Employer-sponsored health insurance costs increased by 6.3 percent in 2021, the highest annual increase since 2010. These increases follow a brief dip in health care spending in 2020 as many deferred preventive and elective services due to the COVID-19 pandemic. Some experts are projecting additional health spending increases in 2022. Research has found that provider prices are the leading cause of high and rising health care spending in the US and that while utilization contributes to this rise, it is relatively less of a problem. However, given the political challenges of controlling provider prices thanks to powerful special interests, many advocates for cost containment have turned their attention to less direct tactics. In the U.S., the most predominant way of paying providers is through “fee-for-service” (FFS), which means that providers are paid for each individual service performed. This model encourages overutilization and fails to incentivize efficiency, quality, and health care outcomes. As a result,  many policy experts have advocated for moving away from FFS and towards value-based, alternative payment models (APMs) instead.

What are Alternative Payment Models?

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Examples of APMs

Accountable Care Organizations (ACO) – A group of providers, like a hospital and affiliated physicians’ practices, agrees to coordinate care with the goal of improving clinical quality and reducing health care costs. The providers can share in any cost savings achieved by implementing this model.  Bundled or Episode Payments – A provider agrees to accept a lump sum payment for all services provided during an episode of care, such as a joint replacement procedure, instead of billing for each individual item or service. The provider bears the responsibility for any excess costs incurred during the episode of care that exceed the previously agreed-to bundled payment. Capitation – A provider agrees to receive a payment per member per unit of time. In a full capitation system, the provider bears the responsibility for any excess costs incurred in providing services to the patient beyond the periodic fee. Patient-Centered Medical Homes (PCMH) – Primary care providers who agree to meet certain care coordination requirements specifically for those with chronic illnesses are eligible to receive enhanced payments in the form of per-member-per-month fees or bonus performance-based payments. More information on APMs can be found here.

APMs are a payment approach that seeks to incentivize high-quality and cost-efficient care. Some APMs, like ACOs, rely on a FFS chassis but provide financial incentives for providers to meet certain quality or cost-containment targets over a period of time. Others shift away from FFS and pay a global or capitated fee for services over a fixed period or time or episode of care. These latter APMs may require providers to take on a greater degree of financial risk.

Not all APMs have demonstrated clear positive outcomes in terms of reducing costs and improving quality, but certain models like bundled or episode-based payments have shown promise. Many providers resist participating in APMs and taking on more financial risk. Despite growth in value-based APM participation, adoption continues to lag behind the threshold required to have a significant impact on health care costs, quality, and outcomes.

Where Are We Today?

Adoption of APMs in Public-Sector Insurance Programs

Over the last decade, the Center for Medicare and Medicaid Innovations (CMMI) has launched a number of demonstration projects to test a variety of APMs, primarily for Medicare and Medicare Advantage plans. In 2018, Medicare and Medicare Advantage plans had the highest rate of adoption of APMs, with 40.9 percent and 53.6 percent of payments to providers made through APMs, respectively. The evaluation of these models has shown mixed results in terms of improving quality and reducing costs, but some lessons have emerged to help tailor future APMs, such as:

• The more the APM’s structure relies on FFS, the smaller the payoffs;
• Models must provide resources like upfront capital and technical assistance for practices to transform their operations in order to better integrate APMs; and
• Increasing transparency around issues such as methods for calculating performance against benchmarks and model evaluations would enable provider organizations to more confidently invest in system transformation.

In 2018, Medicaid had the lowest proportion of payments made through APMs (23.3 percent) out of all payer types. Some states have pushed for payment reform through their state Medicaid programs. For example, Tennessee and Ohio Medicaid programs have implemented bundled payments for specific episodes, and, in 2019, 14 state Medicaid programs reported that they have ACOs in place. Early results show that these ACOs have generated cost savings and lowered emergency department utilization and hospital admissions.

Some states have also pushed for payment transformation through their State Employee Health Plans. Our 2020 survey of these plans shows that 19 states implemented APMs such as capitation, ACOs, and bundled payments. While three of these states reported cost savings from these efforts, many states found that providers were resistant to risk-sharing agreements, particularly those that resulted in the providers losing money if costs exceed certain benchmarks (also known as “downside risk”).

Adoption of APMs in the Commercial Sector

Adoption of APMs in the commercial sector is higher than Medicaid, but lower than Medicare and Medicare Advantage with 30.1 percent of provider payments flowing through APMs. Catalyst for Payment Reform, a non-profit organization that supports payment transformation efforts, found that the proportion of value-based payments from the commercial sector to physicians and hospitals increased from 10.9 percent in 2012 to 53 percent in 2017, but that as of 2017, 90 percent of value-based payments were still based on an FFS foundation and only 6 percent of total dollars came from APMs with downside risk. The report also found that the adoption of APMs was highest in 2012 but has since leveled off.

Further, a survey of 174 health care professionals across hospitals, health systems, physician practices, and federally qualified health centers confirms that the industry is still heavily reliant on FFS reimbursement. About half of the surveyed providers reported that a significant majority of their organization’s revenue comes from FFS reimbursement, and only 57 percent report using value-based APMs. Hospitals and health systems were more likely to have transitioned away from FFS than physician practices, perhaps due to greater economies of scale and the ability to invest in the necessary underpinnings of APMs, such as IT and workflow transformation.

Spurring Multi-Payer Payment Transformation

In order to fully realize the potential of value-based APMs and achieve cost savings, providers need both public and private payers to push them away from FFS. Achieving this multi-payer payment transformation requires leadership either from federal or state governments or from a dominant insurer in a state.

Federal initiatives: CMMI launched the Comprehensive Primary Care Plus model in 2017. This advanced multi-payer primary care medical home model incentivizes primary care transformation through care coordination fees, performance-based incentive payments, and provision of health IT support. In track 1 of this program, providers continue to receive FFS payments, but in track 2, FFS payments are reduced and transitioned to a lump-sum population-based payment on a quarterly basis. As of the third program year (2019), about 13,000 primary care practitioners serving 15 million patients and 60 payers participated in the program. Evaluation of the third program year showed that although the model increased expenditures for Medicare beneficiaries, it also produced small reductions in hospitalizations and improvements in emergency department visits and some quality-of-care outcomes for the Medicare FFS population. CMMI remains optimistic about the model reducing costs in the future and finds that practice transformation takes time to implement. In 2021, the agency launched another multi-payer model for primary care—Primary Care First—which is yet to be evaluated.

State initiatives: States have explored a variety of ways to drive multi-payer payment reform initiatives. Arkansas serves as a successful example of public-private payer collaboration. Since 2011, the Arkansas state Medicaid program and some of the state’s largest private insurers like Arkansas Blue Cross Blue Shield (BCBS) have worked together as part of the multi-payer Arkansas Payment Improvement Initiative to launch and implement the Arkansas Patient-Centered Medical Home program. A 2019 evaluation of the program found that the initiative has been popular with providers and patients, and has “supported the transformation of primary care to a more patient-centered, population health model.” Both the Arkansas Medicaid program and Arkansas BCBS have been able to achieve a significant number of their quality metric targets such as improved or maintained performance related to asthma management, infant and adolescent wellness, and statin use for diabetes. Further, the practices enrolled in the program experienced a lower cost growth than those not enrolled in the program.

Insurer initiatives: Beyond government-led initiatives to encourage private payers to transform how they pay for health care, private stakeholders like health plans, providers, employer groups can develop and lead these efforts themselves. California’s Integrated Healthcare Association is a multi-stakeholder nonprofit group that is working on standardizing how payers and providers measure and reward high-quality care. In collaboration with California Health Care Foundation, they also publish a California Healthcare Cost & Quality Atlas covering about 75 percent of the state’s population that measures care performance in terms of both cost and quality. Using this data, IHA has been able to demonstrate that when providers share more risk, like through capitation models, health care costs are lower.

Absent the ability to bring together a number of different private payers to support payment transformation, a dominant commercial insurer can also step up. In 2019, Blue Cross Blue Shield of North Carolina, the state’s largest insurer, launched Blue Premier, a value-based payment model with ACO-like contracts requiring provider organizations to take on significant downside financial risk by year three. The insurer has found that the program created an estimated $197 million in cost savings and quality improvements in 2020, although these findings have not been independently evaluated. The program has grown rapidly from five systems in 2019 to eleven hospitals and health systems and more than 870 independent primary care practices participating across the state in 2020.

Where Do We Go from Here?

While the evidence of the impact of APMs on cost, quality, and utilization continues to be mixed, as discussed above, there have been a few successful initiatives which, along with lessons learned from models that have failed, could provide a path towards developing future successful models. Federal and state support for the development and evaluation of APMs is crucial to further improve the effectiveness of these models, and many private payers can test innovative models as well. Providers’ reluctance to adopt these models suggests that they will need greater incentives to transition their practices away from FFS and towards value-based APMs. These could be carrots – such as financial support for the necessary infrastructure or technical assistance – or sticks – such as the threat of loss of network status or reductions in reimbursement rates. Given the political barriers to directly capping provider prices, shifting away from FFS to a system where providers are willing and able to take on more financial risk could be an important step towards containing ever-rising health care costs, transforming our health care system to care for the whole person, and improving population health outcomes.