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The Patient Protection and Affordable Care Act has led to new provider relationships and payment models. Although fee-for-service arrangements still dominate, there's a paradigm shift underway that will change reimbursement as we know it.

  • To be successful under budget-based payment models, you must be able to predict future utilization of services and the cost to deliver those services.
  • Technology differentiates today's models from some tried in the 1990s.
  • Educating yourself about the models will improve your negotiating position.

The Patient Protection and Affordable Care Act (PPACA) has played a significant role during the past few years in emphasizing new provider relationships and payment models aimed at controlling the growth of runaway healthcare costs by financially rewarding physicians who provide high-quality care as opposed to a high volume of care.

Fee-for-service (FFS) payment arrangements, whereby doctors are paid only when they provide a medical service, still predominate in most healthcare markets around the country, but that situation is rapidly changing. New budget-based payment models that build on current Medicare demonstration projects such as accountable care organizations (ACOs), medical homes, and shared savings are slowly replacing traditional FFS.

With or without healthcare reform, however this paradigm shift will continue to alter the U.S. healthcare system.

"The FFS system, although still predominant, is fast disappearing, so physicians will have to change the way they think and act, because payment will come in different manners," says David Hilgers, JD, a partner with the Austin, Texas-based law firm Brown McCarroll LLP and a former chairman of the American Bar Association.

No matter the methodology, budget-based payments-which are found today in varying degrees around the country-represent both opportunity and risk for doctors. Both Wes Cleveland, JD, attorney in the American Medical Association's (AMA) Private Sector Advocacy unit, and Catherine Hanson, JD, vice president of the AMA's Private Sector Advocacy and Advocacy Resource Center, say the method that will best serve a practice depends on a wide range of factors, including a medical group's characteristics, its leadership, experience, location, sophistication, and patient population.


The various budget-based payment models debuting in markets across the country, including pay-for-performance (PFP), capitation, bundled payments, withholds/risk pools, and shared savings, vary from one another in myriad ways.

Some mix FFS payments with an opportunity to earn additional money if quality and cost metrics are met (shared savings and PFP), others offer only set flat rates for either a package of services (bundled payments), pay a fee each month on a per-member basis (capitation), or set aside some portion of contractual payments, which are paid only if providers meet pre-established goals (withholds and risk pools).

Regardless of the particular payment model, however, each has one critical element in common: the requirement that doctors take on greater financial risk, albeit to varying degrees.

To be successful under budget-based payment models, physician practices must be able to accurately predict the future utilization of services by their patient populations and how much it will cost their practices to deliver medical services. Then the key is managing patient care in a way that sticks to the budget.

Which payment model is right for you?


Many of the budget-based payment methods entering the market today resemble those of the 1990s, when managed care upended healthcare in the United States. That has many people asking, 'What's different this time around?'

Perhaps the greatest difference, according to Hanson and Cleveland of the AMA, is the sophistication of technology. Technology systems today enable automation, data analytics, risk adjustment, and computerized care management and accounting programs to inform a practice and better manage a patient population.

However, if doctors aren't given "sufficient, actionable data concerning their respective patient populations, and if their budgets and payments are not the products of sufficiently sensitive and accurate risk adjustment, it is likely the mistakes of the past will re-occur," Hanson and Cleveland say.


The Patient-Centered Medical Home (PCMH) is fast becoming the foundation on which many emerging budget-based payment models are being implemented.

The PCMH is a model of comprehensive primary care delivery that emphasizes an ongoing relationship between patients and a primary care physician (PCP) to enable better care coordination and health tracking.

The key to success under this model, according to Hanson and Cleveland, is "ensuring that PCMHs receive payment sufficient to compensate them for providing care management and coordination that is expected to be the lynchpin to healthcare financing and delivery reform."

Glen Stream, MD, FAAFP, MBI, president of the American Academy of Family Physicians, agrees and says that, particularly for primary care specialties, a blended payment model with three components-FFS; a per-member, per-month (PMPM) care management fee; and a PFP component-best supports medical homes and doctors' ability to thrive.


PFP is among the more common payment types in practice today, particularly for family physicians and internists, according to Hilgers. This model places doctors at least financial risk as compared with others. Typically, PFP models use a base FFS payment structure and pay out what amounts to a bonus if a host of quality and/or cost-of-care measures are met.

According to the AMA's recently released physician guide to budget-based payments, Evaluating and Negotiating Emerging Payment Models, under the PFP model, payers performance standards that doctors must meet to warrant a bonus. Data on a physician group-most commonly administrative or claims-are evaluated to measure the quality and/or cost of care delivered.

According to Stream, examples exist from around the country of doctors doing quite well under PFP. "We have seen that member practices that have transformed to medical homes are more efficient," he says. And in some cases, sizeable bonuses have been paid out, Stream adds.

But not everyone is a fan. Michael Brown, CHBC, president of Health Care Economics, a Fishers, Indiana-based healthcare consultancy, says the model is "not well defined and is different everywhere.

That lack of clarity can spell trouble for doctors, says Brown, a Medical Economics editorial consultant. As an example, he cites one of his many clients in a PFP contract with a major carrier that has not seen a bonus check for 2 years, largely due to ill-defined performance measures the doctors must meet to get paid.

Frank Cohen, MPA, who heads his own healthcare consulting group in Clearwater, Florida, also thinks PFP often leads to a raw deal for doctors. The contracts, he says, benefit payers more than physician practices because the payers set the standards.

"The methodology has to be sound for all parties involved, and that's difficult to do because doctors typically don't get involved [in the development process]," says Cohen, also an editorial consultant to Medical Economics.

Among other things, doctors must insist that insurers share with them all of the measures to be used to evaluate their quality profile and performance, and those measures must be nationally recognized, which the AMA suggests increases the likelihood of quality being accurately measured.


Capitation arrangements generally pay on a PMPM basis. This method is applied in various ways.

A PMPM case management fee sometimes is paid to PCPs working in a medical home model on top of FFS and PFP reimbursement models.

Some contracts establish PMPM payments intended to cover only the cost of all professional services, whereas others pay for the full cost of professional, facility, pharmaceutical, clinical laboratory, and durable medical equipment, among others, with one PMPM fee.

On the upside, Brown says, "If you get patients well and keep them well and don't see them [too often], you'll do well financially." Of all the payment models, however, he says, "you've got to be a lean, mean, fighting machine to do this well."

Hanson and Cleveland say that smaller practices without experience managing risk are better off steering clear of capitated contracts. Instead, they should get their feet wet in PFP or shared savings arrangements first.

Failure to accurately adjust financial risk to reflect the specific characteristics of the patients treated in a practice can spell disaster, both Hanson and Cleveland warn. And many physicians in practice today lack the resources to accurately predict their costs.


"You're seeing the beginnings of the bundling payments, but those are really tricky for doctors because they are taking risk on their ability to perform these services at the rates that are being paid," Hilgers says.

Bundled contracts typically provide one bulk payment intended to cover the cost of services delivered by more than one provider for a single episode of care for a specific period of time. Think hip replacement or cardiac bypass surgery, for which a lump-sum payment is negotiated to cover the cost of the hospitals, the surgeon, rehab therapists, etc., involved in one case from beginning to end. Global payments can be made directly to physicians. In other arrangements, payers directly compensate hospitals, which negotiate rates with doctors for specific services.

In its physician guide to budget-based payments, the AMA points out that bundled payments raise "key issues that may not arise in other risk-contracting contexts."

Those issues include how exactly the payer will pay (to one entity or more?), when payment can be expected, how each episode of care is defined, the duration of the bundle, and how the basic bundled payment is calculated, among other considerations.

Whether the bundled payments method is a good idea is going to be highly dependent on the practice, says David L. Bronson, MD, FACP, president of the American College of Physicians. "Highly integrated practices are probably better positioned to do bundled payments because you have a big infrastructure, a lot of history, a lot of work done on integrating programs," he says.

Cohen believes that for some practices, the bundled payments method could be profitable. "If I was an orthopedic surgeon and knew my costs, I'd go to the payers and ask for one payment for a broken hip for physical therapy, etc." in exchange for a guarantee of a high volume of business, he says.

But Brown's experience tells him that bundled payment methods are more likely to leave physicians in a financial hole.

"We've looked at well over 100 cases here in our practice, and they've lost an average of 25.5% in this bundling activity," he says. "Bundling payment plan models or bundling hospital facility and professional fees-they are very, very detrimental to the physician. Run in the other direction," he advises.


Because shared savings are a central feature of ACOs, the likelihood of physicians-especially those with a primary care specialty-being pressured to join and to work under this payment methodology is highly likely.

In shared savings contracts, a practice earns when patient care is managed at a cost that's less than the budgeted amount for doing so. If it can accomplish this feat, then the practice is paid a percentage of the difference between actual and budgeted costs. Under some shared savings arrangements, a medical practice only shares in the savings but not the risk if costs exceed the budget; in others, doctors are at risk.

"We are hearing reports that shared savings can be effective, but they are new and have not gone through a highly rigorous analysis," Bronson says.

According to Stream, one of the concerns with this model, which is designed to deliver greater financial gain to practices that continue to lower costs, is that efficient practices ultimately may face a point of diminishing returns.

"Over time as you squeeze excess out, shared savings go down," he says.

In assessing shared savings contracts, the AMA suggests that physicians understand how a payer calculates the quality and cost benchmarks by which performance will be judged, as well as how the payer intends to set cost budgets from year to year and how shared savings and risk will be apportioned among the various participating providers.


As the name of this model suggests, withhold and risk pool payments involve payers "withholding" a percentage or set amount of the contracted reimbursement rate, which is placed in a "risk pool" and returned only in the event that the practice performs-often on metrics of quality and cost of care-as specified in the contract. Withholds can be used along with a variety of payment methods.

Here again, experts differ as to whether this payment model works for most physicians.

"This is the one model I most support," Brown says. "If all the doctors [in a practice] do well, they're going to do well as a profit center and move out of the risk pool," he says.

Stream doesn't support this payment method for family practitioners. "Our academy strongly prefers additional money for high quality rather than a withhold from payment," he says.

And in Cohen's experience, withholds don't work out well for most doctors. "Rarely have I seen money returned back to the practice," he says. That was also the predominant experience in the 1990s when this model was prevalent.


Despite the fevered pitch in many parts of the country for physicians to consolidate and join ACOs, Stream suggests that doctors slow down before signing on the dotted line. "I don't think there is a huge urgency that people have to make a decision about being tightly aligned," he says.

Still, experts acknowledge that in some markets, physicians are being pushed into entering new organizations and payment contracts. Even under pressure, though, doctors may be able to negotiate better terms if they take the time to educate themselves about the models they're being presented, Hanson and Cleveland say.

Across the board, experts say that physicians, particularly those working in smaller practices and in primary care, often underestimate their value in the overall system and therefore, their power in negotiating better contracts for themselves. "ACOs have to have PCPs, and the more the better," Hilgers offers as one example.


Step one when it comes to negotiating a good contract: "Read the contract, and have your consultant or attorney look at it," Brown says. Medical societies and professional associations and colleges also can be very helpful in distilling the comparisons of various programs.

According to Brown, "99% of doctors say they sign everything that comes across their desk because otherwise they won't be competitive." Signing a contract that loses money, however, Brown cautions, doesn't add to a practice's competitive edge.

"I recommend practices do an analysis of each payer," Cohen says. He adds that he often finds that, despite physicians' fear of passing on insurance contracts, when they do the math, they're losing money on most of them. "Determine whether you should dump payers," he says.

Bronson says that today, success means no longer going it alone. "This is hard to do all by yourself. Try to work with other physicians, either in a group practice setting or in other organized systems of care such as independent physicians associations, so you can help develop the standards and negotiate appropriately," he says.

And Bronson offers a final bit of advice to physicians being faced with major changes: "There are two ways to do it," he says. "You can stand back, wait for it to happen, and be a victim of it, or [you can] get out in front of it."

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