Private Payors Alternative Payment Models

Overview

Over the past decade, employers, health plans, and governmental payors have increasingly sought to transition from fee-for-service reimbursement structures (which generally reward providers solely for the volume of services provided) to more innovative reimbursement methodologies designed to hold health care providers accountable for controlling costs and producing high-quality outcomes. The first such alternative payment models (APMs) developed over the past decades in the private sector. Recent federal and state health reform laws, including the Patient Protection and Affordable Care Act (ACA) and the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), have accelerated the shift. While mandatory APMs implemented under the ACA, such as the Comprehensive Care for Joint Replacement program, face an uncertain future, value-based payment initiatives underway in the private sector are likely to continue apace.

Unlike APMs established pursuant to the ACA, which have rigidly defined parameters, private payors have significant freedom—subject only to applicable legal constraints, such as those imposed under the fraud and abuse and antitrust laws—to develop innovative payment methodologies. Typical commercial APMs fall within the following categories, each reflecting different types and degrees of value-based financial incentives:

  • Shared Savings and Shared Losses Models
    Providers are paid at contracted fee-for-service (FFS) rates (typically less a percentage withhold) until a year-end reconciliation, when total FFS expenditures for all members attributed to the provider network are compared against a predetermined budget target. If total expenditures were below the target, providers are eligible to receive a portion of the shared savings, with the percentage often tied to achievement of certain quality metrics. Under a two sided model, if total FFS expenditures exceed the cost target, providers are responsible to the ACO for a portion of the shared losses.
  • Bundled Payment Models
    Under these models, the payor establishes a fixed price for all services, across multiple providers and care settings, related to a defined “episode of care,” such as a knee or hip replacement surgery. Often, the participating providers are reimbursed at contracted FFS rates until a year-end reconciliation. Models may attempt to adjust for severity of illnesses or otherwise adjust for outlier episodes.
  • Global Capitation Models
    Under these models, payors make a single, comprehensive payment to cover a person over a defined period of time (typically on a per member, per month basis). While the popularity of global payment models declined during the 1990s, so-called “total cost of care contracting” is becoming more common again.
  • Enhanced FFS Models
    A number of variations on the traditional FFS model exist, often featuring FFS payments supplemented by bonuses or penalties tied to negotiated performance measures. Most commonly, providers may be eligible for defined bonuses upon achievement of certain quality or utilization benchmarks.

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