Human Capital & Careers

Alternative Payment Models Pose Big Opportunity

Self-funded employers can significantly reduce their health-care spending through alternative payment arrangements for health-care services.
Chris Donovan and C. Frederick GeilfussMay 25, 2017
Alternative Payment Models Pose Big Opportunity

Health-care spending in the United States reached nearly $10,000 for every person in 2015, according to the Centers for Medicare and Medicaid Services, and no doubt passed through that mark in 2016.

Projections are that health-care spending will surpass 18% of GDP in 2017 and grow to nearly 20% of GDP by 2025. Any attempt to provide any meaningful health-care reform is made far more challenging by the sheer cost of health care.

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The Affordable Care Act is known and debated primarily with respect to its insurance and health-care-access provisions, such as the individual mandate, the guaranteed issue requirement, and expansion of Medicaid. The ACA also included, however, a number of pilot projects and demonstration programs whose goal was to change the health-care payment and delivery system.

Introduced through the Medicare program, these models attempt to restrain the cost of health care while also improving quality. Cost is a combination of price and utilization. The models address these issues by putting providers at risk for the cost of care to be delivered either for an episode of care or for the care provided to a given population. The models also move away from a fee-for-service model in which providers are incentivized to provide more and more services.

The models utilize shared-savings payment programs, bundled and/or episode-based payment arrangements, medical homes, and population-based payments (also known as capitation) to change the reimbursement methodology.

Chris Donovan

Chris Donovan

The Medicare program has touted the success of these alternative payment programs in terms of saving costs to the U.S. government. The most popular program, the Medicare Shared Savings Program, has saved more than $400 million in each of the last two years, with other, smaller shared savings programs showing smaller savings.

There are less-reported results in the bundled payment or episode-based programs, but hopes are high for cost savings as well. A couple of these programs — the Comprehensive Care for Joint Replacement Model and the Cardiac Care Program — require mandatory participation for some 800 hospitals across the country. Improvements in quality were also noted in these programs.

Perhaps the most significant aspect of these models is that they have changed the mindset of providers. With Medicare, as the largest payer, providing the lead, providers have participated in alternative payment models with reduced reliance on fee-for-service, at times voluntarily. They have developed systems and expertise to function effectively using such models.

Larger providers in particular have embraced the concept that the payment system is changing and, to be successful, they need to make investments and prepare themselves for survival in an alternate payment environment.

Two Harvard Business School professors, Michael Porter and Robert Kaplan, have noted that the “fee-for-service system … is now widely recognized as perhaps the single biggest obstacle to improving health care delivery.” They conclude that bundled payments being tested under the ACA in a number of models hold the best promise to improve the system. “Bundled payments … are a direct and intuitive way to pay clinical teams for delivering value, condition by condition. They put accountability where it should be,” the professors write.

Do these alternative payment models provide opportunities for self-funded employers? The answer is yes, through third-party administrator (TPA) arrangements or through direct contracts between self-funded employers (or a coalition of them) and providers. Providers increasingly have systems in place to succeed while assuming more accountability.

C. Frederick Geilfuss

C. Frederick Geilfuss

Larger employers are contracting for high-end procedures with “centers of excellence,” even paying for travel across the country to take employees to one or a limited number of high-quality providers for certain procedures and conditions. Making providers accountable, as those alternative payment programs have done, can lead to better results and less cost.

There also are opportunities for mid-size employers to contract directly or to create coalitions with other employers and then contract directly or through a TPA with a provider or providers utilizing these alternative payment models. Cost savings without reduced quality can result.

There are legal issues involved. The arrangements must be structured to conform with state insurance laws as well as antitrust and fraud and abuse laws on both the employer and provider sides of the arrangements. Such legal issues are generally manageable, though.

Employers can take advantage of these alternative payment models that have been tested under the ACA, refine them, and utilize them to obtain cost restraints and improvements in quality. Given the participation in the Medicare alternative payment programs, providers should be more willing and prepared for use of these models.

Chris Donovan and C. Frederick Geilfuss are partners at law firm Foley & Lardner LLP.