Paying for Value Perspective from the Front Lines

The concept of value-based health care is rapidly gaining traction in the U.S., yet implementation remains a significant challenge. For example, the current Medicare “shared savings” payment approach penalizes high-value providers, while rewarding historical inefficiency.

As stated by Ginsburg and Rivlin, “Part of the difficulty involves provider benchmarks that reward improvement rather than level of performance.” This is further complicated by the constant downward pressure on payment benchmarks, which not only reduces or erases any prior gains, but also threatens to put the already high-value providers out of business. Additional issues observed (and described previously) include inaccuracies with patient attribution, inconsistently set cost and quality targets, and the near-complete lack of patient involvement.

We propose that in a true pay-for-value system, a national payment rate should be established and rooted in reality (e.g., based on the costs of the top performing health care delivery organizations) and adjusted for three factors: a) risk of the patient population, b) geographic variation in the cost of doing business, c) patient outcomes. A detailed set of recommendations to setting the payment rate is provided below.

Global-based payment systems more conducive to higher value health care

While all of the provider payment mechanisms, including fee-for-service (FFS), have some merit and potential use cases, we believe that global-based payment systems (e.g., bundled payments, full capitation) are best positioned to move the U.S. health care system toward high-value health care for all. Under the current reimbursement structure most services are paid for separately, which results in limited or no financial incentives for different parts of the system to work together and create value around the patient. Moreover, acute episode prevention and care coordination are not rewarded in the current FFS environment.

While shared savings, reference pricing, and varied provider payment updates are steps in the right direction, if these payment approaches continue to be based on the FFS model, they will be subject to the same limitations and not result in significant movement toward high-value care. In turn, as we move forward toward more global payments, a previous Commonwealth Fund report noted that in order to succeed in promoting high-value care, “payment levels must be carefully calibrated to ensure providers’ financial viability while providing incentives to reduce costs and safeguards to ensure high quality.”

Key components of a successful global-based payment model

As noted above, the implementation of a given payment approach, and specifically how reimbursement is set for a given service, is a major issue that can either facilitate or significantly hamper an organization’s ability to deliver high-value care. We have identified the following elements as key to establishing a global-based payment model that is likely to promote high-value care:

1. Reality-based pricing

Payments should be based on reality, i.e., not defined by complex formulas that are often incorrect and tend to reward the delivery organizations that get the worst outcomes. Instead, we feel the approach should be one suggested by Dr. Harold Luft. This approach would determine what delivering care actually costs in delivery organizations that get the best outcomes (i.e., actual provider cost, not what Medicare currently pays).

Moreover, the cost we are referring to here is total cost of care over time (e.g., episode, one year), rather than cost per line-item of services provided. In our example (see Exhibit 1) the base payment amount could be set at the 90th percentile of the high value quadrant delivery organizations, i.e., hospitals that get better than average quality at lower than average total cost per case.

Therefore, all delivery organizations that had costs to the right of the dotted line would now have incentives to become more efficient. Recognizing that organizations with higher than average present costs will have a hard time adjusting to such a large upfront reduction, we recommend that this payment approach be done in a phased-in manner over three years. A phased-in approach will also benefit payers, Medicare in particular, given that its current payment rates are often below the cost of delivering care. Thus, Medicare could start by setting its rates at the Medicare national average and gradually evolve toward actual costs of the high value quadrant providers.

2. Bundled payment and Per Member Per Year (PMPY) reimbursement

Payments should be further adjusted for population characteristics (risk), the cost of doing business (regional differences in wages and non-labor costs), and patient outcomes (quality). A risk-adjusted quality component/withhold is warranted to ensure that we do not sacrifice care effectiveness in the name of efficiency, i.e., patients are not denied appropriate care.

For example, instead of receiving 100 percent of the base payment amount, delivery organizations would initially receive 95 percent of the base payment amount. Providers with above average outcomes would receive the full amount (95 percent + the 5 percent quality withhold). In turn, payment to providers with below average outcomes would remain at 95 percent of the base payment amount (they lose the 5 percent quality withhold). The quality withhold could be set at a higher percentage and could also be scaled.

3. Margin

Once you have established the baseline bundled payment/PMPY for a given provider, add 2-4 percent margin, as without a small margin even a not-for-profit organization cannot stay in business.

4. Secondary re-insurance

There should be an option to purchase secondary re-insurance to account for catastrophic events. This is particularly important for small and critical-access care delivery organizations.

5. Patient involvement

Patient benefits must be aligned with payment approaches in a way that allows for both patient choice and patient responsibility. Consumer choice has long been a key component of American society and consumer involvement is key to ensuring appropriate levels of health care utilization. Since the advent of the third party payers in the 1940s and further coverage expansion in the 1960s through Medicare and Medicaid, patients have been increasingly insulated from the true costs of care.

Not surprisingly, those with health care coverage have little incentive to limit their utilization of health care services. Consumer Driven Health Plans (CDHP) with Health Savings Accounts (HSA), preventative care covered at 100 percent and no co-pays or co-insurance for visits to a coordinating primary provider, present a potential option to accomplish both objectives. Such plans can accommodate low-income individuals by placing a government contribution directly into the individual’s HSA.

Finally, we believe that a good place to start is by focusing on areas of the health care system where we are likely to achieve the biggest impact. Given the high concentration of health care spending on a small group of highly complex patients (20 percent of patients account for 80 percent of the cost), we feel that these novel payment approaches should be first designed and deployed to address the care and needs of those high-need, high-cost populations, rather than serving as a payment approach “for all.”

Exhibit 1: Setting the baseline payment amount


Note: The information contained within this post grew out of a forum, “The times they a’ changing – How are you leading” (held in Breckenridge, CO on February 23-24, 2016), which featured presentations by and discussions with leaders of seven organizations with demonstrated success in delivering high-value health care to the patient populations they serve.


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