To control rising health care costs and improve outcomes, health care purchasers – Medicare, state Medicaid programs, and large employers – and health plans are eager to entirely replace traditional, inefficient, volume-based fee-for-service (FFS) physician and hospital reimbursement with value-based payment models.  Value-based payment comes in various flavors but the core characteristics are typically the same:

  • Measure provider performance and assign accountability for that performance – ideally in a transparent, timely, and actionable fashion to aide decision making by patients, clinicians, purchasers, payors, and regulators.
  • Align the finances of reimbursement with patient outcomes, safety, and efficient care delivery – increasingly placing providers at risk for their clinical and economic performance and driving care delivery reforms, notably evidence-based, patient-centered, coordinated, team-based care delivery.

Examples of payment reform models include shared savings for accountable care organizations (ACOs), global payments, bundling, episode-based fees, and condition-based fees.  They also include Medicare’s value-based purchasing programs, which continue to steadily evolve from pay for reporting to pay for performance, albeit still built on top of Medicare’s extraordinarily complex fee-for-service methodologies.

Through the Affordable Care Act (ACA), the Centers for Medicare and Medicaid Services (CMS) is required to begin using value-based modifiers to pay physicians under Medicare Part B.  As value-based payment modifiers are rolled out over the course of CY 2015-2017, physicians will be differentiated based on their relative performance compared to select measures of quality and efficiency.

Value-based payment reform is intentionally disruptive, forcing providers to adapt to a transformative new paradigm affecting finances, leadership, clinical practice, and operations in fundamental ways.  Designing and implementing value-based payment methodologies is also challenging for purchasers and health plans.

Controlling healthcare spending without harming patients will depend on active engagement and strong leadership from physicians, hospitals, and other providers. Poorly designed measurement, attribution, and accountability systems not only fail to provide the actionable information providers need, they can discourage providers from making feasible changes by demanding they control services and spending that are beyond their range of influence. – Harold D. Miller, President and CEO, Center for Healthcare Quality and Payment Reform

Key Challenges to Measuring and Assigning Accountability for Healthcare Spending:

In design and operation, payment reforms vary but they often share common methodological challenges, particularly in measuring and assigning or attributing healthcare spending to particular physicians and hospitals.  An interesting, in-depth new report from the Center for Healthcare Quality and Payment Reform identifies and explains six fundamental problems value-based payment models must overcome:

  • Many Patients and the Spending on Their Care Are Not Assigned to Any Provider: Often a large number of patients are not assigned to any particular physician practice or other provider.  Thus, a substantial portion of spending associated with these patients can be missed in the analysis and tracking of provider performance. Unintended distortions may then result.
  • Providers Cannot Control All of the Services and Spending Assigned to Them: Even when a given patient’s health costs are attributed to a specific physician or provider organization, that physician, practice, or delivery system is not in a position to control or strongly influence all the healthcare services that generate the patient’s spending pattern.  Many other providers are often involved in some fashion, especially for high-cost patients who drive a disproportionate share of overall medical spending and who are often at greatest risk of poor quality, inadequate coordination, and medical errors.
  • Providers Are Not Attributed the Spending For Many Services They Provide:  Some payment reform models use attribution mechanisms that fail to assign physicians many of the patients they did care for or a significant portion of the services they delivered.  For example, costs associated with preventable conditions, such as hospital-acquired infections, may be assigned to physicians who treat the consequences of the poor performance of hospitals or other physicians. Unless a payment reform model’s measurement and attribution system is both comprehensive and precise, the costs of inappropriate or even fraudulent services may not be assigned to the bad actors, making it tough to identify them and address the problems.
  • Spending Measures Do Not Distinguish Appropriateness of Services:  Some payment models make little or no distinction between (a) evidence-based, recommended services and (b) inappropriate or unnecessary services.
  • Risk Adjustment Systems Do Not Adequately Adjust for Patient Needs:  Risk adjustment methodologies must evolve to effectively adjust for differences in patient needs, include functional status data, and timely adjust for patients’ current needs rather than historical needs.
  • Inadequate Adjustments Are Made for Structural Differences in Costs:  Payment reform methodologies need to address the practical facts that care delivery in low-income communities and rural areas is different, often more challenging and with different scale economies, and providers may incur higher costs or a different mix of costs.

Payment reform is essential to containing costs, improving outcomes, and driving care delivery reform, particularly in the fast growing, $500 billion Medicaid program.  When designed right, value-based reimbursement benefits every healthcare stakeholder – patients, providers, purchasers, and taxpayers. – Dawn Hawkins Johnson, MSN, RN, Senior Consultant, Sellers Dorsey

Improving the Design of Payment Reform Methods:

The excellent, 84-page report – Measuring and Assigning Accountability for Healthcare Spending – offers valuable insights and recommendations for the design of payment models that drive higher outcomes and greater efficiency.  For example, the report offers specific recommendations to effectively address the above design issues by:

  1. Identifying the healthcare services and spending that physicians, hospitals, and other providers can influence.
  2. Identifying sets of services where health spending can be reduced.
  3. Addressing differences in the current needs of patient.
  4. Comparing providers that are indeed comparable.
  5. Addressing differences in both clinical outcomes and spending efficiency.
  6. Ensuring the “validity, reliability, comprehensiveness, and actionability” of information used in provider payment.

The report’s author – Harold D. Miller, President and CEO, Center for Healthcare Quality and Payment Reform – carefully details the capabilities essential to providing actionable information on health spending and measuring the clinical and economic performance of providers within a value-based payment model.

Learn More:

To read the full report, click here (PDF).  To read the 7-page executive summary, click here (PDF).

The Center for Healthcare Quality and Payment Reform offers several other helpful reports and issue briefs.  For more, visit them at

For help with payment reform initiatives, please consult my colleagues at Sellers Dorsey.  The Sellers Dorsey team offers excellent capabilities and includes several national experts in payment reform and delivery reform.