Making Value-Based Payment Work for Academic Health Centers : Academic Medicine

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Making Value-Based Payment Work for Academic Health Centers

Miller, Harold D.

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doi: 10.1097/ACM.0000000000000864
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Although many challenges still remain, the Affordable Care Act (ACA) has clearly been successful in increasing the number of Americans who have access to health insurance coverage. However, the ACA has been far less successful in ensuring that health insurance is affordable. Health care spending has continued to grow faster than the economy as a whole, and both employers and individuals are struggling to pay for high health insurance premiums.

Fortunately, there are significant opportunities to reduce health care spending without rationing care for patients. Many people develop health problems that could have been prevented, receive tests and procedures that are unnecessary, are hospitalized because their health problems were not effectively managed, and experience complications and infections that could have been avoided. If these unnecessary and avoidable health problems and health care services could be eliminated, tens of billions of dollars could be saved and the quality of life for the patients would be improved.1

The Challenge for Providers in Health Care Cost Containment

Helping people stay healthy and reducing the number of tests, procedures, and hospitalizations can reduce spending, but it will also reduce revenues for health care providers, particularly hospitals. Hospital care represents the largest share of total health care spending and the largest contributor to growth in spending in recent years,2 so significantly reducing overall health care spending will be impossible without reducing or significantly slowing the growth in hospital revenues. However, unless corresponding reductions in hospital costs can be made, hospitals will increasingly experience operating losses.

In addition, private purchasers are taking increasing steps to shift health care delivery to lower-cost providers through techniques such as price transparency, reference pricing, and narrow networks. Because academic health centers (AHCs) are typically among the most expensive health care providers in any community, they could be disproportionately impacted by these types of initiatives.

The Need for Payment Reform

The root cause of the conflict between affordability of health care and the financial viability of health care providers is the way we pay for health care services today. The concept of paying fees for services is not flawed per se; rather, the problem lies in the way that current fee-for-service payment systems used by Medicare and most commercial payers are structured. In particular, most current payment systems have three serious weaknesses.

Lack of payment for high-value services

Physicians are not paid at all for some of the most valuable services they provide, such as responding to a call from a patient to determine how to deal with a symptom, sharing specialized expertise to help another physician accurately diagnose or treat a patient’s problem, and communicating by phone or e-mail with other physicians to coordinate care and avoid duplication. This is a particular problem for AHCs, whose specialists have unique expertise that can improve both diagnosis and treatment.

Financial penalties for high-value care

Physicians and hospitals are paid less when they prevent infections and complications, they are paid less if they do not perform a procedure that was unnecessary or even harmful, and they are not paid at all if their patients stay healthy. In other words, the payment system penalizes providers for delivering higher-quality, cost-effective care.

Payments unrelated to costs

Hospitals are paid the same amount for a procedure regardless of the number of those procedures they perform. However, a significant portion of hospital costs are fixed costs, meaning they do not change in the short run depending on how many patients are treated. As a result, if the hospital delivers fewer procedures of a particular type, the average cost per procedure will be higher (even though the total spending will be lower), and a fixed per-procedure payment rate that was adequate to cover costs at a higher volume will likely not be adequate if fewer procedures are performed. Indeed, although every community wants an emergency room ready to respond to accidents, a cardiac catheterization team ready to respond to heart attacks, etc., hospitals are not paid to maintain the capacity for rapid response. They are only paid when patients actually need treatment, which means that the revenues may not match the costs of maintaining standby capacity.

Problems With “Value-Based Purchasing,” Particularly for AHCs

Concerns about the health care payment system have led both public and private payers to create a growing number of “value-based purchasing” programs. However, most of these programs fail to solve the fundamental problems in the fee-for-service system described above, and they can create new problems for AHCs.

Pay for performance

“Pay for performance” (P4P) programs, such as the Medicare Hospital Value-Based Purchasing Program and Physician Value-Based Payment Modifier, adjust the size of fee-for-service payments to hospitals and/or physicians based on the quality or efficiency of care they deliver. However, the small payment adjustments typically do not offset the higher costs or the loss of operating margin the provider may experience in delivering higher-quality care or reducing spending. Moreover, the quality and efficiency measures used can be particularly problematic for AHCs because of the unique types of patients they see. No risk adjustment system can adequately address the unusual health problems treated in AHCs or the social challenges faced by the inner-city populations they often serve.3

Shared savings

In “shared savings” programs, additional payments are made to health systems and physician practices if total health spending on a group of patients is lower than expected based on national or regional trends. Similar to P4P programs, however, these programs do not change the underlying fee-for-service system, and the shared savings payment may or may not offset the higher costs or loss of operating margin a physician or hospital experiences when spending is reduced.4 These programs can be particularly problematic for AHCs because of the limitations of risk adjustment systems, because statistical attribution systems may not credit AHCs for savings they generate, and because reducing referrals to higher-paid AHCs can result in bonus payments for community providers.

Narrow networks

Many private purchasers are encouraging or requiring patients to use “narrow networks” consisting exclusively of providers that charge less for services. AHCs are often excluded from these networks because of their higher prices, even if an AHC’s higher prices are primarily needed to cover its teaching, research, and higher bad debt costs. Moreover, some of the savings expected from narrow networks may fail to materialize if the AHC would have provided better diagnosis and higher-quality care for patients with unique and expensive conditions.


Publishing the amounts that providers are paid for procedures is intended to encourage patients to choose lower-priced providers and encourage providers to reduce their prices. However, lower payments for procedures can be misleading if the facilities with lower payments have higher complication rates, and average payments for AHCs may be higher simply because of the unique patient populations they serve.

Episode payments

Paying a single amount for a complete episode of care, including the costs of postacute care and preventable readmissions as well as the initial hospitalization, represents a genuine move away from the current problematic fee-for-service payment toward a more value-based structure. However, episode payments are particularly challenging for AHCs because many patients receive their postacute care from different providers in a different community.

Creating a “Win–Win–Win” for Patients, Purchasers, and AHCs

Although the U.S. Department of Health and Human Services has announced a goal of moving 50% of Medicare payments into “alternative payment models” by 2018, the caveat is that those alternative payment models will likely be “built on a fee-for-service architecture,” such as the problematic shared savings program.5

Fortunately, there are better ways to pay for health care that can avoid the problems of both fee-for-service and the current crop of value-based purchasing systems. Bundled payments, warranties, and condition-based payments can enable physicians and hospitals to redesign care delivery without causing financial problems for themselves.3 However, four specific actions will be needed to ensure that these accountable payment models will result in win–win–win outcomes for AHCs, purchasers, and patients.

1. Stable funding for value-based medical education and research

New payment systems must enable AHCs to carry out their teaching and research missions in ways that support national goals for higher-value care. Two complementary actions are needed by payers and AHCs.

Disconnect funding for teaching and research from payment for service delivery.

An AHC’s education and research programs should not be penalized because its patients are healthier or because it uses fewer or lower-cost procedures to treat them. Because the costs an AHC incurs to support teaching and research have no direct relationship to the number or types of patients it sees or the procedures it performs, it makes no sense to have the revenues for teaching and research linked to the payment for health care services. Consequently, a separate mechanism of financing medical education and research must be created. The funding could continue to come from public and private purchasers of health care, but it should not be tied to the number or cost of individual procedures.6

Focus medical education and research on improving value.

In return for more predictable support for teaching and research, AHCs should ensure that their teaching and research programs are aligned with national goals of improving quality and controlling costs. A significant portion of research should be explicitly designed to reduce the cost of care delivery while maintaining or improving clinical outcomes. Medical education should be structured to teach physicians the skills they need to deliver better-coordinated, more cost-effective care, and to work effectively in teams with other providers.

2. Predictable payment for essential hospital services

If we want hospitals to make the investments needed to rapidly and effectively respond to urgent health needs, we need to pay them in a way that adequately supports those investments without penalizing them financially if the community is fortunate enough to have fewer emergencies. We must also avoid forcing hospitals to deliver unnecessary services in order to cover their costs. For example, public and private purchasers could pay hospitals using a combination of a per-member payment (i.e., a payment for each insured member, regardless of whether they were actually hospitalized) and a per-service payment (i.e., a payment made only when the member was treated), rather than an exclusively fee-for-service payment system. The per-member payment would be designed to support the costs of essential standby capacity (for trauma care, rapid treatment of heart attacks and strokes, etc.), and the per-service payment would be much lower than today’s rates (based on marginal costs rather than average costs). Even if the hospital received the same total revenue as it does today, the financial implications of more or fewer patients would be dramatically different.*

AHCs and other hospitals would need to support this move by clearly defining the costs of standby services and ensuring that those costs are as low as possible, such as by eliminating duplication of services and unnecessary standby capacity.

3. Delivering high-quality, efficient care at AHCs

By paying separately for teaching and research, and by paying on a population basis for standby services rather than through per-service payments, it will be possible to directly identify the marginal costs of individual services and compare them across hospitals for similar patients, particularly for routine admissions and elective procedures that are also offered by community hospitals. If AHCs can deliver such services at a competitive price, then there would be no reason to exclude the AHCs from narrow networks, and indeed, if they can deliver common services with fewer complications and better outcomes, they could become preferred providers for those services. As noted earlier, AHCs should focus a portion of their research capabilities on improving the efficiency of care delivery.

4. Leveraging the specialized skills of the AHC for value-based care delivery

It is not necessarily the case, however, that AHCs should want to be providers of common elective procedures or routine admissions. Instead, it may make more sense for community hospitals to deliver those services while AHCs focus on patients with more complex or rare conditions that can only be effectively treated using AHCs’ specialized and interdisciplinary care. If AHCs are no longer dependent on having a high volume of patients to cover their teaching, research, and standby services, then they could choose to be more specialized in the care they deliver and to encourage patients to use community hospitals for more routine care. Similarly, if community hospitals are no longer trying to subsidize their essential fixed costs by delivering higher-paid, specialized procedures, they could refer the specialized cases to AHCs. Each hospital would then have a greater ability to improve both quality and efficiency through treating higher volumes of the types of cases in which they specialize. Moreover, AHCs could help community hospitals and physicians to develop methods of improving their outcomes and costs without seeing this improvement as a competitive threat to the AHCs’ own revenues.

However, for AHCs to be truly effective partners for other providers, additional reforms are needed in the payment system. The specialists in AHCs need to be compensated for telephone, e-mail, and remote video consultations with community physicians and hospitals so that AHCs can truly serve as a “medical neighborhood” for other providers. Reducing the need for patients to make office visits to AHC specialists for consultations that could have been handled remotely will also reduce the delay in caring for patients who truly need to be seen in person.

The payment system also needs to provide better support for accurate diagnosis, rather than simply paying for treatments. This includes both paying adequately for the time needed for establishing an accurate diagnosis and measuring and rewarding diagnostic accuracy.7 AHCs should develop cost-effective ways of delivering rapid and accurate interdisciplinary diagnostic services both for patients who come to the AHC and for patients treated by community hospitals and physicians.

A Leadership Role for AHCs in Value-Based Health Care

AHCs can and should be leaders in the move toward higher-value health care, rather than casualties of it. With appropriate reforms to the payment system by the Centers for Medicare and Medicaid Services and private payers, and with a commitment by AHCs to redesign the ways they provide care, deliver medical education, and conduct research, AHCs could provide the leadership needed to improve care for patients, lower costs for purchasers, and maintain the financial viability of both AHCs and community providers.

* In Maryland, the Health Services Cost Review Commission has set all-payer rates for hospitals based on an analysis of their fixed and variable costs for many years, and it is now moving toward paying hospitals through a global population-based budget. See
Cited Here

† This is one of the stated goals of the partnership called Vivity between Anthem Blue Cross and seven health systems in California. See
Cited Here


1. Yong PL, Saunders RS, Olsen L. Institute of Medicine. The healthcare imperative: Lowering costs and improving outcomes: Workshop series summary. 2010 Accessed June 29, 2015
2. . Author’s calculations from the National Health Expenditure Accounts. Data available at Accessed June 17, 2015
3. Miller HDCenter for Healthcare Quality and Payment Reform. . Measuring and assigning accountability for healthcare spending. August 2014. Accessed June 17, 2015
4. Miller HDCenter for Healthcare Quality and Payment Reform. . Ten barriers to payment reform and how to overcome them. 2013 Accessed June 17, 2015
5. Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services. Fact sheet: Better care. Smarter spending. Healthier people: Paying providers for value, not volume. January 26, 2015. Accessed June 17, 2015
6. Miller HDRobert Wood Johnson Foundation. . Making reform a reality: Ways to facilitate better healthcare payment and delivery systems and lower healthcare costs. June 2010. Accessed June 17, 2015
7. Center for Healthcare Quality and Payment Reform. . How healthcare payment systems and benefit designs can support more accurate diagnosis. January 2015. Accessed June 29, 2015
© 2015 by the Association of American Medical Colleges