Value-Based Payment

Paying a fixed amount for each patient gives a healthcare provider greater flexibility to deliver different services and a more predictable revenue stream than paying fees for individual services, and it makes it easier for a payer to predict how much it will spend.

However, population-based payment can create serious problems for patients:

  • There is no assurance that patients will receive care when they need it.
  • Payments may not be sufficient to cover the cost of delivering high-quality care.
  • Providers are rewarded for withholding services that patients need.
  • Providers can be penalized for providing care to higher-need patients.
  • Health insurance companies can profit at the expense of patient care.

Patient-Centered Payment is a better way to pay for services than population-based payment.

Typical risk adjustment systems, such as the Hierarchical Condition Category (HCC) risk adjustment system used in Medicare payment programs, are designed to predict how much a health insurance plan will spend on patients in the future, not the time or cost required for a healthcare provider to deliver high-quality care to a patient during the current year.

Standard risk adjustment systems only increase payments if a patient was diagnosed with a chronic disease, and only if that disease was diagnosed prior to the current year. There is no change in payment for a patient who:

  • is newly diagnosed with a chronic condition, even though physicians will need to spend a significant amount of time with the patient when a chronic condition is first diagnosed and initially treated;
  • experiences an acute illness or injury, no matter how much time or cost is required to accurately diagnose and treat the problem;
  • has non-medical characteristics that create barriers to health, such as poverty, homelessness, illiteracy, lack of access to transportation and fresh food, etc.

The quality measures currently used by Medicare and health insurance plans do nothing to ensure that each individual patient receives high-quality care. The measures assess the percentage of patients who received necessary services or achieved a good outcome.

Physicians, hospitals, and other healthcare providers are not expected to achieve a 100% score on any of the quality measures, i.e., to ensure that every patient receives the service(s) or achieves the outcomes specified by the measure. In fact, a provider can be deemed to be giving “good” quality care even if its score on a quality measure is significantly below 100% (i.e., if a significant fraction of its patients failed to receive necessary services or achieve good outcomes), as long as the proportion of the provider's patients receiving good quality care is higher than the proportion who receive good care from other providers.

The reason that providers aren’t expected to achieve 100% scores on quality measures is that the measures are typically based on simplistic standards that are not appropriate or feasible to achieve for all of the patients who are included in the measure. However, if a provider has a score that is less than 100%, there is no way to determine whether that is because the quality standard was inapplicable to some of the provider’s patients, or because the provider failed to deliver appropriate care to some of its patients.

Because of this, many quality measures penalize physicians, hospitals, and other healthcare providers that care for higher-need patients. The standards in many quality measures are inappropriate for patients who have multiple health problems, who lack health insurance, or who face other barriers to receiving healthcare services. However, even if a provider customizes care and achieves good outcomes for these patients, their failure to do what is specified in the quality measure will be treated as “poor quality care,” and they may be financially penalized for that. Conversely, if a provider avoids treating such patients, their quality scores will be higher and they may receive a financial bonus.

CMS and other payers have asserted that in order for value-based payments to be successful, physicians, hospitals, and other providers need to take “downside risk” for healthcare spending. However, putting providers at financial risk for things they cannot control, such as the severity of a patient’s illness or injury, or the amount a pharmaceutical company charges for a necessary medication, is more likely to harm patients and force small physician practices and hospitals out of business than it is to reduce spending for payers.

Most risk-based payment models simply shift risk from insurers to providers, without adequate mechanisms to adjust payments for differences in patient needs or for the costs of delivering essential services. As a result, providers can be financially penalized when they provide care to higher-need patients, and they can make higher profits by avoiding such patients. This can exacerbate disparities in access and outcomes for disadvantaged patients.

Many physicians and other healthcare providers have been unwilling to participate in the alternative payment models (APMs) developed by the CMS Innovation Center. This has led to calls for CMS to create “mandatory” payment models.

The term “mandatory payment model” is misleading because the intention is typically not to require every provider in the country to participate in the model. Instead, the goal is to make participation in an APM mandatory for some providers in order to “test” the APM, i.e., to evaluate its effectiveness in reducing spending and/or improving quality.

There are serious problems with mandating participation in untested payment models:

  • There is no guarantee that the APM will achieve the desired results or that it will have no undesirable impacts, otherwise there would be no need to test it. APMs designed to reduce spending, particularly those involving significant financial risk, have the potential to harm patients as well as providers. It is inappropriate to require providers and their patients to participate in an APM that could be harmful before any testing or evaluation has been completed.
  • Conversely, if the potential benefits of the APM are sufficiently great to justify requiring some providers to participate, it is inappropriate to prevent other providers from voluntarily participating, particularly if their patients could benefit from the type of care that could be delivered with support from the APM.

Randomized controlled trials (RCTs) for drugs, medical devices, and procedures do not mandate that either patients or providers participate. RCTs recruit volunteers based on the potential benefits of a new therapy or the opportunity to achieve similar outcomes at lower cost. The mandatory APM approach is also the exact opposite of how every other industry develops new products and services. New products do not immediately jump from the design table to large-scale production and replace existing products. Businesses create one or more prototypes and then test them on a limited scale to identify problems and opportunities for improvement. The design is then revised before broader production begins.

The reason many physicians have refused to participate in CMS APMs is the poor design of those APMs, not unwillingness to move away from fee-for-service payment. Most CMS APMs place physicians at financial risk for aspects of spending and quality they cannot control, while failing to give them the resources they need to improve patient outcomes and reduce Medicare spending. Rather than requiring physicians to participate in a poorly-designed APM, the right approach is to redesign the APM so that it will help physicians deliver better care to patients and hold them accountable only for costs and outcomes they can control.

Primary Care

Primary care is an essential component of a high-value healthcare system. However, in the United States, there is a large and growing shortage of primary care physicians, many primary care physicians are burning out, and most medical students don’t want to go into primary care. The reason is that neither the current fee-for-service system nor current value-based payment systems provide payments that are appropriately structured or adequate in size to support and sustain primary care practices.

Primary care practices need to be paid so that: (1) each patient can receive high-quality care appropriate for their specific needs, and (2) primary care practices with different types of patients receive sufficient revenues to cover the costs of the services their patients need. Under a patient-centered payment system, a primary care practice would receive five types of payment for patients who enroll with the practice for ongoing care:

  • Monthly Payments for Wellness Care.
  • Monthly Payments for Chronic Condition Management. Higher amounts should be paid during the initial month following diagnosis and for patients with complex conditions.
  • A Fee for Diagnosis and Treatment of a Non-Emergency Acute Event.
  • Monthly Payments for Integrated Behavioral Healthcare Services.
  • Fees for Individual Procedures and Tests.

In order to assure that each individual patient receives appropriate, high-quality care, a primary care practice receiving these payments would be required to:

  • Deliver Evidence-Based Care. The primary care practice would only bill and be paid if the practice delivered all appropriate services to the patient during the month or acute care visit that are consistent with applicable, evidence-based Clinical Practice Guidelines (CPGs) or the practice had documented the reasons for deviation from those guidelines in the patient’s clinical record; and
  • Monitor Patient Needs and Outcomes. The practice would only bill for and be paid the monthly payments if it has a system to proactively identify and prioritize any problems the patient is experiencing and to determine whether the practice’s services are effectively addressing the patient’s needs.

The payment amounts should be based on the estimated cost for a primary care practice to deliver each category of service, considering the amount of time needed to deliver evidence-based services, the types of personnel who are most appropriate to deliver the services and their compensation levels, and non-personnel costs such as information systems, equipment, and space.

For patients with insurance, cost-sharing amounts must enable and encourage patients to use the primary care practice. There should be no cost-sharing for wellness care or chronic condition management, and a modest co-payment for acute care visits.

It is clear that payments to primary care practices need to be higher than they have been in the past. However, the percentage of total healthcare spending that goes to primary care practices is a poor indicator of the adequacy of primary care payment from a payer or purchaser. The amount spent on primary care relative to the amount spent on other services depends on the characteristics of the patient population and the amounts paid for services to other providers as well as the amounts paid for primary care services. For example:

  • For a relatively healthy group of individuals, a high proportion of the services they need could likely be delivered by a primary care practice, so a high percentage of total healthcare spending for this group would be expected to be used for primary care.
  • A relatively unhealthy group of patients will likely need many services that cannot be delivered by a primary care practice, such as care from specialists and surgeries and treatments that have to be delivered in hospitals or other specialized facilities. For these patients, a large amount will need to be spent on these expensive non-primary care services, so even if primary care practices are receiving adequate payments, those payments will likely only represent a small percentage of total spending on the patients.
  • A health plan that pays higher amounts than other plans for services delivered by specialists, hospitals, and other providers will spend more on those services even if its members are using those services at similar rates. That could cause the percentage of total spending on primary care services for that plan to be lower than other plans, even if the plan is paying primary care practices higher amounts for services than other payers.

Because of this, it is both inappropriate and problematic to set targets for the percentage of total healthcare spending that primary care practices should receive. No matter what target amount is used, it may be too low or too high depending on the characteristics of the patient population and the community where they are receiving care. Moreover, if a payer implements other initiatives to reduce utilization rates or payment amounts for specialty services that cause total healthcare spending to decrease, this does not mean that payments for primary care should be reduced in order to maintain the same percentage of total spending.

Spending on primary care will only be adequate if the amounts paid for primary care services are sufficient to allow primary care practices to spend the time and hire the appropriate staff to deliver those services. That is the appropriate criterion for determining whether primary care payments are adequate, not the amount by which spending has changed or the percentage of total spending going to primary care.

Rural Hospitals

“Global budgets” have been proposed as a way of reducing financial problems for rural hospitals and preventing closures. Under a global budget, a hospital’s revenue would no longer be based on the number of services that it delivers.

This approach is attractive for hospitals that do not need to deliver as many services as they do today. Morever, under a global budget, the hospital will not automatically lose revenue if it delivers fewer services because of either a decline in population in the local community, improved health of the residents, or reluctance of residents to obtain services during a pandemic.

However, hospitals that are currently losing money would experience greater losses under a global budget when patients need more services or the hospital’s costs increase. Most global budget programs have been created in order to limit or reduce payments to hospitals, not to address shortfalls in payment or prevent closure of small rural hospitals. Hospitals that experience higher costs or higher volumes of services due to circumstances beyond their control would likely be harmed, since their revenues would no longer increase to help cover the additional costs.

Access to care for patients can be harmed if global budgets are not large enough to support the costs of services, which has led many other countries to modify or replace their global budget systems. There are only three places in the United States where global budgets are actually being used, and they are not as desirable or successful as proponents suggest:

  • Maryland’s global budget program has been cited as an example of how rural hospitals can benefit from this approach. However, the smallest rural hospital in Maryland was forced to close in 2020 despite operating under the global budget system.
  • Under the Pennsylvania Rural Health Model that was created by CMS, hospitals receive global budgets that are based on the amount of revenues they received in the past, with no assurance the budgets will be adequate to support the current cost of delivering essential services.
  • Under the CMS Community Health Access and Rural Transformation (CHART) Model, the “capitated payments” to rural hospitals will be reduced below the inadequate amounts they currently receive in order to reduce Medicare spending.