Private shared-savings deal puts half of future raises at hospital system at risk

A contract between Hawaii’s largest insurer and its biggest health system could prove a bellwether for contracting in other states, significant because so much of the health system’s payment — and compensation for its physicians — will depend on its clinical quality scores and the degree to which it can cut costs.

The shared-savings agreement between Hawaii Medical Service Assn. and Hawaii Pacific Health puts 50% the hospital’s annual pay increases over the five-year contract term dependent on achieving both quality improvement and cost savings thresholds.

HMSA President and Chief Operating Officer Mike Gold said he sees the arrangement as a model for payers and hospitals outside Hawaii that are dealing with the same dilemma: how to improve quality while cutting costs.

“The whole health care system and country will need to find a way out of this problem we’re in,” he said. “We think we have a good solution.”

Hospitals and payers across the country are moving to adopt shared-risk or shared-savings contracts like those authorized for Medicare under the Affordable Care Act. When large payers and hospitals adopt them, everyone is watching, said Carol Grelecki, a member of the New Jersey law firm Brach Eichler.

“The pressures are there to get involved in these,” she said. Adoption “is going to turn on what the experiences are with these original ones.”

The scale of the at-risk pay under the Hawaii agreement is steep compared with private shared-savings models adopted in Massachusetts, another bellwether state in shared-savings agreements. The Alternative Quality Contracts that BlueCross BlueShield of Massachusetts introduced in 2008 included guaranteed pay increases to account for inflation, and a potential 10% bonus payment in recognition of clinical quality scores.

The Hawaii agreement will cover Hawaii Pacific’s four hospitals, 49 outpatient sites and care provided by its 1,300 affiliated physicians. The arrangement takes effect in 2014.

Gold said the intervening time will give Hawaii Pacific a chance to ramp up some of the changes it will have to undergo to make the new shared-savings model work. Meanwhile, Gold said the two sides will finalize similar contracts that will cover Medicare and Medicaid patients.

The two sides’ current contract includes “pay for quality” as part of HMSA’s transition away from fee-for-service payment. The new contract will keep those elements but will include shared savings so the more money Hawaii Pacific saves, the more HMSA will pay.

“It’s a step on the road toward a full ACO, although I’m not sure what a full ACO is anymore,” Gold said. “It’s been defined so many ways.”

HMSA’s payments to physicians already are partly dependent on HEDIS scores and other quality measures, but physicians’ compensation is likely to become even more dependent on quality scores and cost savings, Ken Robbins, MD, Hawaii Pacific’s chief medical officer and executive vice president, wrote in an e-mailed statement. Hawaii Pacific employs 350 physicians.

Gold said the health insurer and hospital system were able to work out the agreement because of a shared intention. “Support for the physician-patient relationship is the key to making the health care system work,” he said. “Our goal is to do everything we can to support that relationship.” He said he expects that all of HMSA’s contracts will eventually include pay-for-quality and shared-savings elements.

If the contract does not work as planned, HMSA and Hawaii Pacific would share in the financial losses. Gold said patients will at least not be any worse off than they are today in terms of cost and quality of care.

Both sides have every incentive to make sure the shared-savings model works, he said. “There is no contingency plan, except to go back to the way we were, and no one wants to do that.”