My Ideas Versus Congress’ Ideas to Transition to Alternative Payment Models

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Next week I’ll finish looking at the ACP’s papers on fixing healthcare. But this week, I wanted to say one more thing about alternative payment models (APMs)–how to transition to them.

First, let’s think about this task without using the Healthcare Incentives Framework. How would a policy maker go about trying to get our healthcare system to shift from FFS to APMs (ignoring the fact that this is the wrong way to look at it)?

They would probably start by saying, “We need to find a way to give incentives to providers and payers to try out these different APMs.” This would be fairly easy to do through Medicare, so they would create some Medicare APM programs and structure them in a way that makes the benefits of joining large enough that lots of providers will want to participate.

They would also encourage private insurer-provider diads to start using APMs. How could they do that? They would probably just have to offer them money to do so.

These two approaches are what we’ve seen policy makers do. Medicare has the Medicare Shared Savings Program to get providers to enter into ACO contracts with Medicare, and the Bundled Payments for Care Improvement initiative to get providers to enter into bundled payment contracts with Medicare.

And to encourage private insurer-provider diads to start using APMs as well, I am only aware of two initiatives:

1. Medicare joined up with a bunch of private payers to institute a patient-centered medical home program called Comprehensive Primary Care Plus.
2. In 2015, congress passed the Medicare Access and CHIP Reauthorization Act (MACRA). A major part of this law is something called the Merit-based Incentive Payment System (MIPS). MIPS applies to all providers receiving reimbursements from Medicare, and it says they will now get a bonus or penalty based on a few criteria (quality, cost, EHR use, and quality improvement efforts) UNLESS they are actively participating in enough APMs (including qualifying programs with private payers!), in which case they are exempted from MIPS bonuses/penalties and instead they get an automatic 5% bonus.

I don’t think congress has passed any direct-to-private-insurer incentives to create APM programs (unless you count the Comprehensive Primary Care Plus program), but congress is influencing private insurers indirectly through providers because providers who want to get the 5% bonus and be exempted from MIPS will be pressuring private insurers to sign APM contracts with them.

So there we see the evidence of how policy makers not using the Healthcare Incentives Framework are approaching this effort to shift to APMs.

What would I do, knowing the principles illustrated in the Healthcare Incentives Framework?

First, I would discard the assumption that, for APM usage to increase, artificial incentives need to be created. The Healthcare Incentives Framework makes it clear that if an APM could truly offer increased value to patients, it would naturally arise in the market IF there are no barriers to it doing so. Next, I would go about looking for barriers and eliminate them. And only after doing that, if I want to accelerate the uptake of APMs, I could also offer artificial incentives.

APMs are a contract between an insurer and a provider, so let’s look at both parties.

Providers: Their incentive is to provide care of all kinds–this is how they make money. And any investment that enables them to raise their value relative to their competitors and that is not too risky will be desirable to them AS LONG AS they can be reasonably assured that patients will be able to identify their value as being higher than competitors’ and also have an incentive to choose the highest-value option. So, from a provider perspective, as long as any APM contract being offered by an insurer meets those requirements, they will be happy to participate.

Insurers: Their incentive is to minimize the total cost of care because they are getting a fixed amount of money in premiums, so any expenditure that is prevented is money that stays in their pocket (assuming those frustrating medical loss ratio rules instituted by the Affordable Care Act don’t come into play). The problem is, insurers don’t have much control over the total cost of care. Sure, they can try to negotiate the lowest prices possible, but providers are the ones that largely determine the total cost of care because they are the ones with the ability to prevent care episodes and to determine how much care is needed for care episodes that cannot be prevented. What I am saying is that insurers have the incentive to reduce the total cost of care, but providers are the ones able to make that happen. Therefore, insurers need to pass along their incentives to providers with these APM contracts. And insurers are happy to give money to providers to institute and run these programs if they can reasonably expect to save a lot more money than what they are giving.

With all that as context, what would I do to transition our healthcare system to APMs?

First, I would make sure providers are willing to join APM contracts by reasonably assuring them that if their investments into the program successfully increase their value, they will win more market share (and, therefore, profit).* How can I do that? By enabling patients to identify the highest-value provider up front and also ensuring that they actually have an incentive to choose the highest-value provider. I won’t go into details here on how to accomplish those things because I’ve written extensively about them before. But the result of those changes is that it would make providers see APMs as a potential for being very beneficial not only to their patients but also their profitability, which would probably result in them taking the lead in designing many of the APMs since they’re the ones who know best what changes could make a difference.

Next, I would make sure insurers are also willing to sign on to these APM contracts. Since insurers don’t like investing a lot of money into a program and then being required to give away all the financial benefits of that investment, I would eliminate the Affordable Care Act’s medical loss ratio requirements.

Next, lest you worry that insurers will forever keep all the savings generated by these APM contracts, I would enhance the ability for patients to compare the cost and quality of different insurance plans. That way, insurers will want to lower premiums because they will be assured that patients shopping for insurance will see that they are offering higher value (particularly in the form of lower premiums), so more patients will choose them, thus raising their profit as a result of increased market share.

Next, I would probably continue the programs Medicare is already doing, but I would also allow Medicare to sign on to other APM contracts happening between private insurers and providers. This would enable providers to get all insurers to reimburse them using the same contract, which would give them uniform incentives and make a huge difference in how much they are able to optimize toward that program.

Finally, if I do all that and am still unsatisfied with how fast this shift to APMs is happening, I would offer bonuses paid through Medicare to providers who are working hard to implement APMs (like the 5% bonus Medicare already implemented, described above). And if all that fails at getting this shift to happen as fast as I want, I would consider also offering grants to providers and insurers to try out APMs so that they don’t have to risk their own money designing and implementing them.

This approach is very different than the one currently being used by policy makers, and it would require changes that might be more difficult to make, but it would also not be limited by our current understanding of the “best” APMs. Instead, it would create the right environment for our healthcare system to continually shift toward better and better payment models as they are invented and refined.

* I know that an increase in market share does not automatically increase profitability, but this is my shorthand way of saying that it will increase their market power, which leads to increase profit either through a low-margin high-volume pricing strategy or through a high-margin low-volume pricing strategy. And my prediction is that, given where prices in healthcare are these days, the vast majority of providers would find that the profit-maximizing pricing strategy would be a lower-margin higher-volume option inasmuch as provider capacity allows.