#567 2006 · Geisinger Health System · Healthcare / hospital operations
Geisinger sold heart surgery with a warranty, and suddenly the hospital's own money was on the line for every skipped step
the problem
A patient buying a complex medical procedure has no way to inspect its quality before purchasing it, and under standard fee-for-service billing, a hospital that skips a best-practice step gets paid exactly the same as one that doesn't — so quality varies hospital to hospital with no financial pressure pushing toward the standard actually known to work best
background
Standard hospital billing pays for services rendered regardless of whether every known best-practice step was actually followed — a surgeon or care team that skips a pre-surgery test, delays a medication, or misses a post-operative check still generates the same bill as a team that did everything correctly, because payment is tied to the procedure being performed, not to how well it was performed against known clinical guidelines. Patients, meanwhile, have no way to evaluate quality in advance; they're purchasing a complex procedure whose outcome they can't inspect before committing to it.
Geisinger Health System's ProvenCare program, launched in 2006 for coronary artery bypass graft surgery, restructured the transaction entirely: patients paid one flat fee that already included 90 days of follow-up care, and if a complication arose that a documented best practice should have prevented, Geisinger absorbed the cost of fixing it rather than billing for additional treatment — turning the hospital's own money, not just its reputation, into the stake riding on every procedural detail.
what everyone would do
Train staff harder on best practices, add quality-oversight committees, publish clearer clinical guidelines. It fails because the guidelines already existed and compliance still sat at only 59% before the program — the problem was never a lack of knowledge, it was that fee-for-service billing paid the hospital the same whether a step was followed or skipped, so training pushed against an incentive structure that gave the hospital no financial reason to change.
what they saw
Geisinger saw that inconsistent compliance wasn't a knowledge problem, it was that the hospital had no financial stake in following its own guidelines. Restructuring the payment itself, so the hospital's own money is on the line if a preventable complication occurs, converted 'follow the checklist' from a professional aspiration enforced by oversight into the hospital's own direct financial self-interest.
the move
By converting the hospital's revenue model into something closer to a product warranty, Geisinger made corner-cutting a direct cost to the hospital rather than a hidden risk absorbed by the patient or a future insurance claim — the cardiac team then codified national bypass-surgery guidelines into a specific 40-item checklist of best-practice steps and tracked compliance against it, since the financial incentive to follow every step now ran through the hospital's own account, not just the patient's outcome.
why it works
Under standard billing, a skipped best-practice step and a followed one generate the same revenue, so there's no financial cost to cutting a corner. Bundling payment into one flat fee that includes 90 days of follow-up, with Geisinger absorbing the cost of preventable complications, means any shortcut that causes a complication now directly costs the hospital money it can no longer bill for — turning every checklist item from a recommended practice into a step the hospital personally pays for if it's skipped. Because the exposure was immediate and internal rather than an abstract quality metric, checklist compliance jumped from 59% to 100% within three months, and eliminating preventable complications saved more than the warranty cost, which is why Geisinger's margin on these cases rose even while absorbing the risk.
the payoff
Compliance with the full 40-item checklist rose from 59% of patients at the program's start to 100% within three months, and has been sustained at or near 100% since; average length of hospital stay fell from 6.2 to 5.7 days, 30-day readmission rates dropped by 44%, and Geisinger reported the program raised its profit margin on these cases by roughly 17% despite absorbing the cost of any warrantied complications.
where it breaks
The model only works when the best practice being warrantied is genuinely well-established and reliably preventive — warrantying a procedure with poorly understood or highly variable outcomes risks either heavy losses, if complications turn out not to be preventable by following the checklist, or no behavior change at all, if the guidelines don't actually predict outcomes. It also requires enough scale and financial reserves to absorb the risk of warrantied complications without the flat fee itself becoming unsustainable, which a smaller or thinly capitalized provider might not have. And it can distort patient selection if not carefully scoped: a provider financially exposed to complications has an incentive to avoid the sickest, highest-risk patients rather than genuinely improve care, unless the pricing model explicitly adjusts for patient risk.
what came after
ProvenCare is a widely cited case study in health-policy and healthcare-operations literature for bundled, outcomes-based payment models, referenced by the American Medical Association and studied in peer-reviewed health-services research (published in JAMA Surgery) as an early, empirically successful demonstration that tying a provider's own financial exposure to adherence with known best practices drives measurably better compliance and outcomes than standard fee-for-service billing.
references
- [1]The Washington Post — Geisinger's ProvenCare (paid-off performance-based healthcare coverage)The Washington Post, 2009washingtonpost.com
- [2]NBC News — Warranty on surgery? Some hospitals try itNBC News, 2007nbcnews.com