Professor James C. Robinson

1
Aligning Incentives in the Context of Biomedical
Innovation
IHA Pay-for-Performance Summit February 16, 2007

• Professor James C. Robinson
• University of California, Berkeley

2
OVERVIEW

• Continual innovation means continual disruption
• Example orthopedic and cardiac implants
• Example orthopedic and cardiac facilities
• Imperatives coordination and flexibility
• Primary care, specialists, devices, facilities
• Aligning incentives payment and organization

3
The Salience of Biomedical Innovations in Health
Care Costs

• New medical devices, drugs, biologics, radiology,
  etc. are the principal driver of health cost
  inflation and must be explicitly considered in
  discussions of performance measurement,
  pay-for-performance
• They offer dramatic clinical improvements but are
  subject to up-selling, over-pricing, indication
  creep, off-label prescription, financial
  conflicts of interest
• Over-use, under-use, and misuse

4
Dynamic Quality and Efficiency

• Improved quality and efficiency within the
  existing set of technologies is important
• First generation pay-for-performance
• The bigger challenge is flexible adaptation of
  incentives within the context of new technologies
• Second generation pay-for-performance
• Dynamic quality and efficiency is the goal

5
Medicares Highest Payments, by DRG Group
(2002-04)
Source Orthopedic Network News, Millennium
Research Group, July 2005.
6
Percent of 2006 DRG payment devoted to the
medical device (cardiology)
Source Orthopedic Network News, July 2006.
7
Percent of 2006 DRG payment devoted to the
medical device (orthopedics)
Source Orthopedic Network News, July 2006.
8
Innovation and Incentive Example (1) Choice of
Medical Implant

• The decision of which cardiac/ortho implant is
  key to the finances of specialists, hospitals,
  others
• Which functional level (demand matching)?
• Which device manufacturer (price negotiation
  strategy)?
• Potential coordination and incentive failures
• Up-selling vendors use consulting, honoraria,
  CME to influence physician choices
• Regulation Medicare ban on physician/hospital
  gainsharing but no ban on physician/vendor
  consulting

9
Choice of Medical ImplantPayment Difficulties

• Medicare Bundle device into hospital DRG and
  ambulatory APC, exposing facilities to financial
  risk without bundling in physician fee and
  incentives
• Commercial insurance Hospitals negotiate device
  carve-outs from per-day and per-case rates,
  reverting to charge-based FFS and mark-up

10
Innovation and Incentive Example (2) Site of
Care

• Choice of site of care is made by MD but affects
  all
• Inpatient versus outpatient? And where?
• Hospital community or specialty (cardiac, ortho)
  facility?
• Ambulatory hospital OPD or freestanding surgery
  center?
• Potential coordination and incentive failures
• Physician investment/ownership
• Self-referral, cherry-picking, over-treatment?
• Ban on physician investment/ownership
• Hospital monopoly, inconvenience, higher costs?

11
Choice of Site of CarePayment Difficulties

• Medicare DRG payments favor invasive
  cardiac/ortho procedures over medical diagnoses,
  stimulating proliferation of service lines and
  specialty facilities not well adjusted for
  severity
• Commercial insurance Fee-for-service undermines
  coordination across episode of care but
  capitation shifts too much risk to providers

12
Machiavelli on Disruptive Innovation

• It must be considered that there is nothing more
  difficult to carry out, nor more doubtful of
  success, nor more dangerous to handle, than to
  initiate a new order of things. For the reformer
  has enemies in all those who profit by the old
  order, and only lukewarm defenders in all those
  who would profit by the new order
• The Prince (1513)

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Hobbes on Disruptive Innovation

• Whatsoever therefore is consequent to a time of
  war, where every man is enemy to every man
  without other security, than what their own
  strength, and their own invention shall furnish
  them withallAnd the life of man solitary, poor,
  nasty, brutish, and short.
• Leviathan (1651)

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Imperatives

• Adaptive coordination via provider incentives
• Adaptive and flexible provider payment methods
• Adaptive and flexible forms of provider
  organization
• The alternatives to provider incentives
• Over-reliance on consumer incentives
  (cost-sharing)
• Over-reliance on regulatory mandates

15
The Components of CoordinationCardiology and
Orthopedics

• Primary care physicians
• High-cost and high-volume specialists
• High-cost and high-value implants
• Hospitals, cathlabs, ambulatory surgery centers

16
Cottage Industry, Fee for Service Every
Component Separate
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Integrated System, Global Capitation Every
Component Included
18
Medicare Physicians Carved Out, Device and
Facility Carved In
19
IPA Model Physicians Carved In, Device and
Facility Carved Out
20
Episode-of-Care Model Service Line Organization
and Case Rates
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Conclusions

• Biomedical innovation is continual
• Innovation is important, but disruptive
• Flexible adaptation is imperative
• Methods of payment
• Methods of organization
• Dynamic quality and efficiency is the goal