Why Medicare/Medicaid and private payers need to expedite the transition to “real” risk/value-based payment methodologies.
February 2022 – The Journal of Healthcare Contracting
By Tom Campanella
A key lesson learned from history is that a healthcare system is shaped by what you pay for and how you pay for it. A very simplistic concept, but it is so true! We are experiencing a medical arms race which is not a surprise, since historically we have had a fee-for-service payment system for providers based on “the more you do, the more you make.”
Historically, the “what you pay for” has been focused on the “after event,” that is, after you are sick, after you have the heart attack, after you have arrived in the emergency room, after you have been identified with stage 4 cancer. I think you get the point.
Historically, the “how you pay for it” has been fee-for-service based, that is, the more you do the more you make (self-interest). Is the picture becoming clearer?
Finally, adding a finishing touch to this sickly historical scenario, the purchasing decision-maker, the consumer, is unaware of the cost and quality differences between healthcare providers and services rendered (asymmetric information) and in most cases, doesn’t even care because someone else is paying the majority of the bill (employer, Medicare, Medicaid) (moral hazard).
As you can see, there is no magic in this story line, just painful reality.
So, what does all the above lead to?
We need to first start with the “what you pay for” and “how you pay for it.”
The “what you pay for” needs to focus on keeping people healthy and the “how you pay for it” needs to provide rewards, along with accountability, related to services provided in keeping people healthy as well as in the provision of value-based care.
How you pay for it: Why must there be both risk and rewards embedded in a payment system?
Some form of financial accountability and risk needs to be incorporated in our payment systems or the focus will only be on the cheese (money), and there would be no real incentive to address the long-standing structural issues on the cost side of the equation.
Fee-for-service and value-based or some form of capitation yield a different array of incentives. As noted above, fee-for-service incents over-utilization which not only adversely affects healthcare costs, but also quality outcomes. Value-based care models change financial incentives to focus on value by rewarding better outcomes and lower spending.
Capitation is the Cadillac of payment methodologies since its primary financial incentive is to keep people healthy. I believe that capitation in some forms (or premium sharing in joint venture with payers) will be a key catalyst in shaping the winners in this new world of healthcare. These risk-based payment systems would then foster an environment of health and prevention as a key to profitability for providers vs. the current system that incents increased utilization of resources.
Capitation will also enhance the role of primary care in our society. Primary care is the centerpiece in a capitated environment. Since the financial success of an organization will result from keeping people healthy vs. that of our historical sick-care system, the primary care provider will become the captain of the ship, which is what they always should have been.
Those providers that embrace risk/value-based payment methodologies such as capitation will take a giant step in their evolution to becoming a value-based organization. The quickest and best way to break down the silos that have existed forever in healthcare is to embrace payment systems that reward providers for doing so.
Quality measures? It needs to be all about outcomes
If you want a healthcare system that is based on consistent quality, you need to pay for it, but the focus should be on outcomes, not a myriad of quality matrixes that focus on processes. The measures for value-based programs should focus on patient-centered outcomes or processes that only are tightly linked to patient-centered outcomes. Patients do not care that you followed all the appropriate processes, they care about a quality outcome. Also, excessive, and unnecessary quality measures not only add to the administrative cost burdens of providers, they also divert their attention from quality outcomes.
There has been some push back from providers when quality is focused on outcomes since a key factor in a health outcome is also patient engagement. While I agree with this assessment, we still need to focus on outcomes. In focusing on outcomes, providers will need to address patient engagement more aggressively, which is usually not the case. Also, the effective utilization of telehealth could play a key role in enhanced patient engagement and education.
Payment policies’ impact on the health of our communities
One key complicating factor that negatively impacts a community’s ability to address social determinants and overall population health in a proactive manner is the fact that some of these key stakeholders’ (hospitals, physicians, etc.) financial success and, in turn, focus is linked to our current “sick-care” system which is fueled by a “fee-for-service” payment methodology which does not pay for keeping people healthy.
If we truly want to transition from a “sick-care” system to a “health-care” system we need to embrace payment methodologies that reward providers to keep people healthy. This transition will also require hospitals to look outside their walls and focus in collaborative ways with other stakeholders on a healthier community
Also, as noted in a blog titled, “The social determinants of health, can we reach for the stars,” capitation and value-based purchasing also play a key role in addressing the social determinants of health. The tie-in between value-based purchasing and capitation in some form provides the appropriate incentives to ensure that social determinants of health are being addressed in a cost-effective manner and quality services are being delivered.
The focus on population health and social determinants will further hasten the evolution of the healthcare sector to look beyond the walls of the hospital and into the community. This will also impact “Community Health Benefits” that are tied to the tax-exempt status of hospitals that are currently mainly focused within the walls of the hospitals (Medicaid short-falls in revenue, etc.). There will be increased demand for these resources to be redirected outside the walls of the hospital as part of a comprehensive strategy to achieve a healthier community.
Adding employers to the mix with both risk/value-based payment methodologies, value-based benefit designs and increased utilization of cost and quality transparency tools, provides the necessary ingredients for a healthier community for all.
We need to unleash the power of “self-interest” through payment systems that are risk/value-based. If providers are predominately paid under a fee-for-service system, we will continue to have a «sick-care» system.
Payers, especially Medicare, play a key role in transitioning our healthcare system to be value-based
One could point the finger at providers of care for the high cost of healthcare in the U.S. and for inconsistent quality, but the real culprit historically has been the healthcare payers, and specifically, the largest payer, the 800-pound gorilla – Medicare.
Medicare payment policies and regulations also influence payers that focus on the non-Medicare population since they often follow the lead of our largest payer.
As we learned from health economics, providers of care are rational beings and, like decision-makers in other industries outside of healthcare, they will make decisions from a self-interest perspective that is best for their organizations. This applies to both for-profit and non-profit entities, since if there is “no margin, there is no mission.”
If we want to evolve our healthcare system to be more value-based we need to start with substantial changes to Medicare’s payment policies and regulations. While there has been much rhetoric relating to Medicare (as well as commercial payers) transforming its payment system to be value-based, the sad fact is that it has been mostly rhetorical.
We need to get beyond pilot programs and implement real payment reform to create real financial incentives for providers to transform their organizations and services to be value-based.
The power of “self-interest” takes over when Medicare (through Medicare Advantage) and Medicaid (through Medicaid Managed Care) primarily reimburse providers of care with a value-based payment methodology with both upside and downside risk (ideally capitation) which redirects the providers’ focus to the overall health of the patient and the community.
As the Medicare Payment Advisory Commission (MedPAC) has stated for years in different ways, historically, Medicare payment policies and regulations have been a major catalyst to our high healthcare costs.
The following statement is from MedPAC’s June 2020 report to Congress: The Commission contends that unless changes are made to how Medicare pays for services, the cost of the Medicare program will become unsustainable for the country, which could necessitate dramatic changes to the Medicare program and/or its financing. FFS contains inherent incentives for the delivery system to provide more services and thus receive more payments. The FFS system increases Medicare costs, based on higher than necessary use of services, and in some instances, the provision of care at higher cost sites of service.
In June of 2021, MedPAC also had a specific recommendation for The Center for Medicare & Medicaid Innovation (CMMI). Per MedPAC: Most of the Alternative Payment Models (APMs) to date layer bonuses and other payments on top of traditional FFS payment systems, many of which have financial incentives to increase the volume of services delivered. Many APMs attempt to counter these FFS incentives by rewarding providers who reduce total spending per beneficiary while maintaining quality. But because FFS systems are used to pay for services in many of these APMs and any performance payments earned are usually paid several years after any savings are generated, those models can send mixed signals to APM participants.
Fee-for-service payment also encourages providers to pursue the technologies that result in higher volume and payment regardless of value. This can bolster the “arms race” mentality that providers must pursue the latest technologies to remain financially successful relative to their peers.
The message from MedPAC is clear:
- Medicare needs to move away as soon as possible from its reliance on the fee-for-service payment system.
- Value-based reimbursement models to date that are utilized by both Medicare and private plans have been mostly ineffective since a large percentage of them are layered over a fee-for-service payment system which incents over utilization.
- Risk-based payment methodologies, such as capitation and bundled payments, will incent the cost-effective delivery of healthcare services and, as in the case of capitation, reward providers for keeping members healthy.
- If providers are not paid for value and there is no financial risk linked to their decisions, they are less likely to make value-based purchasing decisions as it relates to their supply chain.
Per MedPAC: Research also shows that provider costs are not immutable, they vary according to how much pressure is applied through payment rates. We find that providers under cost pressure have lower costs than those under less pressure, and Commission analysis demonstrates that providers can provide high-quality care even while maintaining lower costs relative to their peers.
Finally, hospital-based Accountable Care Organizations (ACOs) in theory have the potential to positively impact both cost and quality because of the integration of providers into a seamless network. Sadly, these value goals have in most cases not been achieved, mainly because the appropriate payment incentives were not in place. Hospital-based Accountable Care Organizations (ACOs) need to embrace downside risk. In fact, the acceptance of downside risk by ACOs should no longer be voluntary on the part of Medicare. Downside risk, while initially painful, will force efficiencies and collaborations that would not have occurred otherwise. These efficiencies and collaborations will allow both the hospital and the ACO to obtain long-term success.
Our sick-care system represents approximately 17% of our gross domestic product. What one group may call healthcare expenses another group may call healthcare revenue. Our sick-care system is well entrenched and has a significant impact on our economy (jobs, etc.). As in any change that impacts the status quo, this evolution from a sick-care system to a healthcare system will not be easy. There will be major resistance.
We need to embrace a risk/value-based payment system which, during the short-term, will be challenging for health systems that historically have utilized the “fee-for-service” (the more you do the more you make) as their life-line.
Large teaching hospitals do have a potential competitive advantage in a risk/value-based world, especially related to a capitated environment. The combination of their intellectual capital and technology allows them to better assess the needs of the patient as well as be proactive in keeping people healthy, which would make them a winner in this environment. Also, by embracing capitation, large hospital systems have the ability to better compete in the marketplace since they will take ownership of Medicare’s (or other payers’) members’ health in all settings of care. This is why the big systems need to embrace risk as well as collaborative relationships with payers in other ways (premium sharing, etc.).
Tom Campanella is the Healthcare Executive in Residence at Baldwin Wallace University. Backed by more than 35 years of experience in the industry – particularly the health insurance, physician and hospital sectors – he’s focused on strategic advising and community outreach. Follow Tom’s articles on LinkedIn for his latest weekly coverage of the healthcare industry.