How have alternative health care payment models, aimed at lowering costs while improving patient outcomes, affected physicians and physician practices in the United States? A recent RAND Corporation study, sponsored by the American Medical Association, looks at the effects payment reform models have on physicians’ finances, practice management, and work experience and professional satisfaction.

The overall number of alternative-payment models has increased since the passage of the Affordable Care Act (ACA) and they differ from the standard, quantity-based fee-for-service (FFS) models that have dominated healthcare provider reimbursement. The FFS model typically pays a flat rate per service unit, leaving no uncertainty in the amount the practice will receive after billing for services provided to patients and no difference between high quality, high efficient providers and poor performers.  The best, the worst, and everyone in between are paid the same. In contrast, payment reform models put physician practices at risk for their clinical and economic performance and create opportunities for financial gain in exchange for higher patient outcomes and avoidance of unnecessary or preventable services.

The RAND report – titled Effects of Health Care Payment Models on Physician Practice – looks at the alternative payment models used within 34 different physicians’ practices in six different areas of the country through a literature scan and interviews with physicians, physician practice leaders, and market observers.

Alternative Health Care Payment Models:

The report investigated capitation, episode-based payments, pay-for-performance bonuses, shared savings – through accountable care organizations (ACOs) and patient-centered medical homes (PCMHs) – and retainer-payment models:

  • Capitation pays a flat fee to a physician for each specific patient for a given time period, e.g., one month. Capitation creates pressure to reduce unnecessary referrals, hospital admissions, expensive drugs, and tests, which could lead to compromised patient outcomes. At the same time, it relieves the pressure to increase services caused by other forms of compensation.
  • Episode-based and bundled payments operate by paying the costs of treating entire patient “episodes,” such as a specific diagnosis, or an in-patient hospital stay. Facilities can “bundle” together the payments made to different physician specialists, as well as for hospital care and post-patient care.
  • Pay for performance (“PFP” or “P4P” for short) functions only when combined with one of the three previous models. Physicians can receive PFP bonuses based on the quality of their performance, costs, patient experience, or utilization of care. Individual physicians, practices, or organizations can all collect PFP bonuses.
  • Shared savings, along with an underlying FFS model, pays a lump-sum bonus or exacts a penalty at the end of the contract year to incentivize cost savings or performance.  This is the underlying reimbursement model for accountable care organizations (ACOs).
  • Retainers are also known as concierge or subscription healthcare.  Consumers pay physicians directly as per a specified time period. This extra fee – an annual or monthly amount – from the consumer is typically in addition to regular FFS payments from the consumer’s health insurer.

Nearly all physicians, physician practice leaders, and market observers who participated in this project described multiple simultaneous changes in payment models and regulations (such as meaningful use—a federal program to encourage physician practices to adopt and use EHRs).  Most interviewees therefore described how interactions between these simultaneous changes, rather than the introduction of a given specific alternative payment model, affected physicians and physician practices. Prominent among these interactions were the tensions caused by lack of alignment among the plethora of performance measures and payment incentives deployed by different private and public payers.

Effects of Payment Reform on Physicians’ Work Experience and Professional Satisfaction:

The study found that alternate-payment methods affected physicians’ professional satisfaction and work quantity. The intrinsic desire to provide high-quality patient care strongly motivates physicians, and when financial incentives can determine their ability to provide that care, some felt their professionalism becomes undermined.

Though alternative-payment models did not substantially alter the way physicians provided face-to-face patient care, they often led to additional documentation requirements, causing apprehension. Though physicians approved of documentation that directly improved patient care, they disliked documentation deemed irrelevant to their own work.

In some cases, physician outcomes were mixed. They experienced lowered satisfaction in the quality of care they could provide and their autonomy in choosing treatment plans. However, they felt an increased satisfaction with patient load, patient face-time, and administrative processes. The study noted that physicians in practice-leadership positions were generally optimistic about alternative-payment models.

Impact of Payment Reform Models on Physician Practice Management:

Physician practices using alternate-payment models need to measure and improve their quality of service. Doctors reported that keeping track of the multiplicity of incentive programs was a burden, requiring an increased amount of physician and staff time to enter, manage, and analyze data. This requirement also increased expenses and the need for capital investment in health information technology (IT), often resulting in physician practices joining together with other practices and hospitals.

Some alternate models encouraged the development of teams for patient management, requiring the addition of dedicated care managers, and thus alleviated some of the pressure on medical practitioners.

Effects on Finances of Physicians and Physician Practices:

The study found that physician practices tended to insulate individual physicians from negative financial incentives, not passing them through directly. Instead, they transformed them to non-financial incentives, such as performance feedback, coaching, and selective retention.

Though PFP incentives did improve quality measures, the study found that the “cacophony of performance metrics” arising from the variety of plans under which each practice must work dampened their impact. The literature search did not show PFP payments had substantial effects on a practice’s financial viability.

Practice leaders expressed considerable uncertainty about best strategies for responding to the combinations of alternative payment models that they faced, and doubts about the future compounded these uncertainties. Guided by practical limits on available capital and how much change their physicians could absorb quickly (especially when “change” amounted to “more work for each physician”), practice leaders tended to proceed cautiously, prioritizing areas in which multiple payment incentives overlapped with each other and with practices’ internal priorities.

Recommendations for Improving the Transition to Value-Based Reimbursement:

The report found that the alternate-payment models were more complex to administer than the traditional FFS model, making errors in implementation more likely. The need for more support in more accurate data and IT resources, including support staff to manage and analyze that data, is the key to success with alternate-payment models. Therefore, the study recommends that health plans should invest in physicians’ data-management capabilities.

The report also recommends clarifying the operational details of alternative models, conducting dry runs before implementation, and communicating the changes that physicians were expected to make more effectively.

Finally, the report recommends harmonizing the multiplicity of performance measures and payment incentives employed by different private and public payers – some of which fundamentally conflict – in order to reduce the complexity of managing alternate-payment models and improve patient outcomes.

The thoughtful study was authored by Mark W. Friedberg, Peggy G. Chen, Chapin White, Olivia Jung, Laura Raaen, Samuel Hirshman, Emily Hoch, Clare Stevens, Paul B. Ginsburg, Lawrence P. Casalino, Michael Tutty, Carol Vargo, and Lisa Lipinski.

To read or download the full report, click here (PDF).