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Attending physicians and improvements in the efficiency of medical operations.

Recognizing their growing financial burden, major health care purchasers have attempted to limit health care spending through a series of utilization controls and reimbursement restrictions designed to switch financial risk to health care providers. The impact of these changes has been felt most acutely in the hospital sector, where utilization rates and patient days have decreased about 20 percent compared to the mid-1970s. Financial security and economic survival have become the number one hospital priority. (1)

Faced with dwindling inpatient revenues and increasing operational expenses, many hospitals are having difficulties making ends meet. Strategies for survival have included trying to maximize revenues by increasing either price or volume or to reduce unnecessary expenses. Increasing price through rate increases or cost-shifting has limited potential in today's medical market. Increasing volume via participation in managed care programs is a risky maneuver at best, depending on the extent of the volume-discount tradeoff. Limiting expenses has traditionally been accomplished by following sound business techniques, maximizing FTEs and productivity, improving staffing patterns at all levels of the organization, and eliminating unprofitable services. There is one additional item on the expense side that should be given stronger consideration--improving efficiency in medical operations.

Hospital Financial Risk and the

Reimbursement System

There has been a dramatic shift from the traditional fee-for-service reimbursement system to per-diem, per-diagnosis, or capitated payments. What's left of the fee-for-service system is usually contracted at a discounted rate that averages 15-25 percent below customary charges. Each reimbursement system places the hospital at varying levels of financial risk (tables 1, right, and 2, page 35). Under the Medicare Prospective Payment System of fixed payment by diagnosis, the hospital's financial incentive is to reduce the length of stay and to provide only those services necessary for immediate patient care. Under the per-diem reimbursement schedule, assuming the per-diem rates cover the daily cost of care, the major financial incentive is to provide as little as possible in the way of additional medical services. Under the capitation system, the incentive is primarily to prevent hospitalization or to limit the services provided. The financial incentives for the discounted fee-for-service system depend on specifics of the negotiated reimbursement rate.

The degree of financial risk is proportionate to the hospital's payer mix. With most inpatient care falling into other than fee-for-service categories, most hospitals find that they run contractual deductions that can average between 30 and 60 percent of inpatient charges. A contractual deduction of 50 percent means that the hospital receives only fifty cents on each dollar charge. Obviously, it is in the hospital's best interest to reduce these contractual deductions as much as possible. This can be accomplished by developing strategies that emphasize improved cost-efficiency of operations by reducing nonreimbursable expenses attributable to unnecessary care. Accomplishment of this goal requires active participation of those in control of medical operations, the attending physicians.

Control of Health Care Resources

Recent studies have suggested that as much as 15-25 percent of certain medical services and procedures may not be clinically indicated. The factors responsible for this discrepancy include unnecessary hospital admissions, inappropriate

Table 1. Hospital Economic Incentives
 Admission Length of Stay Resources Used
Full Charges (1) + + +
Discounted Charges (2) +? +? +?
Payment per Case (3) +? - -
Payment per Diem (4) +? +?? -
Capitation (5) - - -
Legend: + desirable/increase
 - undesirable/increase
 (1) Full Charge--reimbursed for services provided
 (2) Discounted Charges (PPOs)--reimbursed on percentage
 ? Reimbursement is enough to cover costs
 (3) Prospective Payment (DRGs)--Fixed payment
 ? Subject to "admission approval"
 (4) Daily Rate (Medicaid)--Paid by the day
 ? Subject to "admission approval"
 ?? Payment for "medically necessary" days
 (5) Payment per Enrollee (HMOs)--money upfront

levels of care, clinically unustified treatments or procedures, and unnecessary surgery. [2-3] The price tag for this "wasted medical care" is more than $125 billion a year. [4] Recognizing the quality and financial implications of these inefficiencies of care, major health care purchasers and other outside agencies have begun to pay more attention to the actual process of health care delivery in an effort to eliminate many of these clinically unjustified procedures. [5-6] Economically, the emphasis will switch from generalized reimbursement restriction and utilization control to payments specifically tied to indications and outcomes in an effort to make health care providers more accountable for their actions. From the hospital's perspective, improvements in efficiency not only eliminate expenses by reducing unnecessary care, but also can be considered a potential tool for increasing patient volume because of selective contracting and purchaser preferences for cost-effective care.

Physician Behavior

To improve the efficiency of the system, we must involve the controllers of medical operations, the attending physicians. Changing physician behavior is the key to success, but getting physicians to cooperate is often another story. Physicians tend to relate quality to quantity. Physicians have been trained to use all the resources at their disposal in order to reach a relatively secure final diagnosis. Kassirer calls this "our never-ending search for diagnostic certainty." [7] Physicians also are quick to embrace the newest, most sophisticated, most elaborate (and most expensive) technologies in an effort to improve quality of care. Unfortunately, there is frequently no concomitant decrease in the use of older technologies that the new technologies were designed to replace. [8] We also can't ignore the fact that physicians will order additional tests in fear of malpractice concerns.

Despite changes in the hospital reimbursement structure, physicians for

Table 2. Physician Economic Incentives
 Admission Length of Stay Resources Used
Full Charges (1) + + +
Discounted Charges (2) + + +
Payment per Case (3) +? + +
Payment per Diem (4) + +? +?
Capitation (5*) - - -
Legend: + desirable/increase
 - undesirable/decrease
 (1) Full Charge--reimbursed for services provided
 (2) Discounted Charges (PPOs)--same incentives as
 (3) Medicare (DRGs)--physicians reimbursed for services
 ? Medicare denial for unnecessary services
 (4) Medicaid-physicians reimbursed for services provided
 ? Medicaid denial for unnecessary services
 (5) Capitation (HMOs)--money upfront
 (*) MDs may be on fee-for-service reimbursement,
 with hospital on

the most part are still relatively free from any direct individual financial risk, as they continue to be reimbursed under the traditional fee-for-service system. Unfortunately, the fee-for-service system tends to reward resource consumption and provides little incentive for economic efficiency. Recognizing these potential difficulties, we must work with physicians in an effort to convince them that cost-efficiency and high-quality care go hand in hand. This can be accomplished through a comprehensive program of physician education that emphasizes information sharing, physician input, and the development of positive alternatives to meet these objectives.

Physician Education

The physician education process can be divided into several components. The first component is information sharing. Information is presented to the physician on two different levels. The first level gives a more general overview of today's medical environment and discusses the impact of change on hospitals and physicians. The second level goes into more specific detail about hospital and physician services. Data can be analyzed by high volume, high cost, or any other special studies designed to look at particular departments, diagnoses, procedures, or events.

After the data are organized, they are presented to physicians for their review. Table 3, page 36, gives an example of how the data can be displayed. In our hospital, one of the projects targeted for more detailed study was DRG 209, major joint procedures. [9] In order to improve resource utilization, our firstobjective was to identify where the money was being spent. The data are organized by resource centers. Room charges represent a fixed charge per day, while the remaining resource centers represent variable charges dependent on physician utilization of different ancillary services. The goal is to improve efficiencies by focusing on any areas where significant variances are noted. Reducing lengths of stay will reduce fixed room costs and reducing unnecessary ancillary services will reduce variable costs. Improvements in quality will occur by not exposing patients to unnecessary additional services.

The next step is to encourage physician input. Physicians tend to practice in an information void. By simply exposing them to this type of information, we can stimulate interest and motivate them to change. When physicians compare their own profiles to those of peers, they are frequently surprised. Behavior is modified because nobody really wants to practice out of the norm. When significant trends or variances are noted, we actively encourage physician suggestions on how to reduce expenses by either limiting resource consumption or improving efficiencies in resource utilization. With the cooperation of physician leaders and department chiefs, positive alternatives and recommendations are developed that are presented to the group as a whole in an effort to stimulate further discussion. The third stage includes follow-up and control, where alternatives and recommendations are revised as the system evolves.

Physician education includes discussions at grand rounds and departmental meetings, structured lectures for house staff and residents, and individual meetings if all else fails. The education program should also be extended to nursing, administration, department heads, and other health care managers involved in patient care.

Results and Conclusions

Many studies have shown significant benefits from comprehensive physician education programs. Lengths of stay and ancillary service utilization (including x-ray, laboratory, and ECGs) have averaged 12-20 percent


below levels prior to the education process. [9-13] One author has even suggested that all physicians should practice "fiscal budgeting at the bedside" in an effort to reinforce the need for more conscious control over scarce medical resources. [14]

Recognizing physician concerns about quality and quantity and the differences in financial incentives between hospital and physician reimbursement systems, we must focus our attention on issues that support the need for strong hospital-physician interaction. One approach counts on physician loyalties to the hospital. If the hospital has to compromise its services to survive, this will upset the physician's admission and referral patterns, which is something they would prefer not to have disturbed.

A significant proportion of care is provided through managed care contracts. Many of these contracts are negotiated at the hospital level, and, in order for physicians to participate in the care of these managed care patients, they must be active members of the hospital's medical staff. The hospital has the power to control active staff membership and decide which physicians will be able to participate in the plan. Some plans have even gone so far as to evaluate physician performance based on their previous utilization history and to selectively contract only with "more efficient" providers. [15] In fact, it's gotten to the point where everybody else seems to be looking over physicians' shoulders in an effort to make them more accountable for their actions. [16] Efforts aimed at developing appropriate guidelines for care are just around the corner. [17] It is in the physician's best interests to maintain internal control of the system, rather than being forced to adhere to a series of externally developed controls.

The threat of further health care rationing may finally get the physician's attention. More appropriate utilization of scarce resources will mean more resources remain available for all those in need. However it is accomplished, in order to preserve the system as we know it today, physicians will have to learn how to become more efficient health care managers.


[1] Rosenstein, A. "Hospital Survival: Then and Now." Health MArketing Quarterly 5(3/4):33-45, Spring 1988.

[2] Chassin, M., and others. "Does Inappropriate Use Explains the Geographic Variations in the Use of Health Care Services?" JAMA 258(18):2533-7, Nov. 13, 1987.

[3] Leape, L., and others. "Does Inappropriate Use Explain Small-Area Variations in the Use of Health Care Services?" JAMA 263(5):669-72, Feb. 2, 1990.

[4] "$125 Billion in Waste Alleged in U.S. Hospital, Surgical Costs." San Francisco Chronicle, May 4, 1988.

[5] Winslow, R. "AMA, RAND Go After Modern III: Unneeded Procedures." Wall Street Journai, March 22, 1990, p B1,6.

[6] Kendel, P. "Claims Analysis Firm to Sell Information Comparing Medical Prices, Procedures." Modern Healthcare 18(48):39, Nov. 25, 1988.

[7] Kassirer, J. "Our Stubborn Quest for Diagnostic Certainty: A Cause of Excessive Testing." New England Journal of Medicine 320(22):1489-91, May 1, 1989.

[8] Eisenberg, J., and others. "Substituting Diagnostic Services: New Tests Only Partially Replace Older Ones." JAMA 262(9):1196-2000, Sept. 1, 1989.

[9] Rosenstein, A. "Health Resources Management and Physician Control in a San Francisco, Calif., Hospital." Western Journal of Medicine 154(2):175-81, Feb. 1991.

[10] Pugh J., and others. "Effect of Daily Feedback on Impatient Charges and Physician Knowledge and Behavior." Archives of Internal Medicine 149(2):426-9, Feb. 1989.

[11] Berwick, D., and Coltin, K. "Feedback Reduces Test Use in a Health Maintenance Organization." JAMA 255(11):1450-4, March 21, 1986.

[12] Tierney, W., and others. "The Effect on Test Ordering of Informing Physicians on the Charges For Outpatient Diagnostics." New England Journal of Medicine 322(21):1499-504, May 24, 1990.

[13] Rosenstein, A. "Health Economics and Resource Management: A Model for Hospital Efficiency." Hospital and Health Services Administration 36(3):313-30, Fall 1991.

[14] Morreim, E.H. "Fiscal Scarcity and the Inevitability of Bedside Budget Balancing." Archives of Internal Medicine 149(5):1012-5, May 1989.

[15] "Upswing in PPOs That Screen For Physician Efficiency." Health Week 2(5):15, Feb. 29, 1988.

[16] Findlay, S. "Looking Over the Doctor's Shoulder." U.S. News and World Report 106(4):70,73, Jan. 30, 1989.

[17] McGuire, R. "Practicing Guidelines in Development." Medical Tribune 31(14):13, July 12, 1990.

Alan H. Rosenstein, MD, MBA, is Director of Medical Resource Management/Manager of Outcomes Measurements, California Pacific Medical Center, San Francisco. He is a member of the College's Forums on Cost Management and Computers and Information Technology.
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Author:Rosenstein, Alan H.
Publication:Physician Executive
Date:Nov 1, 1991
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