Creating Successful Alternative Payment Models
In an effort to address the problems caused by current Medicare payment systems, Congress authorized the creation of “Alternative Payment Models” in Medicare as part of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA).
Under MACRA, an Alternative Payment Model (APM) is not just a different way of paying for healthcare services. The law requires that an APM must either:
Most of the Alternative Payment Models (APMs) that have been created to date have failed to achieve significant savings or improvements in quality.
It has been asserted that the poor performance of current APMs is because they do not create enough “financial risk” for the participating providers. However, the real problem is that most current APMs do not actually solve the problems with current payment systems and in some cases they make them worse.
Successful APMs can be designed by following a four-step process:
Step 1 is to identify a subset of current spending that is potentially avoidable.
Avoidable spending falls into two major categories:
Although there is a large amount of avoidable spending in the healthcare system, the specific types of avoidable spending will differ for different patients, different health conditions, and different communities.
Step 2 is to identify or design a different approach to delivering services that will reduce the avoidable spending.
In most cases, reducing avoidable spending is not simply a matter of delivering fewer services. In general, at least one new or different service must be delivered to a patient instead of the service(s) that will be reduced. For example:
The specific change in services will differ for different types of avoidable spending and different patients.
Step 3 is to create payments that adequately support the new approach to delivering services.
When a better approach to care delivery exists and is not being used, it is often because current payment systems create barriers to doing so. These barriers generally fall into two categories:
If the APM does not remove these barriers, physicians, hospitals, or other providers will be unable to deliver services in a way that will reduce avoidable spending.
One cannot expect providers to deliver services in different ways unless payments under the APM are adequate to support the costs of those services. It is impossible to know whether payments will be adequate unless one knows what those services will cost.
The cost of delivering services under an APM cannot be determined from payers’ health insurance claims data for several reasons:
Cost accounting systems and methodologies such as Time-Driven Activity-Based Costing can provide information on what it currently costs to deliver current services, but not what it will cost to deliver care differently in the future. A Cost Model is needed that identifies the fixed costs, semi-variable costs, and variable costs associated with the services and makes estimates of how those costs will change when there are changes in the number or types of services delivered.
Step 4 is to hold the providers receiving the new payments accountable for delivering services in the new way and for reducing the avoidable spending.
If the payments created in Step 3 eliminate or adequately mitigate the barriers that exist in current payment systems, it should be feasible for patients to receive services in the way defined in Step 2, which in turn should reduce the types of avoidable spending identified in Step 1. Consequently, it is reasonable for the payer and patient to expect assurance that a healthcare provider participating in the APM will, in fact, deliver services differently in order to achieve the desired results.
There is no one “right way” to structure an APM so that it both provides adequate payment and ensures appropriate accountability. There are several different approaches that can be used, including:
The appropriate approach will depend on the types of health problems being addressed, the types of services needed, and the types of providers and patients involved.
Although there is no one right way to hold healthcare providers accountable for results, there is a wrong way to do so, namely putting providers at financial risk for aspects of services and costs they cannot control.
The APMs created by the Centers for Medicare and Medicaid Services (CMS) and other payers attempt to hold providers accountable for total healthcare spending on their patients, even though providers cannot control all of the services their patients receive or the costs of many of those services. For example,in CMS APMs, physicians can be penalized when there are increases in the prices of drugs that their patients receive even though physicians have no control over what pharmaceutical companies charge, and a specialist treating one health problem can be penalized for services ordered by a different physician who is treating an unrelated condition. Moreover, these APMs can increase disparities in healthcare access and outcomes by penalizing physicians when they care for sicker and more complex patients.
If it is designed properly, an Alternative Payment Model can and should be a “win-win-win” for patients, providers, and payers:
The best approach to an Alternative Payment Model is Patient-Centered Payment.
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Most of the Alternative Payment Models (APMs) developed by the Centers for Medicare and Medicaid Services (CMS) have been designed to place healthcare providers at risk for total healthcare spending on their patients. However, no individual healthcare provider can control total healthcare spending on their patients. Moreover, since a small percentage increase in total healthcare spending can represent a large percentage of the APM participant’s revenue, there is the very real possibility that participating in these APMs could bankrupt small healthcare providers. As a result, many providers have been unwilling to participate in CMS APMs.
Unwillingness to accept such large and uncontrollable risk does not mean that healthcare providers are unwilling to accept any risk at all. Contrary to popular belief, there is significant financial risk for healthcare providers under standard fee-for-service payments: there is no guarantee that the fee they are paid for a service will be greater than the cost of delivering that service, particularly if the volume of service delivery is not high enough to cover the provider’s fixed costs. However, unlike CMS APMs, fee-for-service payment does not place providers at financial risk for whether their patients develop a new health problem or receive services from a completely different provider.
To be successful, an Alternative Payment Model needs to transfer only appropriate components of financial risk from payers to providers.
The starting point for appropriate risk sharing is to define the amount providers will be paid under the APM based on two separate things:
If the expected cost of delivering the services that patients need is less than the amount payers are currently spending on services to those patients, there is an opportunity for a “win-win” for payers and providers. The payment amount under the APM can be set at a level that generates savings for payers while also providing a positive financial margin for providers.
What providers fear is that the actual cost of delivering services will be higher than expected, or higher than the amount payers actually pay.
Under this scenario, the payer could still “win” financially if the APM payment is less than what the payer would otherwise have expected to spend on the services the patients need or receive. However, the provider would experience a financial loss if they have to incur the costs of delivering the services without adequate payment to support those costs.
Many CMS APMs set the APM payment amount by applying a “discount” to the amount that CMS expects it would otherwise spend under standard fee-for-service payments, without regard to whether that amount will be more or less than the cost providers will incur to deliver the services. Although this is designed to guarantee Medicare will “win” under the APM, the win will merely be theoretical if providers refuse to participate or go out of business because they are not paid adequately.
Assuming that a good faith effort has been made to set the APM payment so it produces savings for the payer while avoiding losses for the provider, there are two fundamentally different categories of reasons why the cost of delivering services can increase over time or exceed the amount that providers or payers projected:
An APM should be designed to address these two types of risk in different ways:
There are four different components that can be included in APMs to protect providers from different types of insurance risk:
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