Healthcare Payment Reform: A Look into the Future

It used to be so simple.

A patient arrived at the office, the clinicians analyzed their problem, performed a service, and sent a bill. Next.

Even though I am wildly overstating the simplicity of fee for service (the method described above), at a very basic level it is pretty straightforward. The complexities primarily originate from the fact that we have over 1,000 health insurance companies each with slight variations (a single payer system would be a lot easier).

Even though fee for service (FFS) hardly seems simple, the future may be significantly more complex. We all know the reason: under the current system, which is dominated by FFS, the nation is approaching spending 20 percent of GDP on healthcare, an unsustainable level for individuals, companies and the country (on personal note, my premiums have doubled in the last five years—ouch.)

The one thread throughout all payment reforms schemes is an increased burden on providers and their organizations to deliver higher quality and lower cost care. This will require a significant transition in delivery models—the way medical work is done. More on that later. 

Here are some of the new payment modes on the near horizon.

Bundled Payments: instead of receiving a fee for each specific service, a bundled payment defines a flat fee that will be paid for a particular episode of care. Let’s say a patient is diagnosed with congestive heart failure or needs a new knee, under bundled payments a fee would be calculated for the diagnosis and then divvied out to the various providers that care for the patient. To prevent underutilization of services, quality measures are attached to payment. To prevent over-utilization, the fee is fixed and may specifically define what is allowed for a patient with a particular episode—anything above that will not be paid. It encourages coordination because all providers are on the hook for achieving desired outcomes. Although the details of this approach are daunting for any organization that has not fully integrated hospital, primary care, and specialty services, it does get the incentives right. If providers are getting a fixed fee and are judged on outcomes, the incentive is for efficient, high quality care. The devil is in the details which will mean some pretty sophisticated IT to operationalize it.

Modified Capitation: under a capitated plan providers receive a flat monthly fee for every member that is assigned to them. Version 1.0 of capitation got a black eye because of the overzealousness of some plans in restricting care as a means of controlling costs. In the new iteration of capitation, quality performance measures have been added so that plans and providers are incentivized to keep care standards high as well as keeping costs low. Patients are risk-adjusted (with an associated modification of fees), so that providers are not punished for having an unhealthy panel. I love the basic simplicity of capitation (like all of these systems, the under the hood details are brutal) and it can be lucrative for practices that perfect the model. Since providers are taking risk, they have strong incentives to keep people healthy. It does favor integrated delivery systems or medical homes that are actively coordinating care across settings. The challenges: collecting and managing to quality metrics and dealing with difficult, non-compliant, chronically ill patients. 

Hybrid Models: Some schemes will blend fee for service plus either rewards, penalties or supplemental fees to drive the right behavior. Example: providers that transition to a patient centered medical home (PCHM) may be eligible for monthly per member care coordination fee. This is a great idea since a huge hunk of medical costs are driven by individuals with chronic illnesses bouncing through the health care system. A fundamental principle of medical homes is help the chronically ill navigate this maze more effectively and with better outcomes. Physicians on FFS that are part of larger group or ACO (accountable care organization) may be able to participate in gain sharing in which bonuses are provided based on the ability of the group to achieve annual cost savings while meeting specified quality metrics.

Whatever ends up sticking, provider organizations will have to adopt their operations to fit the payment model. ACOs and the Patient Centered Medical Home (for primary care) are the two most prominent examples of modified delivery systems built to fit the new payment models.

Where are we now in payment reform? Still very early in the transition. Advocacy group Catalyst for Payment Reform recently reported that only about 11 percent of medical payments are outcome or value based. Report is here.

Since we are now in period of experimentation with new payment models, it is premature to predict what methodology will prevail; over the next five years there will be detailed analyses of pilot projects using these systems to see what works and what doesn’t. One thing is certain: the existing system will not stay the same.

What do you see coming down the road for healthcare payment reform?

Bruce Kleaveland is President of Kleaveland Consulting and a sponsored health IT correspondent for Intel