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Policy Innovation Profile

Insurer Contracting Program Features 5-Year Terms, Accountability Across Continuum, and Substantial Incentives, Leading to Spending Slowdown and Higher Quality


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Snapshot

Summary

Through its Alternative Quality Contract program, Blue Cross Blue Shield of Massachusetts contracts on a long-term basis with primary care–based provider organizations for health maintenance organization and point-of-service members. The 5-year agreements include a global budget and make the organizations accountable for the costs and quality of care across the full continuum of care. As additional support, Blue Cross regularly distributes a variety of actionable performance reports and provides additional funding for investments in infrastructure designed to improve the quality and cost-effectiveness of care. The program has attracted broad participation by provider organizations and encouraged many of them to make major changes to the delivery system, leading to a slowdown in spending and higher quality.

Evidence Rating (What is this?)

Moderate: The evidence consists of post-implementation trends in the number of participating provider organizations and covered enrollees; post-implementation actions taken by participating providers to improve care delivery as a result of the program; and pre- and post-implementation comparisons of performance on various quality measures and of growth in total health care spending for a group of enrollees whose PCPs participated in the program to a similar group whose PCPs did not.
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Developing Organizations

Blue Cross Blue Shield of Massachusetts
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Date First Implemented

2009

Problem Addressed

U.S. health care costs are quite high and continue to grow rapidly, while quality remains suboptimal. The short-term, fee-for-service (FFS) contracts that govern the majority of provider payments give little or no incentive to control costs or improve quality. Pay-for-performance (P4P) and other innovative payment systems designed to address this problem generally remain too small and/or are not structured in a manner that encourages meaningful, sustained improvements.
  • High costs, subpar quality: U.S. health care costs are much higher than in other developed nations, and costs continue to grow more rapidly than in these countries. Despite this spending, health outcomes in the United States lag those of other nations.1
  • Few incentives for providers to improve: For the vast majority of services, providers are reimbursed through short-term (typically 1-year) contracts that pay on an FFS basis. The FFS nature of payments creates little or no incentive for providers to curb use of unnecessary services, while the short-term nature of the contracts and the absence of incentives make it impractical for providers to invest in programs to improve quality and cost-effectiveness.
  • Inadequacies of current P4P programs: While many public and private payers now offer innovative payment arrangements, these programs generally do not provide adequate resources or incentives for providers to improve. Most are small “add-ons” to payment systems still dominated by FFS reimbursement; in fact, a 2006 review of 27 programs found the average bonus equaled just 2.3 percent of physician FFS payments.2 Many programs are still negotiated annually, and even the lengthier contracts typically last just 3 years, likely not enough time for providers to feel secure investing in the infrastructure needed to control costs and improve quality. In addition, many arrangements do not cover the full continuum of care and/or do not force providers to share in both upside and downside risk.

What They Did

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Description of the Innovative Activity

Blue Cross Blue Shield of Massachusetts contracts on a long-term basis with primary care–based provider organizations for health maintenance organization (HMO) and point-of-service (POS) members. The 5-year agreements include a global budget and make the organizations accountable for costs and quality across the full continuum of care. Blue Cross also regularly distributes a variety of actionable performance reports and provides additional funding for investments in infrastructure. Key program elements are outlined below:
  • Eligible providers: The program is open to any provider organization that has primary care physicians (PCPs) and cares for at least 5,000 Blue Cross HMO or POS members. (HMO and POS members must select a PCP, allowing Blue Cross to direct payments to the physician’s affiliated group.) Participating organizations may or may not include specialists or hospitals.
  • Long-term contract based on global budget: Each participating organization signs a 5-year contract that sets a global budget intended to cover all medical expenses for members who have chosen a PCP in the group. These agreements contain several provisions designed to distinguish them from capitation (a fixed monthly payment per enrollee for comprehensive care), a popular method of contracting in the 1990s that met with significant provider resistance and often proved ineffective. Distinguishing elements of the contract include the following:
    • Initial budget set at prior year’s spending: The first-year budget is negotiated between the organization and Blue Cross, with the level typically set at an amount roughly equal to total medical spending for the organization’s Blue Cross members in the previous year. This approach helps deflect provider concerns that the program will quickly threaten their financial viability by significantly cutting reimbursement before they have an opportunity to redesign care processes. Such concerns were common under capitation in the 1990s.
    • Long-term agreements with increases tied to regional trends: To give providers greater certainty, contracts cover 5 years and specify the annual increase in the global budget for the duration of the contract. All 5-year contracts signed during the first 2 years of the program (2009 and 2010) specified annual increases based on the expected level of general consumer inflation. However, this approach has proven cumbersome, as Blue Cross often must make complex adjustments based on specific circumstances within a local area, such as a flu epidemic, a new mandated benefit, or general fee schedule increases. Beginning with agreements signed in 2011, contracts specify that annual increases be based on spending trends within the region (e.g., Boston, western Massachusetts). To encourage cost control over time, specified increases are generally set slightly below (e.g., one percentage point) this regional trend.
    • Annual adjustment based on risk profile: To encourage participating organizations to accept all patients (regardless of risk status), Blue Cross evaluates the risk profile of each group’s enrollees every year and compares it to that of the previous year. As necessary, the global budget is adjusted up or down based on changes in the risk profile. This approach addresses the concern (common under capitation) that provider groups may “cherry pick” healthy enrollees and/or proactively avoid high-risk individuals.
    • Coverage across continuum, in and out of network: Unlike programs that create incentives to control the costs of only physician services, the budget covers the entire continuum of care, including inpatient, outpatient, rehabilitation, long-term care, and prescription drugs. The provider group takes on responsibility for the costs of all services, regardless of where enrollees receive them.
  • Sharing of surplus/deficit based on quality performance: Throughout the year, the provider organization receives payments based on submitted claims, just as they would under a traditional FFS contract. At the end of the year, total payments are compared to the global budget. The resulting surplus or deficit is shared according to a predetermined formula. The initial formula (used for contracts signed in 2009 and 2010) specified that participating organizations receive between 50 and 100 percent of the surplus and absorb a similar percentage of any deficit. Beginning with contracts signed in 2011, the sharing formula is based on the organization’s performance on a set of well-established process, outcomes, and patient experience measures. As their performance on the quality measures improves, participating organizations keep a larger share of any surplus and absorb a smaller share of any deficit. For example, those achieving the lowest of five “thresholds” of performance keep 20 percent of any surplus and absorb 80 percent of any deficit. Those achieving the highest threshold (i.e., best-possible performance) keep 80 percent of any surplus and absorb only 20 percent of any deficit.
  • Additional incentives based on quality: Separate from the sharing of the budget surplus/deficit, contracts signed in 2009 and 2010 give participating organizations the potential to receive up to an additional 10 percent of total medical budget based on performance on the aforementioned quality measures, with the pool divided evenly between inpatient and outpatient care. Under this arrangement, a physician group earning the full 10 percent can boost its income by 50 percent. Payments depend on performance versus the five thresholds, and are structured so as to encourage both good performance and improvement over time. Beginning with contracts signed in 2011, Blue Cross restructured and in most cases reduced this incentive, with specific structures, incentive pools, and performance thresholds varying by contract.
  • Regular performance reports: Blue Cross provides participating organizations various reports to help them understand and improve their cost and quality performance. Reports include regular (sometimes daily) lists of individual enrollees visiting the emergency department (ED) or admitted to a hospital (so as to enable proactive interventions to address their health issues); monthly reports of where the organization stands versus its budget; quarterly reports on quality performance, including comparisons to peer organizations; and regular practice pattern reports that identify variations in how individual clinicians within a group treat common conditions and diseases.
  • Infrastructure support: Each contract specifies an amount of funding that Blue Cross will provide to support investment in needed infrastructure to promote better management of patient care, including information technology, staffing, and other needs. The amount varies by contract, with relatively larger levels of support given to smaller and/or less tightly structured organizations. For example, Blue Cross gave one independent practice association significant funds to support development of a sophisticated data exchange program to allow better coordination of care between PCPs and specialists.

Context of the Innovation

Blue Cross Blue Shield of Massachusetts offers health insurance coverage to individuals and businesses through a variety of plan offerings, including HMO, POS, and preferred provider organization (PPO) plans. Blue Cross’ HMO and POS plan offerings currently cover over 850,000 individuals. The impetus for the Alternative Quality Contract program began in 2006, when Blue Cross launched a 10-year initiative designed to transform the health care system in Massachusetts following the recommendations of the Institute of Medicine’s Crossing the Quality Chasm report. Around the same time, the Massachusetts legislature passed health care reform legislation that explicitly focused on enhancing access to coverage and care, with relatively few provisions related to improving quality and managing costs. (The legislature focused on these issues in later reform efforts; see the Additional Considerations section for more details.) In early 2007, Blue Cross’ CEO at the time, Cleve Killingsworth, MD, began to understand the importance of payment reform to realizing the vision outlined in the 10-year transformation initiative and in reining in health care costs in Massachusetts (which had the highest per-capita health care spending in the nation). In February 2007, he charged his senior leadership team with developing a new payment system that could quickly be introduced to provider organizations.

Did It Work?

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Results

The program has attracted broad participation by provider organizations and encouraged many of them to make major changes to the delivery system, leading to a slowdown in spending and higher quality.
  • Broad participation by providers: The program has generated substantial interest from provider organizations. In its first year, eight provider organizations that collectively care for slightly more than 300,000 HMO and POS enrollees signed up for the program. As of June 2012, 17 organizations participate, representing three-quarters of PCPs and specialists in the Blue Cross provider network. These organizations collectively care for roughly 665,000 individuals.
  • Catalyst for major changes to improve quality and efficiency: The program has encouraged participating organizations to make major changes in the way they manage the quality and efficiency of care, as outlined below:3
    • Investments in infrastructure: Participating organizations report making concrete investments in quality improvement infrastructure as a direct result of the program, including setting up or expanding quality departments, forming physician-led quality committees, investing in new information systems, hiring new staff to lead quality improvement activities, and hiring new staff (e.g., nurses, medical assistants) to better coordinate and manage patient care.
    • Revamped compensation systems: While provider organizations remain free to allocate incentive payments as they see fit, three of the eight initial participants allocated the full bonus to PCPs, thus creating a strong incentive to manage quality and spending.
    • Enhanced referral management: Five of the eight initial organizations highlighted referral management as a top priority. Several began monitoring referral requests and flagging those that could potentially be redirected to an in-network provider, and one organization began distributing a daily report on outside referrals to its entire leadership team. Rather than denying referrals, these organizations educate physicians about the cost of using outside providers and the availability of the same services within the network. Some participants have also increased in-house specialist capacity to reduce waiting times and the need for outside referrals.
    • Better care coordination for high-risk enrollees: Several organizations enhanced systems for coordinating care for high-risk patients. For example, one began proactively contacting all patients discharged from hospitals and skilled nursing facilities to monitor complications and side effects and to ensure that they understood discharge instructions, took prescribed medications, and had access to support services. Another expanded home visits to high-risk patients to monitor their condition and assist them in following care plans. Other initiatives include regular rounding at hospitals and skilled nursing facilities to ensure effective discharge planning and placing case managers in EDs to prevent unnecessary inpatient admissions.
    • Redirecting inpatient admissions: In 2010, one participating organization moved half of its 7,200 annual admissions from one high-priced hospital to another with lower fees and a greater willingness to improve care coordination and care transitions. As part of this arrangement, the hospital gave physicians online access to the inpatient medical record.
    • Delivery system reform: One participant made delivery system restructuring its immediate strategic priority, investing $4 million annually in “lean” production processes, training of facilitators, and other initiatives. Others made more modest investments in delivery system redesign, including teams to improve workflow and prescribing practices and small-scale testing of patient-centered medical homes.
  • Higher quality, more efficient care: Early results (from the first 2 years) suggest that the program has improved quality and moderated the growth in spending, as outlined below:
    • Higher quality: In a 2009 comparison of over 380,000 enrollees whose PCPs participated in the program to over 1,350,000 similar enrollees whose PCPs did not, performance improved on several measures, including a 2.6 percentage-point increase in adult enrollees meeting quality thresholds for management of chronic conditions and a 0.7 percentage-point increase in enrollees meeting thresholds for pediatric care. These improvements exceeded any previous 1-year change achieved within the Blue Cross provider network. There was not a significant change in provider performance on adult preventive measures.6 Overall for the first year, the initial set of 8 participating organizations achieved roughly twice the rate of improvement of nonparticipants on the full set of ambulatory clinical process measures; data are not yet available on measures of clinical outcomes and patient experiences.4 These 8 organizations continued to improve performance at a greater rate than nonparticipants in 2010 (the second year of the contract), as did other provider organizations that signed new contracts in 2010.5
    • Meaningful slowdown in spending growth: In the first year of the contract (2009), all 8 organizations came in under their global budget and hence shared in the resulting surpluses. Enrollees whose PCPs participated in the program experienced a 1.9-percent smaller increase in costs than did enrollees whose PCPs did not, equivalent to $15.51 less in spending per enrollee each quarter. Organizations that had not previously participated in a Blue Cross risk contract fared even better, holding growth in spending to 6.3 percent less than in nonparticipating groups (equivalent to $44.20 per enrollee each quarter).3 The vast majority of these savings came from increased use of lower-priced outpatient facilities, particularly for procedures, imaging services, and tests for high-risk enrollees.6 In the second year, additional savings came from other areas, including reductions in inpatient admissions, more appropriate use of high-cost imaging procedures, and increased use of less costly care settings.5 Program leaders believe the initiative is on track to achieve its goal of cutting growth in medical spending in half by the end of the first 5-year contract period.

Evidence Rating (What is this?)

Moderate: The evidence consists of post-implementation trends in the number of participating provider organizations and covered enrollees; post-implementation actions taken by participating providers to improve care delivery as a result of the program; and pre- and post-implementation comparisons of performance on various quality measures and of growth in total health care spending for a group of enrollees whose PCPs participated in the program to a similar group whose PCPs did not.

How They Did It

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Planning and Development Process

Key steps included the following:
  • Charge to senior leaders, with hard deadline: In a memo to his senior leadership team, the CEO called for development of an alternative payment system that went beyond P4P programs, which Blue Cross had used with mixed results. He gave the team 6 months to develop a new system that could be offered to all provider organizations that paid based on the value (rather than volume) of services.
  • Rejection of return to capitation: An internal working group recommended resurrecting the idea of provider capitation by testing it with one hospital. The CEO rejected this approach and reiterated the need for a new type of contract that could be offered to all providers in a short period of time.
  • Two-week sequestering of leadership team: The 17 members of the senior leadership team initially tried to meet the CEO's charge by meeting for an hour or 2 at a time. Led by the head of provider networking, the group included a wide array of senior leaders from contracting, strategic planning, budgeting, performance measurement, legal, and other relevant departments. The group set ground rules for its work, including the need to act as a team, not be skeptical, and not assign blame or “hang anyone out to dry.” The group quickly realized, however, that progress could not be made without carving out dedicated time. Team members cleared 2 weeks on their calendars, meeting every day in a windowless room to work on the new contracting model. The first week focused on creating a payment structure and the second on working out contract details, including use of validated, accepted quality measures to gauge performance. The group felt that tying payment to quality was critical to dissuading providers from withholding care (a common concern under capitation). The group explicitly banned use of the term “capitation” so as to distinguish this approach from it.7
  • Eliciting input from key stakeholders: Members of the senior leadership team met face-to-face with key partners (e.g., employers, provider organizations) to gauge their reaction to and get input on the plan. Despite fears that few providers would be willing to take on significant risk again, many expressed interest, in part because of well-publicized discussions among lawmakers about the need for state-mandated payment reform. These providers wanted to help shape reform rather than just react to it.
  • Initial contracts with two groups, expansion over time: Blue Cross initially signed 5-year contracts with two large integrated provider groups in the Boston area that expressed a strong desire to take on risk. Early experiences with these contracts led to some minor changes in the approach. As noted, the program has expanded rapidly and now includes many types of provider organizations, including standalone physician groups, hospital-affiliated groups, independent practice associations, and others.
  • Ongoing program modification: As highlighted earlier, Blue Cross has made several changes to specific aspects of the program, sometimes in response to input and in other cases based on observations made by the senior leadership team. As described earlier, these modifications include revamping the method for determining the annual increase in the budget, changing the formula for sharing the annual surplus or deficit, and reducing the size and revamping the structure of the quality-based incentives.
  • Potential inclusion of PPO enrollees: Blue Cross is in the process of determining an approach to including PPO enrolles in a quality-based risk model for providers.

Resources Used and Skills Needed

  • Staffing: Blue Cross dedicates four full-time staff to oversee activities that support participating providers, including data analysis and reporting, sharing of best practices, and other forms of assistance. In addition, a large group of individuals perform program-related duties as part of their regular job responsibilities, including medical directors (who work with their groups on clinical quality improvement), data analysts, contracting personnel, actuarial/budgeting staff, and others.
  • Costs: Data on upfront program development costs and ongoing operating expenses are not available; major categories of expenses include salary and benefits for the four full-time staff and the costs of the infrastructure and quality-based incentive payments. As noted earlier, program leaders believe the initiative is on track to cut growth in medical spending in half by the time the first five-year contracts expire in 2014. By this time, the cost savings generated by the program should outweigh the incremental program-related costs absorbed by Blue Cross.
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Funding Sources

Blue Cross Blue Shield of Massachusetts
Blue Cross Blue Shield of Massachusetts funds this program internally out of its operating budget.end fs

Adoption Considerations

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Getting Started with This Innovation

  • Use long-term contracts: A 5-year contract allows the insurer and participating providers to forge a long-term partnership, without the need for contentious negotiations each year. Long-term contracts also give participating providers the financial security and certainty needed to consider making significant investments in infrastructure to improve quality and reduce costs.
  • Negotiate contracts individually, based on organization’s readiness: Each contract must be negotiated individually with the interested provider organization and be based on that group’s current situation and level of readiness to take on risk. The goal is not to execute dramatic change in a short period of time, but rather to meet organizations “where they are” and then work closely with them over time to improve quality and control costs.
  • Cover entire care continuum: Providers need to be accountable for the costs of all care their patients receive, regardless of the type of care or where it is delivered. This approach gives PCPs an incentive to choose high-quality, low-cost specialists and facilities, thus driving improvement across the entire delivery system.
  • Set budget at current spending, grow at declining rate over time: To avoid a negative backlash by providers (as occurred with capitation), set the initial medical budget at or very close to the amount spent in the prior year, and then grow the budget at a rate that declines over time. This approach mitigates provider concerns about immediate, significant declines in revenues and income, but also makes it clear that long-term success depends on slowing the rate of cost growth and improving quality.
  • Make program as transparent as possible: Participating providers need to know their current quality scores and medical costs and the annual spending and quality performance levels they must achieve to earn incentive payments.

Sustaining This Innovation

  • Provide regular performance reports: Most groups lack the data to understand their cost and quality performance, including wide variations in practice patterns such as referrals, prescribing habits, and use of expensive imaging procedures, diagnostic tests, and treatments. Regular reports can help them identify opportunities for improvement.
  • Help participating organizations support individual physicians: Individual physicians within participating organizations may not receive meaningful, actionable information related to their performance, and often have little or no incentive to improve that performance (even though the organization as a whole does). To address these issues, encourage participating groups to share detailed data with individual doctors and to distribute a meaningful portion of incentive payments to them based on their performance.
  • Emphasize need to curb inpatient use: Reducing avoidable hospital use likely represents the single biggest cost-savings opportunity. However, hospital-led organizations and others with close ties to hospitals may be less interested in doing so, as their culture and internal incentives still encourage a focus on filling beds.
  • Adjust performance thresholds over time: Targets should be adjusted over time to encourage ongoing improvement in the costs and quality of care, not static performance over time.
  • Consider coupling program with enrollee education, incentives: Enrollees may react negatively to initiatives that limit their choice of physicians and care sites, such as referral management programs. To minimize the potential for resistance, consider creating financial incentives for enrollees to choose high-quality, low-cost providers, and offer education programs that explain the benefits of doing so. To that end, Blue Cross has started to couple the Alternative Quality Contract program with new insurance products that offer incentives for members to choose high-value providers.
  • Monitor program and make adjustments as needed over time: Any program of this magnitude and complexity will need to change and evolve over time. Some things may not be well conceived initially, while other modifications will be necessitated by changes in the environment. As noted, Blue Cross program leaders have made several changes to better support delivery system reform since the program’s initial launch. 
  • Support provider participation in similar programs: Blue Cross supports participating provider organizations that want to take part in similar programs sponsored by other payers, including Medicare and Medicaid.

Additional Considerations

The Alternative Quality Contract initiative has been highlighted as an innovative payment model that should be considered by other organizations. The model is explicitly mentioned in the Patient Protection and Affordable Care Act as a potential structure for sharing savings with accountable care organizations. It has also been highlighted by the Massachusetts legislature in various reform bills that promote quality improvement and cost control. The Massachusetts Senate and House have each passed similar (though not identical) versions of reform as a follow-on to the state’s initial reform legislation in 2006. A compromise bill (being negotiated via conference committee) is expected to pass both chambers and be signed into law in 2012.

More Information

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Contact the Innovator

Katherine Barrett, MPH
Senior Manager, Performance Measurement and Improvement
Blue Cross Blue Shield of Massachusetts
401 Park Drive
Boston, MA 02215
(617) 246-9913
E-mail: Katherine.S.Barrett@bcbsma.com

Innovator Disclosures

Ms. Barrett reported no financial interests or business/professional affiliations relevant to the work described in this profile other than the funders listed in the Funding Sources section.

References/Related Articles

Song Z, Safran DG, Landon BE, et al. Health care spending and quality in year 1 of the alternative quality contract. N Engl J Med. 2011;365:909-18. [PubMed]

Mechanic RE, Santos P, Landon BE, et al. Medical group responses to global payment: early lessons from the 'Alternative Quality Contract' in Massachusetts. Health Aff (Millwood). 2011;30(9):1734-42. [PubMed]

The Commonwealth Fund. A conversation with Dana Gelb Safran about getting the incentives right: The Blue Cross Blue Shield of Massachusetts Alternative Quality Contract. Quality Matters. June-July 2010. Available at: http://www.commonwealthfund.org/Newsletters/Quality-Matters/2010/June-July-2010
/A-Conversation-with-Dana-Safran.aspx
.

Devaux D, Dreyfus A. An insurer adds a new twist to an old idea. Health Aff (Millwood). 2011;30(1):62. [PubMed]

Chernew ME, Mechanic RE, Landon BE, et al. Private-payer innovation in Massachusetts: the 'alternative quality contract'. Health Aff (Millwood). 2011;30(1):51-61. [PubMed]

Footnotes

1 Institute of Medicine. Crossing the Quality Chasm. Washington, DC: National Academy Press, 2000.
2 Rosenthal MB, Landon BE, Howitt K, et al. Climbing up the pay-for-performance learning curve: where are the early adopters now? Health Aff (Millwood). 2007;26(6):1674-82. [PubMed]
3 Mechanic RE, Santos P, Landon BE, et al. Medical group responses to global payment: early lessons from the 'Alternative Quality Contract' in Massachusetts. Health Aff (Millwood). 2011;30(9):1734-42. [PubMed]
4 The Commonwealth Fund. A conversation with Dana Gelb Safran about getting the incentives right: The Blue Cross Blue Shield of Massachusetts Alternative Quality Contract. Quality Matters. June-July 2010. Available at: http://www.commonwealthfund.org/Newsletters/Quality-Matters/2010/June-July-2010
/A-Conversation-with-Dana-Safran.aspx
.
5 Internal data from Blue Cross Blue Shield of Massachusetts.
6 Song Z, Safran DG, Landon BE, et al. Health care spending and quality in year 1 of the alternative quality contract. N Engl J Med. 2011;365:909-18. [PubMed]
7 Devaux D, Dreyfus A. An insurer adds a new twist to an old idea. Health Aff (Millwood). 2011;30(1):62. [PubMed]
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Original publication: August 15, 2012.
Original publication indicates the date the profile was first posted to the Innovations Exchange.

Last updated: September 25, 2013.
Last updated indicates the date the most recent changes to the profile were posted to the Innovations Exchange.