Alternative Payment Models: The Industry’s Latest Buzzwords

By Doug Smith, Managing Partner of Strategic Positioning & Consulting Services

Since the Affordable Care Act’s adoption in 2008, the healthcare industry has been inundated with waves of change, ranging from the utilization of electronic health records to ICD-10 implementation to greater patient choice regarding medical decisions.

Shifts in industry payment methodologies have been on the horizon for several years, but are just now entering the landscape’s forefront as the next major change within U.S. healthcare delivery. In 2013, the Bipartisan Policy Center issued a report calling for major reform in payment models to “promote better care coordination, improve quality of care, and slow cost growth.”

And it is easy to see why policy leaders are calling for cost containment when it comes to healthcare. According to a study published in Health Affairs, in 2012, U.S. healthcare spending increased by 3.7 percent to $2.8 trillion, or $8,915 per person. This composed 17.2 percent of the nation’s Gross Domestic Product (GDP). And it doesn’t stop there; The Centers for Medicare and Medicaid Services (CMS) projects that by 2022, U.S. healthcare spending will reach approximately $5 trillion, amounting to 19.9 percent of GDP.

A recent white paper developed by the CMS Health Care Payment Learning & Action Network (LAN) describes an update to the alternative payment model (APM) “framework” they are developing. This update reflects the result of a prior period of public comment and input from various constituents including hospital providers, physician providers, insurance companies and CMS policy makers. The good news: LAN recognizes that fee-for-service must be the anchor for all future payment methodologies.

Below are some key points from LAN’s recent white paper which provide a “pathway” to its shift toward APMs in the health care industry.

Population-Based Payment Methodologies

The plan ultimately culminates in population-based payment methodologies and, in the long term, is designed to move from what is known as “Category One” (Fee-For-Service) to “Category Two” (Fee-For-Service linked to Quality and Value Metrics). This includes Foundational Payments for Infrastructure and Operations, Pay for Reporting, Rewards for Performance, and Rewards and Penalties for Performance.

Then comes “Category Three” (Alternative Payment Models Build upon Fee-For-Service Architecture) with APMs with Upside Gain Sharing, APMs with Upside Gainsharing and Downside Risk. And finally, we have “Category Four” (Population-Based Payment), including Condition-Specific Population-Based Payment and Comprehensive Population-Based Payment.

Bundled Payments

Also mentioned in the report was an evolution of “Bundled Payments” for certain episodes of care provided by multiple providers. CMS defines an episode of care as the set of services provided to treat a clinical condition or procedure, such as a heart bypass surgery or a hip replacement. Under the initiative, organizations enter into payment arrangements that include financial and performance accountability for episodes of care.

This payment methodology demands we get a seat at the table when “who gets what” is being determined. It also necessitates we are at the table with supporting evidence of our position with respect to what we should be compensated before we are told what we are going to be paid.

Equally as important as understanding the implications of the LAN report is our understanding that our customers (hospitals) are reading the same report with optics focused on what this may mean for their future. We are already seeing many hospitals wanting or even requiring data and information on clinical, quality and utilization management as well as operations and financial cost to the patient. These are all essentially measures of a practice’s value.

At IMP, we believe strongly in the power of predictive and prescriptive analytics to improve practice performance and future outcomes. We equip our clients with the data they need and the knowledge to transform that data into meaningful and credible information in order to “win” at the previously mentioned negotiations. In addition, it is critical to regularly report practice metrics and initiatives physician leaders have implemented to clearly demonstrate the value provided to both hospital and patient customers.

For more information about APMs and practice analytics capabilities, please contact