Massachusetts’ largest health insurer is trying a new strategy to tackle health care costs: put hospitals on a budget.
Blue Cross Blue Shield of Massachusetts will announce Tuesday that it is developing a program to pay hospitals not for every patient they admit and every procedure they do, but for how well they control costs while helping to keep patients healthy.
Hospitals would be rewarded when they collaborate with physician groups — even physicians affiliated with a different hospital — to manage costs and improve patient outcomes.
Blue Cross launched a similar payment program for physicians about a decade ago. But the business model for hospitals is still largely rooted in the old fee-for-service system.
Hospitals represent the biggest portion of health care costs, accounting for more than a third of the $61.1 billion spent on health care in Massachusetts last year, according to state data.
Many experts believe that changing the financial incentives for health care providers — so they are encouraged to keep patients healthy and out of hospital beds — can help contain rising costs.
“Essentially, at the heart of the model, we are providing financial support to the hospital to lower community health costs,” said Andrew Dreyfus, the chief executive of Blue Cross.
“It will really over time change if not reverse the historic incentives at hospitals that the more patients you admit or treat, the more you get paid,” he added.
Blue Cross is testing the idea with South Shore Hospital in Weymouth, where it launched a pilot program earlier this year. If the pilot goes well, Blue Cross expects to begin offering the program to other Massachusetts hospitals by 2020.
South Shore Hospital’s chief executive, Dr. Gene Green, said health care payments must change for hospitals to focus on keeping patients healthy while also staying financially viable.
“There’s a lot of work that we do that is not paid for,” Green said, such as the time doctors and nurses spend coordinating care for patients.
That would change under the Blue Cross model: South Shore Hospital would be encouraged to refer some patients for treatment in urgent care, at their regular doctor’s office, or at home.
Instead of admitting a patient who comes to the emergency department, for example, the hospital would be rewarded for calling that patient’s doctor’s office and setting up a follow-up appointment for the next morning, even if the patient’s doctor is not in the South Shore network.
US health care providers have long earned more money for every test, procedure, and service they provide. Critics say this drives up costs because it encourages overuse of expensive medical services.
Over the past several years, the industry has been moving to what are known as value-based payments, or accountable care models. Under these payment programs, health care providers earn more when they stay under budget and meet a set of quality measures, and they lose money if they exceed their budget and perform poorly on quality measures.
Medicare, which covers seniors, and Medicaid, which insures low-income people, also have been changing their payment systems. The Massachusetts Medicaid program this year launched several accountable care organizations — or networks of doctors and hospitals that will work to manage patients’ care.
The new hospital payment contract from Blue Cross will be similar to a state program in Maryland, where hospital rates are regulated, and insurers pay hospitals a set amount of money each year.
Under the Maryland system, health spending has grown more slowly than the national trend, and preventable hospital admissions have declined, said Dr. Joshua M. Sharfstein, professor at the Johns Hopkins Bloomberg School of Public Health.
“The old way of thinking about hospitals is they sit and wait for people to show up, and then take care of them,” Sharfstein said.
“A hospital executive should not just be worried about keeping the beds filled. A hospital executive should be saying, ‘What are the needs in my community, and how can I help prevent illness?’ ”
Dr. John B. Chessare, the chief executive of GBMC HealthCare, a health care provider based in Towson, Md., said Maryland’s payment system has allowed him to stop worrying about filling hospital beds in order to make money. Instead, he said, GBMC can focus on managing care for patients with addiction and chronic medical conditions.
“Now we don’t have to worry about how many widgets did we sell, we can refocus our efforts on generating better care at lower cost,” he said.
Chessare, formerly a hospital executive in Massachusetts, applauded Blue Cross for developing a new hospital payment program.
“I kind of wish they had done this when I was there,” said Chessare, who worked in the former Caritas Christi system (now Steward Health Care).
Blue Cross began putting doctors on a budget in 2009, under a program called the Alternative Quality Contract. More than 80 percent of Massachusetts doctors now accept some form of this contract, and studies show that it has helped to contain costs.
It could take years to know if Blue Cross’s new program for hospitals accomplishes its goals. But some hospital leaders are already enthusiastic.
“We enjoy an excellent working relationship with Blue Cross and are excited to learn more about this program as it is consistent with our care philosophy,” Christine Schuster, the chief executive of Emerson Hospital in Concord, said in an email.
Lowell General Hospital’s chief executive, Joseph “Jody” White, said doctors, hospitals, and insurers must align their financial incentives to address costs and improve care.
“Doing things the same old way, you get paid to do things to people,” White said. “That’s all got to change. Our industry is just too expensive.
“I don’t know what it’ll look like,” he said of the Blue Cross program, “but we’re all ears.”Priyanka Dayal McCluskey can be reached at firstname.lastname@example.org. Follow her on Twitter @priyanka_dayal.