Our nation’s disappointing experience with the performance of its health care system necessitates serious consideration of how health care services are paid for. Under our largely fee-for-service (FFS) payment system (based on Medicare’s Resource-Based Relative Value Scale model), we richly reimburse procedures and pay little for evaluation and management services.1,2 It should come as no surprise that “we get what we pay for”: too many procedures and too little doctoring.3 The consequences include the world’s highest per capita health care expenditures, poor rankings in health status and health outcomes,4 and a distorted physician workforce (too many procedural specialists and a shortage of primary care physicians).5,6 The situation persists despite the preponderance of evidence finding access to primary care significantly associated with lower per capita costs, better health status, and fewer health disparities.7 The poster child for this state of affairs is McAllen, TX, exhibiting twice the per capita Medicare expenditures as El Paso, TX (same demographics), with no difference in the measures of health quality.8 Such disappointing outcomes indicate poor value for each health care dollar spent and pose serious economic and social challenges. Nevertheless, the current health care debate continues obsessed with how we pay for health insurance rather than how we pay for health care services, the key to unlocking value.
The reasons for this misplaced focus are multidimensional. The social tragedy of having a large uninsured population certainly deserves attention, but major reluctance to proceed with fundamental payment reform constitutes another important factor. Those doing well under the current payment system (eg, procedural specialists, insurance companies serving predominantly as claims processors) are understandably nervous about a major change in provider payment as are those maintaining a large installed FFS infrastructure and shouldering responsibility for “keeping the trains running”—Medicare alone processes $1 billion in claims daily. Proponents argue that FFS is essential to ensuring access to services and to preservation of the doctor-patient relationship,9 while analysts point out FFS’s adaptability, transparency, and encouragement of productivity.10 Many physicians take a skeptical devil-you-know attitude toward payment reform, even those in primary care (who have done poorly under FFS), recalling their distasteful experience with prior iterations of capitation and other modes of payment reform.11 Taken together, these represent major impediments to payment reform.
A less obvious, but no less important, barrier to payment reform is the relative dearth of validated risk adjustment/risk stratification tools, especially as regards primary care.12 If payment is to shift from rewarding volume to rewarding value (the current policy mantra), then fixed-budget models using bundled, global, or partially capitated payments blended with payment for achievement of desired outcomes will need to replace FFS over time. Without risk adjustment in these models, providers will end up shouldering actuarial risk as well as performance risk. Although practitioners should be willing to assume performance risk, they cannot afford to assume unadjusted actuarial risk. Risk adjustment enables the assumption of actuarial risk by ensuring that the resources for care and the rewards for performance are appropriate to the patient population served. Without it, practices and networks have to cherry-pick patients to protect themselves financially, a phenomenon noted during the first go-round of poorly risk-adjusted capitation in the late 1990s.13 In the current environment of attempting to improve access to primary care, individual primary care practices are especially vulnerable to actuarial risk as they are asked to assume responsibility for the comprehensive care of many new patients, including those previously uninsured. Without a payment system that provides the necessary resources to durably support robust primary care delivery, health system reform efforts are likely to fail.1–3,14
Using risk adjustment to guide the setting of capitation or global payment rates is nothing new and has been used over the years for network and hospital contracting,15 but, as noted, its application to individual primary care practice panels and patients is relatively uncharted territory.12 In this issue of Medical Care, Ash and Ellis present a methodology for customizing risk adjustment down to the individual and practice-panel levels16 in support of our vision for fundamental payment reform for primary care, which replaces FFS with a base payment for delivery of comprehensive primary care supplemented by a large performance payment for achievement of desired outcomes in cost/efficiency, quality, and patient experience.17 Commentary on the methodology and practice implications are the subjects of accompanying editorials, but a few thoughts about the policy implications of their work are also warranted.
First, their method supports fundamental reform of payment for primary care by empowering primary care practices. It gives them the foreknowledge essential to negotiating more effectively and entering more confidently into new types of payment arrangements that encourage value but entail risk sharing and performance-based contracts. Being able to better predict their specific costs for delivery of comprehensive primary care helps practices secure the necessary resources and reduces their financial uncertainty, a major impediment to payment and practice reform. It also helps convert temporary transitional funding for practice transformation into a durable payment mechanism.
Second, it encourages more performance-based payment, which currently represents only a small fraction of total revenues to practices.18 A major barrier to acceptance of performance-based payment is the concern among physicians that they cannot control outcomes because of patient actuarial and behavioral factors.11 By risk adjusting the performance expectations and targets, this risk adjustment tool gives physicians more confidence in being able to qualify for performance-based payments. Having a payment system that focuses increasingly on performance is key to improving outcomes.
Third and most importantly, reliable risk adjustment at the primary care level removes the incentive to cherry-pick patients and shun the sick and needy. Knowing that practice costs can be reliably predicted and negotiated for the care of individual patients relieves financial concerns about taking on new patients and obviates the need to restrict access. This becomes increasingly important as demand for access to primary care services escalates.
The emergence of accountable care organizations (ACOs) and their risk-adjusted global payment models (to which the Ash-Ellis risk adjustment method can be applied) does not obviate the need for customized risk adjustment and payment reform at primary care practice levels. Although the ACO model represents major payment reform at the network level, such reform does not automatically translate to primary care payment reform. In fact, most of the patient-centered medical homes (the structurally transformed primary care practices that constitute the foundation of an ACO network) are still paid largely on a FFS basis,18 an ironic and potentially reform-compromising situation for all the reasons noted earlier. To secure the appropriate financial support and resources essential to delivering the outcomes desired under a globally capitated system, each primary care practice still needs to estimate its risk-adjusted cost structure on the basis of the care needs of its patient population. Inability to do so contributes to a sense of inadequate preparedness to assume risk under global payment, a reluctance expressed by >71% of physician respondents to a recent Massachusetts Medical Society survey.14
A validated, practical, risk adjustment tool for application at the primary care level is essential to payment reform, which in turn is essential to health system reform.1,2 Both must begin with primary care if we are to realize the Triple-Aim goal of better health, better health care, at lower cost.19 Ash and Ellis have made a substantive contribution toward that goal.
2. Guterman S, Davis K, Schoenbaum C, et al. Reforming Provider Payment: Essential Building Block for Health Reform. 2009 Washington, D.C The Commonwealth Fund
4. Murray CJL, Frenk J. Ranking 37th—measuring the performance of the U.S. health care system. N Engl J Med. 2010;362:98–99
5. The Physician Work-Force. 2008 Rockville MD HRSS
6. Hawkins D, Proser M, Schwartz R. Health reform and healthcare homes: The role of community health centers. Harvard Health Policy Review. Fall 2007;8(2)
7. Starfield B, Shi L, Macinko J. Contribution of primary care to health systems and health. Milbank Q. 2005;83:457–502
9. Resolution 102, I-10: Third party payment for physician services. 2010 Waltham, MA Massachusetts Medical Society
10. Robinson JC. Theory and practice in the design of physician payment incentives. Milbank Q. 2001;79:149–177
11. Hsu J, Chernew M, Landon B, et al. Massachusetts Medical Society Survey on Global Payments. 2012 Waltham, MA Massachusetts Medical Society Available at: http://www.massmed.org
/globalpaymentsurvey. Accessed April 3, 2012
12. Rosen AK, Reid R, Broemeling AM, et al. Applying a risk-adjustment framework to primary care: can we improve on existing measures? Ann Fam Med. 2003;1:44–51
13. Goodson JD, Bierman AS, Fein O, et al. The future of capitation: the physician role in managing change in practice. J Gen Intern Med. 2001;16:250–256
15. O’Malley AJ, Zaslavsky AM, Elliott MN, et al. Case-mix adjustment of the CAHPS hospital survey. Health Serv Res. 2005;40:2162–2181
16. Ash A, Ellis RP. Risk-adjusted payment and performance assessment for primary care. Med Care. 2012
17. Goroll AH, Berenson RA, Schoenbaum SC, et al. Fundamental reform of payment for adult primary care: comprehensive payment for comprehensive care. J Gen Intern Med. 2007;22:410–415
18. Bitton A, Martin C, Landon BE. A nationwide survey of patient centered medical home demonstration projects. J Gen Intern Med. 2010;25:584–592
19. Berwick DM, Nolan TW. Whittingham the triple aim: care, health, and cost. Health Aff. 2008;27:759–769