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Slide Deck for Chapter 6 in Medical Quality Management, published by the American College of Medical Quality.

Slide Deck for Chapter 6 in Medical Quality Management, published by the American College of Medical Quality.

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  • Philip Crosby James Crouch David Eddy Donald Berwick
  • I used to think politics is what makes the world go round. In fact, its economics.
  • To determine future value using compound interest : where PV is the present value , t is the number of compounding periods (not necessarily an integer), and i is the interest rate for that period. [1] Thus the future value increases exponentially with time when i is positive. The growth rate is given by the period, and i , the interest rate for that period. Alternatively the growth rate is expressed by the interest per unit time based on continuous compounding .
  • You make a pitch to a health plan for a medical management program that would cost $7 PMPY to implement. You are convinced, and the payer is convinced, that the savings would return at an ROI of 1.2 to one, or $8.40 PMPY If you were only offered $5 PMPY, you would be at a contribution margin of $0. You would need to either enroll more patients, or lower costs, so that the total profit was more than your fixed expenses overhead of $46,000. Or else withdraw the offer.
  • This was an actual pro forma for a QAPI project.

ACMQ NoonConference100527 Presentation Transcript

  • 1. American College of Medical Quality Noon Audio-conference Series 2010 Donald Fetterolf, MD, MBA, FACP Rahul Shah, MD, FAAP “ Economics and Finance in Medical Quality Management” The authors have no financial conflicts of interest with the material presented herein.
  • 2. Goals and Objectives for Improving Job/Practice Performance and/or Outcomes
    • Activity Goals of the Presentation
      • Review the role of economics and finance in medical quality management
      • Review basic terms and concepts in economics and finance, and how they relate to professionals working in the field of QI.
      • Develop a strategy to best present the business case for a participants quality program.
    • Anticipated Results to Improve Performance/Outcomes
      • Better understanding of the basic terms used in business, finance and economics to improve communication with nonclinical financial managers and improve business efficiency.
      • Use the knowledge to better operate and finance quality initiatives.
      • Have a framework for using these concepts in a quality management role and apply them in typical situations
      • Understand the use of the ACMQ textbook Medical Quality Management in teaching other quality professionals to improve their roles.
  • 3. Medical Quality Management Medical Quality Management American College of Medical Quality, 2009 “ Chapter 6: Economics and Finance in Medical Quality Management” Don Fetterolf, MD, MBA Rahul Shah, MD
  • 4. Outline
    • Introduction
    • Historical perspective
    • Basic concepts in business and economics
      • Economics
      • Accounting
      • Finance
    • Other general business principles
    • Making the business case for medical quality
    • Conclusion
    • References
  • 5. Introduction: The Business Context
  • 6. Introduction
    • What is the relationship between medical quality initiatives and the business world?
    • 10-20 years of increasing importance of quality management in healthcare
    • How is our expertise to be used in an era of constrained resources and rising costs?
    • Cost effectiveness as an emerging need.
    • How can QI professionals maximize their impact? Why is this relevant for the “Senior Vice President of Medical Quality” in your organization?
  • 7. The Board on Quality:
    • Quality is very important to our company.
    • We have a Director of Quality and Clinician Directed Quality Committees
    • Quality is something we do at the individual level.
    • Quality is the key ingredient to making our business a success.
    • Lack of quality results in unnecessary costs, lawsuits, and rework.
    • We reward individuals who do quality work.
  • 8. Quality Presentations
    • The BOARD OF DIRECTORS
      • “ We’ll get to the QI report as soon as we get done with the important things like the merger and financial pieces of the agenda.”
      • “ You have 10 minutes at the end of the meeting. Don’t talk for a long time, since we’ll be ready for lunch then.”
      • People look at their watch as you begin to speak. The CEO reviews his mail.
      • You start handing out your presentation or it otherwise won’t even go in the minutes.
    • ACCOUNT Presentations
      • “ How much will all these quality initiatives inflate my costs?”
      • “ You know all those things you do for quality? Could you just not do them for us, and give us a lower premium?”
  • 9. Introduction: Case Study
    • The CEO of your company has made friends with the Vice President of Marketing of a national company that claims that it can provide the services one of your areas does effectively. The two have gone golfing, have had dinner together, and have had several “high-level” discussions about having the vendor replace some or all of your existing staff with the vendor's staff. Two of your company’s senior vice presidents at your level with little real knowledge of what you do, and in totally unrelated areas, but who also went golfing, concur that the vendor’s proposal might be a viable option. The vendor claims that he can give your company an “ 14:1 return on investment,” will do the calculations for you, and will ”guarantee” it.
    • You are now approached by the CEO for the first time in all this, who admits that he might dissolve the area in question but offers to give you 30 minutes to agree with his idea or talk him out of it. He is interested in the return on investment that you get now . What do you tell him? Your answer should address both an analytic approach using the principles of a financial analysis and recognition of the various political factors that may influence your choices.
    • Fetterolf, AJMQ Jan/Feb 2003.
  • 10. Tip: What If You Had to Prove You Were Worth Keeping?
    • Always, always, consider the following questions:
      • If your CEO decided to abolish the quality area as not being cost effective, and he gave you 15 minutes to talk him out of it, what would you pull out of your desk and show him?
      • How would you present it to him?
      • What does the quality purchase buy?
  • 11. Historical Perspective
  • 12. The Evolution -- Definitions of Medical Quality
    • Many writers borrowed heavily from concurrent activities in business, engineering and statistical quality control programs in manufacturing.
    • Deming/Juran - Industrial Quality Management Systems - CQI/TQM and the movement from QA to QI.
    • Crosby – Quality is defined as conformance to requirements
    • Couch – Quality = The attribute of a product, service, or outcome that is the extent to which achievable value is actually achieved. Value is usually defined in terms of consumer expectations, whether explicit (i.e. wants), or implicit (i.e. needs)
    • Eddy – Attributes of quality indicators and HEDIS
    • Berwick – Provider participation, continuous improvement. The IOM report.
    • ACMQ – Core Curriculum for Medical Quality Management
    • Quality has progressed from an inspection based techniques to a more data driven, analytical approach.
  • 13. Historical Perspective
    • Quality has had an evolutionary course that has paralleled similar developments in the business world. The relationship to the business world and business thinking is important:
    • Stage 1: Quality Assurance, The Era of Inspection
      • CPCs, sentinel event monitoring, outlier review, inspection
    • Stage 2: Statistical Quality Control and CQI
      • Deming tools, control charts, multivariate normal distributions
    • Stage 3: Outcomes Focused Analysis
      • Prevention, functional status, patients perceptions,
    • Stage 4: Big Management
      • Rise of the QI bureaucracy: NCQA, JCAHO, URAC, CMS
    • Stage 5: Fluid Change, a Cacophony of Quality
  • 14. First Generation CQI
    • Physician Credentialing
    • Institutional Credentialing
    • Procedure Specific Credentialing
    • UM/QI Process Adequacy
    • Technology Assessment Process Adequacy
    • Adverse Occurrence Monitoring
    • Sentinel Event Monitoring
    • External Accreditation
    The Era of Inspection Questions answered: Did the horse get out of the barn? Who left the barn door open?
  • 15. Second Generation CQI
    • Diagnosis-Specific Admissions Variations
    • Targeted Surgical Variations
    • Targeted Ambulatory Surgery Variations
    • Physician Statistical cost/mortality profiling
    • Pharmaceutical Profiling
    The Era of Statistical Quality Control Questions Answered: How many horses get out per year? Can we make repeated door structural changes to reduce the number of escapes over time?
  • 16. Third Generation CQI
    • Selected Claims-Based Outcomes
    • Member Satisfaction/Perception of Health
    • Clinical Outcomes Measures
    • Disease Specific Patient Perceptions
    • Linkage to Disability/Absenteeism
    • Life Event Risk Intervention Analysis
    • Conventional Medical Outcomes
    • Social - small area analysis Dartmouth Study
    • Functional Status and Well Being
    • Health Risk Appraisal
    • Cost Effectiveness Analysis (CEA)
    The Era of True Outcomes Measures Questions Answered: Can we reduce the reasons why the horse would want to leave the barn and instead want to stay and work for me?
  • 17. Fourth Generation CQI
    • Big Systems
      • Integrated Care Management Delivery Systems
      • Multispecialty Group Practice
      • PHO, PHCO, IPA, CHIN, and Others
    • New Methods, Tools, and Concepts
      • “ Data Driven” Information Systems
      • Statistical Quality Control - Shifting the Bell Curve
    • Comparing Across Plans, Hospitals, Companies and Individuals
      • Best Practice Analysis
    The Era of Big Management Questions Answered: If we hire consultants and build big farm coops, will fewer horses escape? Can data mining and predictive modeling reduce the number of horse escapes?
  • 18. Fifth Generation CQI
    • Government Agency Participation
      • CMS, AHRQ, PADOH, PADOI
    • Pseudo-governmental Participation
      • NQF, IOM, PROs, QIOs
    • Accreditation Bureaucracies
      • JCAHO, URAC, NCQA, AAAHC
    • Integrated Care Management Delivery Systems
      • PHO, PHCO, IPA, CHIN, and Others
      • Health plans, HMOs, Group practice.
    • Other Players
      • Consultants
    • Buzzwords Galore
      • P4P, Transparency, Meaningful Use, Accountable Networks, EMR/EHR, the Medical Home
    The Era of Confusion and Cacophony Question: Our system of evaluation for accountable providers transparently creates acceptable deliverables to reduce equine escapement.
  • 19. External Organizations Concerned about Health Care Quality
    • Governmental
    • Centers for Medicare and Medicaid Services (CMS)
    • Peer review organizations (“PROs”)
    • Quality Improvement Organizations (“QIOs”)
    • State departments of health and insurance
    • State health care cost control councils
    • Centers for Disease Control
    • Accreditation
    • National Committee for Quality Assurance (NCQA); includes use of Health Plan Employer Data Information Set (HEDIS) and Consumer Assessment of Health Plans Survey (CAHPS) tools
    • Joint Commission for the Accreditation of Healthcare Organizations (JCAHO)
    • American Accreditation Healthcare Commission (“URAC”)
    • Accreditation Association for Ambulatory Health Care (AAAHC)
    • Business
    • Business Health Care and Purchasing Coalitions
    • Washington Business Group on Health
    • Pacific Business Group on Health
    • Leapfrog Group
    • Local business groups and councils
    • Regional employer coalitions
    • Tech councils
    • National Business Coalition on Health
    • Drug companies and their spin off organizations
    • Others
    • Americas Health Insurance Plans (AHIP)
    • Blue/Cross Blue Shield Association (BCBSA) and the TEC
    • American Board of XYZ
    • Council for Affordable Quality Healthcare (CAQH)
    • Doctors Office Quality Project (DOQ)
    • Institute of Medicine (IOM)
    • National Quality Forum (NQF)
    • Organized medical associations (e.g. AMA)
    • Professional organizations (e.g., American Heart Association) and Specialty societies
    • The BIG UNIVERSITY “experts”
    • Benefit management consultant “experts”
    Question: How much money is being spent on the development and delivery of the medical quality initiatives that are present or being planned for the future? How much will you need to know about business in quality?
  • 20. Theories and Ideas Too!
    • CQI
    • Six Sigma
    • Hoshin Planning
    • ISO 9000
    • Toyota Production System
    • The Intergalactic Business Group on Health’s RFP Analytic Quality Statistic
    Takeaway point: The language of business is pervasive in the language of medical quality.
  • 21. Basic Business Concepts MDs, RNs: “Oh, I know all that.” Consider why you would need to read or train in these subjects.
  • 22. Basic Business Concepts Economics
  • 23. Economics
    • Macroeconomics: the big force that drive things
      • Focus on larger scale, health care markets
        • Supply and demand curves:
        • Factors influencing Medicare funding
        • Regional health initiatives
        • CON legislation
      • Not just about money
        • Labor forces and distribution
        • Physician and nursing shortages
        • Other resouces of value
      • Why important?
        • Consumption and spending
        • Democrats vs Republicans
  • 24. Economics
    • Microeconomics
      • “ Economics of the firm”
        • The behavior of hospital CEOs in a competitive market
        • Big chain vs mom and pop pharmacies
      • Behavior of individuals
        • Behavior change in disease management programs
        • Physician behavior change under pay for performance
      • Why important?
        • Price elasticity of demand
        • Monopsonistic purchasers vs monopolistic suppliers
        • Any willing providers
  • 25. Economics of Clinical Quality Management
    • Low quality healthcare costs more
      • So can you prove high quality cost less?
      • Ewe Reinhardts quality/cost Starling curve:
    • Economics of health care quality is complex
      • complex, multivariable activities
      • high variation in clinical material
      • not always quantifiable
      • not always immediate or even short term impact
    • If you cant do everything you’d like you need cost-effectiveness analysis to choose.
    • Ultimately, what is the ROI?
  • 26. Basic Business Concepts Accounting
  • 27. Typical Forms of Financial Information
    • Financial statements
    • Annual reports
    • Budgets
    • Invoices
    • Bank statements
    • Sales forecast results
    • Financial forecast results
    • Claims payment records
    • Billed and paid premium records
    • General ledgers
    • Investment reports
    • Financial models
    • Cost accounting reports
    • Actual versus budget results for provider risk pools
    • Medical loss ratio and expense ratio reports
    • Utilization statistics reports
    • Payroll records
    Source: Academy for Healthcare Management. Health Plan Finance and Risk Management. 1999.
  • 28. Accounting Concepts
    • Financial Accounting
      • Balance Sheet
      • Income Statement
      • Statement of Cash Flows
    • Managerial Accounting
      • Contribution Income Statement
      • Financial pro formas
    • Statutory Accounting
      • DOI Forms
    • GAAP
    • Annual Statement
    • “ Management Letter”
  • 29. Why Bother with Accounting?
    • It’s the language your boss speaks.
      • What is the ROI?
    • You won’t be a member of the “management leadership team”.
      • Pay attention to those budget discussions.
    • They will take advantage of you if you don’t participate.
      • Internal cost transfers
    • You’ll go to jail if you don’t fill in the forms right.
  • 30. Sample Balance Sheet. Balance Sheet: ABC Medical Corporation Balance Sheet As of December 31, 2002 Assets Current Assets Cash $ 50,000 Accounts Receivable 35,000 Total Current Assets $ 85,000 Non-current Assets Land $ 200,000 Medical Office Building 1,579,000 Equipment (net of depreciation) 250,000 Total Non-current Assets $2,029,000 Total Assets $2,114,000 Liabilities and Shareholders’ Equity Current Liabilities Accounts Payable to Supplier $ 25,000 Salaries Payable to Employees 32,000 Taxes Owed 52,000 Noncurrent Liabilities Notes Payable to Lenders $150,000 Total Liabilities $259,000 Shareholders’ Equity Common Stock $1,500,000 Retained Earnings 355,000 Total Shareholders’ Equity $1,855,000 Total Liabilities and Shareholders’ Equity $2,114,000
  • 31. Income Statements Form of a Regular Income Statement   Revenues Revenues $ 100 Expenses Variable Expenses $ 60 Fixed Expenses $ 20 Profit (Loss) $ 20
  • 32. Income Statement: ABC Medical Corporation Income Statement For 2002 Revenues Patient Revenues $ 1,575,000 Consulting Income 85,000 Investment Income 2,000 Total Revenues $ 1,662,000 Expenses Salary of Partners 853,347 Staff Wages 235,645 Laboratory Fees 32,583 Administrative Expenses 75,495 Interest Expense 3,453 Insurance 23,453 Total Expenses $ 1,223,976 Net Income $ 438,024   Note: Categories come from the “chart of accounts” May leave out or in interest, taxes, depreciation, amortization: EBITDA “ Economic Value Added” may subtract the cost of capital.
  • 33. Income Statements Form of a Contribution Income Statement   PMPY* Total Members Affected 50,000 Revenues Variable Revenues $ 7 $350,000 Expenses Variable Expenses/Unit $ -5 $250,000 Contribution Margin $ 2 $100,000 Fixed Expenses $46,000 Profit (Loss) $54,000   __________ *PMPY = Per member per year. Note the definitions “at the margin”, “marginal cost” and “marginal profit” Note also the relationship with a “breakeven analysis” – you need at least 23,000 members to break even. Why?
  • 34. Income Statements: Activity Based Cost Accounting – “ABC” Example of activity-based cost accounting.   Product A B C Total   Revenue Variable Revenue $50 $50 $20 $120     Expense Variable Expense $30 $ 5 $ 5 $ 40 Fixed Expense $15 $30 $ 5 $ 50 Profit (Loss) $ 5 $15 $10 $ 30 Note: The revenues, expenses, and profits can all contribute in various ways. Here, A the most costly item contributes the least profit, but you would still do it. Or would you?
  • 35. Cash Flows: ABC Medical Corporation Statement of Cash Flows For 2002 Cash at the Beginning of the Period : $1,000,000 Operations Cash Flow from Operations $ 1,662,000 Investing Sale of Noncurrent Assets 0 Acquisition of Noncurrent Assets -30, 000 Total Cash Flow from Investing $ -30,000 Financing Issue of Partner Stock 50,000 Dividends - 2,000 Total Cash Flow from Financing $ 48,000 Net Change in Cash Flow $ 1,680,000 Cash at the Beginning of the Period : $ 2,680,000 Why do this? You don’t want to run out of cash even if you have lots of cash and assets.
  • 36. Basic Business Concepts Finance
  • 37. Finance
    • Budgeting
      • Annual Budget
      • Capital Budget
    • Cost of Capital
      • Opportunity cost
      • Economic value added
    • Discounted Cash Flow Analysis
      • Future Value = Present Value x (1 + Interest Rate) t
      • Net present value calculations
  • 38. Other General Principles
  • 39. Other General Principles
    • Creation of business plans
    • Financial pro forma statements
    • Project management
    • Organizational planning
    • Organizational psychology
  • 40. Key elements of a business plan, each typically described in a few paragraphs, include:
    • An overview of the industry or company and a description of any products that are being produced or are under consideration
    • An evaluation of the current market , including the advantages of the proposed initiative over competitors’ initiatives
    • A formal outline of the proposed initiative and the opportunities that it provides to the company
    • Marketing research that identifies the potential target market and the projected costs and revenues for the initiative
    • A formal design for implementing the initiative and a development schedule
    • An overall operations plan that uses standard project-management approaches
    • A profile of an accountable lead person and the credentials of the management and operations teams
    • An overview of the economics surrounding the business and the initiative including general profitability, sales potential, and so on.
    • Anticipated risks and problems that could result in less-than-optimal outcomes
    • Financing arrangements and pro forma financial statements that outline return and costs over a period of several years
    • Estimated contracts, terms, agreements, and other items that must be negotiated
    • Exit strategy : the process for ending or discontinuing the program
    Business Plans
  • 41. Business Planning: Project Mgmt Note the column headings: Goal-Objective-Tactic-Accountable person- Dates-Metric
  • 42. Financial Pro Forma: Income Statements over Time
  • 43. Style:Key Concepts to Know/Use
    • Business Plan & Project Management
      • Gantt Chart
    • Income Statement Terms
      • Revenues, costs
      • Gross, net profit
    • Contribution Income Statement
    • Activity Based Cost Accounting
    • Return on Investment, Breakeven Analysis
    • Financial Pro Formas
    • Valuation of business programs
  • 44. The Business Case for Medical Quality
  • 45. The Business Case for Medical Quality Components of the Business Case for a QI Unit
    • Government mandates
      • Basically, you have to…
    • Financial effect
      • Lower quality is more expensive
    • Demands by the payer/business/consultant community
    • Logical requirements for quality oversight
    • Demands of business partners
    • Trade off between value of accreditation and lower costs
    • Estimated economic impact from econometric attempts
      • NCQA Quality dividend calculator
    • Social goals
  • 46. Tip: They are Not Idiots -- Historical Value Estimates
    • “ I saved $1000 by sending Mr. Jones home”
    • “ I negotiated a $1000 savings”
    • “ My denial rate is 15%”
    • “ My Admits/K went down by 10% so I saved $8.6 million”
    • “ My MLR is 78%”
    • We raised mammography rates by 5%
    • So, Mr. Medical Director, why didn't my premiums go down ?
  • 47. Wisdom from CMO’s: Stay Focused on the Important Stuff
    • Generate more revenue
    • Lower/maintain PMPM costs (to you and clients)
    • Reduce administrative overhead
    • Measurably improve quality
    • Improve relationships with business contacts
    • Have real impact, not inconsequential activities
  • 48. Multidimensional Categories of Quality Impact
    • Operational
    • Clinical
    • Financial
    • Productivity
    • Intangible
    • Social
  • 49. Return on Investment in Quality and Medical Management P = Probability of Outcome $$$ Profitability/Impact of the Initiative Soft Hard Intangible
  • 50. Example: Problem Presentations
    • “ Diabetic foot exams increased under our new program.” – Pointless clinical statistic
    • “ We spent $1 million generating the HEDIS statistics this year.” – High cost for something that isn’t necessary anyway
    • “ If we had more people in the quality area, we could really improve care.” – Adding still more resources to an already bloated concept
  • 51. Better
    • Our HEDIS measurement is now a necessary component of our NCQA quality accreditation. The Intergalactic Business Group on Health is comparing our results with ABC Health, our biggest competitor. (smugly) Ours are better in 7 of 10 areas.
    • Our scores have been improving, which will be useful marketing information.
    • Our scores are good compared with national benchmarks and our competitors, so if any one asks you, they are a good thing.
    • While the cost to produce this information is high at $1 million dollars, the result will assure our competitive position with respect to accreditation and compliance needs.
    • Actually, the value is higher – for every point we increase mammography rates alone for example, economists estimate that we will experience $500,000 less costs in breast cancer treatment over the next 5 years.
  • 52. Business Case for Quality: Case Studies Rahul K. Shah Assistant Professor of Otolaryngology and Pediatrics George Washington University Medical Center Children’s National Medical Center Washington, D.C.
  • 53. Case 1: New Medical Mgmt Program
    • PMPY* Total
    • Members Affected 50,000
    • Revenues
    • Variable Revenues/Savings $ 7 $350,000
    • Expenses
    • Variable Expenses/Unit $ -5 $250,000
    • Contribution Margin $ 2 $100,000
    • Fixed Expenses $46,000
    • Profit (Loss) $54,000
    Question: What is the minimum number of patients enrolled that would make the project profitable? What would you do if the payer only offered $5 PMPM as your reimbursement?
  • 54. Case 2: QAPI project
  • 55. Case 3 – Evaluating cash flow
    • A hospital realized that a surgical sub-specialty (orthopedics) which should normally be profitable was losing money. The hospital lost both from fewer cases and from inefficient operations
    • Financial analysis suggested that DRGs for total hip and knee cases appeared to be the principle cost drivers of the unprofitable unit. Flow chart analysis of the care process revealed a bottle-neck due to a prolonged length of stay, specifically for total hip surgery and total knee cases. Average length of stay numbers were reported higher than regional insurer network averages and normative professional society statistics.
    • Target: reducing the length of stay which would allow more cases to flow through the system and increase surgical volume.
  • 56. Case 3 – Cont’d
    • Using fishbone diagrams, process flowcharts, and run chart analyses, medical quality professionals developed a plan to have patients brought in prior to the surgical procedure and give them intensive education as to what to expect during their stay and post-operative period.
    • The QI team targeted effective and efficient pain management, infection control, and early ambulation protocols using continuous quality improvement tools.
    • Total hip and knee surgery average length of stay (ALOS) values were reduced, and capacity increased.
  • 57. Case 4 – Creating a new clinic
    • A tertiary care pediatric children’s hospital noted that they were not on par with best practices regarding the pre-operative preparation of some of their critically ill children and those with chronic conditions.  
    • A proposal was made to create a Pre-anesthesia Consult Clinic (PACC).
    • The approach taken was be to demonstrate simultaneous direct profit from the PACC and indirect savings through efficiency and quality effects from improved OR management. Financial risk would be negligible, and the CQI effort independently sustainable.  
  • 58. Case 4 – Cont’d
    • The PACC would both telephonically screen and physically evaluate patients, with the purpose of assuring timely patient preparation and minimizing cancelled or forfeited OR times.
    • While the majority of the screening work would be done as a “virtual clinic” with contact via phone and telephone, the PACC would also physically see (ie submit bills for) on average 5 consults a day or 20 patients a week, for a billable amount of approximately $5,000/wk or $260,000/yr.  
  • 59. Case 4 – Cont’d
    • For the leadership team, benefits included realization of direct revenues, and real but somewhat less tangible improvement in operating efficiency and safety, including reduced waiting for operating room cases to begin.
    • It has been approximated that the cost of an OR delay is $10 per minute, and the cost of cancellation to be up to $1,500 per hour. The PACC would be positioned to minimize cancellations and delays through a more efficient preadmission process.
    • The case presented suggested that if even one 15-minute block of OR time could be better utilized each day that would be a $150/day savings. Additionally if even one cancellation of an hour long case every other day could be avoided, it would translate to a weekly savings of $3,750.  This would translate to a $4,500/wk savings or at least a $252,000/yr savings.
  • 60. Case 4 – Cont’d
    • The PACC would result in a gross revenues for the hospital of $512,000/yr.  Expenses were mainly staffing based -- the PACC needed to be staffed appropriately.  The proposal planned for 1 nurse (RN) FTE ($90,000/yr), 1 LPN FTE ($50,000/yr), 2 FTE nurse practitioners ($120,000/NP/yr) and one .25 FTE anesthesiologist ($75,000/yr) to run the PACC.  
    • Existing hospital facilities would be used, and initial startup costs would thus not need to include office space, secretarial support, or additional costs. Startup capital would be minimal, and the program could be terminated at the end of one year if results did not meet expectations.
  • 61. Case 4 – Cont’d
    • Thus the final business case for the leadership was that the costs for the PACC would be at approximately $455,000/yr, offsetting the revenues described above.  
    • The budget of $500,000/yr the PACC would be anticipated to cover its own costs and potentially even provide a minimal profit to the institution.  
    • The executive leadership approved the budget and plan.
  • 62. Case 5 – Pay for performance
    • A large, multispecialty provider group in northern California used an existing chronic disease care management (CDCM) program to assist in the management of cholesterol for selected, specific high risk patients that would allow reporting of measures that would be potentially used for payment for performance.
    • The actual gain in revenue from the CDCM is confidential; it is hypothesized that it would be around $28,000 assuming a one-dollar incentive per patient per month that meet the goal – assuming that this multispecialty group was above the percentile slated to receive payments.
    • Patients followed in the CDCM program had statistically significantly higher rates of LDL-C testing and goal attainment than patients followed in the routine manner in this group.
    • The advantages of the CDCM for this group is that it utilized existing infrastructure and thus did not require start-up costs – this allows for the P4P monies to be considered as a potential source of profit as well as revenue.
  • 63. Case 5 – Cont’d
    • For this program to be implemented de novo, we can cautiously estimate the time of approximately .5 FTE at the level of RN. This cost would be about $45,000. A program that generates revenue for the above mentioned multispecialty group ends up generating a loss in another practice setting. The group is asking for more money to fully cover the cost of the nurse to expand the program across the practice.
    • In the above mentioned case study, the potential payment of $28,000 to the multispecialty group was only for approximately a fraction of the group. Would it be in the administering organizations financial interest to make a payment of $50,000 to this group if the multispecialty group was able to achieve target goal thresholds on all potential patients? Additionally, this cost to the administering organization is only for incentive payments to one multispecialty group!
    • The medical director for the payer who reports to you does not know how to estimate the economic impact of compliance with cholesterol guidelines. One could argue that the money saved also may not be realized due to the patients moving from one region to another, especially in a disease process such as affected by cholesterol levels.
  • 64. Case 5 – Cont’d
    • The timeframe of a ROI: In specific disease states, the ROI (or cost savings) can be appreciated in a short-time frame (e.g. influenza vaccinations for a seasonal disease process) or over a much longer time frame (e.g. the effect of LDL-C levels on morbidity and mortality).
    • With a largely transient and migratory pattern, the effectiveness and financial case of P4P programs from the perspective of the administering organization has to be considered.
    • So, should the administering organization pay the money, keep it as is, or close out the program?
  • 65. Case 6 – Macroeconomic issues Health plan actuaries predict a flattening in the health care cost trend because costs “can’t keep getting higher.” They also note that economic analyses by the federal government (in a CMS report) suggest considerable debate about the leveling of costs in the near future. They admit that “provider reform” efforts by the federal government to control costs are doomed to failure, and that costs could keep going up. The Chief Medical Officer is asked to comment. He notes that costs are up in every category. He also notes that various classes of emerging technologies continue to arrive in increasing numbers, and that the demographics of the plan suggest that the aging population will continue to have a great effect on cost. The Vice President of Provider Relations observes that vertical and horizontal market consolidation in the area, as well as declining hospital margins, will make it unlikely that simple price controls will be effective, because reimbursements to hospitals may need to go up this year. He admits that providers also have not had a fee increase for some time, are being hit with rising malpractice premiums, and are unlikely to settle for any reduction in fees. He concedes that physicians may be leaving the state because of low reimbursement and high malpractice premiums and that Medicare recently had to retreat from a planned reduction in physician payment. In his view, multiple economic factors seem to point to continuously increasing costs. The group concludes that the percentage of the gross national product attributed to health care, now edging to 14%, will rise even higher. These national trends are likely to be reflected in local health plans as well cost drivers. The Chief Medical Officer is asked to participate in a workgroup in the plan to “brainstorm” methods of cost control. Several managers believe that cutting payments to physicians is the only way to reduce consumption of medical services. Others argue that better management of individuals will be the most cost-effective method. Still others maintain that the days of managed care are over, and that real cost savings will come through reducing unnecessary variation by applying quality tools.   What should the Chief Medical Officer’s advice to the group be?
  • 66. Summary of business cases
    • Need to have data
    • Target population needs to be able to be captured
    • Need to make assumptions
    • Need to include ROI
    • Need to include time to break even
    • Need to set realistic targets
  • 67. Questions? References on Next Slides
  • 68. References
  • 69. “ Estimating Clinical and Economic Impact in Case Management Programs.” Fetterolf, D. et al. Population Health Management. 13(2): 73-82 April/May 2010
  • 70. The Business Case for Quality: Combining Medical Literature Research with Health Plan Data to Establish Value for Nonclinical Managers Fetterolf, D and West, R AJMQ, 2004
  • 71. Presentation Advice From the Experts Fetterolf, D.. "Commentary: Presenting the Value of Medical Quality to Nonclinical Senior Management and Boards of Directors.." American Journal of Medical Quality. (18)1. Jan/Feb 2003. pp. 10-14.
  • 72. Bibliography --Academy for Healthcare Management. Health Plan Finance and Risk Management. Atlanta, GA. Academy for Healthcare Management. 1999. --Baker, Judith. Activity-Based Costing and Activity-Based Management for Health Care. Aspen Publishers. 1998. --Berwick, D. Curing Health Care. New Strategies for Quality Improvement. San Francisco. Jossey-Bass. 1990. --Blissenbach, H. "Use of Cost-Consequence Models in Managed Care." Pharmacotherapy. (15)5. 1995. pp. 59s-61s. --Carey, R. and Lloyd, R. Measuring Quality Improvement in Healthcare. New York. Quality Resources. 1995. --Clancy, C. and Kamerow, D. "Evidence-Based Medicine Meets Cost-effectiveness Analysis." JAMA. (276)4. July 24/31, 1996. pp. 329-330. --Couch, JB. Health Care Quality Management for the 21st Century. Tampa, FL. Hillsboro Printing Co for the American College of Physician Executives. 1991. --Crosby, P. Quality is Free. New York. New American Library. 1979. --Crosby, P. Quality Without Tears. New York. McGraw Hill Book Company. 1984. --Donabedian, A. Explorations in Quality Assessment and Monitoring. Volume II. The Criteria and Standards of Quality. Health Administration Press. Ann Arbor. 1982. --Drummond, M. and McGuire, A. Economic Evaluation in Health Care. Merging Theory with Practice. Oxford University Press. 2001. --Drummond, M., O'Brien, B., Stoddart, G. and Torrance, G. Methods for the Evaluation of Health Care Programmes, 2nd Ed.. New York. Oxford Medical Publications. 1998.
  • 73. Bibliography --Fetterolf, D. "Commentary: Presenting the Value of Medical Quality to Nonclinical Senior Management and Boards of Directors." American Journal of Medical Quality. (18)1. Jan/Feb 2003. pp. 10-14. --Fetterolf, D. Costs from a Third Party Payer Perspective, Chapter 20 in Quality and Cost in Neurological Surgery. Philadelphia. Lippincott, Williams and Wilkins. 2001. --Fetterolf, D. and West, R. “The Business Case for Quality: Combining Medical Literature Research with Health Plan Data to Establish Value for Non-Clinical Managers.” American Journal of Medical Quality. (19)2. March/April 2004. pp. 48-55. --Fetterolf,D. “Notes From the Field – The Economic Value Chain in Disease Management Organizations”. Disease Management . December 2006. pp 316-327. --Fetterolf, D., “Application of Disease Management Principles to Pregnancy and Delivery.” Stanziano, G. and Istwan, N. Disease Management. Disease Management. (11)3. 2008. pp 161-168.   --Fetterolf, D. and Tucker, T. “Assessment of Medical Management Outcomes In Small Populations.” Disease Management. Population Health Management (11)5. 2008. pp. 233-239. --Fetterolf, D. et al. “Estimating Clinical and Economic Impact in Case Management Programs.” Population Health Management. 13(2): 73-82 April/May 2010 --Gafni, A. "Willingness to Pay in the Context of an Economic Evaluation of Healthcare Programs: Theory and Practice." Am. J. Man. Care. (3(suppl))S21-S32. 1997. --Galvin, R. "The Business Case for Quality. Developing a business case for quality will require a deliberate approach, with all economic parties at the table.." Health Affairs.Nov/Dec 2001. pp. 57-58. --Gladowski,P., Fetterolf, D, Beals, S., Holleran, MK, and Reich, S. “Analysis of a Large Cohort of HMO Patients with Congestive Heart Failure.” American Journal of Medical Quality . (18)2 April 2003.
  • 74. Bibliography --Gold, M. et. al. Cost Effectiveness in Health and Medicine. Oxford University Press. 1996. --Hubbell, W. "Combining Economic Value Added and Activity Based Management." Journal of Cost Management. Spring 1996. pp. 18-29. --Plocher, D. and Brody, R. "Chapter 31, Disease Management and Return on Investment. In Best Practices in Medical Management." 1998. pp. 397-406.Santerre, R. and Neun, S. Health Economics: Theories, Insights, and Industry Studies. Chicago. Irwin. 1996. --Stephens, K. et al. "What is Economic Value Added? A practitioner's view. (corporate performance measure)." Business Credit. (99)4. pp. 39(4). --Torrance, G. "Preferences for Health Outcomes and Cost-Utility Analysis." The American Journal of Managed Care. (3(Suppl)). 1997. pp. S8-S20. --Walton, M. The Deming Management Method. New York, NY. Perigee Books. 1986. --Weinstein, M., Siegel, J., et al. "Recommendations of the Panel on Cost-Effectiveness in Health and Medicine." JAMA. (276)15. October 16, 1996. pp. 1253-1258.Wessels, WJ. Economics . Second Edition 1993.          
  • 75. Slide Set Information
    • Author: Don Fetterolf, MD, MBA, FACP
        • Phone: 412-638-2891
        • Email: [email_address]
    • Author: Rahul Shah, MD, FAAP
        • Assistant Professor of Otolaryngology and Pediatrics
        • George Washington University School of Medicine
        • 111 Michigan Avenue, NW
        • Washington, D.C. 20010
        • [email_address]
    • filename: 100527 Econ Fin in QI.ppt
    • date: May 2010
    • date of this printout: May 24, 2010