Reimbursement Revisit

Oct 10, 2014 at 09:04 am by Staff

A Look at payment innovation

While physicians and facilities have long had to keep up with different negotiated contract rates among payers, the reimbursement landscape has become much more varied over the last few years as a push toward payment innovation has ushered in a host of reimbursement options ranging from shared savings programs to bundled payments to carrot-and-stick compensation as applied to quality and efficiency metrics.

Rob Lazerow, practice manager for Research & Insight at The Advisory Board Company, recently analyzed some of the payment changes providers are navigating as the healthcare system begins to shift away from a fee-for-service model. While the traditional payment method based on volume still makes up the majority of healthcare reimbursements, Lazerow said it appears the shift toward accountability models is picking up steam … albeit slowly.

Lazerow, who is based in Washington, D.C., has created a ‘Field Guide to Medicare Payment Innovation’ ( However, he was quick to note the transformation isn’t limited to the Centers for Medicare & Medicaid Services. “There is a lot of payment innovation happening right now, and it’s happening in both the public and private sectors,” he said. Lazerow added CMS, commercial payers, state Medicaid programs and employers are all experimenting with new payment models in markets across the country.

While there is any number of subtle variations within the pilot projects, Lazerow said there are generally three big categories of payment innovation being rolled out at this time — pay-for-performance initiatives, bundled payments, and shared savings reimbursement models.


“It’s still a fee-for-service payment, but a portion is withheld and linked to predefined metrics, including process, outcomes and patient satisfaction measures,” he said. “Medicare has a lot of experience here,” Lazerow added of the Hospital Value-Based Purchasing Program, Hospital Readmissions Reduction Program and hospital-acquired conditions (HAC) penalties.

Lazerow said in some cases, it could mean hospitals must invest in performance software or additional manpower to provide the necessary outcomes data … effectively making it cost more to capture the same reimbursement rate compared to the pre-pay-for-performance world. However, as Lazerow pointed out, this isn’t a ‘request’ from CMS. These are mandatory programs for all hospitals that accept Medicare prospective payments with two of the three already in place and the HAC penalties set to begin in fiscal year 2015.

“We’re seeing pay-for-performance in hospitals and physician practices,” Lazerow said, noting the reimbursement model has spread past the Medicare population. “The challenge then becomes having different payers with different metrics.”

Even when broad categories of data collection apply to multiple payers, it isn’t uncommon for each to ask providers to drill down to different outcomes measures within the umbrella category. “As you can imagine, the reporting and compliance burden continues to grow,” Lazerow noted.

Bundled Payments

Lazerow said bundled payments offer a different take on volume-driven reimbursement by coordinating care among all providers responsible for a patient’s diagnosis, treatment and rehabilitation and inserting a level of accountability into the group dynamic.

“In a traditional fee-for-service world, all these providers are paid individually and have no aligned incentives or mutual accountability,” he explained. Although bundled payments are still volume-based … the more you do, the more you are paid … Lazerow said the concept focuses on costs and outcomes. “A bundled payment drives efficiency and quality within a discreet episode of care.”

For payers, Lazerow said the reimbursement model creates both savings and price predictability. The sum for the bundle of care is generally less than would have been paid individually to those involved. On the provider side, the reimbursement option helps drive efficiency and care coordination with a goal of having the patient receive the right care in the right setting to maximize outcomes and minimize costs.

While Medicare has a big program around bundled payments, Lazerow said this model has been adopted by the spectrum of payers including private employers. Wal-Mart, he noted, has established a bundled payment program around certain cardiac care and orthopaedic procedures. Although most current bundled payment programs are designed around specific procedures such as hip replacement or cardiac bypass surgery, Lazerow noted, “We’re starting to hear more interest around medical admissions, as well as the procedures.”

Shared Savings Models

Although bundled payments might be highly effective for unavoidable care, the concept doesn’t address preventive care. That’s where accountable care models … also known as shared savings … step in to apply population health metrics to mitigate potentially avoidable healthcare spending. The intent with these reimbursement models is typically to spend some in order to save more.

“The big focus right now is on shared savings models,” Lazerow pointed out. He added providers work together against a pre-set annual spending target per patient. Unlike past payment experiments based on monthly capitated payments, the shared savings model combines existing fee-for-service payments with a reconciliation process at the end of the year. Providers then share in a percentage of the savings they generate. Best practices and quality metrics are a foundational element to ensure patients aren’t denied necessary care simply to save money.

“The overall concept of the ACO is these providers are collectively accountable for the total cost and quality of care for populations of patients over time,” Lazerow stated.

From Medicare Advantage plans to self-funded employers, the focus on population health has taken root across the country. While providers also seem to embrace the evidence-based concepts and focus on chronic disease management integral to population health, the financial realities of such programs have proven problematic in some cases. Lazerow noted that of the 32 original participants in the CMS Pioneer ACO program, nearly one-third have left … with seven moving to Medicare shared savings programs, which have a lower risk profile for providers, and three dropping out altogether.

“One challenge providers are facing is that sharing 50 cents on the dollar of volumes they are destroying might end up creating a negative financial outcome for the health system,” said Lazerow. “They’re not capturing enough of the savings they are generating.”

The Bottom Line

Lazerow noted he hears different sentiments from different providers as to which payment innovations they prefer. Some, he added, might like to stay in the traditional fee-for-service model, but that ultimately is unlikely given payer demands for more accountability, increased savings and improved efficiency.

“Some providers right now, given their market dynamics, are in a watch and wait mode, but each year we see more and more payers and providers experimenting with accountable payment models,” Lazerow concluded.


Advisory Board Payment Transformation

Advisory Board Field Guide to Medicare Payment Innovation

CMS Innovation Center

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