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Emerging Payment Models

Fee-for-service medicine has dominated the landscape for the past decade, yet new efforts by government and commercial payers are moving payment away from production-based reimbursement. What will the emerging payment models mean for your bottom line?


After reading this article you will understand how to:

  • List characteristics of non-fee-for-service payment models
  • Recognize provider financial risk potential
  • Define patient management requirements in the emerging payment models
  • Identify nuances impacting specialty physicians

View related pearls


Fee-for-service medicine has dominated the landscape for the past decade, yet new efforts by government and commercial payers are moving payment away from production-based reimbursement. Moving from volume to value is the mantra of the new methodologies, but how does this play out? In other words, what will the emerging payment models mean for your bottom line?

Although outside experts can be called in to assist with annual contract negotiations, physicians are the ones who will have live with the agreements that are reached. Here's a quick primer on the reimbursement methodologies emerging in markets across the U.S.:

Pay-for-Performance. Spearheaded by the Physician Quality Reporting System (PQRS), the government introduced a bonus payment through Medicare that asks physicians to calculate and report quality indicators for specific clinical measures. Typically simple to integrate into traditional fee-for-service plans, the pay-for-performance reimbursement approach has also been introduced by commercial insurers as the first step towards a broader value-based reimbursement methodology.

When compared with other emerging payment models, pay-for-performance puts the physician at the least financial risk because reimbursement is paid as a bonus if quality and/or cost-of-care metrics are achieved. Yet problems can arise, particularly if the insurer fails to clearly define the performance measures or the standards that must be achieved. The programs also tend to be one-sided: insurers define the criteria with little or no input from participating physicians.

With each insurer investing in its own program, there is no consistency among programs, leaving physicians with a multitude of variables to track. While the system isn't perfect, government and commercial payers have invested millions of dollars into pay-for-performance programs.

Capitation. Briefly an industry standard — mainly in the 1990s — capitation has made a comeback recently, paying physicians and hospitals on a "per member, per month" (PMPM) basis for handling the entirety of a patient's care. Typically, the PMPM fee is paid to the medical practice managing the patient (and assuming the risk); the practice then contracts with outside specialists for additional services.

Similar to the 1990s model, specialists today are paid by the managing practice, usually on a case-by-case, fee-for-service basis. Particularly for the practice taking on the risk, the key to success is to predict costs, and control financial risks related to managing patients' medical care.

Bundled Payments. Similar to the capitation approach in that a single fee is paid, bundled payments are gaining popularity with insurers as a way to reimburse physicians and other providers for specialty services. A single rate is paid for a distinct episode of care — a spine surgery, for example. That rate is intended to cover all pre-operative, surgical and post-operative care related to that episode of care. While this may seem similar to a global rate for a surgery, bundled payments feature a single, beginning-to-end payment for the patient's entire course of care. That payment must be divvied among the surgeon, pathologist, case manager, hospital, therapist and others involved in the episode of care. Obviously, a patient with no complications offers great financial reward, while a patient who experiences complications may run up expenses that quickly exceed the single bundled payment.

While the concept seems straightforward — a single payment for the patient's medical care — the distribution of the payment is where things can get hairy. For example, what exactly is the definition of the episode of care? Which services are involved in the payment? Who, when and how does everyone get paid? What happens in the event that the patient develops complications? On a fundamental level, which entity is the recipient of the bundled payment?

For bundled payments, the devil is definitely in the details so physicians would be wise to make sure they understand the specifics before signing on to a bundled payment contact.

Case Rate. A model similar to bundled payment is the case rate. This approach has shown early signs of success, particularly in the urgent care industry. The insurer pays the physician a single rate for the patient's visit (including the physician's time, imaging, lab work, overhead, etc.). Experts predict that primary care and specialist physicians may start seeing this spin on bundled payments soon.

Shared Savings. A central theme of accountable care organizations (ACOs), shared savings — sometimes called "gain-sharing" — features bonus payments if and when the physician manages the patient's care for less than the expected cost. The physician's "share" of the savings is typically a percentage of the difference between actual and budgeted costs. Depending on the contract terms, the physician also may be at risk for a portion of the costs that exceed a defined benchmark.

While shared savings may be profitable for the physician in the short term, it becomes more difficult over the long term because, eventually, excess expenses are eliminated. As the differential between excess costs and utilization targets shrinks over time, so, too, will the shared savings payments. Similar to other reimbursement models, it's critical for physicians to understand the insurer's calculation of quality and cost metrics, the characteristics of the panel of patients involved or the distribution of shared risk.

Risk Pools. For managing a select population of patients, insurers designate a percentage of their contracted reimbursement rate to a risk pool, which is often designed to pay for specialty services. At the end of the contract term, any surplus funds in the pool are distributed to participating physicians. If the costs of specialty services utilized by the enrollees exceed the budgeted amount, the withheld payments are used to offset the pool's deficit, which reduces — potentially eliminates — the amount going to the physicians.

Risk arrangements can be used in conjunction with other reimbursement models but the potential for physician financial losses remains. Because of the numerous factors in play — the number of patients in the risk pool, the average age of enrollees, and the success of other physicians managing that population — the details and calculation of the withhold are critical to understand.

It may be several more years before payers, employers and the medical community settle on a viable physician payment mechanism. In the meantime, physicians, particularly those in independent practice, must quickly get up to speed on the latest wave of reimbursement models. The new attention placed on quality, patient engagement and cost effectiveness may well present an opportunity for physicians to regain influence over the health care spending in their communities, and a better bottom line for their practices.

Finally, while the nature of how practice income is created is clearly changing, these new payment models still require a detailed, current knowledge of the costs of running your practice. With a strong understanding of these costs and a firm grasp of how these payment models function, your practice will be in better position to embrace emerging payment models with confidence.

Summary of Emerging Payment Models

Fee-for-Service: Physicians are paid per unit of work (a surgery, a medical exam, and so on). This long standing system can raise costs because it pays physicians based on the volume of services they provide.

Pay-for-Performance: Fee-for-service, but with a bonus payment to the provider if designated quality and/or cost metrics are achieved.

Capitation: Also known as "per member (patient under the physician's care), per month," the managing practice often subcontracts with specialists for specific episodes of care.

Bundled Payments: A single, bulk payment is made for a specific episode of care. The "bundle" is intended to cover the patient's entire course of care, including the fees of all providers and facilities involved.

Shared savings: Physicians receive a portion of the difference between actual and budgeted costs for managing a patient's care at a cost less than is budgeted by the insurer. This system can also incorporate measurements of quality to increase or decrease payment.

Risk pools: Withhold of a share of the contracted reimbursement rate, which is paid out of a reserve if designated cost and/or quality goals are achieved.

Pearl 2/16/15

Talent in the House
Not every practice has in-house staff with the skill set to thoroughly analyze and negotiate budget-based and outcome-based payment systems. You'll need someone whose knowledge includes:

  • Understanding the differences between fee-for-service and the budget-based payment systems;
  • Mastering budget-based system concepts, such as risk adjustment and risk mitigation; and
  • Estimating, monitoring and managing the financial risks and rewards of a budget-based payment system.

Pearl 2/23/15

Risky Business?
Many new reimbursement systems for physicians involve putting the physician at financial risk for services provided to patients. Tread carefully before accepting this risk. Develop a firm understanding of the size and nature of the patient panel, the breadth of services involved – and how payments are doled out before signing. While there were many lessons regarding managing risk in the 1990s under the early years of capitation, one stands out prominently: Incorporating pharmacy risk has rarely paid off for physicians. If your contract does, be sure to review the terms carefully to protect against potential financial losses.

Pearl 2/09/15

All Bundled Up
A bundled payment system is a pre-designated, single payment for a patient’s entire episode of care. Variations of this approach include: episode-of-care payment, episode-based payment, case rate, package rate, and package pricing. While it appears simple and straightforward, physicians must dig into the details to determine what — if any — margin there is for them in a new payment system.

Critical questions to answer include:

  • Where will the payments come from – directly from the insurer or via a health system?
  • How will payments be divided?
  • What is the definition of the episode of care, including its duration?

While this reimbursement model has its advantages, such as reducing inefficiency and redundancy in patient care, some illnesses do not fall neatly into the pre-defined episodes of care, which might leave physicians at financial risk. These contracts also place a burden on medical practices to negotiate, administer and track.

Pearl 2/02/15

Non-Fee-for-Service Contracts
It’s important to carefully assess a proposed health payer contract. The complexity of non-fee-for-service payment methodologies, such as capitation and shared savings, may make it necessary to call in an outside expert for help. The practice is in a better position to negotiate a fair contract if it has a firm grasp on its own key cost and utilization data. Also, learn as much as possible about the insurer. Ask the health plan to share the data that it has based its proposed utilization budget, cost benchmarks or quality indicators on.

United States