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Readers of this blog are well aware of the growing debate in the Commonwealth about how to slow our health care spending, sustain health care reform, and relieve a growing burden on employers, consumers, and government. Many of the proposed solutions – improved prevention and management of chronic illness, administrative simplification, and greater transparency of cost and quality information – have great potential. But their potential will be severely limited if they are not built on a payment system that rewards the best, most affordable care. We do not have such a system in Massachusetts today.

Last January, BCBSMA CEO Cleve Killingsworth challenged the company to examine how our method of paying hospitals and physicians could be transformed to better support the high quality care we all know our system is capable of delivering. Currently, Blue Cross and most other health plans base payments principally on the number of services provided, and the complexity of each service. For example, surgical and specialty care is rewarded more than primary care, and hospitals receive higher reimbursement when they perform more tests and procedures. As Karen Davis, president of the Commonwealth Fund, has written, “Fee-for-service payments create incentives to provide more and more services, even when there may be better, lower-cost ways to treat a condition…It’s not realistic to tell hospitals and doctors that they must improve quality if by doing so they are likely to lose money.”

What Cleve asked us to create was a system that would instead base payment on quality, outcomes, safety and efficiency –

did the patient get the best result from the most appropriate treatment (eg. based on the best medical evidence) by the right kind of provider (eg. specialist, family doctor, nurse) at the right time (as early in the illness as possible).

A team of physicians, finance experts, and measurement scientists worked for months to develop a model that would give hospitals and physicians meaningful incentives to improve quality and safety of care while conserving health resources. We tested the concept through many conversations with key hospital and physician leaders, policy experts, employers and health care purchasers.

The result: a new, innovative optional contract that combines two forms of payment: a global or fixed payment per patient, per year, adjusted for the health of patients: and substantial performance incentives tied to the latest nationally accepted measures of quality, effectiveness, and patient experience of care.

Can the seemingly arcane payment methods of health plans promote quality and moderate health spending? Growing evidence suggests they can. According to the Centers for Medicare and Medicaid Services (CMS), “quality of care has improved significantly in hospitals participating in the CMS Premier Hospital Quality Incentive demonstration, a groundbreaking Medicare pay-for-performance demonstration project. Improvement in these evidence-based quality measures is expected to provide long term savings, because of their demonstrated relationship to improved patient health, fewer complications and fewer hospital readmissions.”

That’s the goal of this new contract, which combines this kind of performance incentive with flexibility to allow physicians to provide services according to patient needs. The contract will be offered as an option to hospitals and physicians in our network this year.

For hospitals, we believe that payment reform will accelerate initiatives already underway to improve safety and performance. For physicians, our new contract should liberate the whole care team to spend more time with patients, and offer innovative services, such as “e-visits” and group visits for patients with chronic illness. For employers, state agencies, and individuals who pay for care, we believe the new contract could cut in half medical cost trend, which has been rising at rates up to 12% annually, for those who participate.

So, as the state discusses how best to moderate health spending, let’s put the need to pay for quality at the center of the debate.

Andrew Dreyfus is executive vice president for health care services at Blue Cross Blue Shield of Massachusetts and former president of the Blue Cross Blue Shield of Massachusetts Foundation.

This program aired on January 22, 2008. The audio for this program is not available.