Spotlight on Payment Reform

    • September 23, 2009

What’s At Stake The way we pay for health care has consequences for quality and cost.

Under the dominant U.S. system, most health-care providers are paid a fixed fee for each service they provide, in most cases with no limits on those services and without regard for results.

This "fee-for-service” model rewards volume—more tests, more scans, more specialist examinations and more hospitalizations. But it does nothing to penalize poor patient results or redundancies. Some services, such as high-tech tests, are overvalued, while others, like primary care, are undervalued. Even worse, doctors who work to reduce complications and to help keep their patients well receive less reimbursement and can come out financial losers.

The result is the U.S. pays far more for health care than any other nation and is on a path of unsustainable spending growth. Yet we do not receive high-value care in return for our high level of investment. Rather, studies show that American health care is too often fragmented, uncoordinated and unsafe.

“We simply cannot be shocked and surprised that we’ve created a system of uncoordinated, high volume, incredibly expensive procedural care when that’s what we pay for—high volume,” writes Michael W. Painter, senior program officer for the Robert Wood Johnson Foundation. Experts say there is no silver bullet, but there are promising approaches to promote accountability for costs and outcomes: Public and private stakeholders need flexibility to experiment with payment and delivery models that have the potential to ‘bend” the cost curve and reward quality. Health care providers need technical support to adopt new technologies such as electronic medical records to promote coordination and collaboration. Consumers need access to reliable information on quality and cost to help foster competition around value. Most of these approaches need testing and refinement before they can be implemented across a $2.3 billion system, however, a process likely to be “a long, hard slog” in the words of Brookings Institution health care economist Henry Aaron.

"We don’t have ready plug-and-play solutions,” acknowledges RWJF’s Painter. “Because of that, regional innovation and approaches to refine payment and delivery models will be critical.”

The Background on Payment Reform For many consumers, it is an article of faith that more care equals better care.

In fact, a growing body of research shows that more services are not associated with better outcomes and can actually do harm. The tracked variation in Medicare spending between areas of the country with the highest costs and those with the lowest costs. Researchers found that patients in the highest-spending regions were no sicker than those in lower-spending regions, nor did they prefer additional care. Most striking is that patient outcomes were poorest in the areas providing the most high-tech services. In other words, more care could actually be harmful.

Massachusetts’ experiment with health reform offers another, more pragmatic economic lesson—that extending universal coverage in a system that encourages volume, rather than value, is financially unsustainable.

Earlier this year, . If approved by the legislature and governor, the recommendations would make Massachusetts the first state to end the practice of paying health care providers for each office visit, laboratory test or procedure in favor of a capitation or global payment, i.e. a flat monthly or annual fee.

Payment and Delivery Alternatives The most commonly discussed payment and delivery reforms fall into three categories:

The first calls for encouraging more effective primary care through more generous reimbursements.

With its emphasis on primary care doctors and teams of coordinators, the goal of the medical home is to help patients—especially those with chronic illnesses—stay healthy enough to avoid hospital trips and expensive treatments, saving money in the long run. Medical home payment models usually reimburse more for primary and preventive care, but may also link to bundled or capitated payments. The second category calls for shifting away from separate payments for each discrete service to a single payment for all of a patient’s needs over a particular episode of illness, both outside as well as inside the hospital. This “episode-based,” model was the underpinning of a 2007 initiative by the Geisinger Health System in Pennsylvania, which the characterized as "surgery with a warranty." Key to the experiment is a flat payment for elective cardiac bypass surgery and all related care for 90 days after discharge. An evaluation in the first year found a 10-percent drop in hospital readmissions, shorter average length-of-stay, and reduced hospital charges. Another episode-based model, PROMETHEUS Payment Inc., pays physicians substantial bonuses for reducing potentially avoidable complications while improving quality. PROMETHEUS is currently operating in four communities with the support of the Robert Wood Johnson Foundation.

The third reform approach calls for creation of coordinated delivery systems, often called ‘’ (ACOs)—essentially a more expansive coordinated care system than the medical home which will reward providers who deliver lower-cost, higher-quality care for a given population of patients.

A typical ACO would include a hospital, primary care physicians, specialists and other health professionals. The idea is that the more providers collaborate, and are rewarded for improving the health of a group of patients, the better and more cost-effective our health system will be.

Large, integrated delivery systems like the Mayo Clinic in Minnesota, Geisinger in Pennsylvania and Intermountain Healthcare in Utah serve as real-life examples of accountable entities with reputations for high-value care. Since about 80 percent of physicians have small practices, however, implementing this model poses structural and political challenges and there are no ready payment schemes.

Undergirding all these plans are payment schemes that provide different incentives than fee for service. Two of the most frequently discussed are the health care services a patient needs over an entire episode of care (e.g., all the inpatient and outpatient care required after a heart attack); and also, condition-adjusted capitation, sometimes called comprehensive care payment, which pays a single price for all the care a patient will need over a set period of time. Understanding how financial risk is apportioned in those models is key to understanding their strengths and potential pitfalls: Fee for service, for instance, places essentially no risk on the physician or hospital —neither the risk that the patient will need care (the probability risk) nor the risk that the care provided is the right care (the technical risk). As a result, providers have no incentive to improve care—just to provide more of it. Capitation goes to the opposite extreme, placing all risk on the physician or hospital. The incentive is to reduce costs, which can lead to indiscriminate service reductions since the system does not explicitly reward high quality, value or patient outcomes. Episode payments—where a gamut of services are grouped together for a single reimbursement, instead of being paid for separately—could give hospitals, doctors and other providers an incentive to provide more efficient care and reduce unnecessary hospital readmissions, since they won't get paid for doing more. In this model, providers decide what services are provided within a particular episode of care, but bear none of the financial responsibility for probability risks. Some argue, however, that paying for discrete episodes does nothing to control the overall number of episodes, and could actually encourage more episodes.


Implementing Change Francois de Brantes, national coordinator of PROMETHEUS, likens the challenge of transforming the health care system to trying to turn around a Mack truck speeding down the payment superhighway at about 80 mph and gaining speed as it goes.