Question

Risk-Based Reimbursement

For your assignment, a primary care physician is often reimbursed by Health Maintenance Organizations (HMOs) via capitation, fee-for-service, relative value scale, or salary. Capitation is considered as a risk based compensation.

In an effort to understand the intricacies involved with physician reimbursement, particularly in an era of health care reform, identify and interview an expert in the field, such as:

Hospital Administrator

Managed Care Organization (MCO) executive

Health care Consultant

Legal Professional

Assumption: MCOs use risk-based reimbursement for primary care physicians.

Ask the following questions in the interview:

What kind of risk do the MCOs assess?

Does risk-based compensation limit the freedom of primary care physicians in any way in terms of patient care? Why or why not?

How does the capitation model of reimbursement work? Do physicians generally prefer one model over the other? Why or why not?

Why do HMOs prefer the prepaid, monthly premium?

Is pay-for-performance a better model than existing models of compensation? Are there limitations to it as well?

Answer 1

Capitation is often characterized as a means of cutting physicians' compensation, but there's a more positive way to use capitation — as tool for providing proper reimbursement incentives to reduce inpatient bed days and unnecessary specialist procedures.

The hospitals associated with United Physicians have either a capitation contract with the HMO or a per-diem arrangement. Every HMO contract has a financial matrix defining the services that are the responsibility of the medical group or the hospital fund to provide. Not all HMOs have a standard matrix. In most of our IPA contracts, the medical group is responsible for outpatient diagnostic procedures, both the professional and the facility component, such as MRIs, CT scans and cardiac testing. Therefore, expenses must be planned to provide certain facility costs as well as professional fees.

The risk pools depend on the hospital contracts. Very often HMOs will have shared-risk contracts: Physicians are in partnership with the HMO to take the risk, to share the deficits and to share the surplus. Under this system, efficient utilization of hospital services may result in a surplus that is shared with the health plan. There is also a downside risk. A deficit in the hospital fund results in payment by the medical group back to the health plan. In a full-risk contract, both the hospital and the medical group are capitated and risk is shared. For Unified, the $36 per-member per-month commercial premium income is not a break-even amount without some retention of shared risk. The challenge in this situation is to provide the best quality of care in a cost-effective manner.

Only specialists are capitated

Unified Physicians is different from other IPAs in that only the specialists are capitated. Primary care physicians are compensated on a fee-for-service basis. Fee-for-service reimbursement is meant to encourage primary care physicians to provide as much care possible for the patient because overutilizing primary care has significantly less effect on the budget than overutilizing the specialties.

Income limitations necessitate maintaining a realistic budget and tight control of cost overruns. To obtain that control, there is a need to know exactly how much is being spent on primary care, specialists and ancillary care. The IPA spends 23 percent of its capitation dollar on primary care, 56 percent on specialists, 14 percent on ancillary services and 7 per cent on administration. As you can see, specialty care represented more than half of the capitated dollars. This was a significant reason why United Physicians capitated specialty providers. Another reason for capitating specialists stems from dissatisfaction with traditional utilization management, such as services that require prior authorization. Prior authorization is cumbersome — micromanagement of medical care that has minimal effect on utilization management. HMOs don't like it, nor do waiting patients.

Shared capitation

Advantages

• Moderate competition among specialists
• Greatest freedom for primary care physician referrals

Disadvantages

• Productivity-based — first to bill use up the pool
• Does nothing to control levels of utilization
• Cannot monitor quality across the board

Group capitation

Advantages

• Puts UR back in the hands of providers
• Each specialty creates its own guidelines
• Least overhead cost
• Specialists control their own payments

Disadvantages

• Requires selection (and deselection) of providers
• Requires solo physicians to band together

How does the capitation model of reimbursement work?

Beyond capitation is a movement to base payment on outcomes. Termed pay-for-performance (P4P), it has the potential to improve care to this population. Current payment systems do not consider quality in determining reimbursement. The incentives of the current reimbursement systems sometimes promote poor quality care. The present fee-for-service payment systems pay providers based on the number and complexity of services provided to patients without regard to quality, efficiency, or impact on health outcomes. Pay-for-performance has been proposed as one strategy designed to correct this deficiency.

HMOs provide medical treatment on a prepaid basis, which means that HMO members pay a fixed monthly fee, regardless of how much medical care is needed in a given month. In return for this fee, most HMOs provide a wide variety of medical services, from office visits to hospitalization and surgery. With a few exceptions, HMO members must receive their medical treatment from physicians and facilities within the HMO network. The size of this network varies depending on the individual HMO.

When you join an HMO, you choose a primary care physician (PCP) who is your first contact for all medical care needs. The primary care physician provides your general medical care and must be consulted before you can see a specialist. Because of this control system, HMO costs tend to increase less rapidly than other insurance plans.

Pay-for-performance programs are now common elements of the payment systems of public and private insurers alike. While pay-for-performance sponsors are most often individual health plans, the programs are being introduced by a variety of purchaser and multistakeholder coalitions in a number of markets. Perhaps most significantly, through a series of demonstration projects and public statements, the Center for Medicare and Medicaid Services (CMS), has made clear its intention to phase in pay-for-performance for physicians, hospitals, and other institutional providers.

Is Paying for Performance a Good Idea?

While some object to pay-for-performance as running counter to notions of professionalism by “paying physicians twice for the same job,” it may be more appropriate to think of it as the latest refinement in fee-for-service and capitation. Pay-for-performance will not replace the existing payment structure in either system, but it will allow payors to take into account a set of quality indicators in addition to volume of service (as fee-for-service does now) or the number of covered lives (in the case of capitation). In this view, pay-for-performance can be viewed as a mechanism to correct some of the distortionary incentives that already exist in the reimbursement system. For example, by rewarding activities connected to managing the health of populations (eg, screening, managing chronically ill patients) that have been historically under-reimbursed relative to the technical challenge they pose to the average office-based physician, many pay-for-performance programs are attempting to encourage realignment of physician priorities towards prevention.

Is There Any Evidence that Pay-for-Performance Works?

There are few rigorous studies of pay-for-performance in health care. Prior to the recent surge in adoption of pay-for-performance strategies, only a handful of controlled studies were published in the health care literature. Among these were a number of null findings [3-5]. Two controlled studies found modest improvements in evidence-based process measures of quality under pay-for-performance plans [6,7]. Recently published evaluations of the current generation of pay-for-performance programs have also been mixed [8,9]. It is reasonable to conclude therefore that pay-for-performance can positively affect quality of care, but payors have a lot to learn about how to do so effectively.

Could Pay-for-Performance Be Harmful?

The design challenges facing responsible payors attempting to use pay-for-performance to improve the quality or value of health care are not limited to eliciting the desired response from health professionals. There are also possible unintended consequences. The 2 most important challenges for pay-for-performance from the point of view of patient care are: (1) dealing appropriately with diverse patient populations to minimize incentives to avoid some patients, and (2) making sure that “teaching to the test” does not actually result in worse care.

Many physicians who object to pay-for-performance are concerned that the quality measures upon which payment is based are confounded by differences in severity of illness and patient behavior. It is well-known that physicians who treat sicker or less compliant populations are likely to have lower scores on process and outcome measures, despite working hard to provide high-quality care. Thus a critical challenge for pay-for-performance is to use risk adjustment or other tailored approaches to account for these differences fairly and thus minimize physicians’ incentives to avoid certain types of illnesses and patients [10].

Rewarding a few (or even many) specific, easy-to-document quality processes will almost surely discourage unrewarded activities, some of which may be important to patient health but difficult to measure. In education, this response to being graded on test performance is called “teaching to the test,” and critics worry that important dimensions of the educational experience are lost when school districts pay too much attention to test scores. Similarly, since pay-for-performance programs focus, by necessity, on the few clinical areas where there is good consensus on what constitutes high-quality care, there is a risk that other aspects of care will suffer. To some extent payors can address this by establishing broad measure sets that include patient experience as well as individual processes of care. At a minimum, this problem suggests that payors should consider tradeoffs and interrelationships among targeted and untargeted domains of performance.

The Future of Pay-for-Performance

In many ways, pay-for-performance is the inevitable result of several decades of refinements in quality measurement and reporting. Now that there is sufficient data to convince most people (including Congress and major purchasers of health benefits) that there is a quality problem in the US health care system, it will be hard to resist the widespread urge to use that same information to reform an obviously imperfect payment system. Used effectively, pay-for-performance could remove some of the well-known distortions that are generated by the underlying structure of current payment systems and help refocus delivery on critical aspects of population health. If it is to succeed in promoting patient health and value for the health care dollar, pay-for-performance will require careful design and effective safeguards against potential unintended consequences including those associated with patient selection incentives (and the associated fairness concerns) and “teaching to the test” to ensure that these positive objectives are not achieved at too great a cost.