Payment reform: Moving Provider Compensation from Volume to Value

With health care reform accelerating, companies have sought ways to reduce health care costs. Approaches range from instituting defined contributions and limiting dependent benefits to implementing wellness programs with financial incentives. However, for health care reform to truly succeed, the payer side also has to transform the way it operates. One transformation taking place is in the area of payment reform. Health care providers had long been compensated for volume of care with a fee for every service. Now, more and more providers are being rewarded for value of care.

When providers are rewarded for meeting quality targets known to result in better health outcomes, care should become less expensive. The rationale is easy to understand: A healthier population is likely to have lower health care utilization rates, which would lower the total cost of care.

A new approach to payment reform: Shifting risk from payer to provider

Four payment reform models are gaining traction within the health care industry. The payment methods outlined here represent an evolution of who bears the risk. As providers assume more risk, costs become more predictable for the payer.

1. Fee for service with performance incentives (aka pay for performance)

This approach keeps fee-for-service payment as its foundation. Providers—such as physicians, medical groups, and hospitals—are offered incentives to improve both efficiency of care delivery and patient health. There may also be penalties for poor performance or outcomes.

One of the advantages to this type of payment reform is that there are incentives to save costs by providing care more efficiently and effectively. It also can encourage evidence-based medicine, collaboration among providers, and coordination of services. This approach is the most common first step toward value-oriented payment.

Kaiser Permanente (formerly Group Health) has pilot programs underway with nine large group practices using this payment approach, with more being developed.

2. Bundled payments (aka episodes of care)

Like pay for performance, bundled payments function within the fee-for-service world. Rather than different providers being paid for each test, procedure, or encounter, all providers involved share an all-inclusive fee for an entire care episode.

For example, a bundled payment for a total hip replacement would include consultation prior to surgery; all professional services required including X-rays, tests, or lab work; the surgery and hospitalization; and follow-up care—all for a single cost.

Serving 2.6 million residents in Central and Northeast Pennsylvania, Geisinger Health System bundled payment for coronary artery bypass graft surgery. Doing so helped them achieve quality results that included drops in readmission rates, length of stay, and reduced hospital charges.

3. Shared savings

This payment strategy provides an incentive for health care providers and services (doctors and hospitals, for example) to be rewarded with “shared savings” if they’re able to reduce costs. Often providers are required to meet quality measures as part of the strategy.

Interest in this payment model has been driven, at least in part, by the creation of the Medicare Shared Savings Program for Accountable Care Organizations (ACOs). This program calls for shared payments to be a primary payment method.

ACOs in the Pioneer ACO Model and Medicare Shared Savings Program generated more than $417 million in savings for Medicare, according to a 2014 report from the Centers for Medicare & Medicaid Services. Medicare continues to track the performance of these ACOs.2

4. Global payments

Global payments, sometimes called the next generation of capitation, seek to address some of the issues associated with the fee-for-service payment system by removing incentives to deliver more care or services.

The model generally calls for a group of health care providers (usually a large multispecialty physician group or a hospital-physician system) to receive a comprehensive payment for the total cost of care for a specific patient population. Whereas bundled payments are for a single episode of care, global payments are for a fixed set of plan enrollees and are paid monthly per enrollee.


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