Health Reform WK-EDGE Value-based reimbursement: The new normal
Tuesday, April 19, 2016

Value-based reimbursement: The new normal

By Michaela D. Poizner, JD, Baker Donelson

Imagine you’re eight years old, and you head to the sidewalk outside your house to set up a lemonade stand. Lucky you, up the street comes a whole Cub Scout troop—and they look thirsty. But instead of the Cubmaster paying you a set price per cup of lemonade, he pays you based on whether you saved dollars making the lemonade, you effectively used technology to coordinate the delivery of the lemonade, and any of the Scouts had to come back for a second glass of lemonade because he was still dehydrated. Eight-year-old you was just introduced to value-based payment.

The services that health care providers offer are a little more complicated than making lemonade for Cub Scouts, but the payment system in the anecdote is fast becoming reality for providers in the Medicare program. Value-based reimbursement (VBR) is the concept by which CMS pays providers for services offered to beneficiaries based on efficiency, quality, and outcomes, rather than on quantity alone.

Value-Based Reimbursement is the New Black

The traditional fee-for-service health care reimbursement system is falling out of fashion, largely due to its undeniable role in driving up health care costs. When Medicare (or any other insurer) pays a provider for each individual service provided, providers are incentivized to provide more services. While this doesn’t necessarily mean that doctors everywhere are running amuck and performing unnecessary procedures, there is a powerful economic motivator to provide more care, even if the provider could achieve the same result with less care. This dynamic has created a steady upward trend in health care costs—and the aim of VBR is to reverse that trend.

The idea is to break (or weaken) the connection between quantity of services and reimbursement dollars. If providers are paid based on their cost savings or the effectiveness of the care they provide, the impulse to provide more, more, and more care will wane. Given the emphasis on health care costs, not just in the medical industry, but in the political arena, in the news media, and around the dinner table, VBR has gained traction as a way to meaningfully reduce costs in the short-term and change the long-term trajectory of the health care spend.

Better, smarter, healthier. Providing health care for Medicare and Medicaid beneficiaries in 2014 cost more than a trillion dollars and accounted for 36 percent of the national health expenditure in that year (NHE Fact Sheet, CMS, December 2015), so it’s not surprising that CMS is taking a lead in promoting VBR.

In a news release published in January 2015, HHS, which houses CMS, announced its “Better, Smarter, Healthier” VBR initiative, which included the following goals for the Medicare program:

  • 30 percent of traditional (fee-for-service) Medicare payments tied to quality or value through alternative payment models (APMs) by the end of 2016;
    • 50 percent by the end of 2018;
    • Examples: Accountable Care Organizations (ACOs) and bundled payment arrangements;
  • 85 percent of all traditional Medicare payments tied to quality or value (even if not fully migrated to an APM) by the end of 2016;
    • 90 percent by 2018;
    • Examples: Hospital Value-Based Purchasing and Hospital Readmissions Reduction Program.

In March 2016, HHS announced that it has achieved its goal, 10 months ahead of schedule, of tying 30 percent of traditional Medicare payments to APMs that reimburse based on quality of care rather than quantity of services alone.

The many shapes of value-based reimbursement. The CMS approach to VBR is less like a laser and more like a disco ball; not a single ray of light, but dozens of glittering beams that shine on providers in all corners of the health care dance floor. A multifaceted approach allows CMS to roll out VBR across the provider spectrum (because not all provider types receive reimbursement under the same system) and to experiment with an array of financial incentives and disincentives (reimbursement increases, penalties, shared savings, cost-sharing, and others). Below is an alphabet soup of VBR initiatives:

  • MIPS: The Merit-Based Incentive Payment System (MIPS), passed in April 2015 as part of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) (P.L. 114-10), will overhaul the way Medicare pays its Part B providers. Each year, providers will receive a MIPS score, ranging from 0 to 100. CMS will set a threshold number of points annually at which providers will receive no adjustment to their traditional fee-for-service rates. As providers’ MIPS scores rise above or fall below the threshold, they will receive incentives or reimbursement penalties (growing annually until they reach maximums of 9 percent +/-), respectively. A physician’s use of technology will account for 40 percent of the MIPS score through the new iteration of the Meaningful Use Program and a category called “clinical practice improvement.” The other 60 percent will be based on a combination of cost and quality. The first performance year under MIPS will be 2017 (with the first MIPS payments issued in 2019), but specifics of the program are still blurry because CMS has not yet completed MIPS rulemaking. A proposed rule is expected in spring or summer 2016, with a final rule expected in late 2016.
  • ACOs: ACOs bring together multiple provider types in an organized system that seeks to provide all (or nearly all) of its patients’ care. For example, an ACO may include a hospital, primary care physicians, specialists, and a pharmacy. Generally, Medicare pays an ACO based on a capitation model. Under this model, the ACO receives a certain dollar amount for each patient who is a member of the ACO and, in return, the ACO is responsible for providing all (or some defined portion) of the patient’s care. In a partial capitation model, the ACO may receive a dollar amount that is intended to cover all of the patient’s outpatient services, but hospital admissions are reimbursed separately on a fee-for-service basis. In a full capitation model, a larger per-patient payment covers all care that a patient receives. ACOs have the opportunity to generate profit when they are able to provide care for less than the capitated payment; however, they also assume financial risk, because they do not receive any additional reimbursement if a patient’s care costs more than the capitated payment for that patient. The ACO model incentivizes efficiency and cost savings because payments do not rise with the quantity of services provided.
  • Value-based prescription drug pricing: In March 2016, CMS issued a proposed rule that would alter the way Medicare pays for prescription drugs that are administered in doctors’ offices and hospitals to emphasize use of the most effective drug regardless of economic incentives. (Proposed rule, 81 FR 13230, March 11, 2016) For example, the rule would change the way drug costs are reimbursed to remove systemic incentives that may cause providers to prescribe a higher-cost drug when a lower-cost drug would be more effective; vary payments for drugs based on their clinical effectiveness for certain indications; and allow drug manufacturers to enter into voluntary agreements with CMS that link payment adjustments for drugs with patient outcomes.
  • BPCI: Under the Bundled Payments for Care Improvements (BPCI) Initiative, CMS pays providers a pre-determined amount for an entire episode of care (such as delivery of a baby or a joint replacement) instead of paying for each individual service received as a part of the episode. In this way, like ACOs, BPCI encourages providers to be efficient so that they can profit from their reimbursement rather than coming out of pocket to cover costs above the episode payment amount.
  • HRRP: The Hospital Readmissions Reduction Program incentivizes hospitals to provide high-quality care by penalizing a hospital’s reimbursement rates if admitted patients return to the hospital too frequently soon after discharge.

Growing Pains

Providing quality patient care, efficiently, is a deceptively simple concept. In reality, however, providers attempting to implement VBR-based strategies are finding that the transition from volume to value can be anywhere from complicated to downright maddening.

Big data, big problems. So much of the success under a VBR program depends on a providers’ ability to accurately track and effectively harness utilization and financial data on an ongoing basis. This is especially true in a program like an ACO, where the financial incentive or penalty doesn’t drop until the end of a program year. If the provider cannot keep track of its outcomes and cost savings as the year progresses, it could be walloped with enormous unexpected liability on judgment day. Similarly, the ability to fine-tune provider behaviors and recalibrate along the way depends heavily on timely access to highly detailed information. Beyond making relatively microscopic adjustments to drive efficiencies, many APMs require highly detailed data reporting to qualify for incentives or avoid penalties—reporting that requires providers to capture and parse through large amounts of patient data.

Provider organizations, large and small, simply don’t have the capacity to collect this volume of data. Collecting the data is only half the battle—providers must actually be able to process and analyze the information they gather. According to the Healthcare Attitudes 2016 Survey conducted by Xerox, 80 percent of providers acknowledged some uncertainty about their abilities to leverage patient data for improved outcomes. Furthermore, 35 percent of providers are “very concerned” about their abilities to measure care outcomes to qualify for their proper reimbursement under an APM.

The two-pronged challenge of collecting and analyzing data can create a very real problem when tiny tweaks at the margins of a provider’s operations can mean huge differences in reimbursement or an APM requires a detailed report on the care provided.

Communication breakdown. Another major challenge for providers seeking to transition to the VBR world is interoperability of electronic health records (EHR) technology. Thanks to the EHR Incentive Program that was launched under the Health Information Technology for Economic and Clinical Health Act (HITECH), more than 97 percent of all hospitals possess certified EHR technology and nearly 60 percent of all office-based physicians have demonstrated Meaningful Use under the EHR Incentive Program. (Quick Stats, at While the requirements of the EHR Incentive Program are numerous and dense, the program originally did not include a requirement that a provider’s EHR system be interoperable (that is, able to share information with other providers’ EHR systems).

The lack of interoperability among EHR systems has created a major problem because much of the ability to streamline care and maximize efficiency depends on the ability to share information (so that services are not duplicated, a patient does not have to “start from scratch” with each provider he or she visits, and providers can easily coordinate among one another to develop and execute a comprehensive treatment plan). Additionally, the Meaningful Use program, which is being incorporated into MIPS, specifically requires that providers share information electronically with other providers.

Efforts are under way among the government, EHR vendors, and providers to coalesce around standards for technology that will pave the way for interoperability. But, the lack of interoperability to date has created a roadblock to maximizing the care coordination that is crucial to success in most VBR programs.

Pile on! Private insurers get in the game. While Medicare may not be the only shop in town, it’s definitely the most influential. VBR trends that CMS has pioneered are making their way into the private sector, and many commercial insurers have rolled out some sort of value-based system. Some private insurers are offering ACO programs, for example, and some are modifying their traditional fee-for-service reimbursement models to include a quality component.

As of September 2014, 40 percent of commercial health plan payments reflected some sort of cost reduction or quality improvement component, an increase of 29 percentage points over the previous year, according to a Catalyst for Payment Reform (an independent nonprofit that works on behalf of large health care purchasers such as employers) press release.

The challenge for providers is keeping up with rapidly changing standards coming at them from all directions, especially from the payors. While the VBR concept is the least common denominator among insurers’ plans, the details vary across the payor landscape. Thus, providers are forced to spend resources getting and staying up to speed on their various payors’ requirements. This wave of new payment models outside of Medicare sends a clear message that VBR is the new normal, for all of health care reimbursement—not just government reimbursement.

A New Kind of Lemonade Stand

The key for providers transitioning to the new VBR normal is staying current on laws and opportunities and being adaptable to change. The process will not be seamless; there will be stops and starts—in government policy and in provider operations—along the way. But the most important thing is that VBR, in some form or another, doesn’t appear to be going away. So buy your lemons on sale, get your online ordering system ready, and make the highest quality, lowest cost lemonade you can, because the days of getting paid by the glass are dwindling.

Michaela D. Poizner is an associate at Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C. in Nashville, Tennessee.

Attorneys: Michaela D. Poizner (Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.)

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