JAMA Health Forum – Health Policy, Health Care Reform, Health Affairs | JAMA Health Forum | JAMA Network
[Skip to Navigation]
Sign In
JAMA Forum
August 6, 2020

Financial Stability as a Goal of Payment Reform—A Lesson From COVID-19

Author Affiliations
  • 1Harvard Medical School, Boston, Massachusetts
  • 2New York City Health + Hospitals, New York
  • 3NYU School of Medicine, New York, New York
JAMA Health Forum. 2020;1(8):e201012. doi:10.1001/jamahealthforum.2020.1012

Over the last decade, the US health care system embarked on a journey toward value-based care. The Centers for Medicare & Medicaid Services (CMS) designed and implemented a range of value-based payments through the rollout of alternative payment models, such as accountable care organizations (ACOs). The goal of these efforts was to increase value by improving quality and reducing costs. To date, however, alternative payment models have had modest effects on health outcomes or spending.

In the next decade, the difficult work of payment innovation should continue, using lessons learned from prior efforts. However, the goals of payment reform also must be updated—along with the mechanisms used to achieve those goals—based on the lessons learned from the coronavirus disease 2019 (COVID-19) pandemic. Increased financial stability should become an explicit objective for policy makers. Reorienting efforts to include the pursuit of stability may protect access, preserve independence, and advance value-based care.

Disrupting an Unstable Foundation

Approximately 95% of health care payments in 2018—including many through alternative payment models—were built on fee-for-service care delivery, which has long been criticized for incentivizing overuse of medical services and contributing to waste. But COVID-19 laid bare another important drawback of fee-for-service: it provides an unstable basis of financing, making it exceptionally vulnerable to shocks that reduce demand for in-person care.

During the COVID-19 pandemic, the quantity of medical care delivered to US patients decreased precipitously, especially in the early months. Emergency department visits declined, elective procedures were deferred, and inpatient admissions slowed. Outpatient visits decreased almost 60% by early April, with a cumulative visit deficit of 37% between March 15, 2020, and June 20, 2020. These reductions in medical care caused reductions in revenue for hospitals and physician practices, contributing to the 18% decline in national health spending during the first quarter of 2020 and to the layoffs of 1.4 million health care workers in April.

In addition to contributing to unemployment and the contraction in GDP, these unexpected declines in revenue had 2 other important consequences. First, they threatened access to care for patients. Because surgical admissions account for almost half of hospital revenue, the deferral of procedures was particularly devastating for hospitals, which saw significant declines in operating margins. Some hospitals—especially large nonprofit teaching hospitals—can weather such losses in the near term, but many small rural hospitals are more financially vulnerable due to less cash reserves. As a result, several rural hospitals closed during the pandemic despite receiving federal relief funds, accelerating a preexisting trend and leaving rural patients with significantly longer travel times to the nearest medical center.

Second, although the financial duress on physician practices also led to closures, it has another, more insidious effect as well. In a recent survey in Massachusetts, 30% of independent primary care practices—which may provide more cost-effective care than hospital-owned practices—reported they were considering consolidation with a hospital or health system. Even though this type of consolidation is often purported to facilitate care coordination, it usually leads to increased prices for commercial insurers that drive up spending. One-third of independent primary care practices also reported considering selling their practice, creating an opening for private equity firms and other buyers that may emphasize profit over other goals, raising concerns about patient welfare and health equity.

Stability as a Goal of Payment Reform

These consequences underscore the risks that the fee-for-service care model poses to access, cost, and quality because of its unstable financial foundation. In contrast, financing methods such as prospective population-based payments are more resilient in the face of shocks like COVID-19, protecting access to care when it is most needed. Such financing methods may also protect against further consolidation by preserving the financial independence of physician practices. And they can enable, as 6 former CMS administrators noted in a recent letter to Congress, more versatile care models, including proactive outreach to high-risk patients, home-based care, and integration of medical and social services, all of which are important during and outside a pandemic.

How can the goal of increased stability in health care financing be accomplished? For physician practices, one avenue is fully capitated payments. Drawing on past experiences, including the ACO Investment Model of the CMS and Hawaii’s experience with population-based payments for primary care, and looking to emerging examples, like the Blue Cross Blue Shield of North Carolina Accelerate to Value program or the Blue Cross Blue Shield of Massachusetts pilot for independent primary care practices, can help speed implementation. For hospitals, adopting global budgets (building on the experience of the CMS partnership with the state of Maryland), can help foster health care financing stability. For both physician practices and hospitals, 2019 revenue can serve as an anchoring point for these population-based payments, with limits on future growth but also enhancements for preparedness and select high-value services (such as integrated behavioral health). To facilitate this transition, the CMS should provide ample technical support and offer special pathways that limit downside risk for small practices, which often have fewer levers to manage total cost of care compared with large physician groups and hospitals.

These payment methods, which are rarely used today, would provide a financial lifeline for hospitals and primary care practices during the COVID-19 pandemic and provide greater stability beyond the pandemic. In addition, by tying spending growth to a benchmark over multiple years, capitation and global budgets incentivize financial stewardship by constraining annual expenditures and year-over-year spending growth. This incentive may help seize this once-in-a-generation opportunity to eliminate waste by encouraging clinicians to resume necessary services and let unnecessary ones remain foregone as society transitions into a new normal. Evidence-based guidelines and international standards can inform this process, especially for cancer care and supply-sensitive surgeries like spinal fusion. Prospective payments also offer increased flexibility for the delivery system—to invest in prevention and other upstream services, to devote more attention and resources to the sickest patients, and to deliver care through whatever modality makes the most sense for a given patient.

Moreover, these models provide a foundation for sorely needed redistributions of dollars in the health system. By abandoning the fee-for-service reimbursements that disproportionately reward specialist and procedural care, true population-based payments at the organizational level may stimulate redistribution of resources from specialists toward primary care, improving population health. By gradually titrating those payments based on need, agnostic of payer mix, they could also drive redistribution of dollars from wealthier systems to safety net institutions that—despite caring for the most vulnerable patients—are systematically disadvantaged by existing payment structures.

In this way, adding financial stability as a goal of payment reform would provide a platform to make progress on other priorities, including cost containment, prevention, and health equity. Value was—and still is—a worthy objective. But, as COVID-19 teaches us, stability is often a precondition for access to high-value care.

Back to top
Article Information

Open Access: This is an open access article distributed under the terms of the CC-BY License.

Corresponding Author: Dave A. Chokshi, MD, MSc, New York City Health + Hospitals, 160 Water St, New York, NY 10038 (dave.chokshi@alumni.duke.edu).

Conflict of Interest Disclosures: Mr Gondi reported being an advisor at 8VC and was recently employed at Commonwealth Care Alliance. Dr Chokshi reported receiving personal fees from the Institute for Healthcare Improvement, Aspen Institute, RubiconMD, and ASAPP Inc; and being a board member of the nonprofit Primary Care Development Corporation.

Limit 200 characters
Limit 25 characters
Conflicts of Interest Disclosure

Identify all potential conflicts of interest that might be relevant to your comment.

Conflicts of interest comprise financial interests, activities, and relationships within the past 3 years including but not limited to employment, affiliation, grants or funding, consultancies, honoraria or payment, speaker's bureaus, stock ownership or options, expert testimony, royalties, donation of medical equipment, or patents planned, pending, or issued.

Err on the side of full disclosure.

If you have no conflicts of interest, check "No potential conflicts of interest" in the box below. The information will be posted with your response.

Not all submitted comments are published. Please see our commenting policy for details.

Limit 140 characters
Limit 3600 characters or approximately 600 words
    3 Comments for this article
    Correct the Flaws in the Way we Do Fee-for-service
    Stephen Kemble, M.D. | Physicians for a National Health Program
    COVID-19 has indeed exposed the drawbacks of a fee-for-service reimbursement model that pays only for in-person care. And reduced visits and procedures during the pandemic are indeed threatening independent primary care practices and smaller hospitals, and access to care for patients is threatened as a result. I also agree that global budgeting of hospitals would be cost-effective, with or without a pandemic. However, I disagree that capitation is a solution for primary care. I am not aware of a shred of evidence that primary care doctors were delivering excessive volume of care when paid with fee-for-service. In Hawaii, cited by the author and where I practice, several recent surveys of capitated primary care practices have found complaints of increased administrative costs and burdens without commensurate increase in capitation rates, and over half of practices report reduced physician income, many to the point of insolvency, while health insurance premiums have doubled in the past decade of “payment transformation.” Instead, we should consider a reformed fee-for-service system that was not skewed toward procedures, that paid primary care physicians for the time spent on behalf of their patients beyond just face-to-face time (including care coordination, telephonic care, and documentation time), and that required much less administrative overhead than the overly detailed documentation and data reporting required for pay-for-performance and risk management under capitation and “value-based” payment.
    "Value-Based Payment" Can't Fix Clinic-Hospital Revenue Loss
    Kip Sullivan, Juris Doctor | Healthcare for All Minnesota
    I agree completely with the authors’ description of the problem, but I disagree with their diagnosis.

    The authors’ description of the problem is accurate: The pandemic has inflicted huge financial losses on many hospitals and clinics. But the authors’ diagnosis of this problem is not accurate. They blame the fee-for-service method of payment, and they endorse “prospective population-based payments” as the solution. They seem to think that the timing of provider payment –- prospective versus retrospective -- determines the stability or instability of reimbursement.

    But the stability of provider income does not hinge on whether doctors
    and hospitals are paid retrospectively (which is the case with FFS) or prospectively (which is the case with capitation or salary for physicians, or budgets for hospitals). It depends, rather, on the stability of the revenue that finances provider income, and on the presence or absence of social control over the allocation of those revenues.

    If the revenue source suffers from instability and lack of social control, which describes revenue from premium and out-of-pocket payments, it is inevitable that large swaths of the medical sector will suffer loss of income in a recession or pandemic. If, on the other hand, the revenue source is relatively stable and is subject to social control, provider income will be less susceptible to sudden declines, and the allocation of resources among clinics and hospitals will be more equitable (rural hospitals, for example, will not be more exposed to the risk of bankruptcy than urban hospitals). The only revenue source which fits this description – relative stability and social control – is tax-financed payments from governments.

    The issue the authors should be talking about, therefore, is not whether doctors and hospitals are paid by FFS, salary, or capitation, but whether America should continue to rely on the current system -- a system in which insurance companies, which are not subject to social control over how much they pay to which providers, and which are themselves vulnerable to large swings in revenue, should be a major source of provider income, along with millions of financially stressed Americans paying out of pocket.

    The illusion that the authors labor under – that capitation and other forms of prospective payment are the only way to protect provider incomes during a pandemic -- appears to be based on the assumption that over the few months since the pandemic began clinics that have received some capitation payments are less likely to have suffered revenue losses than clinics that rely primarily on FFS payment. But insurance companies that are subsidizing “their” doctors now with prospective payments cannot grow money on trees. Those insurance companies will have to find some way to make up their losses vis a vis insurance companies that pay FFS and are not subsidizing "their" doctors. The most obvious solution is to claw back those temporary subsidies when they next negotiate with “their” doctors. Raising premiums high enough to make up for the losses is not an option in most insurance markets.

    To sum up, the authors got their diagnosis and their solution wrong. The problem is not the FFS system, and prospective payment is not the solution. The solution is tax-financed universal coverage coupled with social control over the allocation of resources. Under such a system, there would be no need to continue the interminable experiment with "value-based payment" schemes that don't work, no need for premium payments, and no need for insurance companies.
    Fee-for-Service Scapegoating is a Red Herring
    Henry Broeska, PhD | University of California Irvine (Beall Center for Innovation)
    My home country of Canada has been successful at controlling costs and keeping medical inflation lower despite the prominence of private physicians working in a FFS system. Rather than assuming that a FFS system will always be a waste and overuse cost-driver that requires cost-deterrent mechanisms, American policy makers should take note of how FFS works in other countries. In keeping Canadian healthcare costs lower, the greatest factor seems to be the social control (governmental monopoly) over payments to providers. Providers really have no other choices should they be unhappy with reimbursement levels.

    But does this make career
    choices bleak for down-in-the-mouth, impoverished Canadian physicians? In their unhappy lives are they making poor care decisions treating neglected patients who experience worse health outcomes? Actually, the opposite is true. In decade after decade of negotiations across all Canadian provinces, physicians have always been able to agree with their governments leading to successful negotiations over fair FFS compensation.

    FFS hasn’t been particularly seen as a cost driver for healthcare inflation in Canada. In fact, generous compensation has greatly reduced the financial burden for physicians through the pandemic slowdown. At this writing the incidence and transmission of COVID has been greatly reduced largely due to better performance against the virus at critical moments with coordinated public health measures. COVID is down to negligible levels in most areas of the country where contact tracing is reducing the risk and limiting further spread of the virus. And lest we forget who a healthcare system is meant to serve, Canadian patients experience better treatment outcomes and live an average of nearly 4 years longer than Americans with much smaller life expectancy differences between racial and economic populations who lack access to healthcare.

    Nonetheless an obsessive preoccupation with value-based reimbursement systems in the US has been the focus for the past decade—and exposes the weaknesses of these control mechanisms in a pandemic. The wrong-headed assumption that the negative consequences of FFS “underscore the risks that the fee-for-service care model poses to access, cost, and quality because of its unstable financial foundation,” is a myth…and a drag on any meaningful systemic reform.

    I know plenty of American physicians who bill private insurance and are denied, for one reason or another, a significant portion of the FFS claims they bill. This has been made worse during the pandemic. Yet in collecting only a portion of their bills, the healthcare system manages to continue its precipitous inflationary climb at a rate much higher than other wealthy countries year after year.

    Industry expert Paul Hughes-Cromwick, an economist at Altarum has the correct perspective. He says medical costs in the US are rising along with health insurance inflation because of growth in managed care, including Medicare Advantage. He blames higher administrative costs, not FFS.

    So let’s go back to why Canadian healthcare costs and inflationary pressures are half of what they are in the United States despite their largely FFS Provider reimbursement model. It’s the single payer system. The real cost culprit in the US is the quest for profits of private companies which no cost controls, however complex or well-intentioned will ever regulate. And anything not directed to reforming the system to a single-tiered, universal healthcare system is just delaying the inevitable reform to Medicare for All.