Skip Navigation LinksAlternative-Payment-Models

aaa print

Alternative Payment Models

​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​Payers are moving away from fee-for-service (FFS) volume-driven health care services to value-based payment models. These alternative payment models (APM) utilize varied payment methodologies that seek to incentivize providers on quality, outcomes, and cost containment. Practice viability will be dependent on how well quality, cost, and efficiency are managed. For an overview of APM view the AAP webinar An Overview of Alternative Payment Models (requires login)

There are different types of APMs (i.e., shared savings, bundled payments, pay for performance, global payments, risk adjusted rates, episode based payment, etc.,) and it is important for pediatricians to understand them and consider how they might implement an APM within their practice setting. See Understanding APMs for additional information on the different types of APMs.

​Steps for Implementing an APM.

(Note, a practice might consider employing the services of a consultant to help make these determinations.)


 AAP Accordion

    1. Determine whether APMs are being implemented by state/local payers or others in the practice’s geographic area.

    ​As an initial step, the practice should conduct an environmental scan to identify the types of APMs that are being implemented in their market area; and specifically whether any are being implemented among pediatric populations. Payers, both public and private, as well as health systems (ACOs, Integrated Delivery Systems, IPAs) most likely have implemented APMs. Pediatricians will need to determine which APM will work for the practice as well as how the practice can align with the APM(s). See A Guide to Physician-Focused Alternative Payment Models

    2. Assess the risk to your practice

    Once the practice has identified the types of APMs available to the practice, it is vital to determine how the new payment methodology will impact the practice. All APMs transfer some degree of risk to the practice; and the degree of that risk will help determine whether the practice will be successful or not.

    The key to success for a budget- or risk-based payment system is to determine expected costs and utilization specific to the practice and to assess whether the practice can come in at or under the projected budget. Specifically, 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:

    2a. Obtain from the proposed payer their actuarial certification of the current and proposed payment plan.
    Payers may resist sharing this information however it will demonstrate how the payment plan is set up and the methodology employed to calculate risk.  Since the practice is assuming risk, not only for its own services but possibly the services of others providers, it is imperative to understand the payment and risk adjustment methodology.

    2b. Supplement the payer's certification with an independent analysis of the practice utilization and costs.
    Don't just take the payer's word for what the fee schedule and payments will be. Look at your current and projected utilization and assess your payments under the proposed payment plan.  Although some believe that this can be done by practice staff, it is advisable to have the practice's financial advisor or accountant or actuary to conduct the assessment.

    2c. Identify all services that are to be included in the budget and what services will be carved out.
    It is critical to identify which services are included as well as excluded in captitated and bundled payments.  Identify carve outs or services not included in the capitated or bundled rate.  Carve out services are usually paid on a fee-for-service basis, and should be specifically identified by their relevant codes and any related modifiers.

    2d. Accurately predict expected utilization.
    Have the payer 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 payer will market the plan. Who will be attracted to join the plan? Also look at co-pay 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 payer? Look at the practice's current claims data to develop a practice profile to determine current utilization and compare it to the projected utilization.

    2e. Develop an imputed fee schedule to determine potential revenue.
    Identify what you will be paid for the services you will be providing. 

    2f. 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.

    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

    Additional Resourc​​es on M​anaging Risk:

    How to Prepare Your Practice for Implementing Alternative Payment Models
    To view a recording of the free webinar, please click here How to Prepare Your Practice for Implementing Alternative Payment Models   

    For information on Risk Adjustment, see the AMA Resource, Evaluating and Negotiating Payment Options.​

    3. Evaluating a Value-based Contract

    In a value-based contract, risk is shifted to providers as payers base payments on documented outcomes (i.e., quality of care, efficiencies) with the potential of shared savings. As a result, these arrangements usually involve more extensive data reporting and payer collaboration. To make the transition from fee-for-service to value-based care successfully, ​providers should prioritize superior care management, strong physician alignment, disciplined financial management, and enhanced consumer experience. The key to success for a budget- or risk-based payment system is to determine expected costs and utilization specific to the practice and to assess whether the practice can come in at or under the projected budget.

    Consider the following when evaluating a value-based contract:

    ​3a. Assess the practice
    Understand how the practice's financial position will be impacted. Key questions include:
    • ​What is the practice's cash flow and debt capacity?
    • What is the practice overhead?
    • What services are most commonly provided and paid?
    • What are the total operating costs pe​r patient, total operating cost as a percent of total medical revenue (overheard costs), as well as practice operating costs per provider?​
    3b. Assess the payer's proposed contract
    • Insist on transparency by both parties.
    • Review your contract and have a full understanding of its contract terms and provisions.
    • Assess the impact of the contract to your practice as well as the impact of not implementing the contract. It is advisable to engage the practice attorney to review the contract terms in light of current state regulations as well as to have a third party review.
    • 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.
    ​3c. Build Rapport
    • Identify what the practice's priorities are as well as understand the things that are important to the payers.
    • For payers in value based contracting, the ultimate goal is to balance cost reduction with reduced utilization rates.
    • Defining risk a​nd creating value can generate conflict between payer-provider partners. Providers will focus on pricing, asset employment, patient mix and procedure selection, while payers will focus on product design and reimbursement and utilization rates. 
    ​3d. Understand that Negotiation is a Process
    • Understand that negotiating is a marathon, not a sprint. Be prepared to devote the necessary time for dialogue with the payer.
    • Consider options, alternatives and positions that you are willing to compromise
    • ​Pay atte​ntion to the details, but keep the big picture in sight​

    Additional Resource​​​s on Contracting

​​​​Health care is evolving rapidly, and innovate strategies to address these changes are continuously being developed. In an effort to keep this resource as up-to-date and relevant for pediatricians as possible, your constructive feedback on the content is requested. If you believe some of the steps listed above should be modified, or if you are aware of a better resource that should be listed, please provide your suggested edits or links to resources below. ​​


Title *

Best Practice, Implementation Tool or Resource *

Name (Optional)

E-mail (Optional)


Change the CAPTCHA codeSpeak the CAPTCHA code