Improving Efficiency and Quality

An objective of the Health Maintenance Organization (HMO) Act of 1973 was to stimulate competition between health plans in a geographic region. One thought was that each health plan would hire or contract with a select group of physicians. The physician groups would contract with one health plan--such as the Kaiser Permanente Physician Group contacts with the Kaiser Permanente Health Plan. The end result would be health plan competition that would drive health system efficiency. (Efficient means using the least amount of medical resources to treat a medical condition and achieve a desired quality of patient care. Thus, efficiency is a function of unit price, volume of service, intensity of service, and quality of service.)

To date, however, this objective has not been achieved--except in some isolated instances. Physicians and physician groups generally contract with the majority of health plans and preferred provider organizations (PPOs) in a geographic region. Consequently, a health plan or PPO generally controls no more than 1%-to-10% of a physician's medical practice. The end result is that 'true' health plan competition has not occurred, and market efficiency has not really improved. Evidence of this is the current double-digit annual trend rate.

How Provider Networks Developed

In the past, employers and other purchasers demanded that health plans and preferred provide networks (PPOs) have a good breath and depth of coverage. Health plans and PPOs responded by contracting with most physicians, physician groups, and hospitals that accepted a per unit price discount. Health plans and PPOs paid little attention to overall physician efficiency and quality of care--accepting a price discount, having a state license to practice medicine, and not having malpractice claims was good enough. The resulting broad-based provider networks preserved geographic coverage and minimized practitioner disruption for employees and their dependents.

However, the focus on provider price discounts has only partially improved the efficiency and quality of the healthcare market. This is because the market has not well addressed the other components of medical trend, such as the volume and intensity of medical services. Volume refers to the number of services performed to treat a specific medical condition (e.g., an office visit, two laboratory tests). Intensity refers to the magnitude of medical care ordered to treat a medical condition (e.g., an x-ray versus a computer tomography scan). Volume and intensity increase now account for almost 50% of the annual trend rate.

Improving Market Efficiency and Quality

We recognize the need to consider all components of medical trend (not just price discounts), if efficiency and quality are to be improved. We believe market efficiency will be improved once individual practitioner efficiency and quality are accurately measured and individuals have knowledge of--or are directed to--efficient, quality practitioners (see Quality of Care Measurement).

Most recent evidence has suggested that about 10%-to-20% of practitioners, across specialty types, practice inefficiently. The small percentage of practitioners is responsible for driving up to 20% of the unnecessary, excess medical expenditures incurred by employers and other healthcare purchasers--equating to billions of dollars nationally.

This finding translates into significant expenditures for healthcare purchasers. For example, if an employer's current healthcare expenses are about $4,500 per employee (and the employer has 5,000 employees), then this equates to $4.5 million in annual excess expenditures for the employer ($4,500 per employee x 20% excess expenses x 5,000 employees). Over a five-year period, the employer may experience about $30 million in excess expenditures, on a compounded interest basis.

Accuracy of Practitioner Efficiency Measurement Systems

To improve market efficiency, we first need to apply a system that accurately measures individual practitioner efficiency and quality. Recent evidence has demonstrated that leading practitioner efficiency measurement systems have only about 30% agreement across measurement systems. This means that when one system ranks a practitioner as "inefficient," only about 30% of the other systems ranked the same practitioner as inefficient. The remaining 70% of systems ranked the same practitioner as "efficient" (K. Grazier and J.W. Thomas. A Comparative Evaluation of Risk-Adjustment Methodologies for Profiling Physician Practice Efficiency. A report to the Robert Wood Johnson Foundation, September 2002).

The findings show that most existing measurement systems inaccurately identify inefficient practitioners. Moreover, the chances of finding inefficient practitioners may be random.

These findings show that existing systems have significant error in attempting to accurately identify inefficient practitioners (see Efficiency Measurement Errors in existing measurement systems). The error needs to be eliminated, or significantly reduced, if purchasers are to save money by identifying and dealing with inefficient practitioners. Every practitioner falsely measured as efficient (or inefficient) leads to continued inefficiency in the healthcare marketplace.

Cave Consulting Group Approach

Cave Consulting Group's efficiency and quality measurement system is designed to reduce the current errors in identifying inefficient practitioners. Consequently, we more accurately measure a practitioner's efficiency, which will assist you in maximizing savings and minimizing the impact from practitioner-patient disruption.

An efficiency measurement system developed and used by Cave Consulting Group is the "marketbasket approach" of medical conditions. This approach has gone through over a decade of research and development, and is widely published in academic and trade journals (see Efficiency and Quality Measurement references). Studies have addressed practitioner efficiency analyses, small area variation analyses, physician feedback evaluations, capitation health-risk adjustments, and practitioner process of care analyses. The approach has been used by many HMOs and insurance carriers to examine network efficiency and quality of care.

In brief, we build and examine condition-specific, longitudinal episodes of care. Next, we develop marketbaskets of the most common medical conditions for each specialty type. Medical conditions are placed in a specialty-specific marketbasket if they are a prevalent part of the particular specialty type's practice. The medical conditions are selected for the marketbasket in work effort order--a function of the prevalence rate and average medical condition charges.

For example, the marketbasket for general surgeons consists of about 15 medical conditions, including the following: cystic breast disease, hemorrhoids, abdominal hernias, and cholelithiasis. The marketbasket for obstetrics/gynecology also includes about 15 medical conditions, including the following: normal deliveries, complicated deliveries, menstrual disorders, cervicitis, and menopausal symptoms.

There is not a good adjustment system available to make sicker patients appear healthier-and healthier patients appear sicker. The best predictive models on the market today explain only 20% to 30% of the variance in a patient's medical expenditures. This means that 70% or more of the variance is unexplained, and may be attributed to differences in patient health status. Consequently, including all-or almost all-patients in practitioner efficiency and quality measurement will result in unstable and inaccurate ratings. That is, observed practitioner efficiency differences actually may be attributed to patient health status differences.

If we included the sickest patients, only a handful of practitioners would be assigned these sickest patients--that is, about 10% of all individuals drive about 70% of healthcare expenditures. There is not a good adjustment system available to make these sicker patients appear healthier--and healthier patients appear sicker. Consequently, including the sickest patients significantly distorts the practice patterns of those few practitioners that were assigned the sickest patient episodes of care--and practice pattern differences generally are attributed to patient health status, and not to practitioner efficiency differences.

For a specific medical condition, including patients of poorer health status significantly distorts the practice patterns of those few physicians that treat the poorer health status patients. Any observed practice pattern differences probably are attributed to patient health status differences, and not to practitioner efficiency differences.

As with the marketbasket of items used to build the consumer price index, the composition of medical conditions in each specialty-specific marketbasket does not change over time. This means that any trend increase reflected by the specialty-specific marketbasket is independent of changes in patient demographics and health status. Instead, the trend reflects price increases, volume increases, and intensity of service increases in the treatment of the static set of medical conditions.

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