Wednesday, February 13, 2013

Payment Reform Barrier #1: Continued Use of Fee for Service Payment

Even though the serious problems with fee-for-service payment have been widely acknowledged, many “payment reforms” do not change fee-for-service payment at all, but merely add new forms of pay-for-performance bonuses or penalties on top of it.  Trying to fix a broken system merely by adding a new layer of incentives can be problematic for physicians, hospitals, and other healthcare providers, so it is not surprising that to date, acceptance of these types of payment changes has been slow, and where they have been implemented, the impacts on cost and quality have often been relatively small.

The Many Problems with “Shared Savings”

The most common payment change being implemented by Medicare and many commercial health plans today is “shared savings.”  Under the shared savings approach, Medicare or the health plan pays providers using exactly the same fees as they receive today for their services, and then pays a bonus (or imposes a financial penalty) on the providers if the total cost of services for their patients is less than (or greater than) the amount that would otherwise have been expected.

The fact that shared savings programs do not actually change the underlying fee-for-service system creates significant challenges for providers.  For example:

  • Today, Medicare and most health plans pay physicians only for office visits, not for phone calls.  If a physician can respond to a patient’s health problem over the phone, thereby avoiding the need for the patient to make a visit to the office, the physician will lose revenue.  Reimbursing the physician for a portion of the lost revenue through a shared savings program still penalizes the physician’s practice (recouping only a portion of the loss still results in a loss) and also creates a cash flow problem, since shared savings payments typically aren’t made until a year or more after the losses occur.
  • If better coordination of a patient’s care can avoid an emergency room visit or hospital admission, the hospital will lose all of the revenue for that visit or admission, but it will still have to cover the costs of having the emergency room or hospital bed available.  Giving the hospital a bonus or shared savings payment for lower admission rates can still penalize the hospital, since the portion of the lost revenues offset through the shared savings payment may be less than the fixed costs the hospital must continue to cover.

Having two or more providers participating in a shared savings arrangement creates a version of the prisoner’s dilemma:  if provider #1 makes a good faith effort to reduce unnecessary services but provider #2 does not, provider #2 would “win” by maintaining its own fee revenues while also potentially receiving part of the savings generated by provider #1.  If provider #2 increases its volume of services, it would receive more revenue and also thwart the opportunity for provider #1 to receive any shared savings to offset the revenue it lost.

The shared savings model is biased against hospitals which do not employ physicians, since under the most common shared savings approach, all savings are credited to the organizations where the patients’ primary care physicians work, even if the savings are generated through improved care or reduced utilization in the hospital.  Forcing hospitals to solve that problem by acquiring physician practices may simply lead to higher prices, not lower costs.

Another serious problem with the shared savings model is that once the shared savings contract between the payer and provider ends, any shared savings bonuses will also typically end; providers will still be in the same fee-for-service system they had before, but they will now have lower revenues if they have reduced the volume of fee-based services in order to obtain shared savings payments, and they may also be receiving lower fee levels for individual services if payment cuts are being made through other policies, such as the federal Sustainable Growth Rate formula.  In order to obtain continued shared savings payments in the future, a physician or hospital would have to find new sources of savings.  Providers may be unwilling to significantly change the way they deliver care or invest in better ways of delivering care if they can only reap the benefits of savings for a few years.

Some payers have made modifications to the payment system to try and address some of these problems, but in general, the modifications have not changed the underlying fee-for-service payment system in any fundamental way.  For example:

  • Many medical home payment programs provide a small, flexible, non-visit-based payment to primary care physicians to help them cover the costs of services that are not reimbursed directly through fees.  Although these additional payments are highly desirable and address some of the problems of fee-for-service payment, in most cases, the vast majority of the physicians’ revenue continues to come from visit-based fees.  Moreover, the amount of non-visit-based payment the practice receives in these programs may depend on how many fee-generating visits its patients make to the practice, which means that fee-for-service still represents the dominant incentive.
  • The CMS Innovation Center created an Advance Payment Program that makes upfront payments to small provider organizations that want to participate as Accountable Care Organizations in the Medicare Shared Savings Program.  These payments are very helpful, but they are only temporary, and they can only be used to help pay for the costs of new infrastructure or personnel, not to cover revenue losses the provider incurs due to changes in the way they deliver services that reduce fee-for-service payments.

Implementing True Payment Reform

True payment reform cannot be achieved by adding new layers of bonuses and penalties on top of what is still fundamentally a fee-for-service payment system.  Moreover, to be successful, a new payment system needs to be more attractive for providers than fee-for-service payment, not less, while still reducing costs for payers and improving quality for patients.

For most types of patients and health conditions, fee-for-service payment must be replaced entirely with a new payment system that gives providers (a) greater flexibility to deliver the best combination of services for the patient, and (b) the accountability to ensure the combined cost of those services is less than the payment amount (along with the ability to retain any additional savings generated indefinitely).

Examples of such better payment systems include:

  • “Episode-of-care” payments for acute conditions or procedures that give a healthcare provider a payment or budget to cover the costs associated with all of the care a patient needs for that condition or procedure.  Under this type of payment system, the provider has the flexibility to decide which services should be provided.  If the patient’s condition can be managed with fewer individual services or by substituting different services than are delivered today, the payment would remain the same, even if fee-based revenues would have declined, but costs will be lower.  As a result, payers will save money, while providers can actually improve their operating margins.
  • “Global” payments or condition-specific comprehensive care payments for overall management of patients’ healthcare that give a healthcare provider a payment or budget for the costs associated with all of the care a group of patients need for all or some of their health conditions.  The provider has the flexibility to choose the combination of services which will best help the patients address their healthcare needs, but the provider also has the accountability to ensure that the costs of all of those services remain within the global payment or budget amount.

Where these approaches have been used, both providers and payers have benefited.  For example, in the Medicare Acute Care Episode (ACE) Demonstration, which “bundles” physician and hospital payments (i.e., it makes a single payment to both providers, rather than separate payments to each), Medicare has saved money, physicians have received higher payments, hospitals have been able to reduce their costs and improve their operating margins, and patients have received better care.  The positive results from this program led the CMS Innovation Center to create its Bundled Payments Initiative, which will both allow additional providers to participate in the bundling approach used in the ACE Demonstration and allow providers to accept full episode payments for a variety of conditions.  This win-win-win approach – lower spending for payers, better care for patients, and better margins for providers – is only feasible with the types of significant payment reforms described above, not with minor tweaks to the fee-for-service payment system.

Some payers have begun implementing these kinds of true payment reforms.  For example, in addition to the CMS Bundled Payments Initiative, the Integrated Healthcare Association in California has created episode payment definitions for a number of different procedures that are being implemented by several different health plans and providers, and the Health Care Incentives Improvement Institute is implementing episode payments with providers and payers in several different markets.  Blue Cross Blue Shield of Massachusetts has implemented the Alternative Quality Contract, which gives a group of providers a risk-adjusted global budget to cover all of the costs of care for a population of patients.  In Medicare’s Pioneer ACO program, providers will move from shared savings to partial or full global payments in the third year.

However, much faster progress is needed in more parts of the country.  All payers need to make episode and global payments available to providers for as many types of patients and conditions as possible, as soon as possible.  To be successful, though, these payment systems need to be structured appropriately to give providers accountability only for the costs they can control, and they need to be accompanied by appropriate benefit designs.   If payment reforms are designed properly, there will be no need to mandate them; many providers will voluntarily accept a payment system that gives them the flexibility to deliver the best care to their patients and rewards them for high-quality care at an affordable cost without putting them at risk for costs they cannot control.

(For additional details on this and other barriers to payment reform, download CHQPR’s report Ten Barriers to Payment Reform and How to Overcome Them.)




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