Evaluating and Negotiating Emerging Payment Models
The health care delivery system in the United States is undergoing a paradigm shift with regard to physician and other health care provider payment methodologies. In an effort to control the growth of health care costs, payment methodologies involving risk are slowly replacing fee-for-service as the predominant means through which physicians will be paid. These “pay for value” or risk-based models include pay-for-performance, withholds and risk pools, capitation, shared savings, and bundled payment arrangements.
Because the terms “value-based” or “risk-based” do not clearly describe what makes these new payment systems different from fee-for-service, the term “budget-based” is used to make the distinction clear. In all these payment systems, the primary driver of the economic result to the physician practice is the extent to which the actual cost of providing care to a patient population varies from the projected budget for those costs – physicians who come in at or under-budget prosper, while physicians who exceed the budget are penalized.
As complex as it is to manage fee-for-service payments, payments based on a “budget” raise a host of new issues that physicians must understand to successfully negotiate the evolving payment environment. Under “budget-based” payment systems, rather than being paid for each service provided, physician income is tied to the physicians’ ability to successfully predict and manage future utilization for a patient population by thoroughly understanding the past utilization for a similar patient population as well as the costs of delivering these services efficiently.
To determine whether any budget-based payment proposal will be financially viable, physicians must first figure out whether the budget is “actuarially sound” for the patient population that the budget will cover. In other words, is it likely that the costs of providing the health care services covered by the budget to this patient population will be equal to or less than the budgeted amount? Because of the enormous skew in the utilization of health care services depending on the patient, this is not an easy task. Fully half the population spends less than $1,000 per year on medical care. At the other end of the extreme, the top one percent of spenders use more than $44,000 of health care services in a year. In the absence of state-of-the-art risk adjustment systems, physicians who are lucky enough to draw panels, which include large numbers of the low-utilizing patients, will do exceedingly well under budget-based payment systems, while those who draw the patients at the other end of the spectrum will be devastated by such systems. Contrary to every principle of medical ethics, the physicians who will be put at the greatest risk will be those who focus their practices on the poorest and sickest patients! However, with full transparency, actuarial soundness and state-of-the-art risk adjustment systems, budget-based payment systems can be constructed to promote the more efficient treatment of everyone, rather than to provide economic incentives to develop ever more creative ways of discouraging sicker patients from selecting one’s health plan or medical practice.
Thus, successful navigation of budget-based payment systems requires mastery of concepts more commonly associated with health insurance than physician payment, including “actuarial soundness,” “risk adjustment” and “risk mitigation.” Physicians who are considering transitioning to one of these new payment models, whether by choice or payer request, will need practical information to enable them
to evaluate the likely financial impact of these risk-based payment arrangements, negotiate the precise terms of these arrangements, if appropriate, and manage the revenue cycle associated with any new payment model to which they are ultimately subject.
The American Medical Association (AMA) has developed a tool to help physicians understand these concepts and position themselves to succeed under budget-based payment systems, entitled Evaluating and Negotiating Emerging Payment Options.
Visit www.ama-assn.org/go/payment to access this manual. This tool is comprised of chapters written by expert physician consultants and advocates. A new chapter concerning shared savings arrangements will be added to the tool in early February 2012.
Catherine Hanson is the Vice President of Private Sector Advocacy & Advocacy Resource Center with the American Medical Association.