How these three alternate payment models are driving healthcare IT

To pursue the Triple Aim – improve the patient experience of care, improve the health of populations, and reduce the per capita cost of health care – the Department of Health and Human Services (HHS) has set a goal of tying 50% of Medicare fee-for-service payments to value through alternative payment models (APM) by 2018.

APMs seek to deliver better care at lower cost. APMs require providers, payers, and others in the healthcare system to make fundamental changes in their day-to-day operations that would improve quality and reduce the cost of healthcare. Through APMs, the HHS is pushing the healthcare sector toward a population health management (PHM) model.

As of late 2016, an estimated 25% of commercial healthcare dollars flowed through alternate payment models associated with PHM initiatives. This trend is an indicator of the progress of APMs in incentivizing healthcare providers to change their economic preferences on risk-based payment models.

Understanding APM’s is important as they drive behavior that impacts business models of healthcare enterprises and technology solution providers alike. Before exploring APMs, it is useful to understand the dominant payment model today – fee-for-service. 

Fee-for-service (FFS)

FFS is exactly what it sounds like – healthcare providers get paid for providing a service, such as a blood test, a doctor office visit, or an MRI. Since this model rewards volume over value, it gives rise to perverse incentives, driving up healthcare costs. FFS continues to be the dominant mode of payment for healthcare services today, although that is changing quickly.

Here are the three widely proposed and increasingly popular APMs:

Accountable Care Organizations (ACOs)

ACOs are groups of providers across different settings – primary care, specialty physicians, hospitals, clinics, and others – who come together to jointly share responsibilities and sign up for hitting quality benchmarks for a large patient population. They take on performance goals for healthcare outcomes, and in return earn incentives based on improved outcomes (they can also face penalties if they miss their targets). Through improved coordination and elimination of unnecessary medical expenses, such as duplicate tests, ACOs are expected to deliver better care at lower costs. The ACO model has had mixed success for a variety of reasons. However, all indications are that the model will continue to remain an option for healthcare providers willing to take risks for increased returns.

Bundled payments

A healthcare bundle is an estimate of the total cost of all the services related to a certain problem, like a knee or hip replacement. For example, a hypothetical 30-day bundle for a hip replacement surgery could be estimated at $10,000. However, these could vary widely across states (an analysis of hip replacement costs in 2013 found costs varying between $10,000 and $125,000 across the country). These variations notwithstanding, health insurers continue to look at bundles as an alternate payment option to mitigate financial risks. Providers, for their part, can improve margins on the procedure by keeping their costs under control. They are incentivized to do so which is precisely the point of the payment model in the first place.

Patient-Centered Medical Homes (PCMH)

The American College of Physicians (ACP) defines a PCMH as, “a care delivery model whereby patient treatment is coordinated through their primary care physician to ensure they receive the necessary care when and where they need it, in a manner they can understand.” A PCMH comprises of highly coordinated teams of caregivers including primary care professionals, physicians, nurse practitioners, and other specialists. The team works closely to improve care coordination with each other, as well as with patients and their caregivers. In the PCMH model, an additional payment is layered on to compensate for the extra effort of care coordination. The operating principle is that incremental savings from better-coordinated care justify the extra monthly payments, and benefit all stakeholders. 

As the healthcare sector transitions to value-based care (VBC), alternate payment models such as ACO and PCMH will rely heavily on PHM practices to deliver quality outcomes. PHM is already the norm and will expand in range and sophistication in the coming years.

An effective PHM model requires the aggregation and sharing of data from multiple sources for analytics and insight. The implication for health systems is that they will need to invest in technology, analytics, and other new capabilities to succeed in the new payment model.

An important factor in the growth of alternate payment models is the active involvement of patients, as active partners, with healthcare providers in achieving their health goals. New, digital health technologies and applications aim to increase patient engagement by leveraging data and insights to create enhanced patient experiences; often there are financial rewards for patients from active participation in health and wellness, and a corresponding incentive for healthcare providers to help achieve these goals collaboratively.

APM’s and healthcare IT

The promise of PHM and the success of APM’s depend on technologies that improve analytical insights and care management by engaging patients effectively as active participants in their care.

Digital health programs which focus primarily on patient engagement have received a tremendous boost in the past couple of years. Digital health startups have raised billions in funding from venture capitalists looking to benefit from the wave of interest in everything “digital,” from patient engagement to telemedicine programs, the internet of things, and more.

The digital transformation of healthcare will rely on the technology ecosystem’s ability to unlock insights from a vast and growing number of data sources. This is the opportunity and the challenge for healthcare technology firms today.

An additional challenge for tech firms, especially for those who sell to CIOs, is that the PHM space is a new landscape with new decision makers and new titles to navigate. Chief Population Health Officers, Chief Patient Experience Officers, and Chief Data Officers are among the new stakeholders they have to get to know and understand.

Health systems, health plans, and healthcare technology companies all have to plan for a new value-based care era and develop technology and analytics capabilities that enable them to manage risk, control costs, and thrive in a performance-based payment model. There is a significant opportunity for the right kinds of solutions that can unlock insights from population health data in all its current and emerging forms.