Fiscal Fitness:How States Cope

No easy answers, but regional payment demonstrations may start 'fundamental change'

Current health care payment systems create penalties and disincentives across all elements of health care, including preventing illness, diagnosing, treating conditions, and follow-up care. That's the opinion of the Pittsburgh Regional Health Institute's Harold Miller, whose Commonwealth Fund-sponsored analysis calls for regional demonstration projects to make progress on payment restructuring.

Mr. Miller tells State Health Watch there have been several past efforts to restructure the payment system but the system is so complex and there are so many stakeholders involved that it is difficult to make changes. "Because it's so complex, we've been looking for ways to patch it such as pay-for-performance," he says. "But we've come to realize that the only way to address the problems of inherent incentives and disincentives is through a fundamental change to the system."

The paper cites a number of examples of problems with current payment systems, including:

1. Fee-for-service systems generally don't pay adequately (or at all) for many preventive care services. Also, low payment levels are believed to discourage doctors from entering primary care.

2. Payers often don't have an incentive to invest in preventive care since the payoff in terms of better health and lower costs occurs in the future and may accrue to other payers.

3. Fee-for-service systems may not adequately pay for time needed by a provider to make an accurate diagnosis and develop an appropriate care plan and discuss it with the patient. Providers are not financially penalized for ordering more tests, regardless of whether the tests are necessary to make an accurate diagnosis/prognosis.

4. Fee-for-service payment systems reward providers for supplying more services, even if the services are unnecessary or are of low value. Payment systems generally pay for services regardless of whether all of the processes recommended in clinical practice guidelines are performed by the provider.

5. Under most payment systems, providers are paid more for patients experiencing adverse events particularly serious adverse events resulting in multiple complications.

6. Payment systems reinforce fragmentation of care by paying multiple providers for multiple services or tests for the same patient, regardless of whether care is coordinated or duplicative.

7. Current payment systems don't pay hospitals or doctors more to manage needs of patients with complex conditions after discharge from the hospital or to work proactively to encourage and assist patients in complying with post-discharge instructions to improve outcomes and prevent rehospitalization.

8. Patients generally don't have a financial incentive to adhere to prevention and disease management recommendations that could improve outcomes and reduce health care costs.

9. Many payers don't have mechanisms for encouraging or directing patients to providers who supply better value.

Mr. Miller says any redesigned payment system should try to meet 12 goals:
1) enabling and encouraging providers to deliver accepted procedures of care to patients in a high-quality, efficient, and patient-centered manner;
2) supporting and encouraging providers to invest, innovate, and take other actions that lead to improvements in efficiency, quality, and patient outcomes and/or reduced costs;
3) not encouraging or rewarding overtreatment, use of unnecessarily expensive services, unnecessary hospitalization or rehospitalization, provision of services with poor patient outcomes, inefficient service delivery, or choices about preference-sensitive services that are not compatible with patient desires;
4) not rewarding providers for undertreating patients or for excluding patients with serious conditions or multiple risk factors;
5) not rewarding provider errors or adverse events;
6) making providers responsible for quality and costs within their control, but not for quality and costs outside their control;
7) supporting and encouraging coordination of care among multiple providers and discouraging providers from shifting costs to other providers without explicit agreement to do so;
8) encouraging patient choices that improve adherence to recommended care processes, improve outcomes, and reduce costs of care;
9) not rewarding short-term cost reductions at the expense of long-term cost reductions, and not increasing indirect costs to reduce direct costs;
10) not encouraging providers to reduce costs for one payer by increasing costs for other payers, unless changes bring payments more in line with costs for both payers;
11) minimizing administrative costs for providers in complying with payment system requirements; and
12) having different payers align their standards and methods of payment to avoid unnecessary differences in incentives for providers.

According to Mr. Miller, issues that need to be addressed in redesigning health care payment systems include the basic payment method that should be used for care, whether payments for multiple providers should be bundled together, how payment levels should be determined, what performance standards should be set and whether performance incentives should be added to the basic payment method, and whether specific incentives should be provided to patients on choice of providers and participation in care.

"Unfortunately," Mr. Miller says, "there are no easy answers regarding which options offer the best resolution for these many issues. Uncertainty exists due to the fact that there have been relatively few cases where significantly different payment systems have been attempted, and even fewer where thorough evaluations have been conducted."

His recommendation is that a wide variety of payment demonstrations be developed, implemented, and evaluated. "Just as experimentation and evaluation is a hallmark of evidence-based medicine, experimentation and evaluation will also likely be needed to develop the most effective cure for the ills of the payment system,' he says.

Mr. Miller suggests that leadership for payment reform demonstrations come from the regional level rather than the national level because health care is a fundamentally regional enterprise since most providers and even most payers operate exclusively or primarily in metropolitan regions, states, or multistate areas.

"While payment demonstrations can and should be pursued at the regional level, this does not mean that payment reform should be a parochial enterprise," Mr. Miller says. "Indeed, just as medicine itself advances the state of the art through local innovations that are supported, replicated, and evaluated nationally, so too can payment reform be more successful if there is national support for the development, evaluation, and replication of regional payment demonstrations."

Mr. Miller tells State Health Watch it will help if the payment demonstrations piggyback on efforts already underway to improve health care "There can be variations around the country," he says, "so long as the incentives are in line so providers don't have to respond to different payers' programs."

The national payers such as Medicare and Medicaid are important, he says, and it would be helpful if Medicare would support a demonstration tailored to what regions want to do with their other payers. He says it's not yet clear whether Medicare and Medicaid can allow regional variations.

Commenting on Mr. Miller's analysis in an opinion column, Commonwealth Fund president Karen Davis says one approach would be to move the health system toward "blended payments," in which payment for hospitals and physicians includes fee-for-service payments, per-patient payments, and performance bonuses. Hospitals receiving a per-patient episode fee would be encouraged to provide transitional care to reduce the risk of rehospitalizations, and physician practices would be encouraged to set up their offices as medical homes that patients could join to receive coordinated, accessible care. Medical homes, in turn, should lead to improved chronic care management, ensure patients receive preventive care, and offer accessible, off-hours care, she says. They also could reduce the number of emergency department visits.

Ms. Davis cautions that it's not realistic to tell hospitals and doctors that they must improve quality if by doing so they are likely to lose money. She says Commonwealth Fund-supported research into the "business case" for quality has shown that even in programs that save money, the savings are not likely to accrue to the doctor or hospital implementing the changes. And, she says, some patients and physicians are concerned that there will be an incentive to skimp on care if we move away from fee-for-service payments .

"Experimentation with different payment reforms is clearly needed," according to Ms. Davis, "and this can be accomplished through various types of demonstrations. If Medicare and Medicaid provide leadership here, more private insurers would be encouraged to follow suit. Once new payment methods are in place, we can observe their effects, see what works best, and give providers time to learn how to improve through them. We must start testing different approaches now to begin to rein in costs and to make sure we are paying for the best available care, not just more services."

The report is available online at Contact Mr. Miller at (412) 803-3650. Ms. Davis' analysis is online at E-mail her at