Payment Transformation: From Volume to Value

Jaan Sidorov and Vince Kuraitis

First posted 7/7/11 on eCareManagement Blog

This is the 2nd installment in a series on the Strategic Realignment among Physicians, Hospitals and Payers

In our introductory posting, we suggested that a huge shift is underway in the health care industry.  Decades of hospital-physician cooperation are not only eroding, we suggest this trend could accelerate.  Instead of a natural clinical and economic affinity with hospitals, we foresee the potential for physicians forming a new dyad with insurer-buyers.

In this post, we will examine what we and many other commentators view as inevitable: the demise of volume-based payment systems and how the drive for greater value will cause physicians and insurers re-examine their normally antagonistic relationship.

In The Rearview Mirror: Healthcare payment systems have rewarded fee-for-service (FFS), piecemeal work.

The prevalence of acute illness is receding over the distant horizon.  Chronic illness has taken its place and the number of treatment options has exploded.  While fee-for-service (FFS) was an arguably appropriate means of paying for acute illness, its piecemeal methodology has become ill-suited to reimbursing providers for the ongoing, coordinated care of patients with multiple health issues.  Instead of rewarding an integrated holistic approach to chronic illness, FFS has led to an epidemic of fragmented testing, diagnosis and treatment.

What’s more, FFS method of payment has created a healthcare payment system that is fiscally and morally unsustainable.  Not only is healthcare inflation out of control, robust information systems have increasingly allowed us better to understand the clinical output per unit cost.  As a result we have a better understanding of the underlying drivers of medical costs and can now segment patient populations on the basis of need – and we can anticipate which 5% of patients account for 60% of the costs.

Based on that analysis, no economist, policymaker, politician, employer or mom likes what we’re seeing. Variation in care patterns is rampant, avoidable hospitalization rates are too high, too many persons are failing to have basic health screening tests, vaccination rates are too low and too many patients are going to emergency rooms for the wrong reasons.

Out The Windshield: Payment system rewards are changing from “Volume to Value”

Here’s how we are reading the tea leaves:

  • Whether you are for or against current health reform legislation, Rs & Ds largely agree that the PPACA does not go far enough to reform the care delivery system – the root of growing costs.
  • On sides of the political aisle, Rs & Ds increasingly agree that striving for “accountable care” is a worthwhile goal.  Accountable care and ACOs are not the same thing.  Accountable care is a desirable property of a rational health care system, and ACOs are just one possible experiment to create accountable care.
  • Accountable care implies optimizing (rather than maximizing) the amount of care patients receive – not too much, not too little. (We acknowledge and understand the devil in the details here.) This creates both clinical and economic value.

This transformation of purchasing health care services based on “value” has huge implications:

  • Since increasing costs in the absence of any change in discernible quality is becoming intolerable, hospitals – fairly or not – are the most visible source of expensive care services.  We believe this has reached a “tipping point” as more and more persons are coming to view hospitals as a primary cost target.    We note that the in the current deficit-reduction negotiations with Congress that the Administration seem to agree and is targeting hospital payment rates with huge reductions.  Hospitals are no longer seen as the solution, but as a problem.
  • Physicians, on the other hand, because they control the pen (or this digital age, the mouse) are increasingly being viewed the key to controlling the provision of health care services.  What’s more, when physicians look at hospitals, they also agree and intuitively understand that these institutions are frequently inefficient and costly.  That’s one reason why many physicians have expanded into the provision of services traditionally reserved by hospitals, such as same-day surgi-clinic and imaging centers.  They are rudely intruding into the market with services that they believe offer greater value.
  • While health insurers have certainly taken their lumps, it is clear that health reform has expanded their role.  In addition to taking on huge numbers of previously uninsured individuals, national policy is increasingly promoting their role as “fiduciaries” of the health care dollar.  While insurers have always viewed hospitals as cost targets (ironically arguing that they’ve been ahead of their time), they are also coming to recognize the importance of working with – not against – physicians to control costs and increase value.  This underlies their use of pay-for-performance, support for the patient centered medical home, an increasing willingness to include physician-owned centers in their networks and less push-back over physician fee schedules.  We also note that the current budget negotiations have not targeted Medicare’s physician payment rates and the hope of reforming the SGR remains alive.

Summing up:

  • Hospitals are becoming a piñata of cost inflation.
  • Payers are willing to support physicians and use economic incentives to avoid unnecessary inpatient care and outpatient testing.
  • Insurers increasing are understanding the clinical and economic value of cozying up to physicians.

In the next post, we will more closely examine changes in hospital-physician relationships.

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