For the past several years, major payers in U.S. health care have experimented with new payment models that create incentives to control unnecessary health care spending. The traditional fee-for-service model for health insurance does not give providers a reason to control health costs: The more services they provide, the more they get paid.

Private and public health plans have sought new payment systems that place more responsibility for cost containment on providers, and that give providers the chance to earn benefits from cost savings.

Medicare ACOs and Shared Savings:

The Centers for Medicare and Medicaid Services (CMS), for example, launched the Medicare Shared Savings Program for Accountable Care Organizations (ACO). Providers, mostly physicians and hospitals, band together to create ACOs and deliver care to Medicare beneficiaries. If the ACO providers work together to reduce wasteful health care spending, they earn a portion of the savings.

Some states are looking into ACOs for Medicaid enrollees. I also suggested in a previous post that Medicare should extend its shared savings payments to Medicaid long-term care providers. For more on those subjects, see these blog posts:

Population-Based Payments a Model for Employers:

Similar to the ACO model, population-based payments give groups of providers a set fee to care for patients, and shares some of the health cost savings with them as well. Providers also could be held accountable for cost overruns.

In a recent brief, Bailit Health Purchasing looks at a few case studies in which large employers have successfully brought down spending on employee health care by switching to population-based payments. A few highlights from the brief:

1. California Public Employees Retirement System (CalPERS)
In this project, Blue Shield of California paid a set fee to a couple of large providers who would then care for 41,500 CalPERS beneficiaries. The providers also would share in cost savings. Over three years, CalPERS has saved $32 million. Inpatient hospital readmissions dropped 15 percent, and the number of surgeries decreased 13 percent.

2. Intel Corporation
Intel made an agreement with Presbyterian Health System in Albuquerque in which the provider would share some of the financial risk in caring for 10,000 Intel employees. The health system would get additional quality and outcome-based payments if it performed well. But if it performed poorly, the provider was at risk to lose revenue. The Bailit team’s brief does not report the results but says Intel is hopeful the project will reduce costs.

3. Maine State Employee Health Commission
In this case, the Maine State Employee Health Commission and a local system of hospitals and physicians signed a contract requiring the providers to reduce costs by $1 million, while also meeting quality standards.

Bundled Payments Another Form of Provider Responsibility:

Bundled payments are when a health plan or other pay0r reimburses providers for all services related to a certain condition. For example, the provider gets a lump sum for a heart surgery, including all services to prepare and to recover from the procedure. As with population-based payments and ACOs, bundled payments are a way to put some of the responsibility for cost containment on providers.

A separate Bailit brief describes how Medicare and one private employer have attempted to use bundled payments in their employee health care programs.

1. Baptist Health Care System Acute Care Episode
Medicare’s Acute Care Episode (ACE) program makes bundled payments to hospitals and physicians for groups of services, including 28 cardiac and nine orthopedic services. The providers also can earn up to 25 percent of regular fees in a shared savings agreement. Baptist Health Care so far has saved an average $2,000 per case, and its physicians have received $280 per case in bonus payments.

2. Medicare Heart Bypass Center Project
This project from the mid-1990s allowed CMS to make bundled payments to participating hospitals for heart bypass surgeries and related services. The program saved $17 million over 27 months and at four hospitals. The savings figure comes from a research paper in 1997 and would be significantly higher in today’s dollars.

3. Employers Coalition on Health
The Employers Coalition on Health purchased group health insurance for a number of employers in Illinois. The coalition in 2011 began to transition to bundled payments, but the Bailit brief does not say whether the results are available.

In addition to those examples, the new CMS Innovation Center launched the Bundled Payments for Care Improvement (BCPI) Initiative, which could give additional evidence on the benefits of bundled payments.

Health Insurance More Expensive for Employers and Employees:

Health costs for employers and employees have risen dramatically in recent years. From 2001 to 2009, employer-sponsored insurance premiums increased 60 percent for the employer’s share and 90 percent for the employee’s share. Employers also have reduced retiree health benefits and, says the Employee Benefit Research Institute (EBRI), most employers in 2013 will increase retiree premiums while reducing health benefits.

Bailit Health Purchasing, in partnership with the Robert Wood Johnson Foundation (RWJF), recently published a series of briefs that might interest businesses struggling with health costs and spending. The briefs discuss four payment reform models, analyze a few test cases, and include additional resources for organizations that want to implement the models.

Kudos to my old friend Michael Bailit and his team for this great work.

This post is part of a series highlighting new payment models and cases.