In a recently published article in the New England Journal of Medicine, Noah Kalman, a joint medical doctorate and MBA candidate at the School of Medicine and the Fuqua School of Business, and his co-authors argue that Medicare would save $17 billion annually if hospitals were required to offer patients a warranty on medical services. The warranty-based program seeks to alter Medicare’s readmissions-reduction program by giving hospitals a financial incentive to reduce the rate of patient readmittance. The Chronicle’s Danielle Muoio spoke with Kalman about his proposal and its effect on Medicare, hospitals and patient care.
The Chronicle: What encouraged you to look at an alternative program to Medicare’s current readmissions-reduction program?
Noah Kalman: This past summer I had an internship at the Urban Institute, which is a nonpartisan think tank in Washington, D.C., and I worked for a guy named Bob Berenson. One of his main areas of focus is payment incentives for physicians, hospitals and other providers. We were both interested in looking into [payment incentives] given its relevance to the [Patient Protection and Affordable Care Act] going through.
TC: Would you say Medicare currently fails in providing a financial incentive for hospitals to reduce readmissions?
NK: It remains to be seen [whether the system is failing] because this is the first year that the program is in effect. Hospitals are very cognizant of this program for readmissions that has been implemented. To make it sustainable in the long term… the program should be changed to a warranty system with financial incentives. The Medicare program says, “If you don’t reduce readmissions, we will penalize you.” However, from the hospital’s business standpoint, it’s costly to create programs that will address readmissions. Previous evidence has shown that a hospital can do quite a bit to reduce readmissions, but it can negatively impact its finances. If there is a model where implementing these [readmissions] programs generates more financial benefit, it’s a more sustainable way forward.
TC: How does your model change the penalty policy?
NK: The penalties would apply depending on the hospital’s performance. To give a very brief example, let’s say that a hospitals readmission rate is 20 percent. Medicare would say, “We think you can do 19 percent.” If the hospital can improve from 19 percent, [the hospital] stands to make more money. If it is unable to do so or if the readmission rates go up, then the hospital would not be paid as much for those readmissions.... Instead of using measurement to judge hospitals on their performance, [the program uses] payment incentives to change behavior. This means that every additional readmission that can be avoided benefits the hospital financially.
TC: How does reducing hospital readmissions affect Medicare and the hospitals?
NK: From the Medicare perspective, reduced hospital readmissions generally mean lower costs because under the current model, Medicare pays hospitals for the readmission. Presumably the program would save money that way. For hospitals, the impact of the program depends on their current performance in regard to readmissions. If this is a hospital that, compared to the average, has a low readmission rate, the current Medicare program has no impact on them. Only hospitals with an above average readmission rate will see financial penalty. Under our proposal, the penalties are embedded in the payment change if hospitals can’t reduce readmissions. But for hospitals that can improve their readmissions rate, they stand to benefit.
TC: How does the warranty affect patient care?
NK: Some of the ways people have demonstrated reductions in readmissions have been more intensive follow-up once the patient is discharged. One of the reasons for readmissions is lack of timely follow-up, and this is preventable. If you have a more intensive follow-up of the patient, you can make sure they are still doing well, check if medications need to be adjusted and make sure that the patient understands everything they need to do once they leave the hospital. If you have frequent follow-ups, you will catch issues early. Rather than them needing to come back in a bad state, you can catch [issues] early and change medication so that they can be better off.
TC: How is a warranty assigned to a hospital?
NK: We would start by looking at an individual hospital’s readmission rate and the starting point is different from Medicare’s, which uses a national average. We believe that by using a hospital-specific average, you can get a better assessment of what the hospital baseline should be. Just starting at time zero, under Medicare, a hospital that has a higher overall readmission rate is going to get penalized right way, and they shouldn’t be. So you look at that hospitals average readmission rate.
TC: What happens if there is an unavoidable readmittance?
NK: There is a lot of nuance you can build into it. One way that Medicare [does so] is through risk adjustment. The idea is that a healthy 30-year-old should have a lower risk [of readmittance] than a 70-year-old with lots of medical problems. By using hospital-specific rates, you get at that problem in a relatively simple way because a hospital’s patient population, if it changes over time, changes very slowly. There is a lot of nuance you can build into [the program], but, for this paper, we wanted to come out with the broad idea first.
TC: Do you think that hospital-specific risk adjustment is something you would consider?
NK: I think so. Using a hospital-specific benchmark allows people to work off of whatever their baseline is. I would worry that with a national benchmark you might have some hospitals that, by nature, happen to serve a younger patient and therefore have a lower readmission rate or vice versa, so, through no fault of their own, they are starting from a good or bad position. And this type of [hospital-specific benchmark] is done in some other systems. They do this in England and Maryland.
TC: Do you see any potential flaws in adopting this alternative program?
NK: You want to be careful about not only on which diagnoses you include, but also building too much complexity in the system. The simpler you can make it, the better. Also, one could argue that with this payment system, if you built in more payment up front for the index admission, it creates a larger incentive to try and get more new patients in the door. However, with the existing way hospitals get paid right now, that incentive is still there, so I don’t know how much more this particular program would make that behavior stronger.
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