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JAMA Forum Archive, 2012-2019: Health policy commentary from leaders in the field
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Payment Reform Is About to Become a Reality

The US Department of Health and Human Services (HHS) continues to take major steps toward transforming the payment system for Medicare. After hinting about a new payment reform plan in September, HHS Secretary Sylvia Mathews Burwell put out more specifics in late January.

Secretary Burwell’s proposal calls for 30% of Medicare payments to be based on non–fee-for-service models by the end of 2016, and 50% to be so by the end of 2018. By comparison, such payments did not exist in 2011 and account for about 20% of Medicare payments today. In addition, the Secretary intends to have 85% of Medicare fee-for-service payments tied to quality or value in some fashion by the end of 2016.

Make no mistake: this is major news. Medicare is the largest health care purchaser in the country, so these changes matter a lot. In addition, many private insurers that have been hesitant about payment reform are likely to follow Medicare’s lead. Payment reform is about to become a reality.

Cautious Reactions

Secretary Burwell did not announce specifics about new payment models. This lack of specificity may explain the cautious reaction of professional societies to the news. The president of the American Medical Association, Robert M. Wah, MD, stated, “We look forward to hearing more details behind the percentages HHS put forward as well as their plans to reach these percentage targets.” The executive vice president of the American Hospital Association, Rick J. Pollack, MPA, said in a statement, “We look forward to learning more from HHS on how these new goals will be phased in. At the same time, we encourage the Administration to fully evaluate and improve on the delivery system reforms currently in place…. Moreover, we need to phase in changes in a thoughtful manner that is tailored to the specific needs of individual communities.”

In making these goals concrete, HHS might proceed in several ways.

One path is to create incentives that spur more providers to join accountable care organizations (ACOs). More than 400 organizations currently participate in one of Medicare’s 2 ACO programs, and even more participate in similar private programs. The outcomes of the federal ACO program have been mixed. Cost and quality targets have been met, but a number of providers have left the program. Far more success has been achieved in some of the private models. For example, the Alternative Quality Contract run by Blue Cross Blue Shield of Massachusetts realized cost savings of nearly 10% by its fourth year of operation, while at the same time improving quality.

Second, HHS could more aggressively push bundled payments for episodes of acute care. A relatively small share of conditions account for a large share of Medicare spending (50% of spending is accounted for by the top 17 conditions). This includes common forms of cardiovascular disease and musculoskeletal impairments. There are bundled payment models already developed for patients with many of these conditions, including those receiving coronary bypass surgery, patients with common cancers, and those undergoing elective joint replacements. Such payment systems generally group together preoperative care, the acute-phase treatment, and postacute care such as rehabilitation and nursing home use. The Congressional Budget Office has found significant savings associated with bundled payments in the Medicare program, and there are savings in private sector programs as well. The Center for Medicare and Medicaid Innovation already has a Bundled Payment for Care Improvement demonstration program. One straightforward reform would be to extend the programs there into a mandatory, nationwide program.

Third, HHS can tie more of its fee-for-service payments to quality indicators. Some of the quality programs enacted to date have been very successful. For example, the readmission rate in the Medicare population has declined by 8% in the 2 years since the readmission penalty was implemented. Similarly, hospital-acquired infections are down by as much as 50% in the past few years, at least partly because of nonpayment by Medicare and private insurers. Most of these value-based payments are on the hospital side. An obvious extension would be to make quality a condition for physician reimbursement as well.

Hard Work Needed

Although cost savings from payment reform are possible, they are not automatic. Indeed, achieving cost savings requires hard work from physicians, nurses, and other care providers. Consider the example of a bundled payment for an episode of care, such as for joint replacement. Under such a system, hospitals and physicians can save money by standardizing order sets, using such standardization to bargain for lower costs from suppliers, preventing infections or unnecessary readmissions, and discharging patients to less-intensive settings (if warranted).

Clearly, hospitals and clinicians will need sophisticated information systems to take maximum advantage of these opportunities. Equally important are personal interactions. Surgeons need to work carefully with nurses and discharge planners to ensure a smooth flow of patients throughout the care experience. And finally, such innovation may require changes in how physicians are compensated. If health systems are no longer paid on the basis of the volume of services provided, these groups will not be able to sustain pure volume-based compensation models for physicians.

A fascinating recent study in Healthcare examined how 10 leading health systems (as defined by reputation) paid their staff physicians. Five organizations paid a salary without productivity adjustment; 5 more had a salary payment with modest productivity adjustment (generally less than 10% of total compensation) defined by quality, service, patient volume, and teamwork. In all of these cases, the lack of strong fee-for-service incentives allowed these other organizational goals to be more prominent.

The difficult internal work of adjusting to a changing world may partly explain why programs such as the Medicare Pioneer ACO program has realized large savings in some settings (5.8% for the 3 highest savers), but more modest savings overall (1.6% on average). It may take time for institutions to learn how to adapt.

The recent HHS announcement anticipates some of these problems. At the same time Secretary Burwell announced the payment reforms, she also announced an $800 million Transforming Clinical Practice Initiative to provide “hands-on support to 150 000 physicians and other clinicians for developing the skills and tools needed to improve care delivery and transition to alternative payment models.” How will this program work? Will it be enough? No one knows the full answer to these questions.

I believe the capacity for system improvement is there, and thus I am optimistic about what this payment change portends. But we are about to get a real-world trial to find out for sure.

About the author: David M. Cutler, PhD, is the Otto Eckstein Professor of Applied Economics in the Department of Economics and Kennedy School of Government at Harvard University and a member of the Institute of Medicine. He served on the Council of Economic Advisers and the National Economic Council during the Clinton Administration and was senior health care advisor to Barack Obama’s presidential campaign. He also was involved in the debate over the Massachusetts health reform legislation discussed here and is a Commissioner on the state’s Health Policy Commission. He is the author of the recently published The Quality Cure, and Your Money or Your Life(2004). He tweets at @cutler_econ.
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