Carilion Clinic has been named a test site for a pilot program developed by two nationally known institutes often cited as authorities in health care policy.

The Dartmouth Institute for Health Policy and Clinical Practice and the Brookings Institution's Engelberg Center for Health Care Reform have developed a pilot program to track a health care model that financially rewards providers for improving patient outcomes while lowering the cost of providing care. The Dartmouth institute is part of Dartmouth College in New Hampshire. Brookings is a Washington, D.C.-based think tank.

The idea is to continue to push payment reform away from the current fee-for-service model and toward one that rewards keeping patients healthy.

"We are trying to learn how can you design a set of contracts for physician groups and hospitals that would reward them for providing better quality at the same time that they lower cost," said Dr. Elliot Fisher, director of the Dartmouth institute.

Carilion is the first of what will likely be several provider systems to be part of the initial pilot program, Fisher said.

It's one of the ways Carilion is looking at to change the way it is paid for services.

Similarly, Carilion received conditional federal approval May 29 to operate a Medicare Advantage Plan, making Carilion a Medicare HMO insurance company.

"The driving force behind both of these announcements is our trying to get paid differently, so we can get paid adequately, so we can take better care of patients," said Carilion CEO Dr. Ed Murphy.

As part of the pilot project, Carilion is negotiating opportunities to share cost savings with several major insurance companies in the region, including CIGNA, United Healthcare, Southern Health and Anthem. All four have expressed interest in participating, Murphy said.

Instead of the insurance companies reimbursing Carilion on the traditional fee-for-service basis, Carilion would be paid for reducing the overall cost of a patient's care. Although those contracts are not finalized, Carilion likely would be obligated to reduce costs by about 2 percent for a patient. Carilion would then be paid a portion of the savings.

Fisher said he hopes to show how medical payments can be reformed across the country.

"We think by getting a few pilot sites up and running, people elsewhere in the country will say, 'Oh it is possible,' " he said.

Three years ago, Carilion began switching from a traditional hospital system to a clinic model where Carilion not only owns hospitals but also employs specialist and primary care physicians to encourage collaboration. Carilion's goal is to reduce hospital admissions, make people healthier and lower the overall cost of health care for patients, Murphy said.

But that runs counter to how hospitals and doctors make money. The arrangements to run a Medicare Advantage plan and to join the pilot program are about staying financially viable, while still achieving the goals of the clinic, Murphy said.

The pilot is officially known as the accountable care organization model and has made it into the U.S. House health reform bill. The Congressional Budget Office determined the accountable care organization pilot program would save $2 billion over 10 years. The savings are generated by reducing the amount of medical procedures that are billed.

While reducing the overall cost of health care is important, it's also important for hospitals and doctors to get paid for the role they play in saving that money, Murphy said.

The pilot will involve looking at data of about 60,000 patients across Carilion's network, said Dr. Mark Werner, Carilion's chief medical officer. Carilion sees about 250,000 individual patients a year, so it won't include everyone. Patients also will not know if they are part of it, because it will be focused on data and not individuals.

The program will likely start collecting data in January and will look at data over three years. It's possible that it could be extended past three years, Werner said.

In many ways the pilot program's success is based on preventing disease and reducing the use of expensive medical tests and procedures, Werner said.

"We are not looking to ration care," Werner said. "This is about better care."

Building a Medicare HMO

Unlike the pilot program, eligible patients will have to sign up for the Medicare Advantage plan run by Carilion. Enrollment for 2010 is expected to begin Nov. 15.

Carilion has named its plan the Carilion Clinic Medicare Health Plan and said it will offer no or low member premiums and a prescription drug benefit.

Running a Medicare Advantage plan, while not specifically tied to the pilot program, allows Carilion to accomplish the same goal of restructuring how Carilion is paid for services, Murphy said.

Under Medicare Advantage Carilion will receive a flat fee to treat a participating patient instead of being paid on a fee-for-service basis. It is similar to a health maintenance organization, or HMO, type of managed care system, Murphy said.

Carilion anticipates between 3,000 and 5,000 people will participate in the plan the first year.

Like the pilot program, Murphy said, the Medicare plan will allow Carilion to better measure quality, outcomes and patient satisfaction.

While the Obama administration has targeted Medicare Advantage as a system that will likely be dissolved because it pays higher reimbursements then traditional Medicare, Murphy said it was still important for Carilion to take this step.

"I think it [Medicare Advantage] will go away," Murphy said. "But this is not so much of a business finance strategy for us. Rather this is a strategy to fund the care we deliver."