Here was a question a team of public and private insurers and health care specialists put to doctors who perform tonsillectomies:

After surgery, do you send the tonsils to pathology for a full stain and thin-slice workup? Or just for a gross inspection? Or do you simply pitch the tonsils in the nearest biohazard bin?


Here’s the best answer for slowing medical costs while providing quality care, the goal of the Payment Improvement Initiative’s public and private partners: Pitch them. In virtually every case, doctors suspect before they operate whether the tonsils they are removing are malignant and need to go to pathology; otherwise, the pathology study is deemed unnecessary. That means savings at no cost to a patient’s health.

The initiative of the state Department of Human Service’s Medicaid division and private insurers Blue Cross Blue Shield and QualChoice, launched in 2011, given a trial run in 2012 and now in place, is showing that when doctors know the full costs of treatment of, for example, hip and knee surgery, they may change their practice behavior, creating savings in total health care dollars spent.


It was at Gov. Mike Beebe’s urging, said Dr. William Golden, medical director for Arkansas Medicaid, that Arkansas launched the PII, a unique retrospective payment system. “The governor said, ‘Let’s do this. … Let’s be ambitious,’ ” Golden said.

For a year and a half, DHS and Medicaid staff, the private insurers and consultants McKinsey and Co. held dozens of meetings with doctors and other health care professionals all over Arkansas to create a system tailored to Arkansas’s specific health care landscape, a decentralized system in which people look to many independent providers rather than large, multispecialty organizations along the lines of the Mayo Clinic in Minnesota. The PII collaborators rejected managed care — a “fee for service” system that puts doctors “in a corner” when it comes to how they care for their patients. It rejected “bundling,” in which a single payer divvies up a set dollar amount for a particular course of treatment (or episode of care) to members of the medical team, a system that would not work in the landscape of fragmented care. (Former Medicaid director Gene Gessow had been a proponent of bundling; he resigned in October 2011.)


Instead, the team came up this idea: a retrospective reimbursement system based on comparison of what Arkansas providers charge for a particular “episode” of care — say the treatment of a common cold. Using that continuum of charges, the PII team determines what the acceptable range is and rewards providers whose charges fall in the “commendable” range — below the baseline — and penalizes those whose charges are above the baseline.

The curve is based not only on cost, but on quality-of-care indicators that have been factored in. Acceptable levels vary depending on whether Medicaid or private insurance is the payer, since Medicaid reimbursement is lower.

The PII team chose five “episodes” to measure initially: upper respiratory tract infections, knee and hip replacement, congestive heart failure, attention deficit disorder and perinatal care (or pregnancy), first doing three-month trial runs with providers to let them see how they fell along the continuum of charges, and then initiating year-long pay analyses to determine reimbursement. Since the initial five, 10 more episodes were chosen: colonoscopy, cholecystectomy (gall bladder removal), tonsillectomy, oppositional defiance disorder, coronary artery bypass grafting, percutaneous coronary intervention, asthma, chronic obstructive pulmonary disease, coupled ADHD/ODD diagnoses and some neonatal conditions.

The private insurers started with three episodes: knee and hip replacement, congestive heart failure, and perinatal care. Those particular episodes were chosen because of wide variation in charges and quality and high numbers of procedures, Steve Spaulding, senior vice president at Blue Cross in charge of payment reform, said. Its next episodes will be tonsillectomy, colonoscopy and gall bladder surgery.


The private insurance system differs from Medicaid’s in that the target cost per episode was pre-established by historical data and charges are compared against that.

What the Payment Improvement Initiative has done for doctors, Spaulding said, is make transparent the costs of various providers their patients will encounter during the course of an episode, thanks to an electronic data system. For example, surgeons who before might have sent all their hip replacement patients to in-patient rehabilitation post-op can now compare their outcomes with others who used less expensive outpatient alternatives and see if it makes sense for their patients. The electronic records allow doctors to “drill down,” Spaulding said, to examine the average amount spent for their episodes, get details on quality indicators for the episode, compare patients and, if they have questions, call the service line for help with the data.

“The intended result,” Spaulding said, is not to cut back on the cost of health care but “to reduce the rate of increase.”

Tennessee, Ohio and Delaware are looking at Arkansas’s payment improvement plan as a model they could use, and Spauding and Golden both said they hope Medicare will incorporate some of the retrospective approach to create a standard to which to hold providers accountable.

About that common cold: Anyone who has kept up with medical news — not just doctors — knows that antibiotics don’t treat cold viruses. It’s also common knowledge by now that the overuse of antibiotics has made the drugs less effective against fighting bacteria, as the bugs have learned to adapt to their enemies and mutated into resistant strains. That has left us with a smaller arsenal in the fight against infection.

So why are doctors still prescribing antibiotics for the sniffles? “It’s easier,” Golden said: They don’t have to spend time explaining why the antibiotic would only be useful to treat a secondary bacterial infection that develops as a result of the virus, thus shortening the visit.

But since the PII began to provide doctors with information on their peers’ costs and outcomes in the treatment of upper respiratory infection, the prescribing of antibiotics to treat a common cold has fallen more than 10 percent. The number of doctors that prescribed two courses of antibiotics has fallen by 40 to 50 percent, Golden said. The use of strep tests to diagnose sore throats (pharyngitis) has risen more than 5 percent.

Medicaid’s URI data, reported in February, was the first to come in since the PII was launched. Medicaid tracked 654 providers who treated patients for non-specific infections, sore throats and sinusitis from October 2012 to September 2013, and here’s what it found:

More than 78 percent of the URI episodes were in acceptable or commendable ranges. More than 40 percent fell in the commendable range and will receive “gain-sharing” incentive payments ranging from less than a dollar to more than $3,000. Only 22 percent charged above the baseline; their “risk-sharing” (or penalty) ranged from less than a dollar to $7,200. The dollars doctors gained: $69,000. Dollars doctors will pay back to the state: $92,000.


Then there are the practices in the middle, the 38 percent of episodes in the acceptable range: They too represent savings, when they have changed the ways they do things to reach that acceptable level.

Given what doctors know about the common cold, why would a clinic make an appointment for someone complaining of a cold? That also is a question the Payment Improvement Initiative will address as part of its Medical Home initiative for primary care, a team-based approach in which doctors, nurses and other care providers coordinate all care provided to their patients, with the primary care provider accountable for all costs.

That would result in better care, Golden said, and reduce trips to the hospital. It would reduce unnecessary trips to the doctor; that caller with a common cold could be directed to an advanced practice nurse to assess whether a visit is necessary.

It would also allow clinics to do what managed care was expected to do so many years ago: prevent acute problems as well as complications, with outreach and more coordinated clinical care.

There are financial benefits for primary care providers — who Blue Cross’ Spaulding said take in only 10 percent of the medical dollar but influence care for nearly 100 percent of patients — under the medical home model. The Centers for Medicare and Medicaid Services (CMS) is making grants available to clinics to transfer to the medical home model, helping pay for infrastructure and outreach costs, and savings for reimbursements that fall in the commendable level are significant. Say the PCP is showing savings of $10 per member patient per year, a savings that puts them in the commendable category: Medicaid will reimburse them 50 percent of that $10. If the medical home has 1,000 members, that’s $5,000.

It would also provide financial support to primary care physicians, also with incentives that include reimbursements for charges falling under the baseline.

Golden said Arkansas was “launching the most ambitious medical home” program in the nation. Doctors learning about the system were “at first like deer in the headlights,” Golden said, but now 600 doctors in 110 practices seeing more than 250,000 patients are participating.

Golden isn’t exaggerating the importance of the medical home. Just a few weeks ago, an MSNBC program on the Payment Improvement Initiative as a whole — one it called one of the nation’s “most creative, ambitious efforts to transform health care” in the nation — focused on SAMA Health Care in El Dorado, one of the state’s first medical homes. Doctors at SAMA got a CMS grant for $400,000 and raised another $100,000 to transform their practice and in nearly two years have produced outcome rankings far higher than the national average and prevented 880 emergency room visits, which would have cost Medicaid $2.6 million.