New Marketplace

Improving Care by Redesigning Payment

Case Study · October 9, 2018

To address the inconsistent cost and quality of joint replacement procedures, the Washington State Health Care Authority created a Center of Excellence Program. The program requires providers to meet external quality standards for certain procedures, for which the Health Care Authority pays a single, fixed amount. This benefit design allows members to receive high-quality care when they need it for a predictable cost.

Key Takeaways

  1. Combining bundled services and prospective payments can encourage providers to work together, resulting in improved clinical outcomes, cost savings, and a better patient experience.

  2. Using evidence-based guidelines to design bundled services can ensure patients receive appropriate care.

  3. Many providers are open to pursuing prospective payment arrangements with purchasers and plans.

The Challenge

The Washington State Health Care Authority covers one-third of people under age 65 in Washington — including 375,000 public employees, retirees, and their dependents, plus about 2 million Medicaid enrollees. One challenge we’re addressing is moving health care in Washington toward value-based purchasing: paying for the quality, not the quantity, of care that members receive.

As part of this shift in payment, the Health Care Authority designed a new type of benefit for eligible members of Uniform Medical Plan (UMP), the state’s self-insured plan: the Center of Excellence (COE) Program. We took on the challenge of building a center of excellence that was more stringent than many such programs; ours requires providers to meet clinical criteria established by the Dr. Robert Bree Collaborative (which includes the Chief Medical Officer of the Health Care Authority). This group of health care stakeholders was established by the Washington legislature in 2011 to identify specific ways to improve the affordability and outcomes of health care in the state.

The Bree Collaborative has developed evidence-based guidelines for several clinical episodes of care, including knee or hip replacements. For these procedures, they established quality criteria for appropriateness and fitness for surgery, repair of the joint, postoperative care, and return to function after surgery. The provider must follow these criteria and document them in the patient record. Because the Health Care Authority is committed to embedding Bree criteria into its contracts wherever possible, the Bree criteria — rather than the federal CJR program or the Joint Commission COE standards — shaped our approach.

The Bree criteria also list clinical measures that we used to identify high-quality providers. Interestingly, the criteria provide no guidance around payment models, so we looked to other models for direction — most notably, the Employers Centers of Excellence Network, which is run by the Pacific Business Group on Health. We also drew on the work of the Catalyst for Payment Reform, which provided a Total Joint Replacement Bundled Payment Toolkit. The toolkit was invaluable in leading us through many decisions and providing templates for contracts and proposals.

One payment model we rejected was the use of reference-based pricing. We felt that this model places too much of a burden on the member by incentivizing them to find the lowest-priced provider. Plus, most members are not equipped to accurately assess the quality of a provider’s services. In addition, we were concerned that this model would leave our members at risk for being billed for services outside of the bundle. Prospective payment may be more complicated for the administrator, but it leaves less of a burden on the member.

Another decision we made early in the process was whether to contract directly with the providers or have our third-party administrator, Regence BlueShield, contract with them. We decided to contract directly when we learned that providers are often reluctant to offer a discounted bid rate to a payer with whom they already have a higher negotiated rate. This is just one of the challenges health plans may face when using a center of excellence approach like ours.

Many plans and payers are afraid of a true center of excellence approach, in which some providers are chosen over others, because they are concerned doing so will harm their relationships with their existing networks. In some markets, purchasers will have to take the lead. For some providers, it can be a revelation to work with a purchaser who wants to pay them for quality. They find the chance to do so compelling, as most are not normally in a position to discuss quality. Providers across the country have asked us how to get the purchasers in their markets interested in value-based arrangements.

Our challenge was to overcome doubts about the feasibility of the center of excellence and use rigorous clinical criteria to build a program that would drive close collaboration between the provider and the administrator. This collaboration would result in a seamless, high-quality process for the member.

The Goal

Our goal was to use clinical criteria to design a bundle of services that would create consistent quality and cost for knee and hip replacement surgeries. We believed this strategy would keep our members safer and help manage costs for them and the state.

We selected knee and hip replacements because many members receive these services. In a typical year, about 600 UMP members get a knee or hip replacement, for a total cost to the state of around $20 million. However, studies done by the Washington Health Alliance (a nonprofit group that provides data on health care quality and value in the state) revealed significant variation in quality and cost for these procedures.

The first step toward our goal was identifying the clinical criteria for the program. Next, we needed to identify a facility that could serve as the center of excellence for knee and hip replacement and find a third-party administrator willing to manage a prospective payment bundle.

Bundled payments are usually paid retrospectively with a claims reconciliation after services are provided and potential savings for the provider. Most organizations that use bundled payments (such as Medicare) use this model.

Under our prospective payment model, we proposed to pay the center of excellence one fixed sum for all services related to each joint replacement, and the COE would decide how to pay its individual providers. Paying for services this way requires substantial effort and coordination from the COE and the plan administrator. But it also simplifies payment and creates a strong incentive for providers to work together for the best outcome, which can save them money.

Many administrators are not prepared to offer benefits in this way, including our current UMP administrator. However, we made it our goal to find one able to take on our aggressive timeline (8 months from procurement to launch) and a prospective payment model. Other purchasers and health plans in our region were skeptical that any payers or providers would be willing to partner with us because it would likely result in fewer procedures and, by extension, lower revenues. However, the 14 responses to our knee and hip replacement request for proposals shows that many providers are eager to take innovative steps to advance value-based purchasing.

The Team

The core team at the Health Care Authority included a program manager with experience in provider strategies, a program specialist with experience in benefit design, the Chief Medical Officer, and experts from nursing, finance, and contracts management.

We completed procurements for facilities and an administrator with existing resources. However, we hired a project manager during the implementation phase to ensure a smooth rollout to our members. Creating a smooth implementation required a collaborative approach between the third-party administrator and the center of excellence, with each partner equally committed to designing a positive, intuitive member experience. In doing so, we were fortunate to be able to learn from our colleagues in other organizations (such as Health Design Plus and the Catalyst for Payment Reform) who generously shared lessons learned from their implementation experiences.

The Execution

Selecting the Provider
At the beginning of this process, we had hoped to select up to three centers of excellence spread across the state. However, as we completed the evaluations (which included a cost and quality analysis as well as a site visit for the top three applicants), it became clear that only one provider was able to demonstrate our desired level of quality: Virginia Mason in Seattle.

We pay Virginia Mason a fixed, proprietary amount for each joint replacement. The hospital assumes financial risk for preventable surgical complications or infections that require readmissions, for up to 90 days after discharge.

Selecting the Program Administrator

After evaluating seven responses to our request for proposals, we chose Premera Blue Cross as the center of excellence administrator after it demonstrated it could implement prospective payments. Together with Premera and Virginia Mason, we designed a process around what UMP members would need at each step of the way through their surgery.

In January 2017, we began offering knee and hip replacements under the COE Program to eligible UMP members for little or no out-of-pocket cost. Members of one UMP plan, UMP Classic, have no deductible or coinsurance for this benefit. Members of the UMP high-deductible health plan must meet their $1,400 deductible before the plan pays for this benefit (this is an IRS requirement). More than 90% of members who received surgery in the program’s first year were enrolled in UMP Classic.

Developing the Patient Experience

Members receive individualized customer service before, during, and after a joint replacement procedure in this program. A Premera care manager guides members through the process by gathering medical records for review by the surgeon, creating an itinerary for travel and surgery, and answering questions as they arise.

Premera also follows up with members after their surgery to collect feedback and ensure they are healing well. The feedback has been overwhelmingly positive: 98% of our members would recommend this program to others, and the overall satisfaction rate with the program is 95%.

Elimination of Postoperative Events and Readmissions Boosts Cost Savings - Washington State Health Care Authority Center of Excellence joint replacement

  Click To Enlarge.

Developing the Bundle

The following services are included in the joint replacement bundle:

  • Most travel and lodging costs for the patient and a companion, including parking at the hospital
  • A presurgical visit
  • The surgery and inpatient stay
  • Inpatient rehabilitation
  • Durable medical equipment (usually a walker or cane)

Post-discharge care (such as outpatient physical therapy) is not included in the bundled payment, but it is covered by the plan. Because our members usually travel home after their procedure, we did not include post-acute care as part of the bundle. This is typical for a commercial population. The center of excellence works with the member to ensure they’ve arranged post-discharge care near their home before the procedure begins.

The quality standards and payment model under the COE Program minimizes many common concerns during a surgical process — including high or unpredictable costs, travel, lodging, and the quality of care.


In 2017, 95 UMP members had joint replacement surgery through the COE Program, and there were no readmissions due to preventable complications. While 95 procedures is a small percentage of all joint replacements performed annually on the UMP population, it represents a fourfold increase in the number done at Virginia Mason compared to 2016.

The financial gain of this program for both members and the state has been impressive. The average member out-of-pocket expense for a non-COE joint replacement in 2017 was $988.46. Using the COE Program in 2017 saved the 95 participating members a total of nearly $94,000. For each of these procedures, the state saved more than 15% compared to surgeries performed outside the center of excellence. This figure includes all expenses incurred for the bundle, including the surgery, the implant, the inpatient stay, concierge case management, travel, and lodging. Medical costs accounted for nearly 97% of that total, and the remaining 3% for travel and administrative costs.

Member satisfaction with the program has also been high. In surveys given 30 days after surgery, 98% of members said they would use the benefit again and would recommend it to others. Almost 90% of members rated their experience with the program as a 9 or greater (out of 10).

Washington State Health Care Authority Center of Excellence joint replacement elements and outcomes of program produces strong patient experience scores

  Click To Enlarge.

Where to Start

To launch a similar program at your organization, we recommend:

  • Designing your bundle around external, evidence-based criteria like the Bree criteria to hold providers accountable and govern the quality of their care.
  • Considering your member data: Do they have many joint replacement surgeries? Are the price and quality of those surgeries consistent or highly variable?
  • Talking to providers, payers, and administrators to gauge interest and experience in bundles and prospective payments.

Next Steps

The COE Program demonstrates that an innovative purchaser working directly with a provider can result in better member experiences. We wanted to improve care for our members while signaling to the provider community that we are serious about value-based purchasing. The contract with Virginia Mason extends through 2020, at which point we will evaluate whether to extend the contract through 2026 or re-procure, which would allow us to offer additional centers of excellence.

Our next step will be to expand the COE Program with other bundles. In 2019, we will offer centers of excellence for lumbar fusion. Using Bree criteria and a process similar to the one described above, the Health Care Authority has selected two lumbar fusion COEs: Virginia Mason and Capital Medical Center, a community hospital in Olympia. Capital Medical Center had applied for the joint replacement center of excellence but was not selected; it devoted considerable effort to developing a program that would meet the Bree criteria and qualify as a center of excellence for the Health Care Authority. Their efforts are evidence that providers are willing to work hard to meet strict quality standards in bundles like these. Premera Blue Cross will administer the lumbar fusion bundles and provide member services.

By 2020, the state plans to have 80% of the care we purchase be value based. With initiatives like the COE Program and two accountable care networks (collectively called UMP Plus), we’re working to prove that redesigning health care is possible. We anticipate that this center of excellence model will provide a framework on which to expand value-based care, though each bundle will present unique challenges.

As concerns about the quality and cost of health care nationwide continue to grow, this program is a step toward making health care as simple, cost effective, and transparent as possible.

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