Critical Point podcast, Episode 2: Alternative Payment Models 101

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By Pamela M. Pelizzari | 24 July 2018


Disclaimer: This podcast is intended solely for educational purposes and presents information of a general nature. It is not intended to guide or determine any specific individual situation. And persons should consult qualified professionals before taking specific action. The views expressed in this podcast are those of the speakers and not those of Milliman.

Jeremy Engdahl-Johnson: Welcome to Critical Point. This is Jeremy Engdahl-Johnson. I’ll be your host today. I’m very excited to be joined by Pamela Pelizzari. We are going to talk about alternative payment methods, bundled payment, ACOs, all really exciting things. How you doing today, Pamela?

Pamela Pelizzari: Fine, thank you. How are you?

JEJ: I’m good. It’s a rainy Friday in New York, but so it goes. Let’s talk about alternative payment. Just to set the stage a little bit, you wrote the book on bundled payment when you used to work for CMS. Is that right?

PP: You flatter me, but sure. Yes.

JEJ: Okay. And is it actually a book or is it more like a dossier?

PP: It’s more like a collection of documents that can only be found through a great deal of looking that are highly disorganized.

JEJ: Okay. That sounds about right. What is alternative payment? What are we talking about here?

PP: Sure, when we talk about alternative payment models or alternative payment methods, really what we mean is any alternative to fee-for-service. So, historically, you would see providers being paid every time they did another service, which sort of incentivizes them to do more services, and then they will get paid more. As we see healthcare costs increasing, various payers, including Medicare, are taking an interest in changing the schema to pay for the value of services provided instead of just the volume of services. So when we say alternative payment models, really what we mean is any payment model that ties the amount a provider gets paid to something other than just the volume of services that were provided.

JEJ: Okay, and where is this innovation happening principally? Are there certain types of care that are on the front line of this sort of thing?

PP: I think that we’ve seen Medicare fee-for-service take a lot of steps in this direction. So with the Affordable Care Act, Medicare was instructed to open a new office called the Innovation Center where they would develop and test new payment models, alternatives to fee-for-service. They’ve been doing that since the Innovation Center opened around 2011. And there’s no signs of them stopping. So they’ve certainly been catalyzing a lot of this change by putting out payment methods in various areas. We’ve certainly seen other types of payers, Medicaid and commercial payers, follow along in that vein and develop similar payment methodologies, working directly with providers.

JEJ: Okay. Why should people care about this? Why is alternative payment something that people should be interested in?

PP: Well, I think it depends on who you are, why you should care. But a lot of people care because these payment models are becoming so prevalent. Several years ago, Medicare provided some goals. They said, “We’re going to aim to move a certain percentage of care to be covered under alternative payments by certain dates.” So their goal was 50% by 2018. Fifty percent of fee-for-service payments would be flowing through alternative payment models. And they’ve been working towards that goal. So I think that has certainly catalyzed some of this change. I think we also see legislative changes that are pushing people into these models, recent changes in physician payment under MACRA, which is a different law, is pushing more providers into alternative payment models as a way to maintain their revenue streams. So one reason to care is that so many other people care. I think, from the provider side, it’s important to understand what’s going on. Because if you don’t, your payments for services could be detrimentally affected. And so, I think that’s an important factor here.

JEJ: Okay, and you mentioned MACRA. Can you expound on that, what MACRA is and how it moved APMs along?

PP: Sure. MACRA stands for the Medicare Access and CHIP Reauthorization Act and what MACRA did at a high level is change the way physicians get paid under Medicare fee-for-service. We’re talking a lot about Medicare fee-for-service here, but I think for a lot of providers that one payer represents a pretty big portion of their volume compared to the commercial side, where there are lots of different payers. So when Medicare says something is going to change about the way providers get paid, that usually has the effect of catalyzing broader changes.

Under MACRA, physicians are going to be paid based on two different methods. They can either be in a track where there are quality and performance measurements of various types, all providers will be compared to each other, and all of their payments will either be increased or decreased a little bit based on their performance on all of those measures. Or, alternatively, if a provider can demonstrate they’ve invested enough in alternative payment models-- and obviously Medicare has a complicated definition of what “enough” is—but if providers have demonstrated they’ve done enough alternative payment models and they are receiving payments through those models for a large portion of their patient base, then instead of having all this quality measurement requirement and all of this uncertainty around their payments, they will simply get a 5% incentive payment on top of what they already get paid. And so, that has had obviously the effect of motivating physicians to participate in more alternative payment models because they stand to financially gain from doing that.

JEJ: So MACRA is one moment in this move towards APMs. If we were charting out the evolution and so on of this larger movement, where are we? Are we in the first act? Are we in the second act?

PP: Well, I think it depends on how broad of a view you take, right? Because some people would go back to the 80s and 90s and point to HMOs and say, “That’s where we started all of this, right?” Because if you think about it, HMOs, health maintenance organizations, provided a different schema for payment, right? You think about capitation, you think about paying a flat rate for all of the care to be provided for a patient. Some of those themes that we saw previously are coming up again today in, for instance, ACOs, accountable care organizations, which are another type of alternative payment model. So when we think about ACOs, we could say, “Oh, it’s a new idea, right?” ACOs, you can document the literature when people started using that term. But really, things come in ebbs and flows and you’ve seen some of these themes for a long time. I think that right now is a really interesting moment. Because there are so many alternative payment models-- there’s been all of this activity from CMS, MACRA has catalyzed additional activity. Commercial payers are following along. And there are so many different ways to do these APMs that now we have lots of iterations. And I think providers and payers are all trying to figure out what really works because it’s a very complex system right now of different payment methodologies and requirements and if we continue to live in a world where there are this many different types of alternative payment models, it will be difficult for providers to manage all of that complexity.

At the core of it, providers would say, “I got into this to treat patients, right? I went to medical school. I didn’t go to business school. I’m not trying to figure all this stuff out.” And so, I think it’ll be interesting to see how payers can work to sort of simplify the system and make it more accessible to providers while still incentivizing them to provide the highest quality care possible.

JEJ: So you mentioned ACOs. Where do they fit in this larger scheme of things?

PP: Sure. So when we think about alternative payment models, there’s a wide variety of risk that can be taken under those models. In some models, the providers aren’t actually taking on a lot of risk, right? Let’s think about maybe what we would call a pay-for-performance model or a medical home model, where the payer says, “I’ll pay you a little bit extra to manage care for beneficiaries, and that will incentivize you to do something better.” But there’s no real downside, right? You’re paying, let’s say, a primary care provider a little bit extra to cover the extra time they spend in coordinating care. The beneficiary will get better care; maybe the payer will see some savings because that patient’s care is coordinated. They might get less unnecessary tests, but that primary care practice doesn’t really have a lot of skin in the game, right? They’re getting paid a little extra to do a little extra, but there’s not a big down side.

There’s a whole spectrum over all the way to ACOs, or accountable care organizations, where groups of physicians or other types of providers are taking on the full risk of caring for beneficiaries. So under most of these models the payer, whether it’s Medicare or a commercial payer says, “For all of the patients that we assign to your organization, you are at full risk for their expenditures.” Medical expenditures, sometimes drug expenditures, are also included and the idea is to put a really strong incentive on that organization to manage the care of beneficiaries. And sometimes that will go to the extent that once the benchmark or the target for spending is set per beneficiary, if spending goes above that, the ACO has to pay the payer back for extra spending. They’re really only being given that amount to manage the care.

I think that ACOs can be seen as sort of the extreme end of the risk spectrum, taking full risk for everything that happens to a patient, but it can also result in great rewards for physicians if they are able to manage that care. We see ACOs as being one of the more popular alternative methodologies. There are hundreds of them signed up for Medicare fee-for-service and we only point to that because that’s publically documented. You can go look at the hundreds of ACOs that are in a Medicare payment model. But there are also lots and lots of organizations that are in Medicaid ACOs or commercial ACOs with other payers trying to manage care for patients. So I think that that is definitely a big area of interest.

JEJ: Well, that’s a good segue. We’ve mainly been talking about Medicare, but can you talk a little bit more about Medicaid and where alternative payment fits in that area?

PP: Absolutely. With Medicaid and commercial payers one of the big benefits, I think of entering into alternative payment methodologies from a provider perspective is that there’s usually a bit more negotiating power, right? When you’re working with a commercial payer, you have a little bit more say. You can go back and forth on what are going to be the terms of this arrangement. What works for me, what do I think I can do? And so, on the commercial ACO side, we actually see a lot of that. When people have gone to all the effect to put together an ACO, sometimes they’ve started an entirely new business entity. They have population health management and care coordination processes in place. They might as well take advantage of that for other populations. So we definitely see commercial ACOs popping up, largely at the encouragement of payers or providers, who want to take advantage of these broader changes that they’re making anyways. In the Medicaid population, it is very different state by state. There are lots of state Medicaid plans that are making the effort to put in place new incentives to manage care for beneficiaries. I think it’s something that’s of interest in all states, frankly, because Medicaid beneficiaries are an expensive and complex population, but I think that it’s hard to draw broad strokes about anything to do with Medicaid because there’s so much diversity state by state.

JEJ: Right: If you know a plan, you know that plan.

PP: Exactly.

JEJ: So what’s next?

PP: One area of interest that we’ve seen a lot of movement in is bundled payments. And I think there’s a reason for this. Taking a step back when you think about providers who are entering into these arrangements, they have a really broad variety of readiness, right? So some providers, they already coordinate care for beneficiaries; adding population health management and taking on risk aren’t as big of a lift, but for a lot of providers they are. The reality is providers haven’t always taken risk, you know? Fee-for-service allows you to say, “If I do a service, I’m going to get paid for it.” And you don’t really have to do a huge amount of thinking beyond that. Whereas now, there’s providers who have a wide variety of readiness here.

And so, often we see when providers aren’t sure if they’re ready to take on risk, they try to enter into programs where they can take on either a smaller amount of risk or risk on a smaller volume of things, right? So if I do, you know, X number of services in my practice, maybe I can only take risk on half of those so that I know that the other half I have my steady income stream. I can sort of test out risk-taking. We have seen bundled payments becoming really popular as a way to manage a little bit of risk. And sort of dip a toe in the water. Medicare has a number of bundled payment arrangements and they did just announce a new one. So they’ve already been testing bundled payments for five years and they are now starting a program that will test it for five additional years.

One thing that has been interesting in that program is the prevalence of private companies offering to take on risk on behalf of providers. And I think risk-readiness is something obviously we do a lot of work on at Milliman. When you think about providers taking on risk, there is some value in them understanding the actuarial constructs that payers have understood for a long time. And so, when providers are working on that effort to understand and take on risk, they don’t always have the tools in place, but there are private companies willing to do it for them. And so, watching how that shakes out is definitely something that’s of interest because in former iterations of Medicare programs, there was perhaps less of this. There were one or two companies who were sort of doing this risk-taking. And now there are lots and lots, right? The industry has moved. I think that’s one area to look at.

I think another area that we’re certainly watching right now is the different types of accountable care programs that Medicare is coming out with. Whereas perhaps previously they only had one, now they have many different options and it’s an activity just for ACOs to figure out which arrangement is the best for them. So I think that is certainly one. And then the last thing I'll say is something we’ve been talking about for years and still haven’t dealt with is how all these programs overlap with each other. You have all these different providers in the same markets who are entering into various types of arrangements. A lot of these programs have historically been retrospective programs and what we mean by that is all the payments for services will flow normally, fee-for-service, just the way they always have, and after the fact the payer will add up what happened and compare it to some kind of target. Well, if you’re doing all this retrospectively, maybe you don’t even know which patients are going to end up being attributed to your program or not. It makes it a little bit difficult for providers to understand that risk. And so, that’s something we’ve seen payers struggling with, particularly payers that have a lot of different kinds of activity, if they have bundled payments in ACOs in the same markets, figuring out how to attribute risks and rewards in these complex programs that are overlapping is certainly something to pay attention to.

JEJ: Okay, so, that’s interesting hearing about where things are going. One thing we often talk about here at Milliman is unintended consequences. Are there any potential unintended consequences for providers?

PP: When we talk about providers participating in these models, one thing we often hear about is whether or not the payment methodologies come with them. We’ve been talking at a high level today, but there are really complicated payment methodologies that underlie these arrangements. How do we set these targets against which we’re measuring providers? Providers often have trouble understanding those methodologies and understanding how their actions and the implications of those actions might change under a methodology like this. One example I’ll give is the oncology care model. So the oncology care model is a multi-payer initiative. It involves Medicare, but also other commercial payers. And it implicates patients who are on chemotherapy. So any cancer patient who’s on chemotherapy could be part of the oncology care model if their provider is participating. When you think about cancer treatment, it’s changing a lot. Pharmaceutical companies are coming out with new therapies. Sometimes extremely high-cost new therapies and there are issues with how do the payment methodologies, the target pricing methodologies, account for these changes in care? Because often times, we see people being benchmarked on historical utilization. Well, if a drug didn’t exist in the historical period, but now it does and it’s very expensive, how does that change the-- how do payment methodologies account for those new and novel therapies, which might be overwhelming as compared to the cost of former therapies? But they might offer clinical value and oncologists want to make them available to their patients.

I think that what we’re seeing is providers potentially having trouble understanding whether or not they can meet these targets given ongoing changes. We would typically say to a provider, “It’s extremely important to think through these things and go into these arrangements with your eyes open.” So understanding the arrangements in advance of when you enter into them so that you can potentially foresee these types of issues when a new drug comes out, address it upfront with the payer instead of waiting to see what happens. But we often see people who don’t totally understand the payment methodologies that they’ve entered into. JEJ: It sounds like everyone is still figuring out how this is going to work and what it means for them. So what should they be looking at?

PP: I think the other thing that we would typically advise providers is to get your hands on as much data as possible. When we see providers entering into these arrangements and we review their contracts and we talk about what do you want in this contract, the most important thing is that you want a way to track how you’re doing throughout the program. What you don’t want is to wait a year and a half until the payer has added up everything and decided how much you owe them and that be the first time you hear that they think you owe them millions of dollars.

So from a provider perspective, I think that getting access to data is an important part of entering into these arrangements, but it’s also a big opportunity, because it’s important to understand the broader care patterns in which your patients might be receiving services from other providers that you might not even have known about historically. So I think that is another important aspect of APMs and an important opportunity for providers to understand the broader context.

JEJ: Well, thanks a lot Pamela. I appreciate you joining us here on Critical Point.

PP: No problem. Thank you for having me.

JEJ: We’ll have you back.

PP: Any opportunity to talk about Medicare. That’s what I’m here for.

JEJ: Well, if you’ve enjoyed our podcast today, we invite you to visit and check out other editions of Critical Point.