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Peering into a Crystal Ball: The Future of Healthcare Reimbursement and Strategic Evolution

Updated: Sep 26, 2023

Nothing is certain in the United States healthcare industry, especially when considering reimbursement policies. This painful reality leads stakeholders to pine for a “crystal ball” revealing the future of key industry changes. Oftentimes, strategic planning is based on premises that can feel as subject to the whims of fate as the reading of tea leaves. Nevertheless, we believe that valuable clues to the future of healthcare reimbursement can be found in the reports produced by the Health Care Payment Learning & Action Network (HCP-LAN)[1] and the Centers for Medicare and Medicaid Services’(CMS) Innovation Center (CMMI).[2] Both organizations have a focus on developing and disseminating innovative payment models that seek to address the market failures and suboptimal incentive structures present in healthcare. As we will demonstrate, their vision often becomes the market reality, and often faster than anticipated.


This edition of Insights InHealth seeks to accomplish two goals: (i) inform you regarding the key future priorities of Medicare and other payors pertaining to reimbursement, and (ii) define three essential strategic principles that healthcare organizations will need to adopt to successfully adapt to likely reimbursement changes. While we cannot promise a foolproof crystal ball, this article will serve as a guide through the dark forest of healthcare reimbursement changes.


Fortune Tellers: What do CMMI and HCP-LAN Have to Say?


As 2022 winds to a close, both HCP-LAN and CMMI have issued interesting new reports that emphasize both progress and next steps in innovating payment for healthcare services. This month, HCP-LAN held a virtual summit that included details on its future priorities; concurrently, it released a document titled, An Update to LAN’s Approach to Achieving Accountable Care.[3] Additionally, CMMI released a document this month titled, Person-Centered Innovation – An Update on the Implementation of the CMS Innovation Center’s Strategy.[4] Both of the documents are clear in outlining the future steps the organizations will be taking with regarding to healthcare payment models.


Interestingly, both documents touch on common themes related to future priorities, reflecting the growing interest of governmental and private payors to coordinate in developing reimbursement models that achieve mutually beneficial goals. The table below summarizes these common themes from HCP-LAN and CMMI.

Key Takeaways from HCP-LAN and CMMI

Risk-based payment is here to stay. For example, CMS’s goal for 2030 is for 100% of Medicare beneficiaries to be cared for by providers participating in a risk-based payment model.

Accountable care is centered on the patient and involves an aligned care team.

Better coordination between payors is needed to effectuate meaningful transformation in care models.

Payors are expanding alternative payment models beyond primary care to include specialists (e.g., oncology and kidney care).

Health equity is a central tenet of accountable care.

HCP-LAN contributed two very high-value concepts in their document, which we have reproduced below. The first is the new definition for “accountable care” and the second is their Accountable Care Curve to measure progress within an organization in implementing value-based care.

The new definition of accountable care emphasizes many of the takeaways summarized in the first table of this document.

As detailed by HCP-LAN, each transformation stage contains various examples of capability thresholds that organizations can use to measure progress. Later in this document, we will discuss how to apply the curve to evaluating your organization’s provider compensation plans and their degree of alignment with value-based care.


Beyond discussing future priorities, both documents highlighted tangible steps that were or are currently being taken to make these objectives a reality. We spotlight a few of these items to illustrate how we anticipate the industry will evolve in the coming years.

  • Social Risk Adjustment: To further the goals of improving patient-centeredness and health equity, payors are exploring adjustment to reimbursement based on social risk factors. In conjunction with the Update document referenced above, HCP-LAN released a guide for payors on implementing social risk adjustment. We will explore this document and the process of social risk adjustment this in further detail below. In addition, CMMI has established an accountability metric to incorporate the collection of social risk data in 85 percent of its models by 2025.

  • Specialty Bundle Payment Models: CMMI has cited both its Enhancing Oncology Model and Kidney Care Choices Model as examples of where it has expanded value-based reimbursement beyond primary care to specialty care. In addition to dedicated specialty care models, CMMI has identified the care transition between primary and specialty care as a key priority for improvement. With primary care, specialty, and transitional alternative payment models, CMMI is laying the groundwork for its goal of placing 100 percent of Medicare beneficiaries in an accountable care relationship with their providers.

  • Patient Reported Outcome Measures (PROMs): Historically and up to the present, the patient has all-too-often become an oversight in the business of healthcare. The explosion of telemedicine and direct-to-consumer healthcare services have revealed the demand for patient-centered healthcare. To that end, CMMI has targeted increasing accountability to patients in the form of tracking and paying based on PROMs. Examples of these metrics include patient self-reports of clinical conditions (e.g., mental health disorders) and experience of care (e.g., CAHPS measures tied to communication and care coordination). CMMI’s goal for 2025 is for 50 percent of its models to use multiple PROMs.

Furthermore, while participation in CMS’s innovative payment models had historically been optional, CMS will put a greater emphasis on mandatory participation into the future.[5] This observation, combined with the examples highlighted above, clearly demonstrate that the future priorities will become tomorrow’s realities sooner rather than later.


Into the Woods: Three Strategic Principles to Guide You Through Upcoming Changes


While it is always tempting to ignore uncertain, but probable, coming changes, provider organizations do so at their peril. This is especially the case when it comes to provider financial incentives, particularly during this period of burnout. To help you confront the changing healthcare landscape, we have developed three strategic principles to succeed in an environment of growing value-based and at-risk reimbursement:

  1. Misalignment Means Misfortune: As the proportion of at-risk reimbursement goes up, organizations will stand to lose money on value-based reimbursement should provider compensation plans remain production focused.

  2. Evolve Physician Business Management Roles: While physicians are increasingly employed by organizations, as opposed to running their own practices, their role as effective business managers has only increased as value-based care expands.

  3. Add Social Risk Capabilities to Your Risk Adjustment Toolkit: Social drivers of health (also known as social risk factors) will be incorporated into reimbursement models. Effective social risk adjustment starts with data collection and ends with incentives built into provider compensation models that are aligned with value-based payor models.

In the remainder of this Insight, we will explain each strategic principle and discuss steps your organization can take to put them into practice with your affiliated providers.

Misalignment Means Misfortune

Reimbursement is increasingly at risk and, as time goes on, the pressure from all payors to adopt downside risk or even capitated reimbursement will increase. Unfortunately, the traditional provider compensation models relying on production-based formulas are ill-suited to accomplish the goals of value-based care. When, for example, the total cost of care provided to beneficiaries is a primary metric against which the value of an organization’s health care is measured, a production-based compensation plan will encourage behaviors contrary to value-based reimbursement. This misalignment will lead to financial misfortune as either the organization or the providers (or both) face a cut in payment. A recent study in the JAMA Health Forum, found that physician payments tied to the volume of care comprised around 70 percent of total physician compensation, while compensation tied to the quality and cost of care was less than 10 percent.[6] This misalignment underscores a potential financial landmine to healthcare organizations as the proportion of value-based reimbursement increases.


In order to improve alignment between provider compensation plans and value-based reimbursement programs, we believe that organizations must assess their current capabilities. In the diagram below, we have mapped the various transformation stages from HCP-LAN’s Accountable Care Curve to key capabilities needed to succeed in value-based care.

Regardless of current exposure to value-based reimbursement, we believe that the time to start the Learning stage was yesterday. The rapid expansion of capitated financing models among payors (e.g., Medicare Advantage Managed Care Organizations) presages a push for providers to adopt at-risk reimbursement models.

Evolve Physician Business Management Roles

The independent physician practice is becoming ever scarcer—as of this year approximately 3 in 4 physicians are employees of hospitals, health systems, payors, or other corporate entities.[7] Nevertheless, the same entrepreneurial drive and organizational management skills that doctors brought to running their practices are needed now more than ever by their employers. The focus of these skills will shift from day-to-day practice operations to ongoing leadership in improving the value of healthcare. For example, a key driver of success in value-based care is controlling or reducing costs during episodes of care. While an independent practice physician operating under fee-for-service reimbursement would focus on growing service volumes for the practice, a physician leader with significant value-based reimbursement would focus on the development of clinical pathways to manage costs while maintaining quality (e.g., through the deployment of remote patient monitoring tools and care protocols).


Given the bundling of reimbursement into capitated and episodic payments, physician leadership across the facility and professional service domains will grow in prominence. To assist organizations and physicians in redeploying their leadership skills to succeed in value-based care, we have mapped the transition of some sample leadership activities from the fee-for-service setting to a scope involving organizational management of value-based care.

As is clear in the diagram above, the transition from fee-for-service to value-based care does not diminish the importance of physician business management—it only increases its importance. Fortunately, many of the same skills honed in the fee-for-service setting can be put to exemplary use within a larger healthcare organization pursuing value-based care.

Add Social Risk Capabilities to Your Risk Adjustment Toolkit

Providers that are exposed to value-based reimbursement are aware of the essential importance of appropriately documenting the medical condition(s) of their patients for risk-adjustment purposes. Briefly, the risk-adjustment process affects the underlying cost benchmarks that are used to determine the amount of shared savings achieved by managed care organizations and providers. For example, CMS uses the Hierarchical Condition Categories (HCC) model to estimate health expenditures for Medicare Advantage beneficiaries. This model takes a base expenditure amount per beneficiary and adjusts it upwards or downwards depending on (1) demographic factors (e.g., age, sex, dual eligibility for Medicaid, and disability status) and (2) health status (e.g., presence of chronic conditions, episodic illnesses / surgical events, and degree of complications), as tracked based on ICD codes. The combination of HCCs for a given patient determines the risk-adjustment factor that is applied to the base reimbursement amount for the beneficiary.


Recent studies have shown that the existing risk-adjustment models have significant room for improvement in both predicting actual expenditures and reducing inequities in the healthcare system.[8] As a result, payors have taken note and are testing adjustments to their reimbursement formulas that take into account social risk. For example, both of Medicare’s ACO REACH and Shared Savings programs are incorporating payment increases for providers serving patients in marketplaces with high levels of social risk. Furthermore, the ICD system added “Z” codes, which allow providers to capture data related to patient social needs (e.g., problems related to employment, social environment, and upbringing). Medicare is requiring providers to develop the capabilities to incorporate this coding into their standard process of data collection.


Initiatives like this will not be limited to government payors. HCP-LAN recently released a document (Advancing Health Equity Through APMs: Guidance on Social Risk Adjustment)[9] detailing methods that all payors can adopt to effectively incorporate social risk adjustment in their reimbursement formulas. Ultimately, payors are seeking ways to evolve existing risk-adjustment models, like CMS’s HCC, to including social risk adjustment. As detailed in the document, social risk factors can be used to derive more accurate risk adjustment factors for patients, ultimately resulting in updated capitated and episodic reimbursement amounts to providers.


To succeed in value-based care that incorporates social risk adjustment, we have outlined a four-step process that provider organizations can utilize in the diagram below.



Endnotes

  1. “The Health Care Payment Learning & Action Network (HCPLAN or LAN) is an active group of public and private health care leaders dedicated to providing thought leadership, strategic direction, and ongoing support to accelerate our care system’s adoption of alternative payment models (APMs).” Taken from HCP-LAN’s website, last accessed November 22, 2022, from: https://hcp-lan.org/

  2. Centers for Medicare and Medicaid Services: Center for Medicare and Medicaid Innovation. Person-Centered Innovation – An Update on the Implementation of the CMS Innovation Center’s Strategy. November 2022. Last accessed November 22, 2022, from: https://innovation.cms.gov/data-and-reports/2022/wp-eval-synthesis-21models

  3. Health Care Payment Learning & Action Network. An Update to LAN’s Approach to Achieving Accountable Care. Last accessed November 22, 2022, from: https://hcp-lan.org/workproducts/2030_APM_Goals.pdf

  4. Centers for Medicare and Medicaid Services: Center for Medicare and Medicaid Innovation. Person-Centered Innovation – An Update on the Implementation of the CMS Innovation Center’s Strategy. November 2022. Last accessed November 22, 2022, from: https://innovation.cms.gov/data-and-reports/2022/wp-eval-synthesis-21models

  5. “[Center for Medicare and Medicaid Innovation (CMMI) Director Liz] Fowler added that the shift toward more mandatory models was already underway during the Trump administration and reiterated there will not be a change in approach under Biden’s administration.” From: King, Robert. “CMMI director: Expect more mandatory value-based care payment models.” Fierce Healthcare: June 3, 2021. Last accessed November 22, 2022 from: https://www.fiercehealthcare.com/payer/cmmi-director-expect-more-mandatory-value-based-care-payment-models

  6. Reid, Rachel O., MD, MS. “Physician Compensation Arrangements and Financial Performance Incentives in US Health Systems.” JAMA Health Forum, published January 28, 2022, and last accessed November 22, 2022, from: https://jamanetwork.com/journals/jama-health-forum/fullarticle/2788514

  7. Physicians Advocacy Institute (PAI). “PAI-Avalere Health Report on Trends in Physician Employment and Acquisitions of Medical Practices: 2019-2021.” Last accessed November 22, 2022, from: http://www.physiciansadvocacyinstitute.org/PAI-Research/Physician-Employment-and-Practice-Acquisitions-Trends-2019-21

  8. “The use of small-area-based indices of social risk increases the likelihood of aligning health care resources with population needs in the most reliable and transparent manner.” From: Philips, Robert L., et al. “Adjusting Medicare Payments for Social Risk To Better Support Social Needs.” Health Affairs Blog, June 1, 2021, last accessed November 22, 2022, from: https://www.healthaffairs.org/do/10.1377/forefront.20210526.933567/

  9. Health Care Payment Learning & Action Network. Advancing Health Equity Through APMs: Guidance on Social Risk Adjustment. Last accessed November 22, 2022, from: http://hcp-lan.org/workproducts/APM-Guidance/Advancing-Health-Equity-Through-APMs-Social-Risk-Adjustment.pdf


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