Buy the numbers: data on how successfully, not how often, hospital treat their patients will drive dollars under health-care reform.

• Author: Martin, Edward
• Position: FEATURE

In late winter, guests in white rockers sip coffee on the veranda of the clubhouse at Pinehurst Resort, overlooking a lawn that looks like it was clipped by a barber. Visitors stroll streets lined with boutiques and art galleries. Outside of town, wind whispers through longleaf pines: It's a good day for golf. In the heart of the village, daffodils are blooming early this year on the campus of FirstHealth Moore Regional, centerpiece of a three-hospital network that covers 15 counties.

[ILLUSTRATION OMITTED]

One hundred twenty miles to the west, many businesses are boarded up and cars park-behind chain-link fences in downtown Gastonia. Sidewalks are empty, unlike when this was the heart of Tar Heel textiles and busy merchants were updating storefronts with the now-weathered aluminum facades popular in the 1960s. Ten minutes away in the northeast suburbs, CaroMont Health's Gaston Memorial Hospital, with flowing curves and sparkling white exterior, belies Gaston County's fading industrial heritage.

Despite their dissimilar settings, the hospitals could be twins. With fewer than 450 beds each, they are medium in size but among the state's best in various ratings. And both are at the forefront of a revolution in how Tar Heels and their employers pay health-care bills that totaled $60.2 billion in 2010. Value-based healthcare is coming, which means hospitals will increasingly be paid for how successfully they treat patients, not merely for how often they treat them.

In the complex world of medicine, it is a stunningly simple but radical reversal of a compensation model that traditionally rewarded hospitals and physicians for poor results and penalized them for excellence. If, for instance, unsterilized equipment infected a patient the hospital and surgeons were paid for the operation--then paid again to cure the consequences. That's one reason the state's per-capita hospital bill grew to $2,280 in 2009, up an average of 5% a year since 1991.

For the last year, CaroMont and Blue Cross and Blue Shield of North Carolina, the state's largest insurer, have replaced gimpy knees for a fixed price that includes preliminary work-ups in doctor's offices, surgery and rehabilitation after the patient goes home. FirstHealth will ask Medicare this spring to let it replace hips and knees and perform heart-bypass surgery on the same basis. For competitive reasons, neither will discuss bundle charges, but North Carolina hospitals typically charge $26,000 to nearly $60,000 for joint-replacement surgery alone, depending on the joint and hospital location. Bypass surgery frequently tops $70,000.

"On one level, you can ask why the heck we weren't doing this all along," says Kevin Schulman, a Duke University physician who also teaches in its business school. "Why weren't people holding hospitals accountable for the quality of care provided at their sites? What Medicare is pursuing now, along with a variety of private payers, is a step away from just writing checks to hospitals irrespective of whether the service was indicated or provided in the best possible manner--and then writing another check to fix it if there's a problem."

Bundled-care plans are value-based. If FirstHealth's bypass patient recovers better than expected, the hospital and physicians will receive Medicare's fixed price, yet to be negotiated. If the patient falters or has to return to the hospital, perhaps with an infection because doctors and nurses failed to give him antibiotics dictated by surgical protocol, FirstHealth and its physicians could be forced to eat tens of thousands of dollars in extra care. Quality with a carrot and stick? "Yes," FirstHealth CEO David Kilarski says. "Tying reimbursement to quality certainly ups the stakes for hospitals. These are things we've prided ourselves on doing better than a lot of surrounding institutions, so I'd like to think we're doing it to provide better patient care and not just because it's going to increasingly determine our reimbursement But no doubt, the stakes have been increased."

Only gradually will patients become aware of the trend. Not so for insurers, hospital administrators and employers, who bear the brunt of health-care costs. At least eight provisions, most embedded in the Affordable Care Act of 2010, link compensation to quality. They began in 2011 with rules that prohibit Medicare from paying extra to treat hospital-acquired infections. More will be phased in through 2015, including across-the-board reductions in payments for patients readmitted within 30 days, additional bundled-care pilot programs and steeper cuts in Medicare and Medicaid payments to treat hospital-acquired conditions and medical accidents. Medicare accounts for 60% or more of many hospital budgets, and private-sector insurers such as Blue Cross typically follow its lead on pricing and policies.

Value-based care is already affecting hospital bottom lines. Insurers and employers are guiding workers to standout hospitals and physicians, bypassing those with less-sterling records. Self-insured Salisbury-based Food Lion LLC, which operates more than 1,100 supermarkets nationwide, provides injured and sick workers information on hospitals and specialists that, based on data filtered from health-care payouts for its 73,000 employees, get better and cheaper results.

[ILLUSTRATION OMITTED]

However, Food Lion also illustrates a paradox of value-based hospital compensation. Though medicine is quintessentially personal, pay-for-performance relies on huge stores of data that harbor silent stories of medical success and failure. Nowhere is that more obvious than on the outskirts of Chapel Hill, where inside the glass walls of Blue Cross and Blue Shield's trapezoidal headquarters, analysts are mining records of more than 3.7 million customers who submitted $11.5 billion in claims in 2010. What emerges is a list of more than 30 Tar Heel hospitals that have outstanding success for procedures ranging...