Medical evidence: hospitals will have to prove to insurers they provide quality care as pay-for-performance contracts prevail.

• Author: Martin, Edward
• Position: FEATURE

The gurney ride, lying flat on his back staring at the ceiling lights as they pass overhead, halts. "Good morning," a voice intones. "I'm going to be taking care of you today. Did they explain what we'll be doing?" The patient tells the anesthesiologist his name and what he's here for. The gurney moves again, stopping this time beneath bright lights. Behind a lime-green mask, a surgeon repeats the information to a cluster of nurses and others. The patient listens before drifting into the soft darkness of anesthesia. Preparations continue, but before the surgeon picks up a scalpel, he calls another huddle and, like a mantra, goes over the patient's name and other details again.

When the operation ends, nurses collect and count scalpels and other items. "We set up the tray and label it based on the surgeon's preferences," Brian Goldstein, one of the doctors who created the ritual playing out in an operating room on the second floor of UNC Hospitals in Chapel Hill, would explain later. "When we finish, we know what's supposed to be there." Before the incision is closed, a nurse passes a wand that resembles an unstrung tennis racket over the patient. If a sponge or compress, blood-soaked and easily overlooked, has been left inside, a nearby console will beep. Embedded radio-frequency microchips ensure all are removed.

In another wing of this sprawling complex, behind closed doors in secrecy more common in military than medical operations, there's another reason hospitals are going to unprecedented lengths to improve patient care and safety. Their finances are at stake. Insurers are negotiating how to reward them for getting people well quicker and with fewer complications. A decade ago, contracts were mostly battles of who was the biggest, hospital or insurer, and who needed the other more at the moment financially. Asking few, if any, questions, insurers forked over payments, then passed the costs along to premium payers.

"We have understood for some time that the traditional fee-for-service system is unsustainable," says Joan Thomas, president of Managed Health Resources Inc., the negotiating arm of Charlotte-based Carolinas Health-Care System, the state's largest hospital network. "For many years, even before health-care reform, some of the changes were really accelerating." She and her organization handle several hundred contracts a year for the hospitals the system owns and those it manages for others.

Among the latter is Greensboro-based Cone Health Inc., with its flagship, 536-bed Moses H. Cone Memorial Hospital. CEO Tim Rice agrees with Thomas, but he confronts the harsh reality that faces administrators in the pay-for-performance era. Better care is cheaper in the long run, but cutting lengths of stay, treating more patients outside the hospital, reducing readmission rates, eliminating redundant tests and other such measures shrink revenue. Making the transition is "the ugly phase where you're leaping fir one cliff to another."

"We're caught between two worlds," says Jarvis Leigh, network marketing vice president and chief negotiator for Hartford, Conn.-based Aetna Inc., which Covers about 300,000 North Carolinians at nearly 120 hospitals. "One is old-world contracting, in which we're mainly looking at ways to lower our costs year over year and hospital CEOs are looking at ways to increase their revenues year over year. The other is, hospital CFOs--chief financial officers--are loath to take some unnecessary services out of the system because their revenues are tied to them. We need to quickly transition to a model in which they can get rewarded for performance, because that time is very dangerous for them." Garland Scott calls the transition "the core of the challenge we face today" He's the Greensboro-based CEO of UnitedHealth-care of North Carolina and South Carolina. With about 900,000 Tar Heel members, the state's second-largest health insurer is responding with models such as bundling--essentially turnkey pricing for set medical procedures--that reward efficiency and quality of care.

The consequences are huge. The Menlo Park, Calif.-based Kaiser Family Foundation estimates that medical care in North Carolina consumes about $6,500 a year per person, though fewer than one in 20 pay that out of pocket. Medicare and Medicaid pick up 43% and, under the Affordable Care Act of 2010, have started penalizing hospitals for their lapses. "Medicare, of course has been the big driver," Goldstein says. As UNC Hospitals' chief operating officer and executive vice president, he oversees a $1 billion annual budget. Before that, the internist ran the patient-safety and performance divisions. "Is this pay-for-performance? Indeed, 1% of our Medicare revenue is at risk if hospitals don't meet quality standards, and that'll increase by 2015 to 3%."

Employers sponsor 49% of the state's medical insurance plans, and their premiums have more than doubled since 2000. They have muscle and aren't reluctant to use it, pressuring insurers such as Aetna, UnitedHealthcare and Chapel Hill-based Blue Cross and Blue Shield of North Carolina Inc. to hold down hospital costs. "They're writing the tab, so they're looking to us to drive cost improvement, primarily by improving quality of care," Leigh says. "The best way to do that is to make it an even larger component of contract negotiations." Kaiser...