Clinical and Health Affairs
Payment Reform: The Lynchpin of Health Care Reform
By Julie J. Sonier, M.P.A., and Lynn A. Blewett, Ph.D.
■ The federal Patient Protection and Affordable Care Act that was signed into law last year includes provisions that will improve access to health care for everyone in the United States and extend insurance coverage to some 300 million people who currently do not have it. But insurance reforms and expansion of coverage are only part of the solution to the problems within our health care system. The way health care is paid for is another important element of reform. This article describes the steps we need to take to change the way we pay for health care and efforts that are underway both in the United States and Minnesota to test new payment models.
The Patient Protection and Affordable Care Act (ACA) was designed to improve access to affordable health care for all U.S. citizens and is expected to extend health insurance coverage to an estimated 30 million people who are currently uninsured. The many provisions in this historic legislation include an expansion of Medicaid for low-income populations, subsidized premiums offered through health insurance exchanges, subsidized reinsurance for employers to help provide coverage for early retirees (those age 55 to 64), and tax credits to make offering health insurance more affordable for small employers.1 In addition, extensive insurance market reforms will change the rules about how premiums are set, what benefits are covered, what costs enrollees will share in, and what percentage of premium dollars can go toward health plan overhead and profit. But the success of the ACA will depend largely on the next stage of reform—fundamentally changing the way care is paid for. Payment reform is needed if we are to slow the increase in health care spending and “bend the cost curve.”2,3 It is clear that if health care delivery itself is not substantially transformed to result in more efficient care at lower costs, the access expansions included in the health reform act will not be sustainable.
Health Care Spending in Minnesota
Minnesota’s health care costs historically have been lower than the national average; but the gap has been shrinking. Health care spending in Minnesota was estimated at $35.1 billion in 2008, representing 13.4% of the state’s economy.4 An average of $6,720 per person was spent on health care in Minnesota in 2008, which was slightly less than the national average of $7,166.
Figure 1 illustrates the trend in national health care spending growth compared with other economic indicators. Between 2000 and 2009, health care spending per capita in the United States grew by approximately 68%. During this period, the growth of health care spending was more than double the growth of per capita income, average wages, and general inflation (which grew by 31%, 28%, and 25%, respectively).
There are many reasons for the growth of health care spending both in Minnesota and across the country. They include changes in price (both general inflation and increases in health care prices above and beyond the rate of general inflation), changes in the volume of health care services provided, and changes in the type of services provided (for example, new procedures made possible by advances in technology). A number of underlying factors contribute to these changes including investments in new health care facilities and demographic trends.
Treatment of chronic illness accounts for an estimated 84% of health expenditures in the United States, and 10 chronic conditions account for nearly half of the rise in inflation-adjusted Medicare spending over the last 20 years.5 Many of these conditions are preventable. Those conditions that are not well-managed can result in repeat hospitalizations, unnecessary emergency room use, and poor quality of life. Unfortunately, our system is often more willing to pay for acute care delivery than prevention or management of chronic conditions.
We believe payment reform can reduce the growth of health care spending over time. The current health care system pays primarily by volume of services provided. It offers little incentive to provide efficient or coordinated care and no financial reward for either quality or value. Consequently, it misses many opportunities to provide better care at a lower cost. We need to do a better job of rewarding providers for coordinating or managing care, rather than for performing more tests and procedures.
Strategies for Payment Reform
Payment reform can take many different forms, ranging from incentive payments on top of fee-for-service payments to a fundamental restructuring of how health care is paid for. What current payment reform initiatives all have in common is that they attempt to change the way health care is delivered by changing the way providers get paid. Several types of payment reform initiatives are being tested or considered.
Bonus payments for meeting specific targets. Also called pay for performance, this payment mechanism offers providers bonuses for meeting quality targets (or for making significant progress toward those targets). These programs build incentives for quality improvement into the current volume-based fee-for-service payment system; however, because the bonus payments are essentially an add-on to the current system, some experts believe this type of payment reform should be considered primarily a transition mechanism until more fundamental payment reforms can be put in place.
Payments for care coordination. The current payment system fails to reward health care providers who do a good job of managing their patients’ chronic health conditions (thereby avoiding costly and dangerous progression or complications of their diseases). Instead, it encourages discrete billable events such as office visits and diagnostic tests. Thus, a provider who manages care well could actually lose money because good care management can decrease the need for more costly care later on. Over the past few years, initiatives to explicitly pay for care coordination services provided through medical homes or health care homes have gained increasing support from both public and private payers.
Replacing our volume-based payment system. The most fundamental type of payment reform involves replacing the current volume-based payment system with one that encourages greater efficiency and innovation. Providing a single bundled payment for all of the services needed to treat a particular condition (or episode of care) rewards rather than penalizes providers who are efficient and who do a good job of preventing costly complications.
Beyond condition- or episode-based payment models are those that attempt to move toward “global” or “total cost of care” payments. These often include a “shared savings” component; some require providers to assume a degree of financial risk if cost targets are not met. Accountable care organizations (ACOs) are one example of this type of reformed payment system that is increasingly being considered.
Although these types of payment reform create opportunities for providers to transform the way they deliver care so that it results in better outcomes and can be done at lower costs, they also raise several concerns. One is that the quality of care could suffer under a system that rewards providers for containing costs. With advances in quality measurement in recent years, proponents argue that it should be possible to monitor for this problem; in addition, incentives for maintaining and improving quality can be built into new payment systems.
Another is that providers who serve sicker populations or populations that have difficulty complying with physicians’ recommendations (because of poor literacy, language issues, or poverty, for example), will be penalized under a system that emphasizes accountability for the total cost of care; if this issue is not addressed, access to care could suffer for these individuals. For this reason, a reformed payment system will need to include risk adjustment for differences in patient populations so providers are not discouraged from treating high-risk or high-cost patients.
Finally, there is growing concern that payment models that emphasize provider cooperation and coordination could lead to greater market concentration among health care providers, as groups merge in order to operate more efficiently. The result might be higher prices for care, as larger provider organizations gain negotiating leverage with health plans. Policy makers and regulators recognize and are beginning to address this issue, as well as concerns about relationships between providers that could improve care coordination and delivery but violate rules that regulate financial relationships.
Efforts Underway
Although much of the attention given to the ACA has been focused on its provisions related to insurance coverage, the law also includes a number of payment reform initiatives designed to improve health care quality and contain costs. The table on this page illustrates the timeline for several such provisions in the law. In addition, the ACA established a Center for Medicare and Medicaid Innovation to test innovative payment and service delivery models. Minnesota is one of eight states that has been selected to participate in a Medicare demonstration that will pay providers for their efforts to coordinate care for patients with chronic illnesses.6
Payment Reform in Minnesota
Minnesota has been a national leader in health care payment reform, but a number of initiatives in which the state has been collaborating with providers, health plans, and other stakeholders have been taking place under the national policy radar. In early 2008, the Governor’s Health Care Transformation Task Force and the Legislative Commission on Health Care Access each put forth recommendations for comprehensive health care reform after months of intensive discussions involving policy makers, health care providers, health plan representatives, employers, and other stakeholders.7,8
Their proposals formed the basis for the health care reform law that Minnesota enacted later that year.9 The law included provisions that expand both public and private health insurance coverage and make premiums more affordable. It sought to prevent chronic disease with initiatives to reduce the prevalence of overweight/obesity and tobacco use in Minnesota. The law also included several provisions that can serve as a foundation for future payment reforms. These include the establishment of a statewide quality reporting system and a quality incentive payment system to reward providers who meet quality targets or make substantial progress toward meeting those targets. Another established a process for certifying providers as health care homes, making them eligible to receive care coordination payments. The law also required both public and private payers to pay for care coordination services. In addition, it encouraged health care providers and private health plans to participate in bundled payment (“baskets of care”) initiatives.
One of the most controversial issues that was debated during the 2008 hearings was whether to include fundamental payment reforms that would establish provider accountability for the total cost of care delivered to a patient population. This provision was not included, but the law did require creation of a provider peer grouping system that will compare health care providers on both the cost and quality of care they deliver, with the idea being that the comparisons could serve as a foundation for more fundamental payment reforms in the future. The first public results of provider peer grouping will be available later this year and will be used by major health care purchasers (eg, state and local governments) and health plans to encourage consumers to use higher-quality, lower-cost providers.
Payment reform experimentation is also taking place in Minnesota’s private sector. Health plans and provider groups are testing total cost of care arrangements as well as more incremental forms of payment reform. For example, in July 2009 Fairview Health Services and Medica developed a two-year contract for coordinated care with a certain amount of payment based on outcomes and quality improvements that reduce costs. Teams across Fairview have also partnered with University of Minnesota Physicians to develop 12 defined care package standards to improve care and better manage costs for certain conditions and procedures including low-back pain, diabetes, hypertension, migraine headaches, kidney transplant, and prenatal care.10 Although many of these efforts are still in the early stages, several have resulted in better performance on quality measures, reduced costs, and improved patient satisfaction.11
In addition to these collaborations between health plans and providers, large self-insured employer groups in Minnesota have a long history of engaging in payment reforms. In the 1990s, the Buyers’ Health Care Action Group contracted directly with care systems and held those systems accountable for the total cost of care—an early version of the ACO model. Although large purchasers have limited ability to transform health care delivery on their own, their involvement is needed for real transformation of the system to happen.
Next Steps
Although it is widely acknowledged that current payment systems are a barrier to improving the efficiency and quality of health care delivery, achieving the potential of payment reform will not come easily. We believe the following are needed in order to make it happen:
Consistent approaches across payers. No single payer in Minnesota is large enough to transform the way health care is paid for on its own. As shown in Figure 2, Medicare is the largest single source of health care coverage in the state, but it covers only about 15% percent of the population. State and local governments combined provide coverage for about 29% of the population. About 20% of Minnesotans have coverage through the fully insured private employer market and the individual market; Blue Cross and Blue Shield of Minnesota is the largest health plan within that segment, having about one-third market share (or covering about 7% of the population).12 Any one of these payers acting alone will have limited impact on the system. For this reason, payers will have to work together whenever possible in order to send a strong, unified message to providers about the need for improved efficiency and quality. Only by working together will payers be able to achieve the critical mass needed to drive change.
Several of Minnesota’s 2008 payment reform initiatives were designed to be multipayer initiatives. For example, in Minnesota’s health care home program, both public and private payers are required to pay for care coordination in a consistent manner. Similarly, both the public and private sectors are expected to use information from Minnesota’s provider peer grouping initiative to create incentives for consumers to choose lower-cost, higher-quality providers.
Consumer engagement. In addition to changing financial incentives for health care providers, payers also will have to provide consumers with better incentives for making informed choices about their health care. One way to do this is by using tiered health plan networks, in which consumers’ share of the cost (deductibles, copayments, or both) varies depending on the provider they choose. Although tiered provider networks have become more common in recent years, many are based only on cost, and the methods by which health plans assign providers to tiers are usually not transparent. A provider who performs well under one health plan’s ranking system may not perform well under another plan’s system. Minnesota’s provider peer-grouping initiative came about as a result of providers’ desire to include both cost and quality in these rating systems, and to use a transparent methodology and a common base of information for comparing providers.
Experimentation and evaluation. We currently lack the evidence needed to know which payment reform approaches will be most effective. It will be important for payers (including states, Medicare, private health plans, and self-insured employers) to collaborate with each other on reform initiatives. It will be equally important to carefully evaluate the effectiveness of payment reform initiatives and publish the results in order to learn what does and does not work. The Medicare ACO demonstration projects called for in the ACA represent an opportunity to develop and test this model across multiple payers. In addition, the Center for Medicare and Medicaid Innovation can help states develop other projects, assemble the evidence about which models works, and share what they learn.
Through its provider peer-grouping system and quality measurement and reporting efforts, Minnesota is ahead of the curve on developing better measures of outcome, quality, and efficiency that are needed for effective payment reform. In November 2010, the Minnesota Department of Health released its first statewide quality report with data for clinics and hospitals.13 This is an important step in moving toward quality comparisons, but more and better measures are still needed.
Conclusion
Payment reform initiatives have the potential to control the growth of health care spending, and Minnesota appears to be well-positioned to lead the nation in this area. The state is already a leader in multipayer care coordination initiatives through its health care home activities. In addition, Minnesota’s innovative provider peer-grouping system is a potential building block for fundamental payment reforms that improve quality and contain costs.
One key choice that lies ahead for Minnesota is how vigorously to pursue multipayer reform initiatives. Without the participation of both public and private players, including self-insured plans, we will not have the critical mass of payers needed to bend the cost curve. On the other hand, we need to acknowledge and continue the experimentation that is going on in both the public and private sectors.
In addition, many of the payment reform initiatives included in the ACA offer opportunities to leverage efforts that are already under way in Minnesota by adding Medicare as a participant or by “piggybacking” on Medicare’s other payment changes. Both large-scale efforts involving multiple payers and providers and small-scale efforts between individual payers and providers will be needed as we seek to improve quality and contain costs in Minnesota and the United States. MM
Julie Sonier is senior research fellow and deputy director of the State Health Access Data Assistance Center (SHADAC) in the University of Minnesota’s School of Public Health. Lynn Blewett is a professor in the Division of Health Policy and Management in the University of Minnesota’s School of Public Health and director of SHADAC.
References
1. Blewett LA. Patient Protection and Affordable Care Act (PPACA): Impacts for Minnesota. Presentation to the Minnesota Senate Health and Human Services Budget Division. St. Paul, MN: April 8, 2010.
2. Cutler D. Analysis and commentary. How health care reform must bend the cost curve. Health Aff. 2010;29(6):1131-5.
3. Thorpe KE, Ogden LL. Analysis and commentary. The foundation that health reform lays for improved payment, care coordination, and prevention. Health Aff. 2010;29(6):1183-7.
4.Minnesota Department of Health, Health Economics Program. Minnesota Health Care Spending and Projections. St. Paul, MN: Minnesota Department of Health. June 2010. Available at: www.health.state.mn.us/divs/hpsc/hep/publications/costs/healthspending2010.pdf. Accessed January 5, 2011.
5. Thorpe KE, Ogden LL, Galactionova K. Chronic conditions account for rise in Medicare spending from 1987 to 2006. Health Aff. 2010;29(4):718-24.
6. Centers for Medicare and Medicaid Services. CMS Introduces New Center for Medicare and Medicaid Innovation, Initiatives to Better Coordinate Health Care. Press Release. Washington, D.C.: November 16, 2010. Available at: http://innovations.cms.gov/innovations/pressreleases/pr110910.shtml. Accessed January 5, 2010.
7. Health Care Transformation Task Force. Recommendations Submitted to Governor Tim Pawlenty and the Minnesota State Legislature. St. Paul, MN: January 2008. Available at: www.health.state.mn.us/divs/hpsc/hep/transform/ttfreportfinal.pdf. Accessed January 5, 2011.
8. Legislative Commission on Health Care Access. Final Report: Recommendations Submitted to the Minnesota Legislature. St. Paul, MN: February 2008. Available at: www.commissions.leg.state.mn.us/lchca/HCAC%20Report%20final%202-08.pdf. Accessed January 5, 2011.
9. Minnesota Statutes 2008, Chapter 358 – S. F. No 3780.
10. Fairview Health Services. Six ways Fairview is reforming health care. 2010. Available at www.fairview.org/About/S_021596. Accessed January 5, 2011.
11. Minnesota Legislative Commission on Health Care Access Payment Reform Workgroup meeting archives. Available at www.commissions.leg.state.mn.us/lchca/payment_reform/archive.html. Accessed January 5, 2011.
12. Minnesota Department of Health, Health Economics Program. Minnesota Health Care Markets Chartbook. St. Paul, MN: September 2010. Available at: www.health.state.mn.us/divs/hpsc/hep/chartbook/index.html. Accessed January 5, 2011.
13. Minnesota Department of Health. 2010 Minnesota Health Care Quality Report. St. Paul, MN: November 2010. Available at www.health.state.mn.us/healthreform/measurement/report/index.html. Accessed January 5, 2011.