Providers Using Bundled Payments, Quality to Entice Employers

(Bloomberg) -- In the changing world of health care, patients are finding that the best care may be several hundred miles away.
When Travis Bumbaugh needed heart surgery, the Pennsylvania general contractor chose the cheapest option in the Lowe’s Cos. health plan. He flew to Cleveland, to one of the top-rated heart hospitals in the nation.
By bundling all costs for the surgery under one negotiated price and offering expertise that lowers the odds of complications, the Cleveland Clinicgave Bumbaugh and his employer a better deal than the hospital close to his home. In some cases, hospitals will drop their prices as much as 40 percent to guarantee a steady stream of patients they wouldn’t have otherwise, said Terry White, president of the BridgeHealth Medical Inc., a Denver-based benefit manager.

To encourage employees, Lowe’s covers the full cost of surgery, as well as travel and lodging for the worker and a relative. The company health plan won’t cover thousands of dollars of unbundled costs at local hospitals.

“It’s a win-win-win” for patients, employers and the hospital, said Michael McMillan, Cleveland Clinic’s executive director of market and network services. “The patient has no out-of-pocket responsibility, employers have a better long-term financial result and we get patients.”

U.S. employers are seeking innovative ways to trim health expenses as costs rise and the government mandates broader coverage for employees under the Patient Protection and Affordable Care Act. Medical centers, meanwhile, get an extra burst of patients at a time when hospitals nationwide are struggling with sluggish volumes in a tough economy and cutting jobs. Last year, the Cleveland Clinic closed several hundred open positions and gave 700 workers early retirement, citing pressures of health-care reform.

200 surgeries

The Clinic, an early pioneer in offering flying-surgery care, has partnerships with more than a half-dozen large employers and has completed about 200 surgeries in the program over the past three years, according to McMillan.

More recently, it’s been joined by other centers, including Johns Hopkins Bayview Medical Center in Baltimore, that see the same opportunities.

“It’s new volume that we wouldn’t have otherwise, which means new revenue for us,” Trisha Frick, assistant director of managed-care contracting at Johns Hopkins, said in a telephone interview. “It also gives us predictability in reimbursement rates.”

The fixed rate also provides incentive for both the hospital and its medical professionals to be more efficient, she said. If the hospital manages to save costs, it gets a higher profit margin from the agreed-upon reimbursement.

‘Extending Market’

Providers are “very interested in extending their market share nationally,” said Susan Connolly, a partner at Mercer LLC who specializes in clinical consulting. Contracting with Lowe’s or Wal-Mart Stores Inc., “you know you’re going to get a lot of volume because they’re so big.”

Lowe’s, based in Mooresville, North Carolina, employs 161,000 people. Other companies now using the travel surgery option are Wal-Mart, the biggest private employer in the U.S. with 1.3 million workers, and PepsiCo Inc., the world’s largest snack maker, with 106,000 U.S. employees.

Surgery costs can vary widely by hospital, making it tough for large companies to budget for health-care expenses. For instance, the price of a full-hip replacement ranges from $15,464 to $76,785, according to the pricing guide Healthcare Bluebook. By contracting for care at hospitals that agree to a bundled cost based on a set medical diagnosis, self-insured employers can better plan out their expenses based primarily on the number of employees they cover.

Lowe’s, the second-biggest U.S. home-improvement chain, was one of the first big companies to fly employees to the Cleveland Clinic for cardiac procedures, starting in 2011. Since then, more than 60 employees have taken part in the program, said spokeswoman Amanda Manna. She declined to say how much Lowe’s has saved in this time.

Wal-Mart instituted its own program last year. More than a million of the retailer’s employees and family members have opted to be covered by the plan, which flies them to six providers, including the Cleveland Clinic, Virginia Mason Medical Center in Seattle and Scott & White Memorial Hospital in Temple, Texas, for heart, spine and transplant surgery.

The program wasn’t just about cost savings, said Randy Hargrove, a Wal-Mart spokesman.

“We weren’t looking for a low-cost provider,” Hargrove said in an e-mail. “We identified high-quality providers and then developed a bundled payment to cover the entire episode.” He, too, declined to comment on specific pricing.

In January, Wal-Mart added another program, joining Lowe’s and other companies in the Pacific Business Group on Health, a San Francisco-based nonprofit business coalition, that schedules hip and knee replacements with centers that include Johns Hopkins, and Kaiser Permanente in Irvine, California. PepsiCo and Boeing Co. have similar plans.

Big companies aren’t the only ones seeking to take advantage of the idea. Alliances such as the non-profit Employers Health Coalition, which represents about 300 companies, began a travel-surgery program last month for smaller employers, Bruce Sherman, the medical director for the Canton, Ohio-based group, said in a telephone interview.

“It would be prohibitive for a small employer, with only one or two employees needing surgery a year,” said Sherman, who declined to identify the companies and hospitals participating. “When you spread the administrative costs over a number of employers, it becomes more attractive.”

Complications, readmissions

Low rates of complications and readmissions are a big draw for employees seeking to partner with hospitals, said Mercer’s Connolly.

“It’s easy for the cost to exponentially increase if you have a readmission because when patients are readmitted, they’re pretty sick,” she said. “Doubling the cost of the first admission would not be a stretch.”

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