What’s At Stake
The way we pay for health care has consequences for quality and cost.

Under the dominant U.S. system, most health-care providers are paid a fixed fee for each service they provide, in most cases with no limits on those services and without regard for results.

This "fee-for-service” model rewards volume—more tests, more scans, more specialist examinations and more hospitalizations. But it does nothing to penalize poor patient results or redundancies. Some services, such as high-tech tests, are overvalued, while others, like primary care, are undervalued. Even worse, doctors who work to reduce complications and to help keep their patients well receive less reimbursement and can come out financial losers.

The result is the U.S. pays far more for health care than any other nation and is on a path of unsustainable spending growth. Yet we do not receive high-value care in return for our high level of investment. Rather, studies show that American health care is too often fragmented, uncoordinated and unsafe.

“We simply cannot be shocked and surprised that we’ve created a system of uncoordinated, high volume, incredibly expensive procedural care when that’s what we pay for—high volume,” writes Michael W. Painter, senior program officer for the Robert Wood Johnson Foundation.

Experts say there is no silver bullet, but there are promising approaches to promote accountability for costs and outcomes: Public and private stakeholders need flexibility to experiment with payment and delivery models that have the potential to ‘bend” the cost curve and reward quality. Health care providers need technical support to adopt new technologies such as electronic medical records to promote coordination and collaboration. Consumers need access to reliable information on quality and cost to help foster competition around value.

Most of these approaches need testing and refinement before they can be implemented across a $2.3 billion system, however, a process likely to be “a long, hard slog” in the words of Brookings Institution health care economist Henry Aaron.

"We don’t have ready plug-and-play solutions,” acknowledges RWJF’s Painter. “Because of that, regional innovation and approaches to refine payment and delivery models will be critical.”

The Background
For many consumers, it is an article of faith that more care equals better care.

In fact, a growing body of research shows that more services are not associated with better outcomes and can actually do harm. The Dartmouth Atlas of Health Care Project tracked variation in Medicare spending between areas of the country with the highest costs and those with the lowest costs. Researchers found that patients in the highest-spending regions were no sicker than those in lower-spending regions, nor did they prefer additional care. Most striking is that patient outcomes were poorest in the areas providing the most high-tech services. In other words, more care could actually be harmful.

Massachusetts’ experiment with health reform offers another, more pragmatic economic lesson—that extending universal coverage in a system that encourages volume, rather than value, is financially unsustainable.

Earlier this year, a high-level Massachusetts commission recommended the state radically restructure the way doctors and hospitals are paid to rein in costs. If approved by the legislature and governor, the recommendations would make Massachusetts the first state to end the practice of paying health care providers for each office visit, laboratory test or procedure in favor of a capitation or global payment, i.e. a flat monthly or annual fee.

Payment and Delivery Alternatives
The most commonly discussed payment and delivery reforms fall into three categories:

The first calls for encouraging more effective primary care through more generous reimbursements. Proponents call for creating a “medical home”—a blend of the personalized care that primary care physicians have offered for decades, combined with use of electronic medical records and other technology to coordinate patients’ care.

With its emphasis on primary care doctors and teams of coordinators, the goal of the medical home is to help patients—especially those with chronic illnesses—stay healthy enough to avoid hospital trips and expensive treatments, saving money in the long run. Medical home payment models usually reimburse more for primary and preventive care, but may also link to bundled or capitated payments.

The second category calls for shifting away from separate payments for each discrete service to a single payment for all of a patient’s needs over a particular episode of illness, both outside as well as inside the hospital. This “episode-based,” model was the underpinning of a 2007 initiative by the Geisinger Health System in Pennsylvania, which the New York Times characterized as "surgery with a warranty." Key to the experiment is a flat payment for elective cardiac bypass surgery and all related care for 90 days after discharge. An evaluation in the first year found a 10-percent drop in hospital readmissions, shorter average length-of-stay, and reduced hospital charges.

Another episode-based model, PROMETHEUS Payment Inc., pays physicians substantial bonuses for reducing potentially avoidable complications while improving quality. PROMETHEUS is currently operating in four communities with the support of the Robert Wood Johnson Foundation.

The third reform approach calls for creation of coordinated delivery systems, often called ‘accountable care organizations’ (ACOs)—essentially a more expansive coordinated care system than the medical home which will reward providers who deliver lower-cost, higher-quality care for a given population of patients.

A typical ACO would include a hospital, primary care physicians, specialists and other health professionals. The idea is that the more providers collaborate, and are rewarded for improving the health of a group of patients, the better and more cost-effective our health system will be.

Large, integrated delivery systems like the Mayo Clinic in Minnesota, Geisinger in Pennsylvania and Intermountain Healthcare in Utah serve as real-life examples of accountable entities with reputations for high-value care. Since about 80 percent of physicians have small practices, however, implementing this model poses structural and political challenges and there are no ready payment schemes.

Undergirding all these plans are payment schemes that provide different incentives than fee for service. Two of the most frequently discussed are episode or bundled payments, which pay a single price for all the health care services a patient needs over an entire episode of care (e.g., all the inpatient and outpatient care required after a heart attack); and also, condition-adjusted capitation, sometimes called comprehensive care payment, which pays a single price for all the care a patient will need over a set period of time.

Understanding how financial risk is apportioned in those models is key to understanding their strengths and potential pitfalls: Fee for service, for instance, places essentially no risk on the physician or hospital —neither the risk that the patient will need care (the probability risk) nor the risk that the care provided is the right care (the technical risk). As a result, providers have no incentive to improve care—just to provide more of it.

Capitation goes to the opposite extreme, placing all risk on the physician or hospital. The incentive is to reduce costs, which can lead to indiscriminate service reductions since the system does not explicitly reward high quality, value or patient outcomes.

Episode payments—where a gamut of services are grouped together for a single reimbursement, instead of being paid for separately—could give hospitals, doctors and other providers an incentive to provide more efficient care and reduce unnecessary hospital readmissions, since they won't get paid for doing more. In this model, providers decide what services are provided within a particular episode of care, but bear none of the financial responsibility for probability risks.

Some argue, however, that paying for discrete episodes does nothing to control the overall number of episodes, and could actually encourage more episodes.

Implementing Change
Francois de Brantes, national coordinator of PROMETHEUS, likens the challenge of transforming the health care system to trying to turn around a Mack truck speeding down the payment superhighway at about 80 mph and gaining speed as it goes.

“If we pull the e-brake on that track, you’re going to have a big mess,” he said. “We need to slow down the Mack truck in a responsible fashion…Changing the payment system is incredibly complicated and takes time.”

That’s why many experts believe we need both a short-term and a long-term strategy for payment reform. A group of 10 health policy experts from across the political spectrum recommended short-term steps to begin the transition in their recent report, Bending the Curve:

• Increasing payment rates for primary care in Medicare and Medicaid, offset by reductions for specialty care.
• Broadening the bundling of Medicare and Medicaid payments around episodes of illness over a particular period of time, rather than paying for every procedure.
• Expanding the use of pay-for-performance models in which providers earn bonuses by performing specific tasks tied to better results (for instance, some hospitals receive bonuses based on whether heart attack patients are given aspirin soon after they arrive). This does nothing to alter the underlying disincentives of fee-for-service, but does establish greater accountability.
• Rapidly piloting and refining new payment models such as accountable care organizations and episode-based payment.
• Providing additional payments to physicians whose practices serve as “patient-centered medical homes” responsible for first contact and coordination.

In the long term, they advocate a more thoroughgoing transformation to a system that rewards value, rather than volume.

Where Things Stand in Washington
All five legislative proposals support additional Medicare demonstrations to test and evaluate bundling payments to doctors and hospitals in different delivery models, including medical homes and accountable care organizations.

The Senate Finance proposal would create an Innovation Center within the Centers for Medicare and Medicaid Services, a $6-billion center to test and evaluate different payment reform models – and to rapidly expand those that improve quality and reduce costs.

Beginning in 2012, it calls for a percentage of Medicare payments to hospitals to be tied to performance on specific quality measures for cardiac, surgical and pneumonia care, among several categories of care. Another program would encourage Medicare providers to coordinate care by enabling them to share in savings.

In an effort to speed change and remove political obstacles, moreover, President Obama has called for creation of an independent panel of doctors and health system experts that would be charged with rooting out waste in Medicare and ensuring there is no addition to the deficit. He recommended it operate like military base-closing panels whose recommendations are adopted, unless disapproved in their entirety by Congress. The Senate Finance bill endorses a variation on that, calling for creation of a 15-member panel whose recommendations would take effect in years when Medicare costs are projected to be unsustainable, unless Congress passes an alternative measure.

While supported by economists and fiscal hawks, however, the proposal has met strong opposition from the American Medical Association and the American College of Surgeons, who fear the panel would cut reimbursements.

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Payment Reform Reading List

1. From Volume to Value: Transforming Health Care Payment and Delivery Systems
   to Improve Quality and Reduce Costs
   Recommendations of the 2008 Network for Regional Healthcare Improvement, Healthcare Payment Reform Summit, April 2008.
2. Better Ways to Pay for Health Care: A Primer on Healthcare Payment Reform
   A primer on what’s wrong with our current health care payment system with a guide to alternatives. Network for Regional Healthcare Improvement, Jan. 14, 2009.
3. All Roads Lead to Payment: Squeezing Value from Health Reform
   RWJF’s Michael Painter moderates a panel discussion on payment reform. Robert Wood Johnson Foundation, June 4, 2009.
4. Regional Payment and Delivery Reforms: Critical To Obama Plan’s Success
   Harold Miller writes that reducing the growth of health-care costs will require a very different approach to health care delivery and payment than currently exists. Health Affairs, Sept. 10, 2009.
5. The Medical Home: An Idea Whose Time Has Come...Again
   Leigh Ann Backer writes about the history of the medical home concept. Family Practice Management, September, 2007.
6. Medicare to Fund 'Medical Home' Model
   Jane Zhang reports that Medicare will help fund state pilot projects that use primary-care doctors and teams of coordinators to manage patient care and reduce costs. The Wall Street Journal, Sept. 16, 2009.
7. Accountable Care Organizations: A New Idea for Managing Medicare
   Jane Cys explains accountable care organizations and how they might work. amednews.com, Aug. 31, 2009.
8. A New Way to Pay Physicians
   Dr. John C. Lewin, chief executive of the American College of Cardiology, talks about how physicians might be organized into virtual groups to coordinate care and reduce costs. New York Times, Sept. 23, 2009.
9. Payment Reform Options: Episode Payment Is A Good Place To Start
   Robert E. Mechanic and Stuart H. Altman argue that episode-based, or bundled payments are the most immediately viable approach to replace fee for service. Health Affairs, Jan. 27, 2009.
10. In Bid for Better Care, Surgery With a Warranty
    Reed Abelson writes about Geisinger Health System’s experiment with fixed payments for elective heart bypass surgery. The New York Times, May 17, 2007.
11. Building a Bridge from Fragmentation to Accountability—The Prometheus Payment Model
    François de Brantes, M.S., M.B.A., Meredith B. Rosenthal, Ph.D., and Michael Painter, J.D., M.D. explain the thinking behind a new model that rewards health-care providers for reducing potentially avoidable complications. New England Journal of Medicine, Aug. 19, 2009
12. Paths to Payment Reform
    A Web site that explores alternative payment and delivery systems. Center for Healthcare Quality and Payment Reform.
13. Payment Reform to Improve Health Care: Ways to Move Forward
    Ellen-Marie Whelan and Judy Feder argue that by restructuring how we pay for health care, we can slow cost growth while boosting quality. Center for American Progress, June 24, 2009.
14. Bending the Curve: Effective Steps to Address Long-Term Health Care Spending Growth
    Antos J, Bertko J, Chernew M, Cutler D, Goldman D, McClellan M, McGlynn E, Pauly M, Schaeffer L and Shortell S. lay out short- and long-term proposals for reducing health care costs. Engelberg Center for Health Care Reform at Brookings Institution, Sept. 1, 2009.
15. Should Health Care Come With A Warranty?
    Francois de Brantes, Guy D’Andrea and Meredith B. Rosenthal look at how ‘warranties’ could motivate providers to improve quality and increase their profit margins. Health Affairs, June 6, 2009.
16. Connecting value to coverage: a first glimpse
    Michael Painter blogs about key change elements to achieve better value for our health-care dollars. The Health Care Blog, May 14, 2009.
17. Bundling By Decree
    Philip Betbeze writes that the phrase ‘treat 'em and street 'em" accurately reflects the incentives that drive health-care organizations today and looks at the pros and cons of episode-based payments. HealthLeaders Magazine, June 11, 2009.
18. Medicare Test Pays for Hospital Performance
    Jane Zhang writes about how a pilot Medicare project that links hospital payments to the quality of care has helped prevent infections in pneumonia patients and cut death rates in heart-attack patients. The Wall Street Journal, Aug. 17, 2009.
19. Musings on Payment Reform
    Harvard Pilgrim President and CEO Charlie Baker questions whether global capitation is the answer to cost and quality problems, noting that countries with lower-cost health care spend less on each service and have robust primary-care systems. The Health Care Blog, July 12, 2009.
20. Recommendations of the Special Commission on the Health Care Payment System
    A Massachusetts special commission recommends ending fee-for-service payments for health-care providers, July 16, 2009.
21. Mass. Panel Backs Radical Shift in Health Payment
    Kevin Sack writes about how a Massachusetts commission recommends that that state seek to rein in health care costs by radically restructuring the way doctors and hospitals are paid. The New York Times, July 16, 2009.
22. Payment Reform: What Physicians Need
    Massachusetts Medical Society President Mario E. Motta warns that physicians will need time and support to make a smooth transition to payment reform. WBUR Blog, July 29, 2009.
23. Doctors Oppose Giving Commission Power Over Medicare Payments
    Jacob Goldstein reports how proposals to give an independent commission significant power over Medicare payments are drawing opposition from the American Medical Association and the American College of Surgeons. The Wall Street Journal, July 29, 2009.
24. What if MedPac Rules the World?
    Tim Foley writes that Medicare offers a huge opportunity to start turning our health care system around – we just have to start implementing what the experts have recommended for years. HealthCareChange.org, June 3, 2009
25. Obama Proposal to Create Medicare Panel Meets With Resistance
    Robert Pear analyzes Obama’s proposal to create an independent agency to oversee Medicare and why it elicits opposition from doctors, hospitals and some lawmakers. The New York Times, Aug. 13, 2009.

26. How the Baucus Bill Guts Reform
    Maggie Mahar opines that the Baucus bill defangs proposals for an independent Medicare Commission. Health Beat, Sept. 22, 2009.