Shift Away from Traditional Physician Payment Structures

For a lot of healthcare startups, a major issue is convincing doctors to pay for and use new healthcare technologies that can improve the quality of care for patients. While the most common way physicians are paid today is fee-for-service, there is starting to be a shift towards more value-based payment structures. 

Based on physician surveys, a majority of doctors seem to prefer the fee-for-service payment structure, since they get paid for “what they actually do.” However, since doctors get paid more when they provide more services, this method is costly and inefficient and doesn’t take into account how well the doctor improves the outcome for their patients. Below is a summary of the current payment models for physicians and some of the problems with them:

Pros/Cons of Standard Physician Payment Models

Salaried Model: Based on preset income levels

• Doctors are not encouraged to manage costs
• Simple and easy to administer

Equal Shares Model: Revenue less the expenses is distributed equally across all physicians in the group

• Discourages overutilization of healthcare, since extra expenses reduce the overall revenue and how much the doctors get paid
• More productive physicians often dissatisfied with the equally sharing allocations
• Does not encourage high productivity, since there may be doctors that product less revenue within the group

Capitation: Prepayments to physicians based on pre-defined services for the number of enrolled patients

• Physician takes on the role as a budgeter making decisions on how services and costs are allocated
• Encourages under-utilization of services, since doctors pay for additional services provided to patients
• Increased financial risk for treating sicker patients, so it discourages providers from accepting sicker patients
• Cost-efficient

Fee-for-service: Payer negotiates charge for each type of service with the provider based on a listed fee schedule and then physicians are reimbursed for each procedure they perform

• Fee schedule determined by payers so per service fees are often lower than what physicians feel is the appropriate cost
• Incentive for over-utilization of healthcare
• Low payments for basic primary care has discouraged many physicians from choosing primary care

New Models based on “Value”

None of the standard models effectively address how to reimburse physicians based on the value of the services they provide, where value is defined by higher quality with lower costs. And at the same time the newer models need to be both fair for physicians, while providing the best outcomes for patients. The ideal new model of physician payment would not encourage over/under-utilization of services, but ensure standardization of care while maintaining patient-centered care and utilizing the latest healthcare technologies without increasing costs.

These new value-based contracting models are starting to become much more common. These contract models align incentives across providers, members, employers, and payers to improve clinical outcomes and the patient experience along with improving cost efficiency.

Value-based contracts are determined using the following payment methodologies:

1. A portion of the provider’s total potential payment is tied to a provider’s performance on cost-efficiency and quality performance measures. While providers may still be paid fee-for-service for a portion of their payments, they may also be paid a bonus or have payments withheld. For value-based contracts, this bonus is not paid unless the provider meets cost efficiency and/or quality targets

2. Clinical integration fees paid to providers that are contingent on the provider engaging in practice transformation to adopt technology and processes that alter the manner in which they deliver care

3. Cost-efficiency performance measures such as risk-adjusted total cost of care, a percentage of inpatient readmissions, inpatient admissions, inpatient days, emergency room visits, and preventative care measures

The most common value-based new model is pay-for-performance.

Pay-for-Performance: Financial incentives for pre-defined performance goals often determined by patient outcomes

• Often involves upfront additional administrative costs to track and document performance metrics
• Performance incentives tend not to be very meaningful (i.e. offering a bonus of 1.5% when the right target needs to be closer to 10% in order to be an adequate incentive)
• Payers are experimenting with several different performance metrics that it becomes difficult for providers to manage all the different programs (i.e. over 60 different indicators, with no single metric used by all programs)
• Somewhat successful in achieving the goals of improving quality

Big healthcare plans like UnitedHealthcare are now participating in pilots based on the pay-for-performance model. They are implementing a significant ramp in their alternative payment models over the next three years, such that 50-70% of contracts will be value-based by 2015.

I do believe that the future of our healthcare services and reimbursements will be value-based, but the shift from one payment model to another will take years, not months. And while there are more and more systems that provide incentives for quality and patient satisfaction, the incentives need to be a larger portion of the total compensation doctors receive because otherwise they will be focused on increasing the number of patients to increase their compensation. The other difficulties of transitioning to new payment models include frustration that different payers use different metrics in pay-for-performance, high administrative overhead and complexity in adopting new models and concern that implementing new programs may take attention away from patient care and other activities. However, I am hopeful that the newer models will provide more cost-effective reimbursement for the quality of care we all know is needed in order to improve our healthcare system.