Wednesday, February 13, 2013

Payment Reform Barrier #2: Expecting Providers to Be Accountable For Costs They Cannot Control

Many providers have been reluctant to accept episode-of-care payments and global payments because of concerns about their ability to manage significant financial risk.  Patient advocates may also oppose payment reforms that create financial risk for providers because of a fear that if providers take on responsibility for controlling costs, they will stint on services that patients need or avoid patients with significant health problems.

Although this barrier has typically been framed in terms of how much risk providers can take, the real issue is what type of risk providers can and should take.  If episode payments and global payments are structured in ways that give providers accountability for costs they can successfully manage, then providers will be more willing to accept them; conversely, if a payment system demands that providers take accountability for costs they cannot control, then the providers will either be unwilling to accept the payment system or, if they do, they could risk financial problems, which is what happened to many providers under capitation contracts during the 1990s.

There are two key ways to structure payments so that they give providers only the types of financial risk they can manage:

  • Separating Insurance Risk and Performance Risk.  First, a payment system should be structured so the payer retains the “insurance risk” (i.e., the risk of whether a patient will develop an expensive health condition) and the provider accepts the “performance risk” (i.e., the risk of higher costs from delivering unnecessary services, delivering services inefficiently, or committing errors in diagnosis or treatment of a particular condition).  Many of the problems with managed care in the 1990s arose because traditional capitation payment systems transferred both insurance risk and performance risk to providers, causing bankruptcies when providers took on care of many sick patients without any increase in payment.
  • Focusing on Costs That a Provider Can Control.  Second, a payment system should give a healthcare provider accountability for the types of services and costs that the provider can control or significantly influence, but not for services and costs over which the provider has little or no influence.  For example, primary care physicians are in a much better position to determine the appropriateness of services they prescribe than health plans are, so building accountability for utilization of prescribed services into physician payment is better than trying to control utilization through prior authorization and utilization review programs operated by health plans.  On the other hand, a payment reform system that only gives primary care physicians a bonus if there are reductions in the total cost of all services their patients receive from all providers goes too far in shifting accountability, since primary care physicians do not control all of the factors that drive the total cost of care for their patients.  (For example, assume that a primary care physician is able to significantly reduce the rate at which his or her chronic disease patients are admitted to the hospital for exacerbations of their chronic condition; if the subset of patients who are still admitted to the hospital develop serious infections or complications, total costs might increase, even though the primary care physician had been successful in controlling the aspect of utilization that he or she could influence.)

There are several ways to structure payment systems to give providers accountability for the costs they can control, without putting them at risk for costs they cannot control:

Risk Adjustment

A common way to protect providers from insurance risk is to make higher payments for those patients who have more health conditions or more serious health problems, i.e., to “risk-adjust” payments.  For example, in the Blue Cross Blue Shield of Massachusetts Alternative Quality Contract, provider organizations receive a budget based on the number of patients they care for, but the budget is increased if the patients have more health problems, so the providers are accepting only performance risk, not insurance risk.

Some payers have raised concerns about using risk adjustment as part of a payment system because a patient’s risk score tends to increase as soon as they become part of a risk-adjusted payment system, and this can cause overall spending to increase rather than decrease.  This happens because, under fee-for-service payment, the diagnosis codes used for risk adjustment are only recorded when a related claim for treatment is filed; as a result, many health conditions are not recorded in health plans’ claims data systems (particularly if patients have recently changed health plans).  However, under a risk-adjusted payment system, the provider has an incentive to do complete coding of diagnoses, not just to ensure accurate payment, but to ensure that all of the patient’s health conditions are being managed in a comprehensive and coordinated way.  Rather than eliminating risk adjustment entirely to avoid this artificial increase in risk scores (which could thereby discourage providers from taking on sicker patients), risk adjustment systems should be modified so that both the baseline risk score and current risk score are changed when a patient’s pre-existing condition is identified and documented.  Broader use of electronic health records will help to address this problem by enabling risk adjustment to be based on complete clinical data on the patient’s past and current patient health conditions, not just on data recorded to support recent claims for payment to a particular health plan.

Current risk adjustment systems also need to be improved so they do not penalize providers for keeping their patients well.  A patient’s risk score is typically based on the health problems that a patient has today, not on how those problems have changed as a result of the health provider’s care.  So, for example, if a physician helps a patient lose weight or stop smoking, the patient’s risk score would decrease, and as a result, under a risk-adjusted payment system, the physician would receive a lower payment than if the patient had remained unhealthy, thereby penalizing the physician for a successful health improvement effort.  Improved risk adjustment systems that capture such changes over time will be needed, particularly if more providers and payers sign multi-year contracts to manage healthcare cost and quality.

Risk Limits

At best, risk adjustment is only a partial solution; no formula could ever be 100% accurate in predicting legitimate variations in costs, simply because of the myriad factors that can affect patient costs and outcomes.  To adequately protect both providers and patients, risk adjustment should be supplemented with risk limits, such as:

  • Outlier payments to cover unusually high costs for specific patients.
  • “Risk corridors” that require payers to provide additional payments to providers when the total cost of treating a group of patients significantly exceeds the agreed-to payment level.  The sizes and cost-sharing parameters for these risk corridors could vary from provider to provider, since larger providers will be better able to manage variation in costs, and the parameters could also be changed over time as providers become more experienced in managing costs.

Risk Exclusions

In some cases, it is clear that certain kinds of costs cannot reasonably be controlled by a provider, and rather than using risk adjustment formulas or other complex calculations to adjust for this, these costs (or the situations that lead to them) should simply be excluded from accountability altogether.  For example, the costs associated with patients who are seriously injured in accidents could simply be excluded entirely from a global payment model for a small group of physicians, and be paid for separately on an episode-of-care basis or under traditional fee-for-service.

In other cases, as noted earlier, a provider may be able to control certain aspects of a patient’s healthcare costs but not others.  Healthcare providers are far more likely to be willing to accept responsibility for the utilization and cost of services they deliver or prescribe themselves than services chosen by other providers.  (For example, primary care providers can influence the rate at which their patients go to an emergency room, but not the number of tests that are ordered once the patient arrives; emergency room physicians can influence the number of tests ordered in the emergency room, but not how many patients come to the emergency room for conditions that could have been treated by their primary care provider.)   To address this, payment to physicians in a particular specialty can be designed to only include the costs of the services that these physicians can control or significantly influence, while excluding the costs of other services.  (The payer would continue to pay for the excluded services on either a fee-for-service basis or through separate payment reforms designed for the other specialties).  In some cases, one provider may be willing to take accountability for whether a patient uses a particular service delivered by another provider, but not for the price of that service, particularly if the provider of the service is in a position to negotiate high prices or increases in prices; this can be addressed by making the accountable provider responsible for the utilization of the services, but excluding accountability for increases in the price of the services.

Providers will also be better able to accept accountability for controlling costs if their patients are supporting their efforts.  If a provider does not know until after the fact who their patients are, or if the patients’ insurance benefits do not give them the ability and incentive to help the provider change their care in ways that will improve quality and lower cost, then the provider may be unable to control some of the key factors that are driving increases in costs.  If the patients’ benefit structure cannot be changed to support a provider’s ability to control certain aspects of cost, then all or part of those costs could be excluded from accountability under the payment model.  (For example, if some patients spend part of the year living in another part of the country, but their health insurance will pay for them to receive elective procedures while they are away, the designated provider in their home community might only be expected to control costs of care during the time the patient is actually resident in the local community, rather than all of the costs incurred by those patients during the entire year.)

Arbitrated Contract Adjustments

It is impossible for anyone to predict exactly what will happen when payers and providers move to completely different payment models.  New drugs, new medical devices, and new ways of delivering care are being developed at a rapid pace, and these can either help or hurt providers’ ability to control costs and improve quality.  It is not surprising that there are typically long delays in negotiating payment reform contracts, since both payers and providers will try to anticipate all possible contingencies and incorporate provisions covering them in the contracts.

This problem will be exacerbated with multi-year contracts.  Multi-year contracts between payers and providers provide a better opportunity for providers to make changes in care delivery that take time to implement and to reap returns on investments in preventive care and infrastructure, and they give payers greater ability to control the trend in healthcare costs (for example, the Alternative Quality Contract developed by Massachusetts Blue Cross Blue Shield is a five-year contract that was designed to slow the growth in spending rather than achieve immediate savings).  However, the longer the contract, the greater the potential for unexpected events to occur, the greater the difficulty of building appropriate protections into a contract to deal with those unexpected events, and the greater the reluctance providers and payers will have to sign.

A solution to this is simply to acknowledge that unexpected events may occur and to provide for opportunities to make adjustments in the contract to deal with them.  Of course, the party which is disadvantaged by the unexpected event will be more interested in making an adjustment than the party which benefits from it, so the contract could provide for having a neutral arbitrator resolve any disagreements.


(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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