Archived: Payment and System Reform

This program is now closed.

Program Goals

The Program on Payment and System Reform is a key component of The Commonwealth Fund’s efforts to inform health reform policy. It supports the development and analysis of options for reforming how health care is paid for, focusing on incentives to improve the effectiveness and efficiency of care delivery while curbing spending growth. Activities sponsored by the program include:

  • examining reforms that would align incentives with higher-quality health care and provide a base for more comprehensive payment reform
  • modeling the potential impact of alternative payment reform options within the Medicare program and throughout the health care system
  • studying how payment reform could stimulate new models of health care delivery that yield better, more coordinated care
  • evaluating the potential for broader application of successful payment and delivery models.  

The Issues

National spending on health care in the United States—the nation with the most expensive health system—is projected to grow from $2.7 trillion in 2011 to $4.8 trillion, or 20 percent of gross domestic product, by 2021. Yet the resources spent on health care have failed to produce commensurate returns in access, outcomes, or value. There is growing agreement that many of the cost and quality problems in our health system today are caused, or at least exacerbated, by the way we pay for care. It has become clear that new approaches are needed to reward providers for delivering high-value care rather than a high volume of services, as is too often the case in our current system.

In addition to its provisions for making health insurance coverage available to millions of uninsured Americans, the Affordable Care Act establishes a foundation for identifying, developing, implementing, testing, and spreading new payment approaches. To carry out this effort, policymakers require information and analysis on the alternatives available, as well as the potential and actual impacts on health care use, spending, and quality. 

Recent Projects

Exploring Alternative Payment and Delivery Models
The Affordable Care Act has been a source as well as a catalyst for innovative approaches to payment reform and care delivery. One such innovation is the Medicare Shared Savings Program, which provides financial incentives for accountable care organizations, or ACOs, to provide their patients with coordinated, well-integrated, and efficient care. Although many providers and payers are now preparing to participate in ACOs, little is known about what it takes for these organizations to succeed, including the payment models—from shared savings to shared risk—that will support them. A July 2011 Commonwealth Fund report prepared by Catalyst for Payment Reform, in partnership with Booz Allen Hamilton, examined the formation of eight private ACOs that use, or are planning to deploy, a payment arrangement in which payers and providers share risk. The study team, led by Suzanne Delbanco, Ph.D., argues that continued experimentation with both shared-savings and shared-risk arrangements in the private sector will be critical in the search for successful ways to align incentives for high-value care.

In a complementary Commonwealth Fund–supported effort, Michael Bailit, M.B.A., and Christine Hughes, M.P.H., of Bailit Health Purchasing interviewed stakeholders in shared-savings arrangements—payers, providers, and state agencies—to learn about the populations covered, the assignment of providers, risk adjustment mechanisms, and methods for calculating and distributing savings. According to their Fund issue brief, Key Design Elements of Shared-Savings Payment Arrangements (Aug. 2011), among the key issues that payers and providers must still resolve are how to determine whether savings were truly achieved, how to equip providers with the data, tools, and guidance they need, and which standard provider performance measures should be used. Their follow-up study, Shared-Savings Payment Arrangements in Health Care: Six Case Studies, suggest that shared-savings programs will eventually need to incorporate shared risk to be effective in the long term.

Premier, the national performance improvement alliance of U.S. hospitals and other health care sites, offers another model for health care organizations seeking to control costs and improve patient care. Premier, which began as a hospital purchasing coalition, has created a large-scale collaborative to develop an effective accountable care model that could be replicated across hospitals, health systems, and physician practices. In an August 2012 report, Eugene Kroch, Ph.D., Danielle Lloyd, M.P.H., and others from the Premier Research Institute provided an overview of strategies for implementing ACOs that effectively balance cost control with efforts to improve health outcomes and enhance satisfaction with care. The report also describes a model for a successful ACO, payment options and performance metrics, examples of ACOs in action, early challenges faced, and policy recommendations that would support formation of these organizations across the nation. The Premier project team is also performing an inventory of members’ core capabilities as part of an assessment of ACO readiness.

Evaluating Payment and Delivery System Reform
The Physician Group Incentive Program (PGIP) is a collection of practice transformation and quality improvement initiatives in Michigan striving to improve the quality of patient care across the state. Developed collaboratively by physicians, their medical groups, and Blue Cross Blue Shield of Michigan, the PGIP works within the existing fee-for-service payment system to support, recognize, and reward practice performance and improvement among the more than 14,000 participating doctors. Incentive payments are tied to key outcome measures, including evidence-based recommendations for care processes and population-based cost measures, and support physician organizations’ efforts to acquire patient-centered medical home capabilities. The Commonwealth Fund is supporting an evaluation of the PGIP by a team at the University of Michigan, led by Christy Lemak, Ph.D. The study is examining the initiatives developed as part of the program, the implementation of those initiatives, how providers are responding, and the impacts on the quality and costs of care.

In Massachusetts, Blue Cross Blue Shield—the state’s largest commercial payer—is trying out a global payment model called the Alternative Quality Contract (AQC), which pays health care providers a comprehensive global payment rather than reimbursing them on a fee-for-service basis. The payment covers the entire continuum of a patient’s care, including inpatient, outpatient, rehabilitation, long-term care, and prescription drugs, and providers are eligible for a performance bonus if they meet certain quality targets. With Commonwealth Fund support, a team led by Michael Chernew, Ph.D., of Harvard Medical School is evaluating the AQC’s impact on health care utilization, spending, and quality of care. Evaluation of the first two years of the program indicates somewhat lower medical spending and improvements in both chronic and pediatric care.

Informing Payment Reform Policies
Payment reform can also elevate the role of primary care as a driver of health system improvement. With Commonwealth Fund support, James Reschovsky, Ph.D., and colleagues from the Center for Studying Health System Change simulated the impact of turning the temporary 10 percent bump in Medicare fees for primary care services, a policy authorized by the Affordable Care Act, into a permanent increase. In a Fund issue brief, the authors demonstrate that the fee increase would raise both the number and cost of primary care visits. The cost increase, however, would be offset by lower Medicare costs for other services—mostly inpatient and postacute care—once the full effects on treatment patterns are realized.

Under a Fund grant to the University of Massachusetts Medical School, Arlene Ash, Ph.D., and Randall Ellis, Ph.D., developed a bundled payment model that accounts for the cost of all services that primary care practitioners provide. The intent is to promote not only the delivery of more efficient care but also the use of appropriate primary care services. The model has already been adopted by the Capital District Physician’s Health Plan, a nonprofit network-model health plan in New York. In an article in Medical Care (Aug. 2012), Ash and Ellis demonstrated the applicability of the approach to a variety of providers and populations, as long as risk is adjusted to reflect variations in patient complexity and treatment costs.

Future Directions

In the coming year, the Program on Payment and System Reform will further develop the capacity of researchers to model the impact of changes to health care payment and delivery, including those called for in the Affordable Care Act. The projects it supports will also identify ways to improve the process of rapid-cycle development, testing, and implementation of payment and system improvements—the mission of the new Center for Medicare and Medicaid Innovation—and evaluate local initiatives to restructure payment incentives and improve health care delivery.

A few examples of research that will yield results in the near future include:

  • An analysis of the impact of new federal policies that reduce longstanding overpayments to private Medicare Advantage plans and, for the first time, reward plans that perform well on measures of quality and patient experience. The grant to George Washington University and Brian Biles, M.D., will also address topics that are likely to be the subject of continued intense debate: proposals to transform Medicare into a “premium support” program, and interest on the part of the federal government and the states in enrolling Medicare/Medicaid dual eligibles into private plans.
  • An investigation by Harvard Medical School’s Michael Chernew, Ph.D., into geographic variation in commercial health care spending and the correlation between commercial and Medicare spending across hospital referral regions. While it is well known that Medicare spending and service use vary from region to region, patterns in commercial insurance markets are not as well understood.
  • A study of how a tiered hospital network affects choice of hospital, use of services, and prices. Harvard Medical School’s Michael Chernew will focus on Blue Cross Blue Shield of Massachusetts’ hospital network, which features large differences in cost-sharing between tiers, The results will inform insurers and policymakers about the effectiveness of tiered networks as a tool for reducing overuse and lowering prices.