For many decades, at least since the passage of the Health Maintenance Organization Act of 1973, there have been reform efforts focused on moving the United States health care system away from fee-for-service (FFS) reimbursement and toward models designed to reward quality, value and outcomes (often grouped together under the umbrella of cost-effectiveness). We are in the midst of such an effort now, with a variety of alternative payment models (APMs) and quality-based reimbursement models (QBRs) in place or being implemented.  Providers must be prepared to embrace these changes if they are to thrive. 

APMs and QBRs tie financial success to improving quality and controlling costs, and weaken the relationship between volume and financial success. As a consequence, the new payment models can completely change the value proposition in a health care enterprise and transform fundamental approaches to the delivery of health care services. For example, in a population health management model, higher volumes can be financially damaging instead of accretive. The collateral consequences of these types of shifts are not difficult to imagine, as relationships among providers change to address the new incentives. Fundamental system structures, compliance efforts and board oversight functions all may be affected. Further, the shifting incentives result in new ways to think about fraud and abuse, antitrust and tax exemption laws.

This transition is not easy, however. APMs and QBRs are not one-size-fits-all propositions. Rather, they represent a variety of approaches, each with its own set of requirements and incentives (see chart below).  Adding to the difficulties and challenges health care providers face is the reality that during the transition they must operate in both worlds, with contracts that present fundamentally inconsistent financial incentives. Understanding the impossibility of designing a system that can excel in both environments, health care providers will have to decide where their “tipping point” is and at what point they align organizationally and strategically to the new payment world.

Given the long history of similar efforts that have failed, some skepticism about whether the system really will transform to APMs and QBRs is understandable. There are, however, many reasons to believe that the current trend is real and that the changes, this time, will be systemic and transformational. Among the reasons to think this is not déjà vu are: (a) the nature of APMs and QBRs is not overly prescriptive, which is causing health care providers to experiment to find what works within an overall framework of lower costs and improving quality; (b) a revolution in health information technology has resulted in providers who have much more robust, real-time data to inform care management initiatives; (c) the pressure to control costs has only intensified; (d) consolidation in the provider market has created vertically integrated health systems that have the infrastructure to embrace and succeed under APMs and QBRs; and (e) APM and QBR initiatives in the recent past, albeit limited, have created a meaningful base of knowledge, on the part of providers and private and public payers, upon which to build. But perhaps the most compelling reason to think the transition will be transformative is the fact that the federal government, and in particular the Medicare program, is taking the lead.

The Department of Health and Human Services has set a goal of tying 30 percent of FFS Medicare payments to quality or value by the end of 2016, with that growing to 50 percent by 2018 (see chart below). The Medicare program has never set such goals before. In repealing the sustainable growth rate approach, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) established the Merit-Based Incentive Payment System (MIPS). Starting in 2019, MIPS will include substantial financial incentives for physicians and certain other eligible professionals to participate in APMs. On the hospital side, the Comprehensive Care for Joint Replacement requires certain hospitals to participate in retrospective bundling of acute care, post-acute care and physician services for Medicare beneficiaries receiving certain joint replacements. As a mandatory program for designated hospitals, this represents a fundamental shift in how Medicare pays for these services. This is just a small sample of a broad range of reimbursement changes being spearheaded by the Center for Medicare & Medicaid Services.

The transition from FFS to the transformative under APMs and QBRs will pose a series of questions and challenges for health care systems and other industry leaders, the primary question being: How can I prepare my organization so that it is not only competitive, but thrives under APMs and QBRs?