Value-Based Payment Reform Key to Moving Forward with Value

June 26, 2019 - Value-based payment reform will be the key to lowering healthcare costs and improving care quality, according to health economist Michael Chernew, PhD.

At AHIP’s 2019 Institute & Expo in Nashville last week, the Leonard D. Schaeffer Professor of Health Care Policy explained that, of all the reforms the industry has taken to move to value, altering the way providers receive revenue is the path forward for value-based care.

“If we were sitting here saying, ‘Where would you go next?’ Charging people more is not my go-to answer. My answer is: the delivery system is going to be crucial and the payment reform stuff is going to matter,” he told a room full of industry leaders.

Since the passage of the Affordable Care Act almost a decade ago, the healthcare industry has pursued a number of reform strategies to not only lower the unsustainable trajectory of healthcare spending but also improve patient outcomes and satisfaction.

The three goals became what Chernew described as “the move to value,” and chief among those efforts are value-based payment, value-based insurance, and value-based networks.

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Accountable care organizations (ACOs), bundled payments, and other models that tie provider reimbursement to care quality represent the value-based payment reform strategy, while value-based insurance reform centers on ways to use member cost-sharing, patient-facing incentives, and other benefit designs to improve the value of care.

The final strategy – value-based networks – involves payers creating narrow networks of providers based on the quality and/or cost of care they deliver. Examples of value-based networks include tiered networks and referencing pricing programs.

The healthcare industry has seen modest success with pursuing all three value-based reform strategies, said Chernew.

ACOs, for example, have saved Medicare about 10 percent and private payers even more, he reported. Value-based insurance designs in which the plan covers services and items related to chronic care management have also boosted medication adherence, saving downstream costs, while value-based networks for one payer decreased total per member per month spending by five percent.

The value-based reforms strategies are helping, but current spending improvements have not been enough to curb the trajectory of national healthcare spending, which is slated to account for over 19 percent of gross domestic product (GDP) by 2027.

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Industry leaders are calling for more to be done to move the industry to value.

“There is a lot in networks that can help. But with the consolidation going on around the country that will make some of the network stuff hard,” Chernew said. “By and large, if I had to go down one path, I would go down the payment reform path.”

Why value-based payment reform works

Value-based payment reform offers the industry what it needs to lower healthcare spending. And that is increased efficiency, Chernew stated.

“We need to have a more efficient system. You use the inputs differently to get the same or more output. That's efficiency,” explained. “The problem with certain types of payment models, say fee-for-service, is you're paying for the input, so when you get more hospital days, when you get more physicians, you think you've produced more of something, but you really just used more input. You haven't gotten more health, and that’s not really being more efficient.”

Value-based payment models give providers the flexibility to use fewer inputs (e.g., physician visits and hospital stays) to achieve the same or more output, which is health outcomes.

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“You substitute a physician visit for an eConsult. In a fee-for-service model, that's less output and you get less money. In a value-based payment model, that's more efficient. You get to keep some of the money. There's an economic case for paying that way because it encourages efficiency,” Chernew stated.

Furthermore, payment reform is best for moving to value because consumers will not have to pay more for services for spending to go down. The same is not true for value-based insurance and network strategies that focus on patient-facing reform.

“I don’t think we're going to have the stomach for the amount of cost sharing that we're going to need to really solve this,” Chernew said. “A world where patients continue to pay more out-of-pocket is not a world that is going to work well. The only way to get through this is to be more efficient on the delivery system side.”

Population-based payments particularly give providers the flexibility to make care delivery more efficient.

“Versions of population-based payment have the conceptual appeal – they encourage the most flexibility in the delivery system – and they provide a tool to begin to control total spending,” he elaborated.

Conceptually, population-based payments are also better than more fragmented models, like the bundled payment, in which stakeholders need to figure out how much it's going to be per episode, how episodes interact with each other, how to lower fees, and other coding issues.

“Population-based spending is ultimately what you want to do in the places where you can make that work,” he stressed.

The industry is a long way off from implementing population-based payments on a wide scale. Only 3.8 percent of payments made by private and public plans covering over 135 million lives stemmed from a population-based payment in 2017, the Health Care Payment Learning and Action Network (HCP-LAN) recently reported.

Adoption may be down, but Medicare is ripe for greater participation, Chernew reassured attendees.

“I don't think we're that far away in Medicare,” he said. “In that spirit, Medicare Advantage benchmarks its rates based on fee-for-service spending in its area. As Medicare Advantage continues to grow, that becomes less and less viable in some particular areas. You have to think about what you're going to do with the evolution of Medicare Advantage benchmarks. You end up in a world where there are more and more people, at least in Medicare, rolled into a population-based place.”

The move to value is still moving, Chernew concluded. The industry had high hopes for many value-based reforms and realized modest improvements from each of them. But that is no reason to throw the baby out with the bath water.

ACOs, capitation, and other value-based payment reforms have to potential to evolve and continue to bring down costs for all.

“Let's try and build the infrastructure that will enable us to save money going forward,” Chernew advised. “Accept small wins and build on them as opposed to throwing everything out that hasn't revolutionized our system in three years.”