1. How payment
innovation can change
healthcare
Nuffield Summit
Ben Richardson
Discussion Document
8 March 2013
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2. Changing how we pay for healthcare is key to
unlocking innovation
▪ Payment innovation is a way to align payors and multiple providers on the
triple aim of improved quality, better experience and reduced cost
▪ It can do this by helping to 1) making value conscious choices, 2) reduce
needless variation in cost, 3) target resources where it is needed, 4) changing
patient behaviour
▪ Broadly three different models exist for payment: capitation, episodes, and
pay for performance
▪ These payment models are being put into place by different types of players
▪ Note of caution: payment innovation on its own isn’t enough—other enablers
are required
▪ Putting in place payment innovation can be done at multiple levels
McKinsey & Company | 1

3. 4 levers that payment innovation can support
Lever Payment innovation
Make value-conscious choices ▪ Allow provider to benefit from
1 ▪ Practice (eg. resolve in 1ry care) reducing cost
▪ Procedure (eg. decisions)
▪ Products (eg. Gx)
▪ Providers (eg referrals)
Reduce unwarranted variation ▪ Upside better performance
2 ▪ Understand “normal” and/or improvement
▪ Peer review “abnormal” ▪ Downside for poor performance
Better management of chronic ▪ Fund additional care
3 conditions ▪ Allow provider to benefit from
▪ Coordinate care reducing cost
▪ Faster response
▪ Proactively manage
Change patient behaviour to support ▪ Incentivise individual behaviour
4 healthier lifestyles ▪ Provide personal budgets
McKinsey & Company | 2

4. Unwarranted variation in practice-level activity and cost
Activity distribution by practice
Activity per 1000 weighted population (normalised
for average IMD score)
Non-elective Elective (R2 = 0.53) OP (R2 = 0.64) A&E (R2 = 0.64)
11-22%
2.7 2.6 2.6 2.6
Weighted median = 136 Weighted median = 126 Weighted median = 1,565 Weighted median = 482
SOURCE: HES 2010/11, McKinsey analysis, ONS, IMD, DH Exposition book
McKinsey & Company | 3

5. 20% of patients drive 80% of costs
2010/11 data, 4 London Average cost per Health spend
Total
CCGs Population capita per annum, £ Social care spend spend, £m
Very 4,757 39,600 118
high
risk
High 41,675 8,700 327
risk
Moderate 142,773 2,400 There is a 40X
354
risk variation in spend (and
needs) between
There is a 40X
average and highest
variation in spend (and
cost patients, the
Low risk 322,609 500 needs) between 186
mostly flat, “one size
average and highest
fits all” payment
risk patients
model doesn’t address
Very low this
378,020 300 104
risk
Total / average ~890,000 1,230 1088
1 Includes elective admissions, outpatient, and A&E 2 Includes community health & primary care
SOURCE: McKinsey team analysis, NHS NWL data; HES 2010/11, FIMS, Q research/NHS Information centre, PSSEX;
McKinsey & Company | 4
NHS Reference Costs

6. There are 3 major complementary payment models being deployed in US
Full Population-based payment Most applicable
alignment of ▪ Capitation ▪ Primary prevention for healthy
payment to
▪ Care for chronically ill
outcomes
(e.g., managing obesity, CHF)
Episode-based payment ▪ Acute procedures
(e.g., CABG, hips, perinatal)
 Retrospective Episode Based
▪ Most inpatient stays including
Payment (REBP) post-acute care, readmissions
 Bundled payment ▪ Acute outpatient care (e.g.,
broken arm, URI, some
cancers, some behavior health)
▪ Discrete services provided by
Pay for performance entity with limited influence on
▪ Bonus payments tied to quality upstream or downstream costs
(e.g., MRI, prescription,
▪ Bonus payment tied to value medical device, Health Risk
Assessment)
McKinsey & Company | 5

7. International experiments with a wide variety of new reimbursement
and risk-sharing models
Select examples Description
“Payor-led”
▪ Payor-led affiliation or acquisition of health
system seeking full clinical/operational
integrated network integration to reduce costs, improve
Full risk
experience, and manage referrals
“Provider-led”
▪ Provider system that takes full risk either with
own health plan or under contract, using
integrated network integrated clinical system to deliver value
Risk sharing
▪ Provider organisation accountable for quality,
ACO cost, and overall care; share cost savings if
performance metrics are met
▪ Covers all aspects of preadmission, inpatient,
Episodes of care and follow-up care, including postoperative
complications within a set time period
Patient centered
▪ Team of physicians and extenders,
coordinated by a PCP, coordinate provide
medical home high levels of coordinated care; typically tied
sharing
Gain
to P4P contract
▪ Payment bonus tied to efficiency metrics
Pay for value (e.g., reduction in ER visits, imaging)
SOURCE: McKinsey Analysis McKinsey & Company | 6

8. Payment innovation must meet 8 requirements to drive cost-reducing
innovation in care delivery
Expand use of population-based and episode-based
Setting expectations
payment
Maximize provider revenue and earnings subject to
Significant
outcomes-based reimbursement
at Scale Ensure a critical mass of providers within a local
market transition to outcomes-based reimbursement
Stable Clarify long-term vision and commit to providers
Striving, but practical Design approach to be effective in current
regulatory, legal, industry structure
Sustainable Ensure providers that adapt thrive financially
Supportive Payment innovation necessary but not sufficient—
needs support for transformation
Supply-demand Align reimbursement with patient engagement,
integration benefits, network design, etc.
McKinsey & Company | 7

9. Significant impact of payment innovation internationally
Country Example Impact achieved
▪ 25% lower cost per head
▪ 30% drop in admissions
▪ 90% patient satisfaction
▪ 13% reduction in cost per
head
▪ 7% below median costs
▪ Top decile outcomes
▪ 58% fewer amputations
▪ 18-30% lower admission
▪ 17-43% lower readmissions
▪ 92% net promoter score
McKinsey & Company | 8

10. The major success stories that we have studied have all had a major
innovation around reimbursement
Care delivery innovation:
Segmentation of population
by risk    
Innovative delivery model
matched to needs    
Innovative payment
mechanism at scale    
Information flow and IT
platform    
Accountability and
governance    
Clinical leadership and
development of culture    
Patient/user partnership
   
McKinsey & Company | 9

11. How do you take this forward?
Action Example
System-  Establish and fund innovation model with 5 at  US: CMS State
level scale testing sites and 10 planning sites Innovation Model
 Creates risk adjusted individual-level capitation  GE: mRSA
payments
 Change hospital reimbursement to create capitated  US: Medicare ACOs
ACOs
Local Health  Create multi-payor/multi-provider partnerships  US: Sacramento
Economy with payment innovation, governance structure,  UK: NHS NWL
information tools, clinical change and patient  DE: Bundes-
engagement knappschaft
Commissio-  Change reimbursement mechanisms and  US: Arkanas
ners information flow to transfer some risk to providers  US: BCBSMA AQC
and incentivise management of total medical cost  DE: AOK
 Accountable Providers with at-risk reimbursement  US: Chen Med
Providers
based on quality and performance, creating system  ES: Ribera Salud
with clinical model, people model and information to
drive superior performance
McKinsey & Company | 10

12. Changing how we pay for healthcare is key to
unlocking innovation
▪ Payment innovation is a way to align payors and multiple providers on the
triple aim of improved quality, better experience and reduced cost
▪ It can do this by helping to 1) making value conscious choices, 2) reduce
needless variation in cost, 3) target resources where it is needed, 4) changing
patient behaviour
▪ Broadly three different models exist for payment: capitation, episodes, and
pay for performance
▪ These payment models are being put into place by different types of players
▪ Note of caution: payment innovation on its own isn’t enough—other enablers
are required
▪ Putting in place payment innovation can be done at multiple levels
McKinsey & Company | 11

13. Arkansas Payment Improvement Initiative (APII):
William Golden MD MACP
Medical Director, Arkansas Medicaid
UAMS Professor of Medicine and Public Health
William.Golden@arkansas.gov
12

14. Preliminary working draft; subject to change
STRATEGY
The populations that we serve require care falling into three domains
Patient populations
within scope (examples) Care/payment models
Prevention,
‒ CHF
• Healthy, at-risk Population-based:
screening,
‒ COPD
• Chronic, e.g., medical homes responsible for
chronic care
‒ Diabetes
care coordination, rewarded for
quality, utilization, and savings
against total cost of care
‒ AMI
‒ CHF
• Acute medical, e.g., Episode-based:
‒ Pneumonia
retrospective risk sharing with
Acute and one or more providers, rewarded
‒ CABG
post-acute for quality and savings relative
‒ Hip replacement
care • Acute procedural, e.g., to benchmark cost per episode
Supportive • Developmental Combination of population-
care disabilities and episode-based models:
• Long-term care health homes responsible
• Severe and persistent for care coordination; episode-
mental illness based payment for supportive
care services
13

15. PAPs that meet quality standards and have average costs below the
commendable threshold will share in savings up to a limit
Shared savings
Pay portion of excess
- costs Shared costs
No change
High No change in payment to
providers
Acceptable
Receive additional payment as share as savings
+
Commendable
Gain
sharing limit
Low
Individual providers, in order from highest to lowest average
cost

16. Draft thresholds for General URIs
Provider average costs for General URI episodes
Adjusted average episode cost per principal accountable provider1
Average cost / episode
Dollars ($)
Antibiotics prescription rate
above episode average2
Antibiotics prescription rate
below episode average2
Year 1 acceptable
67
Year 1 commendable
46
Gain sharing limit
15
Principal Accountable Providers
1 Each vertical bar represents the average cost and prescription rate for a group of 10 providers, sorted from highest to lowest average cost
2 Episode average antibiotic rate = 41.9%
SOURCE: Arkansas Medicaid claims paid, SFY10

18. ▪ More information on the Payment Improvement Initiative
can be found at www.paymentinitiative.org
– Further detail on the initiative, PAP and portal
– Printable flyers for bulletin boards, staff offices, etc.
– Specific details on all episodes
– Contact information for each payer’s support staff
– All previous workgroup materials