In the 80s and early 90s, health care providers in the managed care world were frequently paid via capitation—that is, a flat fee per patient. Use of the practice has eroded significantly, but experienced provider and plan leaders believe moving to improved models of capitation, called global payment, would result in much better care for all types of patients at more reasonable cost. In researching this report, the author interviewed 16 individuals from four geographic markets with extensive expertise managing capitation and global payment. These experts unanimously supported global payment and estimated that proper alignment of payment and quality incentives could generate a 20 percent to 30 percent cost reduction while greatly improving care quality. They believe it is now possible to resolve problems that plagued capitation in the past, such as avoidance of sicker patients and excessive risk assumption, but that environmental changes have also created new challenges.
The New Environment
Global payment can address concerns about both quality and cost. The need to mitigate cost increases is largely behind the resurgence of interest in global payment approaches, but many quality issues inherent to fee-for-service can also be addressed by using this model.
Risk adjustment has successfully resolved past problems with provider avoidance of sicker members. Implementation of risk-stratified global payment means that insurance risk has been separated from patient-management risk for providers. Attracting healthier patients and avoiding sick patients was the key to success in the old capitation payment models, but this incentive is corrected with risk adjustment. Reinsurance is also now commonly available through health plans and reinsurers. In some cases, provider reserves are adequate to carry the risk. The degree of risk can be tailored to the capacity of provider organizations.
Clinical and financial data systems have improved. Today, providers with fully implemented electronic medical records are well positioned to optimize patient care and some have real time, clinically complete information. Better information systems coupled with global payments are supporting innovative approaches to patient care such as patient registries, outreach and patient education, Web visits, home monitoring of clinical status, and long-distance virtual visits.
Hospitals have consolidated and many have acquired primary and specialty physician capacity. Hospital integration with physicians creates an opportunity for incentive alignment across the delivery system. Hospital access to capital can support investments in systems and staff needed to improve patient care cost and quality. But, accountability for a population-based budget is new to hospitals that are more accustomed to trying to keep their beds full. By using global payment, hospitals can improve quality and cut costs by reducing the frequency and intensity of inpatient care—the opposite of current hospital financial incentives.
Plan designs and self-funding do not always mesh with global payment products. Combining deductibles and coinsurance with global payment models requires claim adjudication and collection of the patient's share of cost. Administration of global payments for self-funded employers also presents a challenge.
Patients have greater expectations of unlimited provider choice. Patients have grown accustomed to unfettered provider choice and loosened rules for service authorization but they may opt into tighter global payment networks if offered incentives.
Our "more is better" culture has not changed. Important drivers, such as fear of rationing, defensive medicine, and the imperative to "do something," dominate our culture and affect both patient- and provider-generated demand.
Expert Insights on What Works and What Does Not
Patient care suffers in the fee-for-service environment. Under a fee-for-service model, patients can experience gaps in care or excess care, resulting in increased probability of complications. Global payments have the flexibility to provide better care to patients, particularly to the chronically ill who benefit from care management services. Providers feel care is much better for patients under global payment and report improved levels of professional satisfaction when working outside the limitations of fee-for-service medicine.
Global payment is necessary but not sufficient to reverse unsustainable cost trends. Global payment is needed to enable investments to optimize care for the chronically ill, which is driving the vast majority of the nation's health care costs, but payment change alone is not enough. Provider leadership, techniques for management of patient populations, data support, alignment of individual provider reimbursement, excess capacity of hospitals, and specialist- and patient-driven demand all must be addressed.
Pay for outcomes. Paying for patient care quality outcomes, along with financial accountability for total cost of care, would reset the emphasis of the delivery system. Comparative clinical effectiveness information is a long-awaited tool to support better patient and physician decision-making on care interventions.
A full range of provider structures can operate successfully under global payment. Very large, hospital-dominated systems, large multispecialty clinics with and without hospital ownership, mid-sized primary care practices, and independent practice associations (IPAs) representing very small primary care practices all have found ways to succeed in global payment programs.
Global payment should be tailored to provider risk capacity and should be phased in over time. There should be a pathway toward full global payment and intermediate models should be supported indefinitely with incentives to move along the global payment continuum. Fee-for-service alternatives should be made less attractive. Excess capacity created through improvements in quality and resource use will take time to be repurposed and financial support to ease this transition should be considered. Global payments must include both cost and outcome accountability and be risk-adjusted to account for differences in the health status of patient populations.
Increasing consolidation should be anticipated. Provider consolidation will likely occur with broader use of global payment, with both positive and negative consequences. Consolidation to promote integration was considered highly desirable. Antitrust and Stark anti-kickback laws make virtual integration challenging and should be amended to better enable innovation within these structures. Experts were concerned about the relative absence of the Federal Trade Commission in preventing anticompetitive consolidation.
Global payment should apply to a critical mass of patients including Medicare. Without global payment for a critical mass of patients, providers cannot make the necessary changes and investments to improve and streamline patient care. A combination of aligned but not identical payment structures can be used, as long as the incentives are directionally consistent. Medicare, by far, has the biggest impact, with reimbursement incentives that drive the business models of physicians and hospitals. Current Medicare fee-for-service payments lock providers into a set of activities based on margins, not patient needs.
Episode-specific bundled payments can be a part of payment reforms but should not stand on their own. Bundled payments are a positive step within an overarching global payment model. They could be especially useful in raising awareness across providers about how to better work together to improve cost and quality. However, bundled payments are seen as overly hospital-centric and are considered easy to manipulate, hard to implement, difficult for smaller physician practices, and not robust enough to drive widespread change.
The amount of payment, as well as the form of payment, is critically important. If the increase in the actual amount of global payment is not controlled, reengineering of health service delivery will not occur and savings will not be achieved. It is unclear that the market alone can discipline the rates of global payments or equalize variation in costs across the country. In most cases, there is no benefit for providers who agree to lower global payment amounts. Consumer incentives to use lower cost providers or an excise tax on higher-than-market global payment amounts could help control global payment amounts.
Downstream provider payments must align. Current methods of compensation to individual providers based on volume are counterproductive under global payment. Better strategies include combinations of payment based on salary, panel size, patient retention, performance on quality and patient satisfaction measures, and bonuses or penalties based on organization-wide performance. Physicians in independent practices can be paid based on the services they provide, coupled with a bonus or higher fee levels based on individual and organizational performance.
Leadership and personal relationships are the foundation for success in global payment. Successful implementation of new forms of payment relies heavily on provider and plan leadership. Local relationships are critical, as the delivery system changes and reductions in redundant resources required for success must be made on a local level. Innovative, highly effective approaches to improved management of patients require extensive, hands-on involvement of primary care physicians and their colleagues.
Global payment models require major hospital transformation. Current hospital incentives encourage increased admissions for high-margin conditions, but much of the cost savings under global payment comes from avoidance of admissions. Under global payment, services that were profit centers instantly become cost centers. Physicians expressed concerns about hospital-centric bundled payments and accountable care organizations. Hospitals failed in past capitation arrangements when they assumed financial risk but could not manage the physicians who were their biggest admitters. Up to 30 percent reductions in needed hospital capacity were predicted under widespread adoption of global payment. This will create a transition problem that must be addressed.
The role of health plans will evolve. Some providers are considering bypassing plans to contract directly with employers or become licensed as insurers, but plans believed that provider organizations under global payment models need plan oversight. Neither plans nor providers were happy with current approaches to establishing global payment rates and risk-sharing arrangements. Plans can add value by tailoring risk to provider capabilities, developing networks and products that align patient incentives, supporting employee and employer wellness activities, and helping patients learn more about the value and cost of health care interventions.
Economic alignment with patients would improve opportunities for patient advocacy and help overcome patient suspicion. Changing long-held consumer beliefs about the value of health care services is essential to improving the cost and quality of care. Aligning benefit and cost-sharing incentives for patients was identified as the best way to achieve this change.
Summary and Conclusions
Global payment, coupled with incentives to improve care outcomes, has the potential to improve health care value. While not all providers may be successful in this environment, size alone should not be a barrier. Better management of patient care is expected to generate a surplus of hospitals and specialists that will need to be redeployed.
The Center for Medicare and Medicaid Services (CMS) must lead payment reform. The private market cannot drive change by itself, but will generally follow CMS's lead. A range of approaches to global payment should be designed and supported. While a phased-in transition period is recommended, with a critical mass of aligned incentives, many feel change will occur rapidly. Improvements in working conditions and rewards for primary care are necessary to ensure the capacity for management of patient care and resource use. Global payment will enable efficiencies from new models of care, fully implemented electronic medical records, and better use of physician extenders to enhance primary care capacity. Global payment models were expected to drive provider consolidation, with attendant pros and cons. It is important to ensure that the positive aspects that consolidation and integration can bring are encouraged, while excess market power and solidification of excessively high costs are avoided. The public consciousness of what constitutes value in health care needs to be raised. Alignment of patient incentives to engage them in value decisions about their care and commit them to actions to support their own health is essential to supporting the efforts of providers to improve cost and quality.
Absent the improved incentives for cost and quality performance of a health care market dominated by global payment, other health reforms that bring more lives into our existing system will exacerbate existing cost problems. With several decades of experience, now is the time to build on what we know and expand these payment models across the system.