Navigating the Shift to Value-Based Reimbursement: How Fast Is Too Fast, and How Slow Is Too Slow?

For over a decade, physicians have been under the threat that their world of reimbursement (and, accordingly, compensation) was approaching an end, yet very few practices have seen the change. However, with the passage of the Affordable Care Act, these perceived threats have become more imminent. Physicians and practice leaders continue to face the same two questions: Is change coming? And, if so, how quickly?

The U.S. Department of Health and Human Services (HHS) set a goal to have 30% of Medicare reimbursements tied to value-based care by 2016, with this percentage increasing to 50% by 2018.(1) Historically, commercial payers have followed the precedents set by the Centers for Medicare & Medicaid Services, which means that many will be looking to accelerate the migration of healthcare reimbursement from fee-for-service (FFS) to risk-based reimbursement or fee-for-value (FFV). In general, the volume to value transition will force physicians to retool their operations to focus more on population-based health initiatives, care management, cost reduction, effective data aggregation and utilization, and overall prevention and wellness.

Practices will likely have to enhance their current infrastructure and support staff to be able to measure and report on certain metrics (e.g., quality and cost) to meet value-based goals and implement new strategies associated with FFV reimbursements. Moreover, this may result in reduced utilization and reduced office visits, which subsequently will reduce reimbursements. With the increase in additional costs and the decrease in reimbursements, physicians may experience reduced revenue if they are unable to capitalize on these new plans. Therefore, it is important to understand the evolving reimbursement models and additional pending market changes thoroughly to know the options and craft a strategy in response that best suits the individual practice.

Numerous approaches are available for transitioning from FFS to FFV, including aligning with a hospital to take advantage of economies of scale; participating in or building your own quality initiative, such as an Accountable Care Organization (ACO) or clinically integrated network (CIN); or tracking quality and cost metrics and offering incentives to providers to reduce overhead costs by tying incentives to such measures. Although these strategies are not direct reactions to the FFV reimbursement shift, they seek to align the practice as a whole to the core concepts of the changing healthcare industry before participating in a value-based reimbursement model, such as shared savings and losses or bundled payments. All of these alternatives have their pros and cons, which organizations will need to vet before they choose their go-forward strategy.

It is important to pursue these strategies proactively without overreacting. The tactics presented can be excellent avenues to mitigate numerous economic, strategic, and operational concerns; however, much of the market continues to follow the FFS model, and implementing an aggressive strategy too early could be detrimental to the long-term goals of the organization.

Second-Generation Alignment Models

The key to taking advantage of FFV reimbursements lies within alignment structures. These newer alignment structures vary significantly from previous alternatives, allowing more physician empowerment through a greater variety of integration strategies.

Alignment is essentially the first step in pursuing a comprehensive level of integration.

It may be critical for physicians to start aligning more closely, either with other physicians or hospitals, to capitalize fully on value-based reimbursement options. Unlike their predecessors of the 1990s, where employment was essentially the sole alignment strategy, these second-generation alignment models increasingly are focused on finding a happy medium between hospital and physician control, as healthcare leaders understand that physicians typically are the primary controllers of cost. When considering second-generation alignment models, two key areas are heavily negotiated to attain alignment with market characteristics and organizational cultures: compensation and governance.

Alignment is essentially the first step in pursuing a comprehensive level of integration, such as a CIN. A CIN is a network of interdependent providers, and potentially healthcare facilities, that collaborate to develop and sustain clinical initiatives and performance metrics and goals on an ongoing basis through a centralized, coordinated strategy and data transfer and sharing. For a CIN to be successful, the participants must be dedicated to developing a governance structure to monitor the adherence to set care guidelines and metrics as a way to hold the physicians accountable to the goals of the organization. As a CIN, the organization pursues centralized contracting that ostensibly benefits all participants. However, the ability of the CIN to negotiate collectively with payers is critical to its success, and requires the CIN to demonstrate a genuine level of clinical integration (in both structure and implementation) so as to meet a “safe harbor” exception and other legal and compliance requirements.

An aggressive alignment strategy should not be pursued without careful consideration of the practice’s market position and current financial structure.

Next-Generation Compensation Structures

If a physician organization or private practice has agreed to pursue one of the listed strategies, it becomes imperative to offer incentives to providers to support the effort. One of the main ways to use incentives is through the restructuring of provider compensation plans to align with the practice’s new measures and strategic initiatives. Restructuring is highly recommended, whether in conjunction with an alignment strategy or as a stand-alone initiative.

The landscape of physician compensation has changed dramatically over the past few years in response to the value-based reimbursement shift. Although there is a continued focus on productivity, many organizations have seen the benefits in including performance incentives (other than productivity) in their compensation plans. In numerous instances, historical compensation structures have led to an increase in costs, because the focus was on maximizing work relative value units (wRVUs) without any significant incentives related to cost control. Thus going forward, we will continue to see the increase of nonproductivity incentives such as patient satisfaction and attainment of quality metrics.

Changing reimbursement structures will demand that incentives be tied to something other than productivity.

The basic four-component model that is becoming common in the industry is made up of: (1) base compensation; (2) productivity incentives; (3) non–productivity incentives (e.g., quality and cost efficiency); and (4) other payments (e.g., pay for call, administrative service fees, medical directorships). Over time, productivity incentives and other payments are beginning to become less important in relation to quality and cost incentives and their weight in the determination of total compensation. This trend is expected to increase, as many organizations want to ensure they have aligned incentives between the way physicians are compensated and the way the organization is reimbursed for the services they provide.

Although these metrics may be harder to measure than wRVUs, changing reimbursement structures will demand that incentives be tied to something other than productivity. Leadership must understand that although second-generation plans will need to reflect the new types of reimbursement, productivity-based incentives should not be excluded. Rather, compensation structures should be a hybrid of productivity- and non–productivity-based incentives, as described in the four-component model presented earlier. Moreover, the change in the total percentage of compensation tied to non–productivity-based incentives should be evident, but not drastic. It is also imperative that physicians feel included in the compensation structure update process and that they be educated on the impetus for the change. With the industry ultimately shifting toward population health management, physician behaviors and the overall organizational culture should shift to align with them.

Even if the practice decides not to pursue a FFV reimbursement contract at this time, it is important to begin considering alignment and compensation structures that reflect the new movement, because eventually these will be the basis for capitalizing on these incentives should it become necessary for the practice to do so.

Value-Based Reimbursement Models

The two predominant value-based reimbursement models in the industry are shared savings/shared losses and bundled payments. Healthcare leaders should first prepare their organizations by applying the tactics mentioned above before contracting with a payer for a value-based reimbursement structure, because it will not be successful without the support of the physicians and internal infrastructure.

Shared savings and losses programs consist of an agreement made between providers and payers that includes payment for covered services and estimated medical costs, meaning the two entities prospectively agree on an established payment amount for a population base. This arrangement is typically contracted by an ACO or CIN (alignment models that are addressed in detail later in this article); however, it is possible for a private practice to participate. Providers submit claims as usual to the payers, as if it were a FFS contract. The payers and providers then review the metrics and analytics of the costs associated with providing care for the established population base. If the practice or group can provide care at a rate of savings to the payer, the organization is awarded a bonus based on these savings (typically between 40% and 60%). The provider organization then divides bonuses among the participating providers. Conversely, if the costs are not controlled effectively, and a loss is realized, the payer and providers split the loss in some mutually agreeable manner.

Alternatively, the provider organization can enter into a shared savings only model, which includes just the “upside risk” portion; however, most likely a smaller percentage of the shared savings will be awarded.

In a bundled payment model, providers deliver a set of services over a specified period within a single target price; often, physicians are only one segment of the providers delivering this care. Within the bundled payment, the fees are prospectively divided among all providers delivering care throughout the continuum of the service. If the physician can deliver the care for less than the stated price, he or she effectively shares in the savings. However, if complications occur and the patient requires more care than anticipated, the physician must absorb the extra cost. For example, if a patient receives an orthopedic procedure that requires anesthesia and an inpatient stay, the patient will pay one price that is divided among the physicians and hospital rather than paying each entity separately. In the new wave of healthcare, this bundle is often established within an ACO or CIN structure. However, it is certainly possible for the payer to distribute the payment to physicians independently under predefined rules, which has been the predominant methodology since bundled payments were first introduced.

Both the shared savings and bundled payment models have existed for several years now and are gaining in popularity. For example, the Bundled Payments for Care Improvement program (one of the most notable bundled payment programs) formalized its first cohort in January 2013, and by mid-2015, the program had more than 2100 participants.(2) Thus these models are solid examples of structures that practices are using as they step toward the FFV environment. Many practices find the shared savings model (where there is upside risk only) a particularly desirable model, since it minimizes risk but allows them to participate in a meaningful (and potentially lucrative) manner in this changing market.

The key to ensuring that the rewards of a value-based reimbursement model outweigh the risks associated with it is adequately structuring the practice to handle these changes before execution.

Conclusion

The accountable care era is ushering in a wave of changes, all of which pose unique challenges for private practice physicians. Private practices may lack the infrastructure or resources (e.g., IT, primary care base) necessary to respond optimally to these changes. Although risks and challenges exist, doing nothing will have detrimental impacts for independent physicians as traditional care delivery will prove to be more costly and unsustainable.

No one can be certain yet how long it will take to see a complete shift in the industry; therefore, different options to drive down cost must be analyzed. Before implementing a strategy, physicians should consider the following points as they pertain to their specific situation and how each strategy will affect their individual practice:

• Physicians should understand their market. Predominantly fee-for-service markets do not necessarily require a complete overhaul of existing systems. However, current strategies should be analyzed to prepare for when the market does shift.

• Practices should analyze their patient populations and payer mix. If a practice has a strong payer mix of predominantly private payers, it provides a very strong position when negotiating with prospective alignment partners. Moreover, if a practice currently has a strong payer mix and high reimbursements, it may be detrimental to renegotiate contracts preemptively. If the practice wishes to seek clinical integration, reimbursement contracts should be reviewed in light of potential collective bargaining. Providers should be cautious if their payer mix and current contracts are particularly high in reimbursement as compared to the market.

• Physicians should fully understand their provider base. Growing the network often is critical to long-term sustainability as an independent practice. Over the long term, when a practice enters into clinical integration or an ACO/CIN structure, it may start out with more of a specialty focus but will need to grow to incorporate primary care. Physicians should begin seeking potential partners and establish relationships with them, potentially through referral processes. Once these factors have been carefully examined, physicians should consider alignment opportunities in their market and identify potential approaches to clinical integration. Physicians should then review different compensation models as a means to work toward compensating physicians through a structure that supports quality and cost savings. Finally, if physician leadership has determined the previous considerations and fully prepared their practice, both operationally and through technology requirements, the practice should seek a value-based reimbursement contract that best fits its specific practice and market.

Significant opportunities are on the horizon in the healthcare industry, particularly under the value-based reimbursement paradigm. Although many private practices are concerned about the growing cost of overhead, they should look to this concept of value-based reimbursement as an opportunity to recapture some of their previously lost reimbursements by capitalizing on these programs. The ultimate goal should be to develop a viable strategy that incorporates aspects of traditional and contemporary strategies to meet the needs of the shifting healthcare landscape after carefully reviewing market considerations and determining what best fits your individual practice.

References

1. Better, smarter, healthier: in historic announcement, HHS sets clear goals and timeline for shifting Medicare reimbursements from volume to value. HHS.gov . January 26, 2015; www.hhs.gov/about/news/2015/01/26/better-smarter-healthier-in-historic-announcement-hhs-sets-clear-goals-and-timeline-for-shifting-medicare-reimbursements-from-volume-to-value.html . Accessed February 25, 2016.

2. More than 2,000 Providers Assume Risk Under BPCI. HFMA.org . August 14, 2015; www.hfma.org/Content.aspx?id=40543. Accessed February 25, 2016.