Flat Fee Plan Boosts Outcomes and Pay

Larry Strieff, MD

A flat-fee system of financing cancer care at two large oncology practices in Northern California has improved patient outcomes and increased doctor compensation while defying inflationary pressures and holding the line on treatment costs.

The payment model was instituted at Sierra Hematology Oncology in Sacramento and Epic Care in the San Francisco East Bay Area after many years of rapid cost escalation forced payers to make unsustainably large premium increases. Both practices are a part of the Hill Physicians group of 3,900 doctors, which functions as an intermediary between the practices and payers. Officials said the flat-fee system has also helped to ensure the survival of eight traditional health plans that finance the network.

The rising costs of oncology payments threatened to do serious damage to multiple businesses, officials explained. “Had things kept on that path, all the traditional health insurers in our region would have eventually gone out of business and the only insurer and provider left might have been Kaiser Permanente, which already controls more than half the market in Northern California,” said Larry Strieff, MD, who is both Hill’s specialty medical director and a practicing oncologist in the East Bay. “We had to adapt or die.”

Sierra Hematology Oncology and Epic Care provide more than half of the cancer care for Hill’s 300,000 patients. The experimental payment model, which has been in service for six years at these two practices, replaces fee-for-service with a payment structure that rewards doctors for saving money by lowering emergency department visits, hospitalizations, and drug expense.

Hill, which began operations in 1984, is what’s known in California as an independent practice association. Insurers pay flat monthly perpatient fees to Hill. Hill pays the practices and distributes any leftover profits to all shareholders.

A Financial Incentive Is Removed

For most Hill physicians in most specialties, payment remains fee-forservice. For physicians at the two oncology-hematology practices that have implemented the new model, payment is based on “case-rate reimbursement”: in essence, practices get paid for each patient they treat each month, but they do not receive a flat per-head fee. Each patient is assigned to one of nine cohorts based on tumor type and current procedural technology codes, and practices are paid according to whatever price is assigned to the cohort. Hill calculated the initial payment rates for each cohort by looking back at actual costs for patients in those cohorts in the last year of fee-for-service payments. It then set the first year’s per-patient payments slightly higher. Subsequent payment rates—they change each year—are based on chronological spend patterns for different patient types over the previous three years. To protect providers from losing money because of individual cases that prove unusually expensive, Hill’s payment structure has “stop loss protection,” which makes practices whole (and provides some profit) in cases where actual treatment costs exceed the standard payments.Under the old model, physicians had a strong financial incentive to overspend on medication—both in terms of using a lot of medications and using expensive ones—because they were effectively buying drugs wholesale, marking them up, and then selling them. Hill’s expenditures on cancer drugs were rising 17% to 18% a year, and cancer drugs represented half of the organization’s total annual pharmaceutical expenditure. Under the current model, drug money is included in the per-patient monthly fee, and physicians cannot capitalize on markups. The changes in payment had the desired effect, practice officials said. “Significant changes in treatment patterns occurred over time, and many early positive changes were seen within six to 12 months of program implementation at both practices,” said Khanh Nguyen, PharmD, Hill’s director of clinical support. “We have seen continuous improvements since then, as physicians are incentivized to provide comprehensive treatment from survivorship, symptomatic management and costeffective chemotherapy, to end-of-life options, as is clinically appropriate.”

“For example, we have seen practices moving into better alignment with [NCCN and ASCO] guidelines and prescribing less chemotherapy in end-of-life situations, specifically within two weeks of death.” In addition, drug choices have become far more costeffective, she said. Oncologists have started prescribing more of the lower-cost version of leuprolide for prostate cancer. “There was also a wide range of positive changes with adjuvant therapy, such as shifting utilization of a highcost branded anti-emetic drug that costs more than $100 a dose to an equally effective generic anti-emetic that costs less than $1 a dose.”

Hill has sought to remove the temptation for physicians to try to boost profits by cutting back on medications that patients need. One way it has done this has been to evaluate practices according to ASCO’s Quality Oncology Practice Initiative (QOPI) standards for chemotherapy administration. Hill also tracks how satisfied patients and referring physicians are with each practice’s performance. QOPI performance has improved at both of the practices that use the new model. Those practices now have QOPI scores in the 90th percentile and above, and get a thumbs-up from more than 90% of patients and referring doctors.

Hospitalization Drops Sharply

“Not many organizations track referring physician satisfaction, but we regard it as a truly vital metric,” Strieff said. “In many ways, it is referring physicians rather than patients who are the customers for our oncology practices. If we oncologists make their lives easy—if we work effectively with them to coordinate care and communicate important information—then they keep sending patients. If not, they send the next patient to another practice.”The practices that use the new model have also improved on another important metric: hospital utilization. Their patients currently use an emergency department 35% less frequently than they did when the program began. Hospital bed use has fallen 17%. Those numbers reflect a large number of small improvements rather than a small number of major changes. Physicians at both practices receive reports every time a patient visits an emergency department or sleeps in a hospital bed. They discuss those numbers at their weekly meetings and test ideas for bringing them down.

For example, physicians at Epic noticed that a significant percentage of patients who ended up in the emergency department went there because they became dehydrated shortly after a late-afternoon appointment. They speculated that they could fix the problem by staying open later so patients had a bit more time to receive any fluids they might need. A short test proved them right.

The new payment model gives doctors plenty of incentive to test such ideas. Health plans pay Hill extra for below-average hospitalization rates, and the savings are passed along. Indeed, when practices excel in three general areas— clinical quality, hospital utilization, and patient and doctor satisfaction—Hill pays up to 10% extra.

Those bonuses, along with the case-rate fees for each patient, go to practices rather than individual doctors because Hill wants to encourage cost savings with social pressure as well as financial rewards. A physician who may be willing to sacrifice personal bonuses to avoid making painful changes may have a harder time forcing such sacrifices on colleagues. Hill also believes that the collective model leads physicians to share cost saving ideas and develop something approaching best practices.

Because statistical averages of per-patient costs were used to develop the cohort payment plan, Hill’s payment system is ideally suited for high-volume practices, as Sierra Hematology Oncology and Epic Care are. Although there will be variations in actual costs of treatment within specific cohorts, costs and revenues can be expected to balance eventually.

The same might not be true if some of Hill’s smaller oncology practices were to adopt the model. A handful of high-cost patients can significantly affect total costs at a two-physician practice. Even if Hill tried to aggregate practices in order to create a larger pool for purposes of a successful model implementation, it still wouldn’t work, administrators said. Small practices whose patients needed unusually inexpensive care would reap huge windfalls, while small practices whose patients needed unusually expensive care would claim stop-loss payments.

“We’re still discussing ideas for expanding the model to other practices, particularly the smaller ones,” Strieff said. “Hill could explicitly try to encourage mergers so that all practices would have the scale we need for the law of averages to take hold. Or Hill might just hold back and let financial incentives guide behavior. Practices that do make the switch will see physician compensation increase sharply, which is probably enough to convince many practices to get big enough to participate. There may even be some way that Hill can tweak the program so that small practices can participate.”

There also may be a way for other payers and practices to participate in Hill’s model. Nguyen says that Hill has received considerable interest from groups that might like to license its model or otherwise pay for assistance in duplicating it, but Hill hasn’t struck any deals yet.