based solution versus a price-based solution."

Emphasis on partnerships

Collaboration is the key to "Value Improvement Partnerships," which the Midwest Business Group on Health says can be a catalyst for national health system reform at the community level. Jim Mortimer, president of MBGH, says the Cleveland project is a data-heavy approach to improving the quality of health care purchases. "The approach we take in value managed care purchasing uses data but emphasizes partnerships as a primary vehicle," he explains.

In 1988, MBGH was granted $600,000 by the John A. Hartford Foundation, a philanthropic organization, to develop the partnerships in three sites: Kingsport, Tenn., Milwaukee, and Chicago. The first demonstration project, to be completed this year, involves quality improvement teams in Kingsport that are evaluating alternatives to readmission for respiratory illness, a clinical area with particularly high inpatient costs.

Rob Johnson, benefits associate at Eastman Chemical, a chemical manufacturer with 11,500 employees in Kingsport, is chair of the quality improvement partnership there. "We really haven't yet used outcomes to try to purchase health care," he says. "Our emphasis is to try to improve the process and thus improve the outcomes. While some folks are dwelling on outcomes to try to find the best providers, in this community we're trying to improve the processes of all the providers, rather than find the bad guys and shoot them."

Heritage IPA, a member of the partnership team, used Medis-Groups to complete a project defining protocols for post-operative gallbladder removal. The software evaluated length of stay, severity of illness, resource use and outcomes. That information was combined with clinical data such as what kind of drain was used, when the change was made from IV antibiotics to oral, and other critical incidents.

The nurses and physicians on the quality improvement team then came to a consensus on what protocol resulted in the best outcome.

Data is a tool, but rather than using data as a quality assessment on which payment incentives are based, it is used to sort out areas needing quality improvement, and those areas are tackled by quality improvement teams that develop, implement and monitor techniques for improving quality. The concept is based on W. Edwards Deming's continuous quality improvement theory. (See box.)

"We have groups of employers working in partnership with providers in quality improvement councils at the community level to find areas where the clinical and administrative processes in health care can be impoved," says Mortimer. "Outcomes data are useful in identifying areas where there is an opportunity for improvement, and helpful in measuring the improvement that's achieved by the quality improvement teams."

While many hospitals across the country have taken it upon themselves to adopt Deming's quality improvement concepts, Mortimer says the MBGH believes employers can motivate more hospitals to do so. In these projects, he says, "the employers make it happen. They take the initiative in creating the partnership they supply education and staff to facilitate quality improvement teams. They help set the policy for the partnership and they can also link the partnership to other systems in the community, such as those involved in economic development."

Honeywell

Honeywell Inc., a control systems manufacturer based in Minniapolis, doesn't call what it's doing "outcomes management." But the company has nonetheless taken an active role in defining quality, based on information on outcomes and processes derived from the medical literature.

"The definition of quality is conformity to specifications," says John Burns, M.D., Honeywell's vice president, health management. "Business doesn't write the specifications, but should require that providers write them based on necessity. There's a new paradigm. Cost control by benefit design should be replaced by quality control through health management."

Honeywell is taking Burns' words seriously. "We've gone directly to closed-panel, multispecialty clinics and asked them if they are willing to hold themselves to existing standards and to incorporate new standards," Burns says. "If they are, their reward will be market share. We pay first-dollar coverage for any demonstrated necessary care, and in our two-year experience with a pilot project, our total cost of health care has been 30 percent below the discount fee-for-service PPO."

Honeywell's goal is to develop exclusive provider relationships in every community in which it does business, provided area hospitals and physicians are willing to restrict their care to the necessary and appropriate. Burns stresses that Honeywell doesn't set the standards it simply keeps up with the medical literature and bases its decisions on standards set by the medical community.

Take Burns's example of Caesarean sections. "We know that a previous C-section is no indication for a subsequent one yet we also know that many obstetricians will do a C-section solely because a previous C-section was done, even though there are no indications that one is necessary," he says. "Many hospitals and their obstetrics staffs have addressed this issue, and by holding themselves to existing standards, have reduced their C-section rates to below 12 percent." If a hospital can't maintain its C-section rate at less than 12 percent, Honeywell won't contract with that hospital.

"The role of business," Burns asserts, "is to employ physicians as part of the health management team and directly contract with physician groups who are willing to hold themselves to the existing standards of the medical literature and adopt [Deming's] continuous quality improvement process and measure outcomes."

But, Burns cautions, outcomes management per se puts the cart before the horse. "Outcomes management, absent standards of necessity and appropriateness, will do nothing to eliminate unnecesary care," he says. "You can't buy smart on the basis of wound infections or blood loss from C-sections when within that group there are any number of C-sections that shouldn't have been done in the first place."

Managed Health Care Association

Paul Ellwood, president of InterStudy and the first to coin the term "outcomes management," believes that how a person reports his or her own quality of life is just as important as clinical indicators. For a $1 fee, InterStudy licenses an Outcomes Management System. InterStudy's license fee is so low because it wants to get the tool used as widely as possible to generate a vast database that can be used for outcomes studies. A key component of the system is a patient questionnaire that helps measure health status. The SF-36, as it is called, was developed by John E. Ware, Jr., a researcher at New England Medical Center, and tested by the RAND Corporation. It asks such questions as:

* In the past month, have physical health, emotional problems or pain interfered with normal social activities or work?

* How well can the person climb several flights of stairs or lift and carry groceries?

"How an individual is able to function in society and his quality of life are the most important frames of reference," notes Michael Huber, manager of the OMS at InterStudy. "The OMS is a great way to start implementing Deming's doctrine and it's a great way for the purchaser to start selling the idea to cooperating providers that they're collecting this kind of information and paying attention to it."

The Managed Health Care Association, a loose affiliation of about 150 employers and providers, has formed a task force to "evaluate the viability of using the OMS," according to William J. Goss, manager, health care programs at General Electric in Fairfield, Conn. The association isn't talking much about how the project is proceeding. However, one participant told Business & Health that the focus was on outpatient care.

Investing in data

Obviously, many employers are investing time and money in outcomes management. But should they have to? Honeywell's Burns says no. "Why should we?" he asks. "That's the obligation of anyone who pretends to be a quality provider. Some of this is standard business practice, evidently not known or understood by the medical community. If medicine incorporates the principles of continuous quality improvement, then it can work very comfortably with business."

But employers will be willing to make an investment in outcomes, says David Vogel, president of David E. Vogel and Associates, a managed care consulting firm in Corrales, N.M. "Employers are going to need to invest time, energy and money," he says. "They'll have to help the provider understand that they need to evaluate the care, the outcomes and the quality of what they are buying."

Rick Lee, vice president, marketing, for Value Health Inc., a utilization review software firm in Santa Monica, Calif., agrees that employers will find it necessary to make an investment. Some will go it alone, but many will decide what they want and pressure their vendors, TPAs, insurance companies, and managed care providers to make the financial commitment. "There is an industry out there that is working to develop the technology to measure utilization and to track for outcomes," says Lee. "And though it's not apparent at this time that employers are ready to buy those products, I think it's fair to say that there will be a significant need for those products. We're going to start out with the employers being educated as to why they have to have those products. They in turn will influence their vendors to produce them."

Alternative to national mandate

The leaders in the movement toward outcomes management see it as much more than a way to save money by increasing quality. To them, outcomes management is the last hope for a private response to the problems of health care in this country. Many of those who spoke with Business & Health stressed that the rising numbers of uninsured and underinsured, skyrocketing premiums that threaten small businesses and global competitiveness, and increased health care costs for government programs, may force a government response.

Says Nestle's Woods: "I absolutely believe that this is the only viable alternative to national health insurance. All the medical literature says there's a lot of productivity to be gained. The only way we'll get it is to reward it. But we've only got a few years to make it work. If we continue to have these problems, it will drive some kind of government response. Whether it's all-payer price controls or a nationalized system like the Canadians have, it will be the signal to the end. Once you've destroyed the pricing system, you can't have a market."

Pamela Taulbee is executive editor, Managed Care Outlook and health Care Competition Week, newsletters published in Alexandria, Va.