Steve Klasko, the chief executive officer of Thomas Jefferson University Hospital in Philadelphia, wants to see fewer patients walking into his emergency room. Jefferson is investing $20 million to open two urgent-care centers, including one three blocks from the existing ER, to treat patients with routine medical needs, and build a program to allow physicians to perform consultations using video apps so that other patients never have to leave home. “The best way to save the system lots of money is to keep them out of the hospital,” Klasko says.

Hospitals account for a third of the $2.9 trillion annual U.S. health-care bill. Academic medical centers such as Jefferson, which has almost 1,000 beds and $2.1 billion in operating revenue, are among the most expensive places to get care because they’re equipped to handle the most complex cases. The Affordable Care Act, combined with pressure from employers to tamp down health-care costs, is nudging providers to treat people in the lowest-cost settings possible. That approach, doctors and economists agree, is better for patients and is essential for controlling medical spending in the U.S., which is higher than anywhere else in the world. It isn’t, however, great for hospitals. Insurers and the government pay medical providers mostly by volume: More tests, fancier treatments, and longer hospital stays mean more revenue. That’s why many hospitals are adding capacity. Two miles west of Jefferson, the Hospital of the University of Pennsylvania is planning a new tower to accommodate more patients.

 
 
 

The Affordable Care Act included incentives to help move patients away from costly hospital stays. The law created a payment model that allows Medicare providers to qualify for a share of the savings if they can reduce overall health-care costs in their areas. The question for hospitals such as Jefferson is whether getting paid for producing better results can make up for the revenue they lose by seeing fewer people. “Can you create a situation ultimately where you’re treating fewer people in the hospital and doing fewer higher-reimbursement treatments? That’s a real risk,” says Dan Steingart, a health-care analyst for Moody’s. “If your contracts only pay you on a pure fee-for-service basis, you’re basically shooting yourself in the foot.”

Klasko, who came to Jefferson in 2013 from University of South Florida Health, is betting insurers will increasingly follow Medicare’s lead. “If that transition happens in two years, then we look like geniuses,” says Judd Hollander, an emergency doctor who’s helping develop Jefferson’s push into virtual medicine, which involves more than 100 employees so far. “If that transition happens in 30 years, we don’t quite look like geniuses.”

The hospital began experimenting with video apps last fall. One afternoon in January, staff crowded around an iPad in Ellen Louka’s hospital room, briefing her daughter, who was at work, via video chat about the progress Louka was making after her hip replacement. The surgeon held an X-ray up to the camera and explained that the 79-year-old could bear weight on her new hip right away. “Jefferson believes that it’s worth doing, even though it’s not reimbursed,” says Sang Hoon Woo, a doctor who leads residents on such virtual rounds.

Soon, hospital staff will use the same technology to coordinate with primary-care physicians when patients go home. Eventually, doctors at Jefferson plan to have a “virtual emergency department” to remotely triage many of the 119,000 people who visit its ER every year. Physicians will be able to use a video connection to assess whether someone with chest pains should rush to the hospital, get checked out at an urgent-care center, or simply call her regular doctor. People with minor ailments such as the flu could get a video consult. Hollander says the goal is to make sure everyone in the emergency room really needs to be there. The real sign of success, he says, will be “when the ERs start closing.”

The bottom line: A hospital is investing in virtual medical service, a bet that insurers will begin paying for quality instead of quantity.

This story appeared in the print edition of Bloomberg Businessweek.

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