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Physician Payment Reform Introduction

There are many factors contributing to the high and escalating costs in the U.S. health care system and to inconsistent quality, but the current predominant fee-for-service system by which physicians are paid is considered to be perhaps the most influential. Fee-for-service is a piecework payment system, financially rewarding physicians (and other health care providers) for delivering more services, and more expensive services. It provides no financial reward for healthy patient outcomes, care coordination, or for efficiency.

Value-based purchasing, by definition, entails purchasers creating incentives and disincentives that reward their suppliers for delivering superior value. Fee-for-service payment doesn’t support value-based purchasing, making payment reform a top purchaser priority. NBCH recognizes payment reform’s importance by making it the third of its four pillars of value-based purchasing.

This chapter reviews a range of options for physician payment reform, all of which have been or are being applied and evaluated:

• Pay-for-Performance
• Supplemental Payment (to support practice transformation, e.g., for the medical home)
• Bundled Payment
• Shared Savings
• Global Payment

The Pay-for-Performance (P4P) model typically provides some form of a financial incentive payment to physicians on based their performance relative to a set of performance metrics. The rating of Physician Performance, measured for a defined time period (e.g., a year) or for change over time, determines the size of the incentive payment. In some cases non-financial incentives may be employed (e.g., removal of administrative requirements, public recognition, increased patient volume), and in some cases financial penalties may be used in conjunction with penalties. While early Pay-for-Performance programs used quality and access measures to determine incentive awards, current models often also incorporate measures of physician practice efficiency (e.g., generic drug use, ER visit utilization).

Supplemental payment to support practice transformation can take the form of grants or per member per month (PMPM) payments. Commonly employed in medical home initiatives, they are intended to provide an investment in practice infrastructure to support traditionally non-reimbursed practice functions, such as nurse clinical care management, care coordination, and patient self-management education and support. The investment is made with the expectation of a net financial return to the insurer or employer. Supplemental payment strategies are often used in conjunction with one or more alternative payment models, including P4P and Shared Savings.

The Bundled Payment model, sometimes referred to as “episode-of-care payment”, entails payment of a single price for all of the services needed by a patient for an entire episode of care. The episode-of-care can be oriented around an inpatient surgical procedure, and incorporate post-discharge services, including home health and rehabilitation. The payment is made for all services, e.g., physician, hospital and other professional services, which the patient is anticipated to use. If the incurred costs exceed the payment, the participating providers are financially at risk for the difference. Bundled Payment can be combined with P4P. It can also be applied to payment for chronic conditions such as diabetes, in which case the payment is made in anticipation of all services to be received for treatment of that condition over the course of a defined time period, e.g., calendar year.

Shared Savings is a physician payment strategy that provides an incentive for a physician group or another association of physicians, potentially in collaboration with a hospital and other providers, to reduce health care spending for a defined population of patients by offering the physicians a percentage of any realized net savings. Shared Savings can be applied to some or all of the services that are expected to be used by a patient population. The ability of the physicians to access the savings is often linked to the attachment of certain performance thresholds using access, quality and/or efficiency measures, and the percentage of earned savings can sometimes increase as performance on the metrics rises.

The Global Payment model involves setting a budget for the care of a population of patients and paying a physician group or some another association of physicians, potentially in collaboration with a hospital and other providers. The physicians can retain all savings if spending falls below the budget, but is financially at risk if spending exceeds the budget. Global Payment is akin to what has historically been called “capitation”, except that payments use more sophisticated risk adjustment mechanisms than existed in earlier forms of capitation, and payments are linked in some fashion to performance on access and/or quality measures. Global Payment can be applied to some or all of the services that are expected to be used by a patient population.

The aforementioned payment model options are not mutually exclusive, and can often be found being applied in combination with one another. There is no certain understanding yet, however, regarding which models work best, under what circumstances, and using what implementation method. What is clear, however, is that the existing fee-for-service is inherently inflationary. While there must be caution taken when pursuing new payment models, particularly with respect to unanticipated consequences, change is clearly called for.

It is important to note that each of the payment model options has been designed with specific consideration for the changes that it will engender in physician (and other provider) behavior. Payment reform and delivery system reform are inextricably linked. Purchasers want to change payment systems to provide economic incentives for changes in care delivery that will deliver higher value.

While this chapter focuses upon physician payment reform, some of the models are intended to be applied to physicians and non-physician providers (e.g., hospitals) in combination. In addition, some of the models can be and have been independently applied to other provider types.

The chapter provides the reader with a review of the research supporting the effectiveness (the business case) of each of the five models, case studies of how they have been applied, in most examples, by employer purchasers or employer coalitions, and finally recommendations for how an interested employer or coalition might begin to take action to support payment reform.