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Health Reform Payment Models January, 2013 BLOG POST

Overview Among the leading initiatives to reform U.S. health care is the development and implementation of new payment models between providers and payers to drive coordinated care and bring down cost of care. The goal is to change the way physicians, hospitals, and other care providers are paid in order to drive higher quality at lower costs and improve value. U.S can realize net savings in health care costs of around $200 billion to $600 billion cumulatively over the next 10 years if coordinated action is taken to reform care provider payment incentives, including moving away from the traditional fee-for-service model, according to UnitedHealth Group's Center for Health Reform & Modernization. Several methods of health care payment are currently in widespread use or have been proposed as the basis for payment reform. The three most commonly cited methods are variations of fee for service, episode-based payments and global payments. •

Fee for Service: This is the dominant method in the current health delivery system, where-in a provider is paid a fee for rendering a specific service. Proposed modifications to traditional fee for service include re-valuing fees for specific services such as prevention and primary care, establishing a uniform fee schedule across all payers and paying certain providers “enhanced” fees based on a variety of criteria.

Capitation Payments: One or more providers are paid a prospective fee to cover all services rendered for the continuous care of a patient for a specific period of time. Capitation payments can either cover all medical costs and conditions or pertain only to specific types of services (e.g. primary care). This is currently the least used payment method.

Episode-Based or Bundled Payments: A provider or groups of providers are paid a set amount for a “bundle” of services rendered during a defined “episode” of care. The most prominent example of episode-based payment is Medicare diagnosis related group (DRG) payments to hospitals. Alternative concepts regarding episode-based payment include the idea of bundling payments across multiple providers (e.g. hospitals and outpatient physicians), risk-adjusting bundled payments based on medical complexity or considering fixed time periods as “episodes” in the treatment of individuals with chronic diseases.

Alternative or Supplementary Payment Models A number of payment reform proposals include using alternative or supplementary payment strategies in addition to one or more of the major payment methods. These payment methods create incentives for providers to provide certain types of care improve the quality of care or increase the efficiency of care. Two major approaches to alternative or supplementary payments are gain sharing and pay for performance:

Health Reform Payment Models



Gain Sharing/Shared Savings: Gainsharing is a contractual arrangement that sets up a reward system in which hospitals and physicians share in cost savings resulting from increased efficiency. Generally, hospitals and physicians are paid separately for care provided in hospitals and this creates a misalignment between the incentives facing the hospitals and those facing the physicians. With a bundled payment, a fixed single payment is made for a package of services delivered by a group of providers during a defined episode of care. Therefore gainsharing is often included as a component of bundled payment arrangements because the model offers an opportunity for cost-savings.


Pay for Performance: Hospitals and physicians begin by engaging in pay-for-performance programs with payors. This model requires establishing quality performance targets and rewarding providers who meet these targets, typically with bonuses above fee-for-service rates. This model requires less integration and IT infrastructure than other models, enabling less mature networks to participate. Impact of Different Payment Methods on Drivers of Per-Capita Costs1


Oregon Health Policy Board

Health Reform Payment Models


Considerations As of today, most of these alternatives have been in the form of payment systems that blend several different ways of remunerating providers. Though blended systems are complex and difficult to evaluate, many of them offer real opportunities for physicians to both earn greater income and to bring down cost of care and increase quality of treatments. However, from a providers’ perspective, negotiating how to equitably distribute these “profits” among participants, as well as extracting the maximum amount from the payer will be an on-going challenge. If a group of care providers is considering a collective payment pool offer, each party must understand both the offer itself and how it will affect patient care and the finances. Though the payer may provide a lump sum amount, without understanding how the payer arrives at the lump sum and the implications that the payment system brings to medical practice, the group of providers can neither fully evaluate the current offer nor be prepared for future renewals. As the usage of alternative payment methods increase, there will be additional leanings which will help to refine these models for mutual “profitability”.

Health Reform Payment Models


Health reform payment models