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Alternative Payment Models

  Frequently Asked Questions

There are varied payment methodologies being developed by payers for health care services. Payers are moving away from fee-for-service (FFS) volume-driven health care services to value-based payment models that incentivize providers on quality, outcomes, and cost containment.

In the near future it is likely that your practice will feel the impact as payment models move away from FFS to other payment formulas. The intent is to promote patient value and efficiency, but one consequence is to shift some risk to you, the physician provider. Practice viability will be dependent on how well quality, cost, and efficiency are managed. Below are answers to common questions regarding these risk-based alternative payment models.

What is a risk-based payment model?
There are a variety of risk-based or budget-based payment models being developed. Risk-based arrangements (i.e., budget-based contracting) payments are predicated on an estimate of what the expected costs to treat a particular condition or patient population should be. This includes capitation, bundled payments, and shared savings arrangements. While health plans will base expected costs on sophisticated and actuarially sound models, physicians need to be sure to understand how these costs were calculated and that they include the total direct and indirect practice expenses and margin.

The onus is on the physician to be able to manage expected utilization and related practice expenses for treatment. Success is based on the practice’s ability to control the health care expenses of the patient population so that they do not exceed the budgeted amount. The practice may share in the potential savings as well as any losses. For example, the practice may share in a percentage of any savings (e.g., upside risk); however, if the actual costs of care exceed the target or budgeted costs, the practice may be responsible for a percentage of the difference (e.g., downside risk).

What types of risks are included in a risk-based payment model?
Basically there are 2 types of risks inherent in a risk-based contract: insurance risk and performance and utilization risk. Insurance risk entails the financial costs of diseases, accidents, or injury spread out over a covered population (i.e., insured members). Carriers of insurance risk (insurance plans, self-insured employers) by state law must have required sufficient financial reserves to cover the insurance risk and, as a result, most providers may not have the necessary financial reserves to fund a commercial insurance program. Physicians should not be required to accept insurance risk (ie, whether or not a covered member gets ill).

Performance or utilization risk involves managing the rates of utilization of medical services by a defined population. Providers may have greater control over the utilization of services (particularly unnecessary services) as well as the quality and availability of services they provide. Under risk-based contracting, it is most often the performance risk that is shifted to the provider.

Additionally, risk-based models include either or both an upside and downside risk. In an upside risk arrangement, the provider only shares in the savings and not the risk of loss. For example, if the actual total costs of care of patients assigned to a physician’s practice are lower than projected budgeted costs, the practice receives a defined percentage of the difference between the actual costs and budgeted costs (shared savings). However, if the actual total costs of care exceed the budget costs, the practice would not be responsible for the difference. In this scenario, since the practice is only at risk for additional revenue through the shared savings, the practice is only sharing in the upside risk. 

In cases where the practice would share in the savings as well as be responsible for a portion of the difference between actual total costs that exceed budgeted costs, the practice would share in the downside risk. 

What will happen to FFS?
The focus of payment reform is toward a value-based system and away from volume-based payment, which is embodied by traditional FFS. Although payment models based on FFS are expected to diminish under payment reform, FFS is not expected to disappear entirely and will still have a role in various payment systems. For example, in those markets in which alternative payment systems are not feasible, FFS will continue to be the dominant form of payment. 

FFS will continue to be part of the physician payment structure, particularly in the following situations:

  • Carve outs (i.e., those services that are excluded from the package of services). In global fees, bundled payments, or capitated arrangements a select group of services is included in the payment. For those services not included (i.e., carved out), FFS rates may apply. 
  • Cases in which stop-loss coverage applies. FFS rates may be used when a case exceeds a specified target (i.e., an outlier).
  • Hybrid of incentive and budget-based payment systems utilizing benchmarking, shared savings, or P4P. 
  • Transitional payment model to value-based payments.

FFS will be important to practices as a benchmark by which physicians can assess alternative payment models. Physicians are encouraged to obtain the payment schedule from the payer and compare it to the practice’s FFS rates with the same payer to evaluate whether the alternative payment model under consideration will provide adequate compensation. 

What are bundled payments?
Bundled payments are a type of prospective payment. Under bundled payments, health care providers (hospitals, physicians, other professional health care providers) share one payment for a specified range of services as opposed to paying each provider individually. The intent of bundled payment is to foster collaboration among the multiple providers to coordinate services and control costs, thereby reducing unnecessary utilization. Many examples of bundled payments currently exist, such as maternal/obstetrical care for a normal vaginal delivery, hip replacement surgery, or asthma care. For example, Geisinger Health Plan established ProvenCare, a bundled payment program that pays one fee for the surgical episode of care, including pre- and postoperative services for coronary bypass, hip replacement, cataract surgery, bariatric surgery, low back pain treatment, perinatal care, and erythropoietin management.

Under the Bundled Payments for Care Improvement initiative, CMS would link payments for multiple services that patients receive during an episode of care. In this model, instead of a surgical procedure generating multiple claims from multiple providers, the entire team is paid one fee for a defined bundle of services, which includes the potential for additional payment for incentives to deliver health care services more efficiently while maintaining or improving quality of care.

Bundled payments represent a shared risk between the payer and provider(s) and are considered to be the middle ground between FFS (in which the payer assumes the risk) and capitation (in which the provider assumes the risk). Under bundled payments, the provider (which may be a team of hospital/physicians or the physician practice) assumes the performance or utilization risk and the payer still carries the insurance risk. That is, the risk taken by the provider is that the patient may utilize additional or higher-cost services above the amount agreed on by the provider in return for the bundled payment. Where the bundled payment includes hospital costs, then the physicians need to negotiate with the hospital for an appropriate share of the payment.

What is shared savings?
By coordinating care, providers and payers believe they can deliver quality care at a cost that is below current budgeted amounts, and the resulting savings is shared between the payer(s) and providers. The degree of shared savings between the entities—how the savings is calculated and distributed—will be specified in the contractual arrangement. The length of the contract should be considered because the shared savings may diminish over time and the terms will need to be renegotiated.

Section 3022 of the Patient Protection Affordable Care Act (ACA) created the Medicare Shared Savings Program (MSSP), which allows ACOs to share savings (and risk) with Medicare. Under the MSSP, the shared savings arrangement is based on setting the expenditure target for a performance year based on the historical expenditures during a base period for a prospectively defined cohort of beneficiaries. Savings is defined as the difference between a per capita expenditure benchmark for a performance year and the observed per capita expenditure of that year’s aligned beneficiaries.

What is P4P?
Under P4P, physicians are paid based on an agreed-on evaluation of the provider’s performance for a designated population according to acknowledged benchmarks. Physicians should not base their payment entirely on P4P, but include some capitation or FFS plus P4P.

How would I evaluate whether a budget-based payment model is right for my practice?
The key to success for a budget- or risk-based payment system is to determine expected costs and utilization in your specific practice and to assess whether the practice can come in at or under the projected budget. Further, the practice needs to assess the proposed payment methodologies, such as how the prices are set, the type of benchmark data being used, and how the risk is shared.
Key steps for a practice evaluation include

  • Obtain from the managed care organization (MCO) their actuarial certification of the current and proposed payment plan.
  • Supplement the MCO certification with an independent analysis of your practice utilization and costs.
  • As part of the practice evaluation
  • Identify all services that are to be included in the budget and what services will be carved out. 
  • Accurately predict your expected utilization. You may have the MCO provide the number of enrollees and age, sex, and risk of the practice’s expected population. Determine the expected utilization by patient profile (age/sex) and Current Procedural Terminology (CPT) code. Also include the demographic information of the covered population (occupation, high crime area, etc). Consider how the MCO will market the plan. Who will be attracted to join the plan? Also look at copay information. How is the plan discouraging unnecessary care? What is the plan’s benefit design? Look at transition costs between primary and specialty care. What risk-adjustment factors are used by the MCO? Look at your current claims data to develop a practice profile to determine current utilization and compare it to the projected utilization.
  • Develop an imputed fee schedule to determine potential revenue. Identify what you will be paid for the services you will be providing. 
  • Determine whether the services covered by the budget can be provided within the budgeted amount. If these are not covered by the proposed budget, you will need to reconsider participating or look at ways to streamline service delivery to meet the projected budget.

How can a physician practice manage the risk in a risk-based contract?
A practice can mitigate the level of utilization risk by incorporating means to identify, assess, and manage risk. 

Necessary elements to manage risk include

  • Technology infrastructure: systems to aid in streamlining administrative operations (i.e., registries, callback systems, data systems)
  • Reporting and analytics: data mining to identify areas of risk, including outliers, patient demographics, and risk factors
  • Population health management: processes to manage the health of defined at-risk groups

Click here for more information on ACOs.