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Navigating Payment Reform

Economic Investment and the Journey to Health Care Value — Part I: Health Care Providers

Article · November 20, 2017

The Health Care Transformation Task Force (HCTTF), formed in 2015, is a consortium of organizations representing patients, payers, providers, and purchasers working toward establishing value-based payment as an industry standard. Its members, which represent, insure, and/or provide treatment for more than 200 million people, or more than 60% of the U.S. population, are committed to having 75% of their business operating under value-based reimbursement arrangements by 2020. This series of three articles examines this transition from the points of view of providers, payers, and purchasers.


Despite turmoil in Washington surrounding the specific mechanisms for getting people covered by health insurance, the impetus for moving to value-based reimbursement remains strong. Regardless of how we handle insurance coverage, rising health care costs continue to stress payers, purchasers, and patients, and all parties seek better value and improved outcomes. The Centers for Medicare and Medicaid Services are pushing ahead with value-based reimbursement for physicians, hospitals, and integrated health networks. Commercial insurers are employing novel types of provider contracting arrangements that promote cost savings and encourage adherence to specific quality metrics.

The distinguishing feature of all value-based reimbursement arrangements is the emphasis on results, instead of or in addition to the specific services provided. The terms “value-based care” and “value-based payment” encompass a multitude of payment and care delivery arrangements, ranging from “episodes of care” models that pay a fixed price for a specific procedure or treatment, to accountable care arrangements that offer incentive payments for achieving specific care improvement and cost targets, to fully capitated risk, where providers receive a fixed cost per patient and must also achieve certain quality targets.

Many providers are embracing value-based reimbursement. For example:

  • An HCTTF analysis of the top 10 largest nonprofit health systems in the country found that all are participating in at least one Medicare Advanced Alternative Payment Model.
  • A 2016 survey from Change Healthcare revealed that 63% of surveyed hospitals were part of an Accountable Care Organization (ACO), while 47% of non-participants expected to join one within the next 5 years. These figures are even more meaningful given that providers are not guaranteed an immediate return on their start-up investments. The average cost of implementation for a Medicare Shared Savings Program ACO across different provider types is estimated at around $1.6 million, though providers have reported costs upward of $9 million.
  • Providers are also readily adopting episodes of care models. The voluntary CMS Bundled Payments for Care Improvement initiative has 1,191 risk-bearing participants in a variety of clinical episodes, including acute myocardial infarction (heart attack), diabetes, and stroke, as of October 1, 2017. As CMS models and private sector initiatives evolve, participation will likely increase. In the 2016 survey cited previously, providers expected to see bundled arrangements grow to 17% of their total payments over the next 5 years.
  • Physician groups and professional organizations are also engaging in new value-based care initiatives by submitting proposals to the Physician Technical Advisory Committee for review and potential adoption by HHS. Recent proposals include a new model for increased end-stage renal disease care coordination, and an alternative payment model to reduce unnecessary and potentially harmful interventions for prostate cancer.

Provider Investments

To operate in a value-based environment, providers must be able to measure their own performance more accurately than most now can. Many providers have already made significant investments in measuring their quality of care so that they can operate under these new arrangements, though the broader economic impact of these investments is not yet quantifiable. For all providers, innovations related to delivering better value are a strategic necessity.

The necessary investments include a new population health management infrastructure, IT systems improvement to streamline care, improved coordination, internal and external data analysis, and recruitment/repurposing of key personnel and staff to support these programs.

Thanks in large part to the $36 billion in federal funds made available in the 2009 HITECH Act (part of the American Recovery and Reinvestment Act), nearly 90% of all health systems had implemented electronic health records (EHRs) by 2017, up from 9% in 2007. The costs of implementation are significant, ranging from hundreds of millions to upwards of $1 billion for the largest systems. This transition to EHRs and integrated data systems is an essential part of implementing value-based care, because the specific clinical information in these systems enables providers to measure their baseline quality and progress and track patients with a precision that was impossible when insurance claims were the only large-scale source of information.

The investments in digital and population health continue to contribute to a burgeoning health care tech economy. Rock Health, a technology incubator, estimates that venture capital funding in digital health reached more than $4 billion in 2016, with nearly $540 million dedicated to population health and big data.

Beyond these investment activities, provider organizations are retooling their workforces to support new value-based infrastructures. For example, Ascension Health, the largest U.S. nonprofit health system, assembled 300 employees to shape its continuing transition to value-based care. Providence St. Joseph Health, a large nonprofit system based in Washington state, tells HCTTF that it has allocated dozens of dedicated resources, such as nurse care managers, social workers, and psychiatrists, to support integrated care management and social/behavioral support throughout its physician practices. Organizations throughout the country have made similar investments, and openings for positions to plan, direct, and coordinate medical services are expected to grow much faster than average over the next decade. As the health care sector continues to evolve toward value, the demand for practitioners and professionals with expertise in strategy, data analytics, and care coordination will outpace and, in some instances replace, revenue cycle management roles typically held by individuals with traditional clinical and/or administrative backgrounds.

The Impact of Private Value-Based Contracting

Although providers still generate most of their revenue through fee-for-service arrangements, private payers are placing more emphasis on value-based contracting. Over the past 2 years, top private insurers have announced more than 184 provider value arrangements, such as an accountable care collaboration between Aetna and Mount Sinai Health Partners and an agreement with Fresenius Medical Care to participate in the Cigna Collaborative Care model for its dialysis services. Both providers and payers anticipate fee-for-service contracting will diminish significantly in the next several years. According to the 2016 survey cited above, payers see fee-for-service dropping from 52% to 35% over the course of 5 years, while providers see it shrinking from 55% to 39%.

Some hospital systems are taking direct control over both care improvement and risk by starting their own health plans and/or setting up joint venture agreements with established health plans. As of 2016, there were nearly 300 provider-sponsored health plans (PSHPs) in markets across the U.S., up from just over 100 in 2014. As of 2016, PSHPs made up 14% of the health insurance market. The rapid proliferation of PSHPs indicates a clear opportunity for capable providers to take the lead on integrated payment and delivery system reform.

How Much Are We Saving?

With so much time, money, and energy on the line, is value-based payment actually reducing waste in the system and generating returns? While it is still too early to predict the ultimate impact of these types of arrangements, we see some early clues in the savings from specific programs and institutions. For example:

  • The CMS Innovation Center’s Pioneer ACO program generated more than $405 million in gross Medicare savings relative to the benchmark during the course of its 5-year run.
  • California’s CalPERS program, a large retirement program for state employees, piloted a now-famous cost-sharing method called reference pricing that paid a fixed amount for certain procedures, with patients covering any additional costs. The program saved millions in health costs over 2 years and also pressured higher-priced facilities to lower prices significantly; for example, the number of California hospitals charging prices lower than the CalPERS reference rose from 46% in 2011 to 72% in 2015 for inpatient orthopedic surgery. The reference pricing program also encourages patients to use systems that are experienced in conducting certain procedures, and takes patient outcomes into account.
  • An estimated 87,000 fewer patients died in U.S. hospitals because of the reduction in hospital-acquired conditions (HACs), equating to $19.8 billion in savings between 2010 and 2014. In a pilot program to reduce HACs and preventable readmissions, Dignity Health estimated that it saved $60 million and impacted more than 16,000 patients. While some of these changes may have happened organically as hospitals improved safety measures, payment reform is widely considered a primary catalyst.
  • Trinity Health also realized cost savings of $120 million in its second half of fiscal year 2016, as a result of initiatives targeted at improving performance measures and reducing costs. Trinity is a Medicare ACO participant and holds a number of value-based contracts with private payers.

In the 2016 survey described previously, nearly half of ACO participants and larger hospital systems perceived the shift to value-based care as having a positive impact on their system’s profitability.  

Next Steps for Providers

With the U.S. health system in flux, many decision-makers are looking for guidance on how strongly to push forward on value-based reform. Should the federal government continue to work in tandem with the private sector to champion value-based payment? Will providers realize a return on their investments? Does value-driven care have a measurable impact on the economy?

Early evidence suggests that value-based payment and care delivery can transform our health care system, delivering both better health and better value for the money we spend on care. Providers should aggressively pursue adoption of new technology, changes in strategy and operations, and new contracting methods, to sustain and increase the momentum for this positive change.


Read “Economic Investment and the Journey to Health Care Value” — Part II: Health Care Payers and Part III: Health Care Purchasers.

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