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

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.

Context for what “Value-based Purchasing” (VBP) Really Is About

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As I was reading through the ACP’s “Health Care Delivery and Payment System Reforms” paper this week, I was thinking more about the principles underlying this whole “value-based purchasing” (VBP) thing. So, before we delve into the ACP’s opinions on the topic, I thought it would be helpful to give a little context about what VBP really is.

I’ve written about these topics before here and here, and those posts describe somewhat different aspects of VBP and fee for service than what I’m talking about today.

The stated goals of VBP boil down to two things: (1) reward (and thereby improve) value and (2) decrease healthcare spending. If you’re familiar with my Healthcare Incentives Framework, you know I think trying to give providers bonuses for delivering better quality is not a transformational nor a sustainable effort. But what of the goal to decrease spending? Let’s talk about that for just a minute.

Question: Who stands to gain (or, save) the most if healthcare spending goes down? Answer: The person on the hook for paying for it. Paying for healthcare is a shared responsibility between the patient and the insurer, but really the risk for having to cover large healthcare expenditures resides with the insurer. (Yeah, that’s the point of insurance.)

So, if insurers are the ones that stand to benefit the most if healthcare costs go down*, what can they do to make that happen? They don’t directly control what providers do, but can they financially incentivize those providers somehow to find ways to decrease healthcare spending for them?

Yes. That’s what VPB is. And that primarily takes two forms:

First, they can simply pay them extra to reorganize in certain ways that would decrease spending. The insurer hopes the additional investment will result in a lot more savings than they invested. So, an example of this would be when insurers give clinics extra money when they offer expanded services such as after-hours access to doctors, social workers, and care coordinators. Think: patient-centered medical home.

Second, they can shift some of the risk to providers, so providers will make more money if they successfully decrease spending but will also make less money if spending increases. Think: Any “shared savings” plan, such as an ACO.

Now when we talk more about VBP, you will see these two tactics at work. Really, these are the only two tactics insurers can use, so every VBP model is some variation of one or both of them.

*There are some complicating factors in that statement. One is that with the ACA’s medical loss ratio restrictions, they actually don’t stand to gain much if they find a way to decrease medical spending, because they’re required to turn around and send a lof of that extra money they saved back to their enrollees in the form of rebates. It messes with insurers’ incentives to lower the cost of care, and this is one of the many reasons I despise those regulations. Another complicating factor is that insurers make a large amount of their profits (if anyone knows a specific number, I’m all ears) off the stock market by investing the premium money until they need to pull that money back out of those investments and pay for care. So, the more they get paid in premiums, the more they have available to invest in the interim. If all insurers could collude and find a way to keep healthcare super expensive, they would be tempted to do that, especially if they could keep premiums high AND decrease spending at the same time (and keep 100% of the difference). However, that is not a Nash equilibrium–there’s an incentive for someone to cheat the others and make more money than their competitors by lowering premiums and winning all the market share–so I don’t expect it to be a lasting thing even if it is happening informally in certain markets at certain times.

What the Government Should Do to Help Flailing Industries

I recently reread two really good pieces on different roles the government should take in helping flailing industries. One was the last chapter of Clay Christensen et al.’s The Innovator’s Prescription, and the other was Atul Gawande’s Testing, Testing. Plus, I have my own addition. (Bear in mind, this all relates to established industries, so I won’t mention the additional subsidizing roles the government could take in helping the foundation of industries.)

Christensen et al. tell multiple stories that are all pretty similar to each other, but here’s a typical one: the government sees that mainframe computers are really expensive and that IBM has a near monopoly on them, so, using the “increase competition, lower prices” dogma, it spends tons of money trying to break up IBM. Meanwhile, new innovative companies come along and meet the same computing needs of consumers with way cheaper micro-processor-based computers, lowering prices for computing way more than competition amongst a bunch of broken up IBM competitors could ever have. Moral of the story #1: instead of worrying so much about monopolies and other limitations on sustaining competition, the government should be more focused on identifying and eliminating regulatory barriers to disruptive innovators. This is when you should think about barriers such as against the building of specialty hospitals, certain prescription-writing privileges for physician extenders, and the licensing of dental health aide therapists for serving rural areas.

Gawande talks about the agricultural industry and how it was revolutionized into a much more efficient industry through a government program (that started out as just another pilot program) that eventually placed government-employed farming consultants in nearly every county. The role of the consultants was to continually provide to the local farmers information about the state-of-the-art methods for growing the best and most abundant crops. For some reason, the invisible hand of competition wasn’t enough to convince farmers to use new farming techniques. Moral of the story #2: if competitors don’t have access to information that can help them improve value, or if the implementation of such information is above their ability/willingness to try, the government can help information flow and help competitors implement that information, possibly by providing subsidies that take away the downside risk of implementation or by teaching how others are doing it.

And here’s my addition: before we can start worrying about removing regulatory barriers or helping information flow and implementation, we need to remember that the goal of all this is to improve the value of the industry, and then we need to make sure financial incentives are aligned with what we value. What I mean is, without the financial incentives to develop a cheaper version of a mainframe computer, it would have taken a lot longer to come about; without the financial incentives for farmers to use new techniques to grow and sell more crops, they would have been even more hesitant to try the new ideas out. Moral of the story #3: until financial incentives are aligned with value, anything else the government does to try to help low-value industries improve (including the first two morals of the stories) will be severely limited in efficacy. I can’t think of another privatized industry in history where financial incentives haven’t been aligned with value, so I think this point isn’t as obvious to people.

Is this list exhaustive? Honestly, I don’t know. I guess the question I need to be able to answer is, Are there other causes of competition failing? I can’t think of any others, but I’m not enough of a markets historian.

Also, this post obviously doesn’t explain exactly why I think financial incentives aren’t aligned with value in healthcare, but that’s what I’ve spent the last month writing a perspective article about (thus, the long time since my last post), and the ideas will make it to my blog hopefully soon.

(The Framing of) How to Solve the Healthcare Cost Problem

“The cost problem” in healthcare is referring to the fact that our country is making itself go bankrupt based on overspending on healthcare, and we’re not even getting amazing outcomes that justify that spending. I’ve blogged before about how this overspending problem can really be broken down into two separate problems:

Spending = Volume x Price

To really get a good solution, we need to both (1) lower the volume of care delivered and (2) lower the prices we’re paying for everything. Lowering the volume, I’ve already argued, would substantially be achieved by giving providers an incentive to profit from long-term wellness. People at Dartmouth say 30% of all care is unnecessary, so, if true, that would mean big savings. But I’ve never said much about how to lower price, so let’s talk about price now:

Price = Cost + Profit

If we want to substantially lower prices, we need to actually lower costs, and then make sure prices follow them down. What I’m saying is that any price-lowering reform needs two components:

  1. Costs to go down
  2. Prices to follow

We’ve actually seen people try to only lower costs (think: tort reform) and other people try to only lower prices (think: all-payer rate setting).

I’ve also explained before that we should expect providers to be the main drivers of cost-lowering innovations. But provider-driven, cost-lowering innovations don’t seem to be happening much in our (or anyone’s!) healthcare system, so why not? The answer to this question is what every health system in the world needs. So I’ll tell you. Next time.

How to Fix Bad Incentives in Healthcare

When talking health policy, I hear the word “incentive” a lot. “Incentives are perverse.” “We need to realign incentives.” “Let’s provide an incentive for quality through payment reform.” Bla bla bla.

Let’s drop the ambiguities and actually talk specifics for a second. I promise you’ll learn more about healthcare incentives in the next 1 minute than you’ve ever learned in your life.

I can only think of two different kinds of incentives in healthcare: cultural and financial.

Our culture has expectations of healthcare organizations to put the patient first, to find ways to reduce errors, etc. I think we’ve done a pretty good job of getting the cultural incentives right in healthcare, but they can only take us so far without . . .

Financial incentives! A financial incentive works like this: If you do ____, you’ll make more money (i.e., profit). How are we doing on financial incentives? Well, we pay providers more for doing more (especially if it’s invasive); we pay providers more for making mistakes and then fixing them; we pay providers more if they band together to increase bargaining power; we pay providers the same amount even if their quality is poor. So . . . we haven’t done so well with the financial incentives.

But here’s how to think about what financial incentives are needed in any situation:

  1. Decide what job you want the organization/industry/whatever to perform
  2. Make it profit from doing that job

I, personally, think a healthcare system’s job is to get/keep us healthy (weird, I know). So that means healthcare organizations need to profit from getting/keeping us healthy; in other words, “profit from wellness” (that’s how they say it in The Innovator’s Prescription).

If we can find ways to get healthcare organizations to profit from wellness, it would solve all kinds of problems! They would be going nuts trying to provide preventive care. They would be spending lots more time with us training us how to manage chronic diseases so we don’t have ED visits and complications. They would be counseling us on weight loss and smoking cessation. And they would be working like crazy to reduce costly errors! (Quality problem: solved.)

So the government can either (1) try to fix bad underlying financial incentives through regulating the healthcare system to death or (2) focus on finding ways to help healthcare organizations’ underlying profit motive be patients’ wellness. One is the bariatric surgery approach, the other is a real solution.

UPDATE: I’ve been thinking more about this, and I should probably mention a few caveats. First, profit from wellness doesn’t work for end-of-life care, for obvious reasons, so a different incentive is needed then. Second, profit from wellness doesn’t work if the payer has a short time horizon because it won’t reap the savings from providing preventive care now to avoid more costly care later. Third, quality problems might not be completely solved just from profiting from wellness because I don’t know if better quality is always cheaper in the long run. Honestly, why do you people let me get away with this stuff by not posting scathing comments?

UPDATE 2: I think the definition of the healthcare industry’s job to “get/keep us healthy” isn’t quite specific enough. The job should really be defined as to get/keep us healthy over the long term, since I’d like to be healthy now and in the future. Thus, profit from long-term wellness. This time horizon issue is a key piece to the foundation on which we will build our future health system.