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Exploring Delivery System and Payment Reform

As the United States health care system continues to implement the Affordable Care Act (ACA), providers everywhere are beginning to venture into more long-term transformation projects. Along with Medicaid expansion and the evolution of health insurance marketplaces (exchanges), delivery system and payment reform are emerging as key topics of interest within the hospital setting.

As our member hospitals embark on this next phase of health reform, Essential Hospitals Institute has made delivery system and payment reform a top priority in research and education. The following is a discussion of the popular and up-and-coming movements in delivery system transformation and alternative payment models.

Delivery System Reform

One of the key elements of the Affordable Care Act (ACA) is transformation of the current health care delivery system. Providers are encouraged to pursue more patient-centric models, resulting in higher quality care and cost efficiency. To date, these efforts include the formation of patient-centered medical homes, integrated delivery systems, and accountable care organizations and the use of risk stratification methods in patient care.

Patient-Centered Medical Home

The patient-centered medical home (PCMH) is a somewhat older model, originating in pediatric medicine, that gained popularity with the ACA. Some of the foundational elements of this model are multidisciplinary care teams, expanded patient access, and care that is coordinated across different providers and practices. Today, primary care sites can seek PCMH accreditation through a number of accrediting bodies, including the National Committee for Quality Assurance (NCQA). However, this process can be tedious and may require significant up-front investment.

As of 2013, 185 essential hospitals and health systems had achieved the highest level of PCMH recognition (level 3) from NCQA. Many more have achieved lower levels of recognition or are implementing a medical home model without this certification, which is by no means mandatory. In many cases, such PCMH implementation has acted as a first step in larger delivery system and payment reform efforts, which are described in more detail below.

Integrated Delivery Systems

Following the ideals of the PCMH, creating integrated delivery systems between local health care providers is a prime example of large-scale transformation. The goal of an integrated system is to provide coordinated care across the larger health care continuum. An important aspect of this is implementation of an integrated electronic health record (EHR).

Delivery system integration efforts have been taking place across the essential hospital network. For example, San Francisco General Hospital (SFGH) and a team of other local providers have successfully integrated to become the San Francisco Health Network. SFGH’s partners in this network include the Department of Public Health, the city’s primary care sites, and the local health plan. Together they create “the city’s only complete care system,” which coordinates care across all of San Francisco’s health care providers.

Accountable Care Organizations

Accountable care organizations (ACOs) are predominantly considered an alternative payment model, yet they require strong elements of transformation that reflect a highly integrated delivery system. In the simplest terms, an ACO is a group of health care providers that form a singular entity for financial accountability as well as coordinated care. That is to say, beyond their financial alignment, ACO providers are also clinically integrated to provide seamless, high-quality care for their shared patient population. However, it is their financial model that distinguishes them from other integrated delivery systems (see Shared Savings Program).

Hennepin Health is one example of an ACO comprising Hennepin County Medical Center, Hennepin County Human Services and Public Health Department, Metropolitan Health Plan, and NorthPoint Health & Wellness Center. Together, the Hennepin Health ACO coordinates health care and social services for eligible high-risk, Medicaid expansion enrollees.

Risk Stratification

One model gaining momentum in delivery system transformation is risk stratification – a process that designates patients to certain clinics or providers based on their medical and social needs or risk rather than random assignment. This ensures that patients receive the most appropriate form of care and that resources are used effectively.

There are a number of methods for risk stratification, and providers at Hennepin County Medical Center have implemented a patient-tiering model, MN Tiering. Patients who are tiered to the highest level receive care at the Coordinated Care Center (CCC), which offers intensive services delivered by multidisciplinary teams. Denver Health has also implemented a similar patient-tiering model.

Payment Reform

One of the largest goals of the ACA is to reduce of health care spending, beginning in Medicare and progressing universally. The general idea is to transform our payment model from fee-for-service to value-based payments. There are a number of specific models that can be used to achieve this goal, each entailing a different set of financial risks and potential cost savings. These include pay-for-performance, value-based purchasing, bundled or episode payments, shared savings programs, and capitated or global payments.

Pay-for-Performance & Value-Based Purchasing

The first step away from a fee-for-service (FFS) model is pay-for-performance (P4P). At its core, a P4P model incentivizes or disincentives certain performance measures and requires little integration or health information technology (HIT) infrastructure. Thus, it is a popular model for launching into payment reform.

Leaders at Virginia Commonwealth University (VCU) Health System are progressing into more advanced payment models by transitioning out of FFS and implementing a P4P system. As part of this movement, VCU has created considerable performance incentives tied to key quality metrics, patient satisfaction, and specific primary care services.

Similarly, value-based purchasing (VBP) is another way to pay for value rather than volume and, technically speaking, still falls into the P4P bucket. The Centers for Medicare & Medicaid Services (CMS) originally began the VBP program in 2012 to reward provider performance in two areas: clinical processes of care and patient experience. However, in this scenario, hospitals have a little more skin in the game, as they equally contribute to the VBP funding

Bundled and Episodic Payments

A bundled- or episode-based payment model incorporates a FFS and P4P mix. In this model, providers receive payment for all services inherent to a specified condition or procedure. Examples include cardiac services, orthopedic surgeries, and gastrointestinal procedures. Bundled payments help providers and payers save money by negotiating costs up front and offering incentives for improving quality and efficiency. However, there is more risk for hospitals, as they are responsible for any costs that may fall outside of their bundled rate. Additionally, hospital revenue is generated by the number of bundles or episodes they perform – a similar model to FFS.

CMS first started piloting this payment model with the Bundled Payment for Care Improvement (BPCI) initiative in 2013.  The program allows health care providers to participate in one of four bundle models including a wide range of conditions. Providers nationwide, including a number of essential hospitals, are now participating in the BPCI models.

For example, five Banner Health hospitals have participated in both installments of BPCI for major joint replacements (lower extremity). UMass Memorial Medical Center has also participated in both installments for all 48 of CMS’ approved bundles. Similarly, Rhode Island Hospital also participated in the first installment for all 48 bundles, and in the second installment moved to a more specific set of five bundles.

Shared Savings Program (ACOs)

The shared savings model is a two-sided model that comes with more risk for providers, and it is often paired with other alternative payments discussed above. To start, providers and payers negotiate a fixed payment level that is then billed in the same way as FFS. If hospitals’ costs are below the negotiated price, they are entitled to a portion of the savings. But if hospitals exceed their fixed price, they are responsible for the difference. However, eligibility for any presumed savings is also dependent on the achievement of set quality measures. Thus, this programs also incentivizes delivery system transformation and quality improvement efforts.

Shared savings is the foundational payment structure for ACOs and is the center of CMS’ Medicare Shared Savings Program, which promotes ACO development. To date, there are 405 participating shared savings program ACOs. Regions Hospital, UCLA Health, and St. Luke’s Health System are just a few examples of essential hospitals involved in the Shared Savings Program.

Capitation/Global Payments

Capitation, sometimes referred to as global payments, has the highest potential risk and reward for providers. Similar to shared savings, providers and payers negotiate a fixed payment based on estimated per-patient costs. Providers are then responsible for adhering to this financing appropriately throughout their payment cycles. If a hospital spends less than it is allocated, the hospital can keep the surplus. However, if the hospital spends more than the payment, it is responsible for the additional costs. Capitation can be partial (i.e., only for a selected set of services) or is considered global when the payment covers all services for a single organization or group of organizations. Similar to shared savings, quality improvements are incentivized through capitated payments and can even be built into payment structures.

As payment reform is still progressing, full capitation is a fairly new model. The state of Maryland recently moved to a Global Budget Revenue capitation model, creating a somewhat new payment system for Bon Secours Baltimore Health System. Similarly, the state of Massachusetts has a long history of global payments which is now becoming more relevant for essential providers, such as Boston Medical Center, Cambridge Health Alliance, and UMass Memorial Medical Center.

What’s Next?

The U.S. health care system is moving toward value-based care, and the uptake is happening quickly. Both payment and delivery system reforms will continue to evolve as new models are designed and tested over the course of the next few years. Despite what may be a challenging transition for essential hospitals into these new models, it won’t be long until we are seeing sustainable, long-lasting results in care delivery, quality, and patient outcomes.


About the Author

Janelle Schrag is a senior program analyst with America's Essential Hospitals.

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