• Industry: Healthcare
  • Type: Survey report
  • Date: 9/28/2012

The quest for the Holy Grail 

High quality, Low cost
Policymakers and payers globally are rethinking payment mechanisms to instead reward value: high-quality, efficient care. Every payment system will do so partly: the classic fee for service mechanism stimulates productivity, timeliness and a focus on the patient as the client; the equally classic block grant or wholesale budget for a hospital, stimulates judicious use of resources, and prevents overuse.

Yet these systems are so coarse and undifferentiated that they tend to destroy more value than they create.

In the fee for service model, information asymmetry between clients and providers inevitably results in overuse of health services. Since every individual activity is separately paid for, there is no drive to coordinate or innovate delivery processes so as to make them more value-adding from the perspective of the patient.

A block grant, on the other hand, almost ensures endless discussions on the parameters upon which the block grant is established – which, historically, have had very little to do with patient value. Indeed, block grants are deadly for productivity enhancing innovation, since that will tend to result in more pressure on the system (more patients, a faster throughput) without added resources.

Payment system redesign

In retrospect, the introduction of capitated payment for general practitioners in many European countries and episode-based payment through DRGs in the US in the previous century can be seen as the first rudimentary step in the effort to redesign payment systems towards delivering 'value'. The capitated GP payment (a fixed, risk-adjusted sum paid per patient regardless of actual use) underwrote the primary care focus towards a population- and prevention-oriented style of practice. By stimulating efficiency, it also emphasized that there was a responsibility for those patients not seen, which – when taken seriously – would add genuine value for the population served.

The DRG system (a fixed sum for an episode of hospital care based on a certain diagnosis, ideally including as many cost-components as possible) stimulated the efficient use of resources required for the care of a patient throughout the hospital. The DRG system puts the patient at center stage as the focus for the value that is either added or wasted as unnecessary tests or bed days now become a burden for the hospital as much as for the patient.

In practice, the situation is often worse than depicted here. DRG systems are frequently just used for inpatient hospital costs while physicians' fees are still often paid on a fee-for-service basis.This creates different drivers for these actors (with little incentive for physicians to cooperate with hospitals in shifting tasks smartly from physicians to nurses for example, or to implement 'lean' care pathways), making the quest for 'value' even more illusionary. In most of Canada, fee for service models for medical specialists are generally juxtaposed against the block-grant financing of hospitals, creating a set of opposing drivers in the organization that makes value-driven innovation (from the patients' perspective) an almost impossible endeavor.

These payment innovations, however, still take the pre-existing providers and institutions as their starting point. While for elective interventions the relevant clinical processes often tend to begin and end at the hospital's boundaries, the same cannot be said for chronic or cancer care, for example. Equally, many simple conditions can be treated by GPs without the intervention of other professionals, yet this is often not the case for the increasing population of frail elderly.

These payment systems remain fully input based: hospitals get paid for treating a patient for a given condition, not for the results it achieves. As a result, increasing volume yields more income, regardless of the appropriateness or the preventability of that additional care. GPs will get their basic capitated payments whether they actually undertake the preventive activities expected of them or not. And since 'results' are not what counts, there is a similar perverse incentive to refer difficult patients to medical specialist care, whether medically necessary or not.

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Case studies

To move towards a more 'value-centered' model, many experiments and payment innovations have taken place that aim to link payment to quality measurements. In the US, the Centers for Medicare and Medicaid Services (CMS) are currently running several projects to investigate if and how paying for improved quality or efficiency will actually improve these outcomes; several other payers are following suit.

Premier Hospital Quality Incentive

Demonstration project

One of the first successful and well-known projects run by the CMS is the Premier Hospital Quality Incentive Demonstration project, which started in 2003. This project aims – as its name indicates – to 'demonstrate' the impact of giving financial bonuses to hospitals that show high absolute or relative performance. In the project, participating hospitals report quality information for several high-volume treatments on some 30 risk-adjusted measures reflecting both process of care and patient outcomes. Over the first 5 years of the project, incentive payments totalling US$48 million were awarded and, on average, quality scores for the five included treatments increased by an average of 18.3 percent (Figure 4). Over time the hospitals not in the study have caught up – possibly spurred by the public reporting of these data and the natural competitiveness of many providers.

Premier Hospital Quality Incentive

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Alternative Quality Contract

In January 2009, Blue Cross Blue Shield Massachusetts (BCBSM) started their Alternative Quality Contract (AQC), which attempts to align the incentives of hospital providers (both in- and outpatient) with primary care doctors. The goal of the AQC is to reduce the growth trend of overall medical expenditures by half over a 5 year contract term. Providers are therefore guaranteed a budget that steadily increases – albeit less steeply than it did over the last several years. Those providers that are able to increase efficiency and quality to the point that costs are actually lower than the planned budget, retain part of that margin with the specific share based on their quality and performance measure scores. Conversely, if they do not manage to do so, part of that risk is theirs as well.

Throughout the AQC contract term, all member claims are reimbursed in the traditional way (largely as fee for service). At the end of each year, all of the services and costs (including inpatient, outpatient, pharmacy, behavioural health and others) that are associated with the AQC provider organizations' BCBSMA patients are then charged against the AQC global budget. This determines the individual provider's performance relative to the global budget.

In the first year of the project, all participating providers met their budgets, thereby producing surpluses that enabled them to invest in infrastructure to deliver more effective and efficient care. Contributing to these surpluses were quality improvements which led, for instance, to reduced readmission rates, which in turn saved US$1.8 million.

The results show that AQC contracted providers delivered annual quality improvements that were both greater than before and greater than non-AQC provider organizations. For example, the quality of chronic care management increased by 60 percent in 2009, while providers outside the AQC project failed to show similar progress.

Comparable results are found for the quality of ambulatory care and preventive screenings. Both in cost savings and quality improvements, the results show that AQC providers are on track to meet their 5 year goals.

Alternative Quality Contract

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The UK GP contract is a similar, large scale initiative: GP practices are paid more when they realize higher scores on a series of almost 150 measures (see below: NHS: GP Contracts). Many similar programs now have bonuses for reporting quality data or for attaining certain scores; a growing number are also including financial penalties for those failing to meet these goals.

These pay for performance initiatives are an essential step forward, since they explicitly link quality of care to the payment of the provider. Here, payment is no longer solely tied to 'input', and providers that undo the negative effects of fragmentation can actually be rewarded.

Yet in most cases, pay for performance initiatives run into severe limitations, because the underlying payment structures remain unchanged. The institutional boundaries that tend to hamper overall quality rather than strengthen it remain untouched. In such cases, pay for performance initiatives put a sweet topping on an essentially sour base, driving improvement activity to those indicators that yield the most points to score rather than incentivizing providers to rethink the overall delivery process. In addition, pay for performance often rewards a level of process compliance which arguably should be part and parcel of standard practice anyway. And since the system is mostly based on process and structure measures (outcome measures are only gradually being introduced), there is also ample room for 'working to rule' without truly improving the outcomes.

NHS: GP Contracts

In the UK, the General Medical Services (GMS) contract came into force in 2004 and addresses the provision of primary care by privately run GP practices contracting with the NHS. Every practice is paid a fixed budget (the 'global sum') depending on the number of patients, the type of patients (as corrected for risk), local labor costs, the degree of rurality and local morbidity rates. Furthermore, a Quality and Outcomes Framework (QOF) has been developed to incentivize GPs to improve the quality of their practice. Based on 146 (government defined) process measures, practices can earn points that translate into additional income.

The effects of pay performance in the GMS are hotly debated. On the one hand, the scores on the measures have improved rapidly, but critics argue that the proportion of GP income determined by the QOF is too high, that the outcomes of the care have not improved comparably, and that gaming and selective attention to 'gathering points' actually undoes some of the possible positive consequences of the program.

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