How Do Alternative Payment Models Fit In With State And National Reform Efforts?

By K. John McConnell, PhD

(Note: This article originally appeared in Health Affairs Blog on December 1, 2014. An edited version is being reposted here as part of the research effort investigating the impact of Alternative Payment Methodology (APM) on the delivery of primary care in safety-net populations. Through this website, Frontiers of Health Care, we are sharing lessons learned and perspectives from key stakeholders on the frontlines of reform.)

The Affordable Care Act has affected health care at almost every level. Extensive experimentation within states continues to create changes. Given all these shifts, it is helpful to step back and consider how alternative payment models (APMs) fit in with these reforms, and why they are critically important.

Many describe the Affordable Care Act as a means to expand coverage, with relatively little emphasis on controlling costs. This is an oversimplification — accountable care organizations are designed to address costs. New “productivity adjustments” in the Medicare program are also intended to check spending growth. But these changes, while real, represent a patchwork approach to controlling costs that probably do not address the underlying problem.

The lack of a wholesale approach to cost control would not be problematic if the long-term spending outlook were not so grim. As documented extensively by the Congressional Budget Office, the federal debt will grow to unsustainable levels if health care spending is not slowed substantially. So, how do you address the growth in spending?

Coordinated Care Organizations

Oregon is on the hook to answer that question. As State Senator Elizabeth Hayward described in her post, Oregon recently launched a new approach to Medicaid coverage, dubbed Coordinated Care Organizations, or CCOs. The transition has been driven in part through a unique arrangement with the Centers for Medicare and Medicaid Services (CMS), which provided an upfront investment of $1.9 billion to the state.

In exchange, Oregon agreed to slow health care spending growth by 2 percentage points while improving the quality of care. If Oregon cannot slow health spending while improving quality, it must pay back hundreds of millions of dollars to CMS. The Oregon experiment is the largest attempt to hold a health system accountable for spending.

When it comes to addressing health spending, there is strong consensus that the current fee-for-service (FFS) system, is problematic for a variety of reasons: it incentivizes volume over quality; getting the prices “right” can be tricky (and create bad incentives); and it discourages efficiency and coordination. (One has to wonder if another name for Alternative Payment Models could be “Anything But FFS.”)

Recognizing the problems with FFS, a requirement of Oregon’s new Medicaid reform is for CCOs to adopt at least one payment model that is different than the existing fee-for-service paradigm by 2015.

Payment Models

The state has not specified what types of payment methodologies must be adopted. CCOs have the opportunity to consider bundled payments (wherein providers are paid a set amount for all services during a defined “episode” of care); shared savings (setting a target for providers and providing bonus payments if the cost of care comes in below that target); pay-for-performance (incentive payments); and other options. The state also recognizes that transitioning to a different payment system may be challenging and can take time.

Thus, feasible and practical models are necessary to smooth the transition. Fortunately, we can learn from the APM demonstration pilot described in this Health Affairs Blog series. The APM pilot was the first model out the door and the only alternative payment arrangement implemented in the first year of the CCO transition. The APM demonstration has the potential to provide important early lessons about how a CCO can change the way it pays for care.

In 2013 the first wave of the APM pilot was rolled out in three health systems. These three initial health systems, a mix of urban and rural community health centers, participate in four different CCOs. A second wave of APM pilot clinics were added earlier this year, bringing five more health systems into the mix and expanding the geographic distribution of the pilot program.

With these additional health systems, there are now clinics in eight different CCOs participating in the APM pilot — half of the 16 total CCOs in Oregon. Other alternative payment models are now starting to take hold. For example, at least two CCOs have contracted with hospitals to accept capitation — essentially accepting an integrated system fixed budget, like Kaiser, to manage a population of Medicaid patients.

There is a great deal to learn from CCO and APM performance. The purpose of payment reform is not to go from one bucket of payment to another. It is to move health care to a different model to slow the growth of spending and to improve health. All eyes will be on Oregon to see if it can achieve better health at lower cost. Stay tuned.