What Is an ACO? What Is a Medical Home? What Is Bundled Billing? What Is P4P?

Image credit: shutterstock.com
Image credit: shutterstock.com

Our healthcare system is currently in experimentation mode–we are trying thousands of experiments to figure out how providers can be rewarded for “value instead of volume.” All the new terminology and reimbursement ideas accompanying these reforms can be hard to keep straight if you’re not steeped in this stuff every day, but guess what? There aren’t actually that many different ideas being tried; there are just a bunch of the same ideas being tried in various combinations. First I’ll describe those four basic ideas, and then I’ll show how they are the building blocks of all the main payment reform experiments out there.

Quality bonus: Give a provider more money when he hits performance targets on whatever quality metrics are important to the payer.

Utilization bonus: Utilization metrics and quality metrics are not usually separated, but they should be. Here’s the difference: improved performance on a quality metric increases spending; improved performance on a utilization metric decreases spending. They both improve quality, but they have different effects on total healthcare spending. So, for example, ED utilization rates and readmission rates would be considered utilization metrics. And childhood immunization rates and smoking cessation rates would also be considered utilization metrics because they tend to be cost saving. Insurers love giving providers bonuses on utilization metrics because they are stimulating providers to lower the amount being spent on healthcare.

Shared savings: If a provider can decrease spending for an episode of care (which could be defined as narrowly as all the care involved in performing a single surgery or as broadly as all the care a person needs for an entire year of chronic disease management), the insurer will share some of those savings with him.

Capitation: The amount a provider gets paid is prospectively determined and will not change regardless of how much or how little care that patient ends up receiving. Again, this could be defined narrowly, such as all the care involved in performing a single surgery (in which case it’s actually called a “bundled payment”), or it could be defined broadly, such as for all the care a person needs for an entire year.

By the way, did you notice that shared savings and capitation are almost the same thing? The only difference is who bears how much risk. In shared savings, the risk is shared, which means that if the costs of care come in lower than expected, the insurer gets some of the savings and the provider gets some of the savings. In capitation, the provider bears all the risk, which means that if the costs of care come in lower than expected, the provider gets all of the savings.

Okay, now that I have listed out those four ideas, take a look at the popular payment reforms of the day . . .

Medical Home

General idea:

  • Give a primary-care provider a per member per month “care management fee” (in addition to what he normally gets paid) for providing additional services (such as care coordination with specialists, after-hours access to care, care management plans for complex patients, and more)
  • Also give the primary-care provider bonuses when he meets cost and/or quality targets

Breaking down a medical home:

  • A care management fee is actually a utilization bonus (because the net effect of the provider offering all those services is to avoid a lot of care down the road)
  • A bonus for meeting quality targets is either a quality bonus or a utilization bonus depending on the specific metrics used
  • A bonus for meeting cost targets is shared savings

Accountable Care Organization (ACO)

General idea:

  • Give a group of providers bonuses when they lower the total cost of care of their patients (but the bonuses are contingent upon meeting quality targets).

Breaking down an ACO:

  • A bonus for lowering the total cost of care is shared savings
  • When a bonus is contingent upon meeting quality targets, that means it’s also a quality or utilization bonus (depending on the specific quality metrics used)

Pay for Performance (P4P)

General idea:

  • Give a provider bonuses when she meets quality targets.

Breaking down P4P:

  • This is either a quality or utilization bonus (depending on the specific quality metrics used), but it tends to be utilization bonuses because insurers especially like when providers decrease the amount of money they have to fork out

Bundled Payment/Episode-of-care Payment

General idea:

  • Give a group of providers a single payment for an episode of care regardless of the services provided.

Breaking down bundled payment:

  • A bundled payment is a narrow form of capitation

There you have it. They are all repetitions of the same ideas but combined in different ways.


How Backward Integration Is Starting to Fix Healthcare Delivery

A good friend just told me about Montana’s state-run clinics that are only for state employees. Going to the clinic is free for state employees, which means the state is paying for everything. And yet, despite paying for everything, the clinics are doing such a good job of managing diseases that the state is actually saving more money than it’s spending on the clinics.

I’ve talked about the importance of cost-saving prevention before, but my point in describing this example is to illustrate a growing trend in healthcare–a trend that is largely unrecognized, but is starting to fix healthcare. So let’s break it down.

Think of the Montana state government as a company. This company, just like most companies, has suppliers that sell it critical inputs it needs to perform its services. And one of the most important suppliers to this company isn’t obvious: healthcare providers. Think about it–they are supplying the healthcare that keeps employees productive, which is surely a critical input.

And here’s the interesting thing about the relationships companies have with their suppliers: if the supplier’s product is too expensive, or isn’t good enough in some way, companies will sometimes just take over the production of that critical input themselves. This is called “backward integration.” Think of all the ways employers are backward integrating into healthcare, whether it’s having their own salaried physicians or working closely with providers to redesign care processes; they’re all variations on the same theme.

But employers aren’t the only ones with a supplier-buyer relationship with healthcare providers. Insurers depend on providers to supply the healthcare they are guaranteeing to their customers. So are insurers backward integrating as well? YES. Any time an insurer joins up with a provider, it could be seen as an attempt by insurers to backward integrate (ahem, ACOs). And insurers are also going crazy trying all sorts of hands-off approaches to backward integration (if it’s hands-off, can it still be called backward integration?) with things like pay for performance, bonuses for starting medical homes, and probably hundreds of other experiments I’ve never heard of. They are all attempts to exert some degree of control over the unsatisfactory supplier. Or, in other words, to fix healthcare delivery.

So, I guess we could say that employers and insurers are fixing healthcare delivery. Strange, isn’t it?

[Update: This is good and all, but there are only so many innovative things a single provider can develop, which is why an even better (system-wide) solution would be to do the following: get patients to choose the highest-value providers, which then rewards those highest-value providers with market share, which creates an incentive for all providers to be innovating to win more patients. This idea is expounded more in other posts on this blog. Anyway, in the meantime, this backward integration thing is a great alternative.]

What Healthcare Delivery Reform Proposals Are Getting Wrong

Let’s pretend I own a primary care clinic. There are quite a few doctors who work in my clinic (primary-care and specialists), and everything’s going great–we have plenty of patients, have a good reputation in the area, and are fairly profitable.

And then I am told I have to start doing this “patient-centered medical home” thing, which means I will now be responsible for all aspects of my patients’ care plans. If my patients go to other doctors, I need someone to talk to those outside physicians and find out what they did. I need to have someone available to answer questions and solve problems at all hours of the day and night so my patients will have continual guidance on how to make good decisions if something goes wrong. I need to hire a “care manager” to keep a close eye on all my high-maintenance patients (e.g., ones with multiple chronic diseases or social disabilities), calling them to make sure they’re taking their medications, teaching them how to follow their care plan the best, and all sorts of babysitting-type things like that. I also need to invest in a more comprehensive electronic health record system so I can keep track of all of this stuff. And I should probably also periodically pay someone to perform a data analysis on how efficiently the doctors in my clinic are performing so that I can find ways to further improve patient health and reduce the cost to my patients. And, as an incentive for my physicians to go along with all of this, I should probably find a way to adjust compensation to reward them for improving their patients’ health and lowering costs. . . . You get the picture.

So now I, the clinic manager, am faced with a choice: turn my clinic into a medical home OR just leave things the way they are.

In evaluating the first choice, I think about the upsides. Most of my patients will be healthier and better taken care of. Maybe even my physicians will have greater job satisfaction, which leads to increased productivity and lower turnover.

And then I think about the downsides. I will expend a lot of energy and money doing all of those things. I stand to lose profits from those increased costs and because my doctors will probably be performing fewer high-profit procedures. This loss of profit might be mitigated by the fact that my physicians will now have more time to take on additional patients, but that assumes I will be able to strengthen my reputation so much that I can steal market share from local competitors.

In summary, I figure the main upside is that my patients will be healthier, and the main downside is that it will generate a net loss in revenue. As high-minded as I am, I am not willing to risk my business’ very viability to potentially improve my patients’ health by implementing this medical home thing, so I choose to leave things the way they are.

Now, step out of the clinic manager perspective and analyze this with me for a second. This whole conversation begs the question: If medical-home patients’ care is so much less expensive (because of fewer procedures, ER visits, and the like), who is getting all of those savings? It’s obviously not the clinic (who, interestingly, is the one being asked to make the effort to change and assume all the attendant financial risk). Have you figured it out? It’s the payer! So patients and insurance companies will reap all the benefits, while the provider will take all the risks, make all the effort, and sacrifice profitability.

If any delivery reform proposal (e.g., ACOs, medical homes, etc.) is to be widely accepted by providers, that reform idea must include a way for the providers to reap some of the financial benefits. And that’s where many of these trendy reforms go wrong.