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The Importance and Economics of Utilization and Outcomes

By: Reed Tinsley
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In order to compete in a market that is moving towards ACOs, value-based purchasing, cost efficiency, and cost containment, doctors must change old clinical habits. In other words, today and future mature markets will reward doctors based upon cost effectiveness, rather than utilization under the old fee for service system. Doctors not considered cost effective risk a continued reduction in third party reimbursement and also risk participation in provider networks. For example, I know of an ENT physician who was recently deselected from a provider network simply because the plan felt he performed too many surgeries on new patients in comparison to the other ENT doctors in the network. A predicted challenge for many medical practices in the future will be to gather the information necessary to prove to a third party payer the practice is indeed cost effective. A practice must somehow gather utilization and outcomes data, usually by clinical episode or diagnosis code. This type of information will be critical when competing for contracts and can also be extremely valuable in the negotiation and renegotiation of managed care rates. Let us look at a simple example.

An Ob/Gyn group wants to negotiate rates with a third party payer. It arms itself with the following limited practice data: (1) C-section rates, (2) VBAC rates, (3) Average length of stay in the hospital, (4) Rate of surgical complications, and (5) Length of stay and complication rates for laparoscopic hysterectomies. At the same time, the group was able to obtain national utilization data for its specialty. It beat the national average in every category named above. Obviously this is an enviable situation for a medical practice since it can demonstrate with actual statistics that it is a cost effective provider. In this situation, the third party payer will probably at least listen to proposed changes to its reimbursement schedule for this particular group. Also, this data puts this group in a good position to deal with emerging affiliation models such as ACOs and the like.

The following are samples of provider utilization reports:


As you have seen from the examples above, here are some of the most common quality indicators you should be looking at for your practice:

  • Cost per patient for a particular series of diagnosis codes
  • Surgeries/Procedures performed as a percent of patient encounters
  • Usage of ancillary services
  • Lengths of stay in the hospital
  • Specialist referrals as a percent of patient encounters or by diagnosis codes (for primary care doctors)
  • Number of repeat visits due to surgical complications

These are just a few, but I bet you can think of others for your own medical specialty. Just think what services you perform that drive healthcare costs for your medical specialty. Also keep in mind quality can also be defined by clinical outcomes as well as by hard figures. One example is asthma and allergy: What are the number of days missed from work for those patients the practice is treating? For Glaucoma specialists: How well was eyesight restored after glaucoma surgeries or are there complications? For addiction specialists: What are the relapse rates? For cardiologists: How soon do patients come off (and stay off) of blood pressure medications?

The problem today is that most doctor office computer systems are incapable of providing this type of information. The reason is simple. Most medical billing/EMR systems were built for a traditional fee for service environment and not for a managed care/cost containment environment. However, I have found that you can "data mine" in to many systems to obtain this clinical/utilization data. You can also obtain clinical information from your hospital's information system and even from third party payers themselves. That is why I often suggest meeting regularly with managed care representatives to discuss utilization issues. It is important to keep abreast just how the plan perceives the practice as a driver of healthcare costs - efficient or non-efficient?

The point should be clear: Medical practices must start addressing utilization and outcomes issues now or risk losing out in the future. Managed care rates can be negotiated or renegotiated with supportable utilization and outcomes information. To engage in and with future provider network models resulting from healthcare reform and the continued shifts in the commercial markets towards value-based purchasing, physician practices must pay strict attention to utilization and outcomes data. It cannot nor should not be ignored.

Reed Tinsley, CPA, is a Houston-based CPA, Certified Valuation Analyst, and healthcare consultant. He works closely with physicians, medical groups, and other healthcare entities with managed care contracting issues, operational and financial management, strategic planning, and growth strategies. His entire practice is concentrated in the health care industry.

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