Costs and productivity in patient-centered medical homes: A simulation

To address the fragmentation and discontinuities in health care, patient-centered medical homes (PCMHs) provide additional care coordination services for an extra management fee with the goal of saving private and public insurers money while improving the quality of care. Because empirical evidence showing PCMH financial success is unavailable, we use claims data from 312 PCMHs and a matched set of comparison practices to simulate the required reductions in hospital admissions, readmissions, and other services necessary to achieve statistically detectable savings thresholds. We also determine staff coordination time and productivity levels necessary to result in detectable savings. Our results indicate that PCMHs will have to generate annual savings between 3 percent and 30 percent depending upon the underlying cost variation per beneficiary, number of demonstration practices, and the extent of beneficiary clustering within practices. Eliminating all readmissions or most non-hospital services alone will not achieve required savings, even in larger initiatives. In order to be cost-effective, additional physician and nurse time coordinating care will have to be quite productive in reducing costly health services. If so, this likely will result in substantial profits for highly productive PCMHs.