The United States Department for Health and Human Services (“HHS”) recently announced its intention to tie thirty percent of fee-for-service Medicare payments to alternative and value-based payment models by 2016. HHS hopes to increase that amount to fifty percent by the end of 2018. Currently, up to twenty percent of payments are made through alternative models, a substantial increase in a short amount of time since almost no payments were made through alternative models as recently as 2011. Two days after HHS’ announcement, a group of key health care industry stakeholders announced the formation of the Health Care Transformation Task Force, a new industry consortium making a public commitment to transition seventy-five percent of its business between now and 2020 to value-based arrangements. These developments demonstrate the shift from fee-for-service payments based on quantity of work regardless of outcome and signals a larger trend to seek quality over quantity. With the seemingly meteoric rise of value-based care, it is important to understand the ramifications of alternative payment models within the health care industry as a whole.

Perhaps the most visible component of the rise of value-based payment models is the Accountable Care Organization (“ACO”). ACOs have been inspired by the Patient Protection and Affordable Care Act (“PPACA”) to coordinate care in order to reduce the overall cost of health care. These organizations hold providers accountable for patient health through measured quality targets and incentivize them to streamline the health care process through mutual cooperation. Those ACOs that are ultimately able to avoid unnecessary costs receive a portion of the resulting Medicare savings as a reward. This approach emphasizes collaboration, efficiency, and quality of care.

A close relative of the ACO, the bundled payment model presents an opportunity for hospitals, physicians, and other providers to share a single payment for a Medicare patient’s single episode of care. Savings earned are determined by the efficiency of the providers’ collaboration during the episode of care. Use of a bundled payment model may not require as many changes to providers’ current business models as the formation of an ACO.

A key feature of alternative payment models, however implemented, is the shift of quality accountability from payor to provider, with the goal to maximize value while cutting costs. Both of the aforementioned payment models require increased efficiency and collaboration while meeting measurable quality standards.